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 March, 2020

____________________ 

 

Commission File Number: 001-38714

 

STONECO LTD. 

(Exact name of registrant as specified in its charter)

 

R. Fidêncio Ramos, 308, 10th floor—Vila Olímpia

São Paulo—SP, 04551-010, Brazil

+55 (11) 3004-9680

(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):

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

StoneCo Ltd.

 

December 31, 2019 and 2018 and the three years ended December 31, 2019 with report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of

StoneCo Ltd.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of StoneCo Ltd. (the “Company“) as of December 31, 2019 and 2018, the related consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board - IASB.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United Stated) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical audit matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue from transaction activities and financial income

 

Description of the Matter

 

As described in note 3.14, the Company recognizes revenues from transaction activities relating to the fees for the intermediation of electronic payments services, including the capture, transmission, processing and settlement of transactions carried out using credit, debit and meals cards, as well as fees for other services. Revenue from transactions activities is recognized when the transaction is captured net of interchange fees retained by card issuers and assessment fees paid to payment scheme networks given that: (i) the Company is not the primary entity responsible for the authorization, processing and settlement services performed by the payment scheme networks and card issuers; (ii) the Company has no latitude to establish the assessment and interchange fees; (iii) the Company does not collect the interchange fee and the assessment fee is collected on behalf of the clients; and (iv) the Company does not bear the credit risk of the cardholder. Total revenue from transaction activities totaled R$ 862,268, while financial income related to discount fees for the prepayments to the clients totaled R$ 1,352,064. Auditing the Company’s revenue from transaction activities and financial income is complex, as such activities are processed through a complex information technology environment, stem from multiple different contractual arrangements and determining the performance obligations and the timing of revenue recognition under those contractual arrangements was complex and required significant auditor judgement.

 

F-2

How We Addressed the matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over revenue recognition arising from transaction activities and financial income with discount fees for the prepayments to the clients. For example, we involved our Information Technology professionals to assist us in testing the relevant controls over the information systems that are important to the initiation, recording and classification of revenue transactions.

 

To test revenue from transaction activities and discount fees for the prepayments to clients, our audit procedures included, among others: (i) obtaining copies of customer contracts and comparing terms and conditions with the Company’s evaluation of the related performance obligations; testing the mathematical accuracy of the Company’s calculation of the amount of revenue to be recognized as a percentage of total transaction value; assessing whether the percentages applied to those transactions were in accordance with the contractual agreement with the customer; confirming balances with third parties; and testing the collection of the transactions. In addition, we assessed the adequacy of the related disclosures in the consolidated financial statements.

 

Deferred income tax assets

 

Description of the Matter

 

As discussed in Note 3.13.2, the Company has deferred tax assets generated mainly by net tax operating loss carryforwards and temporary differences. Deferred tax assets are recognized only to the extent it is probable that future taxable profit will be available against which temporary differences and tax losses can be utilized and significant judgment from management is required to determine the amount of deferred tax assets that can be recognized, based on the estimated timing and level of future taxable profits, together with future tax planning strategies. As of December 31, 2019, the balance of deferred income tax assets totaled R$ 192,781. Auditing the net deferred tax asset recognized by the Company was challenging due to the level of estimation uncertainty in the assumptions about future market conditions, Company´s performance and other key inputs in the computation of that asset.

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over management’s plan for future realization of deferred tax assets. For example, we tested controls around the determination of key assumptions used in management´s computation.

 

To test the net deferred income tax asset, our audit procedures included, among others: comparing the assumptions used by management to the Company´s approved budget; involving of our valuation specialists to assist us in evaluating management assumptions about future market conditions and tax professionals to assist us in assessing the application of tax regulations in management’s computation; evaluating the application of the relevant accounting standard; retrospectively assessing past management estimations about net deferred tax asset recoverability; comparing the prospective financial information and underlying assumptions to industry and economic trends, changes in the entity’s business model, customer base and product mix. In addition, we assessed the adequacy of the related disclosures in the consolidated financial statements.

 

/s/ ERNST & YOUNG Auditores Independentes S.S.

 

We have served as the Company’s auditor since 2016.

 

São Paulo, Brazil

March 2, 2020

 

F-3

StoneCo Ltd.

 

Consolidated statement of financial position

As of December 31, 2019 and 2018 

(In thousands of Brazilian Reais)

 

   Notes  2019  2018
Assets               
Current assets               
Cash and cash equivalents   6    968,342    297,929 
Short-term investments   7    2,937,029    2,770,589 
Accounts receivable from card issuers   8    14,066,814    9,244,608 
Trade accounts receivable   9    249,417    44,616 
Recoverable taxes   10    50,426    56,918 
Prepaid expenses        12,463    15,066 
Derivative financial instruments        14,062    1,195 
Other assets        106,345    6,860 
         18,404,898    12,437,781 
Non-current assets               
Receivables from related parties   19    12,837    8,095 
Deferred tax assets   11    192,781    262,668 
Other assets        44,685    8,507 
Investment in associates        28,242    2,237 
Property and equipment   12    548,607    266,273 
Intangible assets   13    373,699    307,657 
         1,200,851    855,437 
                
Total assets        19,605,749    13,293,218 
                
Liabilities and equity               
Current liabilities               
Accounts payable to clients   14    6,500,071    4,996,102 
Trade accounts payable   15    97,825    117,836 
Loans and financing   18    2,947,811    761,056 
Obligations to FIDC quota holders   18    2,090,894    16,646 
Labor and social security liabilities   16    109,013    96,732 
Taxes payable   17    44,940    51,569 
Derivative financial instruments        1,354    586 
Other liabilities        80,619    14,248 
         11,872,527    6,054,775 
Non-current liabilities               
Loans and financing   18    87,483    1,395 
Obligations to FIDC quota holders NC   18    1,620,000    2,057,925 
Deferred tax liabilities   11    10,687    80,223 
Provision for contingencies   20    9,564    1,242 
Labor and social security liabilities   16    27,432    - 
Other liabilities NC        5,051    4,667 
         1,760,217    2,145,452 
                
Total liabilities        13,632,744    8,200,227 
                
Equity   21           
Issued capital        62    62 
Capital reserve        5,443,786    5,351,873 
Treasury shares        (90)   - 
Other comprehensive income        (72,335)   (56,334)
Retained earnings (accumulated losses)        600,956    (202,276)
Equity attributable to owners of the parent        5,972,379    5,093,325 
Non-controlling interests        626    (334)
Total equity        5,973,005    5,092,991 
                
Total liabilities and equity        19,605,749    13,293,218 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

StoneCo Ltd.

 

Consolidated statement of profit or loss

Years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian Reais, unless otherwise stated) 

 

   Notes  2019  2018  2017
             
Net revenue from transaction activities and other services   23    770,276    514,602    224,215 
Net revenue from subscription services and equipment rental   23    331,565    213,679    104,952 
Financial income   23    1,287,760    801,322    412,178 
Other financial income   23    186,367    49,578    25,273 
Total revenue and income        2,575,968    1,579,181    766,618 
                     
Cost of services        (426,961)   (323,039)   (224,109)
Administrative expenses        (285,788)   (252,852)   (174,601)
Selling expenses        (360,612)   (190,177)   (92,018)
Financial expenses, net        (353,451)   (301,065)   (237,094)
Other operating expenses, net        (57,691)   (69,264)   (134,151)
    24    (1,484,503)   (1,136,397)   (861,973)
                     
Loss on investment in associates        (810)   (445)   (310)
Profit (loss) before income taxes        1,090,655    442,339    (95,665)
                     
Current income tax and social contribution   11    (217,228)   (154,882)   (5,682)
Deferred income tax and social contribution   11    (69,232)   17,770    (3,622)
Net income (loss) for the year        804,195    305,227    (104,969)
                     
Net income (loss) attributable to:                    
Owners of the parent        803,232    301,232    (108,731)
Non-controlling interests        963    3,995    3,762 
         804,195    305,227    (104,969)
Earnings (loss) per share                    
Basic earnings (loss) per share for the year attributable to owners of the parent (in Brazilian Reais)   22    R$ 2.90    R$ 1.30    (R$ 0.49) 
Diluted earnings (loss) per share for the year attributable to owners of the parent (in Brazilian Reais)   22    R$ 2.85    R$ 1.29    (R$ 0.49) 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

StoneCo Ltd.

 

Consolidated statement of other comprehensive income

Years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian Reais, unless otherwise stated) 

 

   Notes  2019  2018  2017
             
Net income (loss) for the year        804,195    305,227    (104,969)
Other comprehensive income                    
Other comprehensive income that may be reclassified to profit or loss in subsequent periods (net of tax):                    
Changes in the fair value of accounts receivable from card issuers at fair value through other comprehensive income        (15,062)   (13,969)   - 
Changes in the fair value of listed securities at fair value through other comprehensive income        (1)   -    - 
Gain on available-for-sale financial assets        -    -    2,595 
Other comprehensive income that will not be reclassified to profit or loss in subsequent periods (net of tax):                    
Changes in the fair value of equity instruments designated at fair value through other comprehensive income   7    (938)   954    - 
Other comprehensive income (loss) for the year, net of tax        (16,001)   (13,015)   2,595 
                     
Total comprehensive income (loss) for the year, net of tax        788,194    292,212    (102,374)
                     
Total comprehensive income (loss) attributable to:                    
Owners of the parent CI        787,231    287,961    (106,136)
Non-controlling interests        963    4,251    3,762 
         788,194    292,212    (102,374)

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

StoneCo Ltd.

 

Consolidated statement of changes in equity

Years ended December 31, 2019, 2018 and 2017 

(In thousands of Brazilian Reais)

 

      Attributable to owners of the parent      
            Capital reserve                                 
   Notes   Issued capital    Additional paid-in capital    

Trans-

actions among share-

holders

    Special reserve    Other reserves    Total    Treasury shares    Other compre-
hensive income
    Retained earnings (accumulated losses)    Total    

Non-

controlling interest

    Total 
Balance as of December 31, 2016      41    944,201    (35,195)   -    14,364    923,370    -    -    (394,287)   529,124    58,118    587,242 
Capital increase  21(b)/28   8    527,523    -    -    -    527,523    -    -    -    527,531    1,483    529,014 
Repurchase of shares  21(b)   (3)   (280,822)   -    -    -    (280,822)   -    -    -    (280,825)   -    (280,825)
Acquisition of non-controlling interest  28   -    -    (198,013)   -    -    (198,013)   -    -    -    (198,013)   (52,467)   (250,480)
Dilution of non-controlling interest  28   -    -    (4,309)   -    -    (4,309)   -    -    -    (4,309)   4,309    - 
Loss for the year      -    -    -    -    -    -    -    -    (108,731)   (108,731)   3,762    (104,969)
Other comprehensive income for the year      -    -    -    -    -    -    -    2,595    -    2,595    -    2,595 
Balance as of December 31, 2017      46    1,190,902    (237,517)   -    14,364    967,749    -    2,595    (503,018)   467,372    15,205    482,577 
Adoption of new accounting standard (IFRS 9)      -    -    -    -    -    -    -    (45,658)   (490)   (46,148)   (1,146)   (47,294)
Balance as of January 1, 2018      46    1,190,902    (237,517)   -    14,364    967,749    -    (43,063)   (503,508)   421,224    14,059    435,283 
Capital increase  21(b)/28   16    4,302,919    -    -    -    4,302,919    -    -    -    4,302,935    1,992    4,304,927 
Transaction costs  1.1   -    (75,774)   -    -    -    (75,774)   -    -    -    (75,774)   -    (75,774)
Repurchase and cancelation of shares  21(b)   -    -    -    -    (142,440)   (142,440)   -    -    -    (142,440)   -    (142,440)
Issuance of shares for business acquisition      -    22,000    -    -    -    22,000    -    -    -    22,000    -    22,000 
Reclassification of share-based payments liability to equity  26   -    -    -    -    217,487    217,487    -    -    -    217,487    -    217,487 
Grant of share-based payments  26   -    -    -    -    46,091    46,091    -    -    -    46,091    -    46,091 
Acquisition of non-controlling interest  28   -    -    13,841    -    -    13,841    -    -    -    13,841    (20,636)   (6,795)
Net income for the year      -    -    -    -    -    -    -    -    301,232    301,232    3,995    305,227 
Other comprehensive income for the year      -    -    -    -    -    -    -    (13,271)   -    (13,271)   256    (13,015)
Balance as of December 31, 2018      62    5,440,047    (223,676)   -    135,502    5,351,873    -    (56,334)   (202,276)   5,093,325    (334)   5,092,991 
Repurchase of shares  21(b)   -    -    -    -    -    -    (90)   -    -    (90)   -    (90)
Share-based payments  26   -    -    -    -    30,786    30,786    -    -    -    30,786    1    30,787 
Deferred tax benefit of tax deductible goodwill from purchased noncontrolling interests 

21(d)

   -    -    -    61,127    -    61,127    -    -    -    61,127    -    61,127 
Net income for the year      -    -    -    -    -    -    -    -    803,232    803,232    963    804,195 
Dividends paid      -    -    -    -    -    -    -    -    -    -    (4)   (4)
Other comprehensive income for the year      -    -    -    -    -    -    -    (16,001)   -    (16,001)   -    (16,001)
Balance as of December 31, 2019      62    5,440,047    (223,676)   61,127    166,288    5,443,786    (90)   (72,335)   600,956    5,972,379    626    5,973,005 
                                                                

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7

StoneCo Ltd.

 

Consolidated statement of cash flows

Years ended December 31, 2019, 2018 and 2017 

(In thousands of Brazilian Reais)

 

   Notes  2019  2018  2017
Operating activities                  
Net income (loss) for the year      804,195    305,227    (104,969)
Adjustments to reconcile net income (loss) for the year to net cash flows:                  
Depreciation and amortization  12(a)   163,396    92,333    57,208 
Deferred income tax and social contribution  11   69,232    (17,770)   3,622 
Loss on investment in associates      810    445    310 
Other financial costs and foreign exchange, net      110,744    126,756    71,920 
Provision for contingencies  20   9,420    778    424 
Share-based payments expense  26   30,787    46,091    138,937 
Allowance for expected credit losses  8/9   33,926    14,272    2,716 
Impairment of intangible assets  13   -    4,764    - 
Loss on disposal of property, equipment and intangible assets  29   14,639    10,712    5,461 
Fair value adjustment in financial instruments      (17,446)   -    - 
Fair value adjustment in derivatives      (12,099)   (609)   - 
Remeasurement of previously held interest in subsidiary acquired  5   -    (21,441)   - 
Others      -    (416)   (3,582)
Working capital adjustments:                  
Accounts receivable from card issuers      (4,779,467)   (3,990,395)   (1,774,348)
Receivables from related parties      (1,132)   3,986    (7,052)
Recoverable taxes      (67,791)   (98,695)   (33,709)
Prepaid expenses      2,603    (4,675)   (6,418)
Trade accounts receivable and other assets      (284,982)   (36,855)   (15,627)
Accounts payable to clients      245,866    570,132    210,251 
Taxes payable      238,967    183,921    33,635 
Labor and social security liabilities      39,713    59,069    15,892 
Provision for contingencies      (1,098)   (22)   (51)
Other liabilities      (3,434)   50,910    24,734 
Interest paid      (268,453)   (141,447)   (47,501)
Interest income received, net of costs      1,191,136    514,788    147,444 
Income tax paid      (171,313)   (87,442)   (3,246)
Net cash used in operating activities      (2,651,781)   (2,415,583)   (1,283,949)
                   
Investing activities                  
Purchases of property and equipment  29   (333,568)   (140,887)   (140,982)
Purchases and development of intangible assets  29   (66,381)   (44,838)   (21,283)
Acquisition of subsidiary, net of cash acquired      -    (2,940)   - 
Proceeds from (acquisition of) short-term investments, net      (21,930)   (2,557,312)   (145,517)
Proceeds from the disposal of non-current assets  29   1,104    13,421    9,028 
Acquisition of interest in associates      (16,789)   (4,549)   (1,220)
Proceeds from the disposal of assets held for sale      -    -    300 
Net cash used in investing activities      (437,564)   (2,737,105)   (299,674)
                   
Financing activities                  
Proceeds from borrowings  18(g)   2,958,838    746,909    - 
Payment of borrowings      (801,849)   (3,665)   (11,655)
Proceeds from FIDC quota holders  18(g)   1,640,000    10,000    2,053,273 
Payment of leases  18(g)   (38,023)   (14,296)   (12,983)
Capital increase, net of transaction costs  21/28   -    4,229,153    529,014 
Repurchase of shares  21(b)   (90)   (142,440)   (280,825)
Acquisition of non-controlling interests      (923)   (30,773)   (223,399)
Dividends paid to non-controlling interests      (4)   -    - 
Net cash provided by financing activities      3,757,949    4,794,888    2,053,425 
                   
Effect of foreign exchange on cash and cash equivalents      1,809    13,777    1,504 
Change in cash and cash equivalents      670,413    (344,023)   471,306 
                   
Cash and cash equivalents at beginning of year  6   297,929    641,952    170,646 
Cash and cash equivalents at end of year  6   968,342    297,929    641,952 
Change in cash and cash equivalents      670,413    (344,023)   471,306 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

1.Operations

 

StoneCo Ltd. (the “Company”), formerly known as DLP Payments Holdings Ltd., is a Cayman Islands exempted company with limited liability, incorporated on March 11, 2014. The registered office of the Company is Harbour Place, 103 South Church Street in George Town, Grand Cayman. The Company’s principal business office is located in the city of São Paulo, Brazil.

 

The Company is controlled by HR Holdings, LLC, which owns 69.41% of Class B common shares, whose ultimate parent is an investment fund, VCK Investment Fund Limited SAC, owned by the co-founding individuals. Company’s shares are publicly traded on the Nasdaq Global Market under the symbol “STNE”.

 

The Company and its subsidiaries (collectively, the “Group”) are principally engaged in providing financial technology solutions to clients and integrated partners to conduct electronic commerce seamlessly across in-store, online, and mobile channels, which include integration to cloud-based technology platforms, offering services for acceptance of various forms of electronic payment, automation of business processes at the point-of-sale and working capital solutions.

 

The consolidated financial statements were approved at the Audit Committee meeting on February 27, 2020.

 

1.1.Initial Public Offering and Follow On

 

On October 25, 2018, the Company completed its Initial Public Offering (“IPO”), offering 58,333,333 of its Class A common shares, of which 45,818,182 new shares were offered by the Company and the remaining 12,515,151 shares were offered by the selling shareholders, including the full exercise of the underwriters’ option to purchase 7,608,695 additional shares from the selling shareholders.

 

The initial offering price was US$ 24.00 per Class A common share, resulting in gross proceeds of US$ 1,103,822 thousand. The Company received net proceeds of US$ 1,060,544 thousand (or R$ 3,923,785), after deducting US$ 43,278 thousand in underwriting discounts and commissions. Additionally, the Company incurred in US$ 20,471 thousand (or R$ 75,774) regarding other offering expenses.

 

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 No.333-227634), which was declared effective by the Securities and Exchange Commission on October 24, 2018. The common shares began trading on the Nasdaq Global Select Market on October 25, 2018 under the symbol “STNE”.

 

Simultaneously with the IPO, the Company entered into an agreement to sell additional 4,166,666 new Class A common shares to a wholly-owned subsidiary of Ant Small and Micro Financial Services Group Co., Ltd., a company organized under the laws of the People’s Republic of China (“Ant Financial”), in a placement exempt from registration under the U.S. Securities Act of 1933, as amended. The price per share sold in this placement was the price per share to the public in the IPO, resulting in proceeds of US$ 100 million (or R$ 375,910).

 

In connection with the consummation of the IPO, the Co-Investment Shares granted to certain employees and represented by common shares in DLP Par Participações S.A. (“DLP Par”) were exchanged for Class A common shares through the execution of a contribution agreement entered into between the Company and each holder of awards under such plans, totaling 5,333,202 shares of the Company after the share split described in Note 21.

 

On April 1, 2019 the Company filed a follow-on prospectus declared effective by the Securities and Exchange Commission (”SEC”) On April 2, 2019 in which selling shareholders offered 19,500,000 Class A common shares of the Company. The Company did not offer any Class A common shares and did not receive any proceeds from the sale of this shares.

 

1.2.Corporate reorganization

 

In December 2019, the Group reorganized its structure. The assets and liabilities from StoneCo Brasil Participações S.A. (“StoneCo Brasil”) were split into Stone Pagamentos S.A. (“Stone”) and other two new holdings, STNE Participações S.A. (“STNE Par”) and STNE Participações em Tecnologia S.A. (“STNE Par Tec”). StoneCo Brasil was extinct.

 

The reorganization conducted had the objective to create a more efficient corporate organization structure, allowing for a reduction in administrative expenses. As a result of the reorganization the Company has no more rights under the tax loss carryforwards at StoneCo Brasil, which were no longer recognized.

 

F-9

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

2.Group information

 

2.1.Subsidiaries

 

The consolidated financial statements of the Group include the following subsidiaries and structured entities:

 

            % Groups's equity interest
Entity name   Country of incorporation   Principal activities   2019   2018
DLP Capital LLC (“DLP Capital”)   USA   Holding company   100.00   100.00
DLP Par Participações S.A. (“DLP Par”)   Brazil   Employee trust   100.00   100.00
MPB Capital LLC (“MPB Capital”)   USA   Investment company   100.00   100.00
StoneCo Brasil Participações S.A. (“StoneCo Brasil”) (Note 1.2)   Brazil   Holding company   -   100.00
STNE Participações S.A. (“STNE Par”) (Note 1.2)   Brazil   Holding company   100.00   -
STNE Participações em Tecnologia S.A. (“STNE Par Tec”) (Note 1.2)   Brazil   Holding company   100.00   -
Stone Pagamentos S.A. (“Stone”)   Brazil   Merchant acquiring   100.00   100.00
MNLT Soluções de Pagamentos S.A. (“MNLT”)   Brazil   Merchant acquiring   100.00   100.00
Pagar.me Pagamentos S.A. (“Pagar.me”)   Brazil   Merchant acquiring   100.00   100.00
Buy4 Processamento de Pagamentos S.A. (“Buy4”)   Brazil   Processing card transactions   100.00   99.99
Buy4 Sub LLC (“Buy4 LLC”)   USA   Cloud store card transactions   100.00   99.99
Cappta S.A. (“Cappta”)   Brazil   Electronic fund transfer   61.79   61.79
Mundipagg Tecnologia em Pagamento S.A. (“Mundipagg”)   Brazil   Technology services   99.70   99.70
Equals S.A. (“Equals”)   Brazil   Reconciliation services   100.00   100.00
Stone Franchising Ltda. (“Stone Franchising”)   Brazil   Franchising management   99.99   99.99
TAG Tecnologia para o Sistema Financeiro S.A. (“TAG”)   Brazil   Financial assets register   100.00   99.98
Stone Sociedade de Crédito Direto S.A. (“Stone SCD”) (a)   Brazil   Financial services   100.00   -
Stone Logística Ltda (Stone Log) (b)   Brazil   Logistic services   100.00   -
PDCA S.A. ("PDCA") (c)   Brazil   Merchant acquiring   100.00   -
FIDC TAPSO (Note 3.2.1)   Brazil   Receivables investment fund   100.00   100.00
FIDC AR1 (Note 3.2.1)   Brazil   Receivables investment fund   100.00   100.00
FIDC AR2 (Note 3.2.1)   Brazil   Receivables investment fund   100.00   100.00
FIDC SOMA (Note 3.2.1) (d)   Brazil   Receivables investment fund   100.00   -

F-10

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(a)On July 22, 2019, the Company obtained a license from BACEN to offer credit through Stone SCD which was formed on August 5, 2019 to provide financial solutions to its clients.

 

(b)In September 2019, the Company started operating the subsidiary Stone Log, which was formed to provide faster and more efficient service to its clients.

 

(c)On July 29, 2019, the Company executed a binding memorandum of understanding to create a partnership with Grupo Globo, the largest media conglomerate in Brazil, targeting the micromerchant space. The partnership will combine Stone’s experience in technology and payments with Grupo Globo’s deep expertise in media and marketing. On August 20, 2019, PDCA was formed to the partnership, as described. The closing of the transaction is subject to certain conditions.

 

(d)In October 2019, the Group launched FIDC SOMA used as funding resource to the credit operation. A “Fundo de Investimento em Direitos Créditórios” (“FIDC”) is legally an investment fund authorized by the Brazilian Monetary Council, and specifically designed as investment vehicle for investing in Brazilian credit receivables.

 

2.2.Associates

 

            % Groups's equity interest
Entity name   Country of incorporation   Principal activities   2019   2018
Linked Gourmet Soluções para Restaurantes S.A. (“Linked”) (a)   Brazil   Technology services   48.56   27.06
Collact Serviços Digitais Ltda. (“Collact”) (b)   Brazil   Technology services   25.00   -
VHSYS Sistema de Gestão S.A. (“VHSYS”) (c)   Brazil   Technology services   33.33   -
Alpha-Logo Serviços de Informática S.A. ("Tablet Cloud") (d)   Brazil   Technology services   25.00   -
Trinks Serviços de Internet S.A. ("Trinks") (e)   Brazil   Technology services   19.90   -

 

(a)On June 21, 2018, the Group acquired a 27.06% interest in Linked for R$ 2,366 fully paid by December 2018. Linked is an unlisted company based in São Paulo, Brazil, that develops software and services for the food service market. The Group also holds an option to acquire an additional interest, exercisable in the period from 2 to 3 years from the date of the initial acquisition, which would allow the Group to obtain control of Linked. Through this acquisition, the Group expects to obtain synergies in servicing its clients. During the year, the Group acquired additional 21.50% interest in Linked through capital increase of R$ 5,181 of which R$ 2,000 paid in cash, R$ 1,600 by converting credits owned by STNE Par and R$ 1,581 payable until January 2020.

 

(b)On February 6, 2019, the Group acquired a 25% interest in Collact, a private company based in the State of São Paulo, Brazil, that develops customer relationship management (“CRM”) software for customer engagement, focused mainly in the food service segment, with which the Company expects to obtain synergies in its services to clients. The Group will pay R$ 1,667 until April 2020 for the acquisition of such interest. The Group also holds an option to acquire an additional interest in the period from 2 to 3 years counted from the date of the initial acquisition, which will allow the Group to acquire an additional 25% interest in Collact.

 

(c)On June 4, 2019, the Group acquired a 33.33% interest in VHSYS, a private company based in the State of Paraná, Brazil, for R$ 13,785 payable until January 2020. The Group also holds an option to acquire an additional interest in the period from 1 to 2 years counted from the date of the initial acquisition. In case of acquisition of the additional interest, the Group will hold 50% of its corporate capital. VHSYS is an omni-channel, cloud-based, Application Programming Interface (“API”) driven, Point of Sale (“POS”) and Enterprise Resource Planning (“ERP”) platform built to serve an array of service and retail businesses. The self-service platform consists of over 40 applications, accessible a la carte, such as order and sales management, invoicing, dynamic inventory management, cash and payments management, CRM, mobile messaging, along with marketplace, logistics, and e-commerce integrations, among others.

 

F-11

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(d)On August 27, 2019, the Group acquired a 25% interest in Tablet Cloud, a private company based in the State of São Paulo, Brazil, for R$ 1,688. The Group already paid R$ 1,003 and will pay the remaining amount until May 2020. The Group also holds an option to acquire an additional interest in the period from 1.5 to 3 years counted from the date of the initial acquisition. In case of acquisition of the additional interest, the Group will hold 50% of its corporate capital. Tablet Cloud is a white label POS and simple ERP application focused on small and medium businesses with simpler needs. The application runs on smart POS and tablet solutions, giving business owners complete control over their cash register and inventory in a fully mobile device while having a robust ERP platform accessible online.

 

(e)On November 25, 2019, the Group acquired 19.9% interest in Trinks for R$ 4,493 payable until November 2020. Trinks is an unlisted company based in the State of Rio de Janeiro, Brazil, that develops an integrated solution of management, focused mainly in the beauty service segment. The Group also holds an option to acquire an additional interest in the period from 1.5 to 3 years counted from the date of the initial acquisition, which will allow the Group to acquire an additional 30.1% interest in Trinks. The Group has determined that Trinks is an associate by its significant influence on the board of directors.

 

Each of the options described above have been evaluated in accordance with pre-determined formulas and R$ 1,714 were recorded in the consolidated statement of financial position as Derivative financial instruments.

 

3.Significant accounting policies

 

3.1.Basis of preparation

 

The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

The consolidated financial statements have been prepared on a historical cost basis, except for some short-term investments, investments in equity instruments, accounts receivable from card issuers, some trade accounts receivable and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Brazilian reais (“R$”), and all values are rounded to the nearest thousand (R$ 000), except when otherwise indicated.

 

3.2.Basis of consolidation

 

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries. Control is achieved when the Group:

 

has power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);

 

is exposed, or has rights, to variable returns from its involvement with the investee; and

 

has the ability to use its power to affect its returns.

 

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

 

the contractual arrangement(s) with the other vote holders of the investee;

 

rights arising from other contractual arrangements; and

 

the Group’s voting rights and potential voting rights.

 

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

 

F-12

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction, in the reserve for “Transactions among shareholders.”

 

3.2.1.Consolidation of a structured entity

 

A structured entity is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

 

Based on the contractual terms, the Group assessed that the FIDCs are structured entities under IFRS 10 and that the Group controls them. See 4.8 for further details.

 

3.3.Segment information

 

In reviewing the operational performance of the Group and allocating resources, the chief operating decision maker (“CODM”) of the Group, who is the Group’s Chief Executive Officer (“CEO”) and the Board of Directors (“BoD”), reviews selected items of the statement of profit or loss and other 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 associates.

 

The Group’s revenue, results and assets for this one reportable segment can be determined by reference to the consolidated statement of profit or loss, consolidated statement of other comprehensive income and consolidated statement of financial position.

 

3.4.Cash and cash equivalents

 

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value, readily convertible into cash.

 

3.5.Foreign currency translation

 

The Group’s consolidated financial statements are presented in Brazilian reais (“R$”), which is the Company’s functional currency.

 

For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currency for all of the Company’s subsidiaries is also the Brazilian real.

 

Transactions in foreign currencies are initially recorded by the Group’s entities in Brazilian reais at the spot rate at the date the transaction first qualifies for recognition.

 

Monetary assets and liabilities denominated in foreign currencies are translated into Brazilian reais using the exchange rates prevailing at the reporting date. Exchange gains and losses arising from the settlement of transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognized in profit or loss for the year. These mostly arise from transactions carried out by clients with credit and debit cards issued by foreign card issuers, from the translation of the Group’s financial instruments denominated in foreign currencies and acquisition of POS equipment.

 

F-13

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.6.Financial instruments

 

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

 

3.6.1.Financial assets

 

3.6.1.1.Initial recognition and measurement

 

Financial assets are classified at initial recognition, and subsequently measured at amortized cost, fair value through other comprehensive income (“FVOCI”), or fair value through profit or loss (“FVPL”).

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. Except for trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus transactions costs, in the case of a financial asset not at FVPL. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 – Revenue from Contracts with Customers.

 

For a financial asset to be classified and measured at amortized cost or FVOCI, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at FVPL, irrespective of the business model.

 

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets classified and measured at FVOCI are held within a business model with the objective of both, holding to collect contractual cash flows and selling.

 

Financial assets at FVPL include financial assets held for trading, financial assets designated upon initial recognition at FVPL, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at FVOCI, as described above, debt instruments may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

 

Purchases or sales of financial assets that require delivery of assets within a time frame set by regulation or market practice (regular way trades) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

 

3.6.1.2.Subsequent measurement

 

For purposes of subsequent measurement, financial assets are classified in four categories:

 

Financial assets at amortized cost (debt instruments);

 

Financial assets at FVOCI with recycling of cumulative gains and losses (debt instruments);

 

Financial assets at FVOCI with no recycling of cumulative gains and losses upon derecognition (equity instruments); or

 

Financial assets at FVPL.

 

F-14

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.6.1.2.1.Financial assets at amortized cost (debt instruments)

 

Financial assets at amortized cost are subsequently measured using the effective interest rate (“EIR”) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

 

The Group’s financial assets at amortized cost includes trade accounts receivable, other assets and loans to directors included under receivables from related parties.

 

3.6.1.2.2.Financial assets at FVOCI (debt instruments)

 

For debt instruments at FVOCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the statement of profit or loss and similarly to financial assets measured at amortized cost. The remaining fair value changes are recognized in OCI. Upon derecognition, the cumulative fair value change recognized in OCI is recycled to profit or loss. This category is the most relevant to the Group.

 

The Group’s financial assets at FVOCI includes accounts receivable from card issuers and some short-term investments.

 

3.6.1.2.3.Financial assets designated at FVOCI (equity instruments)

 

Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at FVOCI when they meet the definition of equity under IAS 32 – Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.

 

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at FVOCI are not subject to impairment assessment.

 

The Group elected to classify irrevocably its non-listed equity investments under this category, included in short-term investments.

 

3.6.1.2.4.Financial assets at FVPL

 

Financial assets at FVPL are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of profit or loss.

 

This category includes Bonds and Investment funds under short-term investments, which the Group had not irrevocably elected to classify at FVOCI, derivative financial instruments and loans held for sale under trade accounts receivable. Dividends on listed equity investments are also recognized as other income in the statement of profit or loss when the right of payment has been established.

 

3.6.1.3.Derecognition

 

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:

 

The contractual rights to receive cash flows from the asset have expired; or

 

The Group has transferred its contractual rights to receive cash flows from the asset or has assumed a contractual obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

When the Group has transferred its contractual rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of its continuing involvement.

 

F-15

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

 

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

 

3.6.1.4.Impairment of financial assets

 

The Group recognizes an allowance for expected credit losses (“ECLs”) for all debt instruments not held at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

The Group applies a simplified approach in calculating ECLs, therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs, provision matrix and days past due at each reporting date.

 

The Group applies a simplified approach on both Accounts receivable from card issuers and Trade accounts receivable. Accounts receivable from card issuers are considered contract assets that have a maturity of one year or less.

 

3.6.2.Financial liabilities

 

3.6.2.1.Initial recognition and measurement

 

Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, amortized cost or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

 

All financial liabilities are recognized initially at fair value and, in the case of amortized cost, net of directly attributable transaction costs.

 

The Group’s financial liabilities include accounts payable to clients, trade and other liabilities, loans and financing including bank overdrafts, and derivative financial instruments.

 

3.6.2.2.Subsequent measurement

 

The measurement of financial liabilities depends on their classification, as described below:

 

3.6.2.2.1.Financial liabilities at FVPL

 

Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVPL.

 

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

 

Gains or losses on liabilities held for trading are recognized in the statement of profit or loss.

 

Financial liabilities designated upon initial recognition at FVPL are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. This category includes only derivative financial instruments.

 

F-16

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.6.2.2.2.Financial liabilities at amortized cost

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. This category is the most relevant to the Group.

 

Amortized cost is calculated by considering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of profit or loss.

 

This category includes all financial liabilities, except derivative financial instruments.

 

3.6.2.3.Derecognition

 

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss.

 

Discount fee charged for the prepayment to clients of their installment receivables from us is measured by the difference between the original amount payable to the client, net of commissions and fees charged, and the prepaid amount. Financial income is recognized once the client has elected for the receivable to be prepaid.

 

3.6.3.Fair value of financial instruments

 

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

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

 

·In the principal market for the asset or liability; or

 

·In the absence of a principal market, in the most advantageous market for the asset or liability.

 

The principal or the most advantageous market must be accessible by the Group.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

The Group uses the following hierarchy to determine and disclose the fair value of financial instruments through measurement technique:


• Level I - quoted prices in active markets for identical assets or liabilities;


• Level II - other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly; and


• Level III - techniques using inputs that have a significant effect on the recorded fair value that are not based on observable market data. 

 

F-17

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

 

3.6.4.Offsetting of financial instruments

 

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.

 

3.6.5.Derivative financial instruments

 

From time to time, the Group uses derivative financial instruments, such as non-deliverable forward currency contracts to hedge its foreign currency risks. Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss.

 

The Group does not apply hedge accounting for its derivative financial instruments.

 

3.7.Leases

 

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. In the event that fulfillment of the arrangement is dependent on the use of specific assets or the arrangement transfers a right to use the asset, such assets are defined as a lease transaction.

 

3.7.1.Group as lessee

 

The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

3.7.1.1.Right-of-use assets

 

The Group recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows:

 

 

Estimated useful
lives (years)

Offices   1-10
Vehicles     1-3
Software        3

F-18

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment.

 

3.7.1.2.Lease liabilities

 

At the commencement date of the lease, the Group recognizes under Loans and financing lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

• Short-term leases and leases of low-value assets

 

The Group applies the short-term lease recognition exemption to its short-term leases of Offices, Pin Pads & POS, software, vehicles and other equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US$ 5,000). Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

3.7.1.3.Group as lessor

 

Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

 

The Group has cancelable month-to-month lease contracts related to electronic transaction capture equipment to third parties (clients). The leased assets are included in “Property and equipment” in the consolidated statement of financial position and are depreciated over their expected useful lives. Income from operating leases (net of any incentives given to the lessee) is recognized on a straight-line basis over the lease term in Net revenue from subscription services and equipment rental.

 

3.8.Property and equipment

 

All property and equipment are stated at historical cost less accumulated depreciation and impairment losses, if any. Historical cost includes expenditures that are directly attributable to the acquisition of the items and, if applicable, net of tax credits. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item is material and can be measured reliably. All other repairs and maintenance expenditures are charged to profit or loss during the period in which they are incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:

 

F-19

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

Estimated useful
lives (years)

Pin Pads & POS     3
IT equipment and facilities 5-10
Leasehold improvements   3-5
Furniture and fixtures    10
Telephony equipment       5
Vehicles       5

 

Leasehold improvements and Right-of-use assets are amortized using the straight-line method, over the shorter of the estimated useful life of the asset or the remaining term of the lease.

 

Assets’ residual values, useful lives and methods of depreciation are reviewed, at each reporting date and adjusted prospectively, if appropriate. Gains and losses on disposals or derecognition are determined by comparing the disposal proceeds (if any) with the carrying amount and are recognized in profit or loss.

 

3.9.Intangible assets, other than goodwill

 

3.9.1.Software and development costs

 

Certain direct development costs associated with internally developed software and software enhancements of the Group’s technology platform are capitalized. Capitalized costs, which occur post determination by management of technical feasibility, include external services and internal payroll costs. These costs are recorded as intangible assets when development is complete and the asset is ready for use, and are amortized on a straight-line basis, generally over a period of five years. Research and pre-feasibility development costs, as well as maintenance and training costs, are expensed as incurred. In certain circumstances, management may determine that previously developed software and its related expense no longer meets management’s definition of feasible, which could then result in the impairment of such asset.

 

3.9.2.Other intangible assets

 

Separately acquired intangible assets are measured at cost on initial recognition. The cost of intangible assets acquired in a business combination corresponds to their fair value at the acquisition date. After initial recognition, intangible assets are stated at cost, less any accumulated amortization and accumulated impairment losses, if any. Internally generated intangible assets other than (3.9.1) above, are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.

 

The useful lives of intangible assets are assessed as finite or indefinite. As of December 31, 2019, and 2018, the Group does not hold indefinite life intangible assets, except for goodwill.

 

Intangible assets with finite useful lives are amortized over their estimated useful lives and tested for impairment whenever there is an indication that their carrying amount may be not be recovered. The period and method of amortization for intangible assets with finite lives are reviewed at least at the end of each fiscal year or when there are indicators of impairment. Changes in estimated useful lives or expected consumption of future economic benefits embodied in the assets are considered to modify the amortization period or method, as appropriate, and treated as changes in accounting estimates.

 

The amortization of intangible assets with definite lives is recognized in profit or loss in the expense category consistent with the use of intangible assets. The useful lives of the intangible assets are shown below: 

 

F-20

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

 

Estimate useful
life (years)

Software  5
Customer relationship 10
Trademarks and patents 1-2
Licenses for use     5

 

Gains and losses resulting from the disposal or derecognition of intangible assets are measured as the difference between the net disposal proceeds (if any) and their carrying amount and are recognized in profit or loss.

 

3.10. Impairment of non-financial assets

 

The Group assesses, at each reporting date, whether there is any indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or Cash Generating Unit’s (“CGU’s”) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

 

In determining fair value less costs of disposal, recent market transactions are considered. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

Impairment losses of continuing operations are recognized in the statement of profit or loss in expense categories consistent with the function of the impaired asset.

 

3.10.1.Goodwill

 

Goodwill is monitored by management at the level of the CGU. Given the interdependency of cash flows and the merger of business practices, all Group’s entities are considered a single CGU and, therefore, goodwill impairment test is performed at the single operating segment level.

 

The Group tests whether goodwill has suffered any impairment on an annual basis at December 31 and when circumstances indicate that the value may be impaired. Impairment losses relating to goodwill cannot be reversed in future periods See Note 13 for a discussion of the model and key assumptions.

 

3.10.2.Other non-financial assets

 

For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. 

 

F-21

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.11. Provisions

 

Provisions for legal claims (labor, civil and tax) are recognized when (i) the Group has a present obligation (legal or constructive) as a result of a past event; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount has been reliably estimated.

 

If there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as Financial expenses, net.

 

Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain.

 

The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement.

 

3.12. Prepaid expenses

 

Prepaid expenses are recognized as an asset in the statement of financial position. These expenditures include prepaid software licenses, certain consulting services and insurance premiums.

 

3.13. Taxes

 

3.13.1.Current income and social contribution taxes

 

Income taxes are comprised of taxation over operations in Brazil, related to Corporate Income Tax (“IRPJ”) and Social Contribution on Net Profit (“CSLL”) on income on the Group’s Brazilian entities. According to Brazilian tax law, income taxes and social contribution are assessed and paid by each legal entity and not on a consolidated basis.

 

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income. The Brazilian entities of the Group record a monthly provision for IRPJ (25%) and CSLL (9%), on an accrual basis, paying taxes based on the monthly estimate.

 

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

 

Cayman Islands laws currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to the Company or to any holder of ordinary shares.

 

3.13.2.Deferred income and social contribution taxes

 

Deferred income tax and social contribution are recognized, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred taxes are not accounted for if they arise from initial recognition of goodwill or an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

 

Deferred tax assets are recognized only to the extent it is probable that future taxable profit will be available against which the temporary differences and/or tax losses can be utilized. In accordance with the Brazilian tax legislation, loss carryforwards can be used to offset up to 30% of taxable profit for the year and do not expire.

 

F-22

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Deferred tax is provided on temporary differences arising on investments in subsidiaries, except for a deferred tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are presented net in the statement of financial position when there is a legally enforceable right and the intention to offset them upon the calculation of current taxes, generally when related to the same legal entity and the same jurisdiction. Accordingly, deferred tax assets and liabilities in different entities or in different countries are generally presented separately, and not on a net basis.

 

3.13.3.Sales taxes

 

Revenues, expenses and assets are recognized net of sales tax, except:

 

When the sales taxes incurred on the purchase of goods or services are not recoverable from tax authorities, in which case the sales taxes are recognized as part of the cost of acquiring the asset or expense item, as applicable;

 

When the amounts receivable or payable are stated with the amount of sales taxes included.

 

The net amount of sales taxes, recoverable or payable to the tax authority, is included as part of receivables or payables in the statement of financial position, and net of corresponding revenue or cost / expense, in the statement of profit or loss.

 

Sales revenues in Brazil are subject to taxes and contributions, at the following statutory rates: 

 

  

Rate

    

Transaction
activities
and other
services

    

Subscription services and equipment
rental

    

Financial
income

 
Contribution on gross revenue for social integration program (“PIS”) (a)    1.65%   1.65%   0.65%
Contribution on gross revenue for social security financing (“COFINS”) (a)    7.60%   7.60%   4.00%
Taxes on service (“ISS”) (b)    2.00%        
Social security levied on gross revenue (“INSS”) (c)    4.50%        

 

(a)PIS and COFINS are contributions levied by the Brazilian Federal government on gross revenues. These amounts are invoiced to and collected from the Group’s customers and recognized as deductions to gross revenue (Note 23) against tax liabilities, as we are acting as tax withholding agents on behalf of the tax authorities. PIS and COFINS paid on certain purchases may be claimed back as tax credits to offset PIS and COFINS payable. These amounts are recognized as Recoverable taxes (Note 10) and are offset on a monthly basis against Taxes payable (Note 17) and presented net, as the amounts are due to the same tax authority.

 

(b)ISS is a tax levied by municipalities on revenues from the provision of services. ISS tax is added to amounts invoiced to the Group’s customers for the services the Group renders. These are recognized as deductions to gross revenue (Note 23) against tax liabilities, as the Group acts as agent collecting these taxes on behalf of municipal governments. The rates may vary from 2.00% to 5.00%. The ISS stated in the table is applicable to the city of São Paulo and refers to the rate most commonly levied on the Group’s operations.

 

F-23

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(c)INSS is a social security charge levied on wages paid to employees. The subsidiaries Equals and Mundipagg pay INSS at a rate of 4.50% on gross revenue due to the benefits this regime offers compared with social security tax on payroll.

 

In addition, please see Note 10 for information in relation to contribution over revenue (PIS and COFINS) paid in the prior periods and recovered subsequently.

 

3.13.4.Tax on purchases

 

Taxes paid on purchase of goods and services can normally be recovered as tax credits, at the following statutory rates:

 

 

Rate

Contribution on gross revenue for social integration program (“PIS”) 1.65 %
Contribution on gross revenue for social security financing (“COFINS”) 7.60 %

 

3.14. Revenue and income

 

3.14.1.Revenue from contracts with clients

 

Revenue is recognized when the Group has transferred control of the goods or services to the clients, in an amount that reflects the consideration the Group expects to collect in exchange for those goods or services. The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the goods or services before transferring them to the client. The Group applies the following five steps:

 

1. Identification of the contract with a client

 

2. Identification of the performance obligations in the contract

 

3. Determination of the transaction price

 

4. Allocation of the transaction price to the performance obligations in the contract

 

5. Recognition of revenue when or as the entity satisfies a performance obligation

 

Revenue is recognized net of taxes collected from clients, which are subsequently remitted to governmental authorities.

 

Revenue from contracts with clients comprises:

 

3.14.1.1.Transaction activities and other services

 

The Group’s core performance obligations are to provide electronic payment processing services including the capture, transmission, processing and settlement of transactions carried out using credit, debit and voucher cards, as well as fees for other services. The Group’s promise to its clients is to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the clients’ use (i.e., number of payment transactions processed, number of cards on file, etc.); as such, the total transaction price is variable. The Group allocates the variable fees charged to the day in which it has the contractual right to bill its clients, therefore revenue is recognized at a point in time.

 

Revenue from transaction activities is recognized net of interchange fees retained by card issuers and assessment fees paid to payment scheme networks, which are pass-through charges collected on their behalf, as the Group does not bear the significant risks and rewards of the authorization, processing and settlement services provided by the payment scheme networks and card issuers.

 

The Group is an agent in the authorization, processing and settlement of payment transactions as it does not bear the significant risks and rewards of those services as follows:

 

F-24

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

The Group facilitates the acquisition of payment information and management of the client relationship, it is not primarily responsible for the authorization, processing and settlement services performed by payment schemes networks and card issuers;

 

The Group has no latitude to establish the assessment and interchange fees, which are set by the payment scheme networks. The Group generally has the right to increase its client discount rate to protect its net commission when interchange and assessment fees are increased by payment schemes networks;

 

The Group does not collect the interchange fee that is retained by the card issuer and effectively acts as a clearing house in collecting and remitting assessment fees and payment settlements on behalf of payment scheme networks and clients; and

 

The Group does not bear credit risk of the cardholder (i.e., the client’s customer). It does bear credit risk from the card issuer for the payment settlement and assessment fees. Card issuers are qualified by the payment scheme networks and are generally high credit quality financial institutions. Receivables can be considered to be collateralized by the cardholder’s invoice settlement proceeds. As such, the Group’s exposure to credit risk is generally low.

 

3.14.1.2.Subscription services and Equipment rental

 

The Group provides (i) subscription services, such as reconciliation solutions and business automatization solutions, and (ii) operating leases of electronic capture equipment to clients, net of withholding taxes.

 

The Group’s subscription services generally consist of services sold as part of a new or existing agreement or sold as a separate service. The Group’s subscription services may or may not be considered distinct based on the nature of the services being provided. Subscription service fees are charged as a fixed monthly fee, and the related revenue is recognized over time as control is transferred to the client, either as the subscription services are performed or as the services from a combined performance obligation are transferred to the client (over the term of the related transaction and processing agreement).

 

The Group accounts for equipment rental as a separate performance obligation and recognizes the revenue at its standalone selling price, considering that rental is charged as a fixed monthly fee. Revenue is recognized within net revenue on a straight-line basis over the contractual lease term, beginning when the client obtains control of the equipment lease. The Group does not manufacture equipment, but purchases equipment from third-party vendors.

 

3.14.1.3.Contracts with Multiple Performance Obligations

 

The Group’s contracts with its clients can consist of multiple performance obligations and the Group accounts for individual performance obligations separately if they are distinct. When equipment or services are bundled in an agreement with a client, the components are separated using the relative stand-alone selling price of the components which is based on the Group’s customary pricing for each element in separate transactions or expected cost plus a margin. In limited situations, the relative stand-alone selling price for an element that cannot be assessed on one of the previous basis, revenue is first allocated to the element where relative stand-alone selling price has been established and the residual amount would be allocated to the element with no relative stand-alone selling price.

 

3.14.1.4.Costs to obtain and fulfill a contract

 

The Group incurs in certain costs to obtain and fulfill a contract that are capitalized at the inception of the transaction. The cost comprises mainly commission to sellers in order to obtain a contract and logistic costs to fulfill a contract. The asset recognized is amortized on a straight-line basis over the expected life of merchants.

 

F-25

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.14.2.Financial income

 

Comprised mainly of discount fees charged for the prepayment to clients of their installment receivables from us. The discount is measured by the difference between the original amount payable to the client, net of commissions and fees charged, and the prepaid amount. Revenue is recognized once the client has elected for the receivable to be prepaid.

 

3.14.3.Other financial income

 

Mainly comprised of interest generated by listed securities bonds, indexed to fixed and floating rates.

 

3.15. Financial expenses, net

 

Financial expenses, net, includes costs on the sale of receivables to banks and interest expense on borrowings, interest to fund FIDC quota holders, foreign currency gains and losses on cash balances denominated in foreign currencies, bank service fees and gains and losses on derivative foreign currency swaps.

 

3.16. Employee benefits

 

3.16.1.Short-term obligations

 

Liabilities in connection with short-term employee benefits are measured on a non-discounted basis and are expensed as the related service is provided.

 

The liability is recognized for the expected amount to be paid under the plans of cash bonus or short-term profit sharing if the Group has a legal or constructive obligation of paying this amount due to past service provided by employees and the obligation may be reliably estimated.

 

3.16.2.Share-based payments

 

The Group has equity settled share-based payment plans, under which the management commits shares to employees and non-employees in exchange for services.

 

3.16.2.1.Equity settled transactions

 

The cost of equity-settled transactions with employees is measured using their fair value at the date they are granted. The cost is expensed together with a corresponding increase in equity over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.

 

Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions.

 

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. See Note 22.

 

F-26

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.16.3.Profit-sharing and bonus plans

 

The Group recognizes a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

 

3.17. Current and non-current classification

 

The Group presents assets and liabilities in the statement of financial position based on a current / non-current classification. An asset is current when it is:

 

expected to be realized or intended to be sold or consumed in the normal operating cycle;

 

held primarily for the purpose of trading;

 

expected to be realized within twelve months after the reporting period;

 

or

 

Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

 

All other assets are classified as non-current.

 

A liability is current when it is:

 

expected to be settled in the normal operating cycle;

 

held primarily for the purpose of trading;

 

due to be settled within twelve months after the reporting period;

 

or

 

There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

 

The Group classifies all other liabilities as non-current.

 

Deferred tax assets and liabilities are classified as non-current assets and liabilities.

 

3.18. Business combinations and goodwill

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, including assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure non-controlling interests in the acquiree at fair value or on the basis of its proportionate share in the identifiable net assets of the acquiree. Costs directly attributable to the acquisition are expensed as incurred.

 

The assets acquired and liabilities assumed are measured at fair value, classified and allocated according to the contractual terms, economic circumstances and relevant conditions as at the acquisition date.

 

Any contingent consideration to be transferred by the acquirer will be recognized at fair value on acquisition date. Subsequent changes in the fair value of the contingent consideration treated as an asset or liability should be recognized in profit or loss.

 

Goodwill is measured as the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the fair value of net assets acquired. If the fair value of net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all assets acquired and all liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date.

 

F-27

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at least annually at December 31 or whenever there is an indication that it may be impaired.

 

Impairment losses relating to goodwill are not reversed in future periods.

 

3.19. Investment in associates

 

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

 

The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries. The Group’s investments in its associate are accounted for using the equity method.

 

Under the equity method, the investment in an associate is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately.

 

The statement of profit or loss reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes, when applicable, in the statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

 

The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and noncontrolling interests in the subsidiaries of the associate.

 

The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

 

After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognizes the loss within Share of profit of an associate in the statement of profit or loss.

 

Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss.

 

None of the investments in associates presented significant restrictions on transferring resources in the form of cash dividends or repayment of obligations, during the periods reported.

 

3.20. New and amended standards and interpretations

 

3.20.1.New and amended standards and interpretations adopted

 

The Group applied IFRS 16 – Leases for the first time. The nature and effect as a result of adoption of this new accounting standard is described below.

 

Several other amendments and interpretations apply for the first time in 2019, but do not have impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

 

F-28

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

3.20.1.1.IFRS 16 - Leases

 

The Group has adopted IFRS 16 – Leases from January 1, 2019, applying the modified retrospective approach, and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019.

 

The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 – Leases and IFRIC 4 - Determining Whether an Arrangement Contains a Lease at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (“short-term leases”), and lease contracts for which the underlying asset is of low value (“low-value assets”).

 

On adoption of IFRS 16, the group recognized lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 6.8% per year.

 

Impact of adoption on the statement of financial position (increase/(decrease)) as of January 1, 2019 is as follows:

 

   2019
Assets     
 Property and equipment (Offices)   35,213 
 Property and equipment (Vehicles)   5,722 
 Total assets   40,935 
      
 Liabilities     
 Loans and financing   40,935 
 Total liabilities   40,935 

 

Impact of adoption on the statement of profit or loss (increase/(decrease)) in the year ended December 31, 2019 is as follows:

 

   2019
 Depreciation expense (included in Cost of services)   (665)
 Depreciation expense (included in Administrative expenses)   (13,549)
 Depreciation expense (included in Selling expenses)   (9,001)
 Amortization expense   (4,168)
 Expense relating to short-term leases and leases of low-value assets   (183)
 Financial expenses, net   (4,904)
 Deferred income tax and social contribution   (1,084)
 Rent expense (included in Cost of services and Administrative expenses) (*)   27,515 
 Expense for the period   (6,039)
 Attributable to:     
 Equity holders of the parent   (6,039)
 Non-controlling interests   - 

 

(*) Recognized under IAS 17 - Leases

 

F-29

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

From January 1, 2019, the payments of leases (principal and interest) were classified as financing activities, except short- term lease and lease of low-value assets (classified in operating activity), in accordance with IFRS 16 and IAS 7 – Statement of Cash Flows, reducing the cash flows of this activity. The impact of adoption on the statement of cash flows (increase/(decrease)) for the year ended December 31, 2019 is as follows:

 

   2019
Net profit   (6,039)
Depreciation and Amortization   27,383 
Other financial costs and foreign exchange, net   4,904 
Loss on disposal of property, equipment and intangible assets   (46)
Deferred income tax and social contribution   1,084 
Working capital adjustments:     
Prepaid Expenses   8,144 
Net cash used in operating activities   35,430 
      
Payment of finance leases   (35,430)
Net cash provided by financing activities   (35,430)

 

There is no impact on other comprehensive income and the basic and diluted EPS.

 

a) Nature of the effect of adoption of IFRS 16

 

The Group has lease contracts for various items of Offices, software and vehicles.

 

Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all the risks and rewards incidental to ownership of the leased asset to the Group; otherwise it was classified as an operating lease. Finance leases were capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognized as finance costs) and reduction of the lease liability. In an operating lease, the leased property was not capitalized and the lease payments were recognized as rent expense in the statement of profit or loss on a straight-line basis over the lease term.

 

Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases that it is the lessee, except for short-term leases and leases of low-value assets. The Group recognized lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

F-30

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

b) Amounts recognized in the statement of financial position and profit or loss

 

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

 

    Right-of-use assets        
    Offices    Vehicles    Software    Total    Lease liabilities 
As of December 31, 2018   -    -    -    -    - 
Initial adoption of IFRS 16   35,213    5,722    -    40,935    40,935 
As of January 1, 2019   35,213    5,722    -    40,935    40,935 
Additions   69,856    6,346    37,513    113,715    113,715 
Depreciation expense   (18,343)   (4,872)   (4,168)   (27,383)   - 
Interest expense   -    -    -    -    4,904 
Payments   -    -    -    -    (35,430)
Disposals   (134)   (683)   -    (817)   (863)
As of December 31, 2019   86,592    6,513    33,345    126,450    123,261 

 

3.20.1.2.IFRIC 23 – Uncertainty over Income tax treatments

 

On June 7, 2017, the IFRS Interpretations Committee (“IFRS IC”) issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 ‘Income taxes’, are applied where there is uncertainty over income tax treatments.

 

The IFRS IC had clarified previously that IAS 12, not IAS 37 ‘Provisions, contingent liabilities and contingent assets’, applies to accounting for uncertain income tax treatments. IFRIC 23 explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment.

 

The Group adopted IFRIC 23 on its effective date, January 1, 2019 and had no impacts recognized in its financial statements.

 

3.20.1.3.Amendments to IFRS 9: Prepayment Features with Negative Compensation

 

The IASB (‘Board’) has issued a narrow-scope amendment to IFRS 9 to enable companies to measure at amortized cost some prepayable financial assets with negative compensation. The assets affected, that include some loans and debt securities, would otherwise have been measured at FVPL.

 

Negative compensation arises where the contractual terms permit the borrower to prepay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. However, to qualify for amortized cost measurement, the negative compensation must be “reasonable compensation for early termination of the contract”. The Group concluded there was no impact of this amendment to IFRS 9 on the Group’s consolidated financial statements.

 

3.20.1.4.Amendments to IAS 28: Long-term interests in associates and joint ventures

 

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.

 

F-31

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognized as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures.

 

These amendments had no impact on the consolidated financial statements as the Group does not have long-term interests in its associate and joint venture.

 

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

3.20.2.New accounting standards not yet adopted

 

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.

 

3.20.2.1.Amendments to IFRS 3: Definition of a Business

 

The amended definition of a business requires an acquisition to include an input and a substantive process that together significantly contribute to the ability to create outputs. The definition of the term ‘outputs’ is amended to focus on goods and services provided to customers, generating investment income and other income, and it excludes returns in the form of lower costs and other economic benefits. The amendments will likely result in more acquisitions being accounted for as asset acquisitions.

 

The amendments are effective as from January 1, 2020, and the Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.20.2.2.Amendments to IAS 1 and IAS 8: Definition of Material

 

The IASB has made amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which use a consistent definition of materiality throughout International Financial Reporting Standards and the Conceptual Framework for Financial Reporting, clarify when information is material and incorporate some of the guidance in IAS 1 about immaterial information.

 

In particular, the amendments clarify:

 

that the reference to obscuring information addresses situations in which the effect is similar to omitting or misstating that information, and that an entity assesses materiality in the context of the financial statements as a whole, and

 

the meaning of ‘primary users of general purpose financial statements’ to whom those financial statements are directed, by defining them as ‘existing and potential investors, lenders and other creditors’ that must rely on general purpose financial statements for much of the financial information they need.

 

The amendments are effective as from January 1, 2020, and the Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.20.2.3.Revised Conceptual Framework for Financial Reporting

 

The IASB has issued a revised Conceptual Framework which will be used in standard-setting decisions with immediate effect. Key changes include:

 

F-32

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

increasing the prominence of stewardship in the objective of financial reporting

 

reinstating prudence as a component of neutrality

 

defining a reporting entity, which may be a legal entity, or a portion of an entity

 

revising the definitions of an asset and a liability

 

removing the probability threshold for recognition and adding guidance on derecognition

 

adding guidance on different measurement basis, and

 

stating that profit or loss is the primary performance indicator and that, in principle, income and expenses in other comprehensive income should be recycled where this enhances the relevance or faithful representation of the financial statements.

 

No changes will be made to any of the current accounting standards. However, entities that rely on the Framework in determining their accounting policies for transactions, events or conditions that are not otherwise dealt with under the accounting standards will need to apply the revised Framework from 1 January 2020. These entities will need to consider whether their accounting policies are still appropriate under the revised Framework.

 

The amendments are effective as from January 1, 2020, and the Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

4.Significant judgments, estimates and assumptions

 

The preparation of the financial statements of the Company and its subsidiaries 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 financial statement date. Uncertainty about these assumptions and estimated could result in outcome that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

 

Significant assumptions about sources of uncertainty in future estimates and other significant sources at the reporting date that pose a significant risk of causing a material adjustment to the book value of assets and liabilities in the next fiscal year are described below:

 

4.1.Measurement of loss allowance for expected credit losses

 

4.1.1.Accounts receivable from card issuers

 

For Accounts receivable from card issuers, the Group uses a provision matrix to calculate ECLs. The provision rates are based on the internal credit rating that consider external information, such as ratings given by major rating agencies and forward-looking factors specific to the debtors and the economic environment.

 

4.1.2.Trade accounts receivable

 

The provision rates are based on days past due for groupings of various client’s segments that have similar loss patterns (i.e., by product type, customer type and rating, and coverage by letters of credit and other forms of credit insurance).

 

The provision is initially based on the Group’s historical observed default rates. The Group calibrates to adjust the historical credit loss experience with forward-looking information every year. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.

 

F-33

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

 

The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of client’s actual default in the future. The information about the ECLs on the Group’s accounts receivable from card issuers and trade accounts receivable are disclosed in Notes 8 and 9 respectively.

 

4.2.Property and equipment and intangible assets useful lives

 

Property and equipment and intangible assets include the preparation of estimates to determine the useful life for depreciation and amortization purposes. Useful life determination requires estimates in relation to the expected technological advances and alternative uses of assets. There is a significant element of judgment involved in making technological development assumptions, since the timing and nature of future technological advances are difficult to predict.

 

In December 2018, the Group reviewed the useful lives of its Property and Equipment and verified that due to technology improvements and use, Pin Pads and POSs should depreciate faster than initially established. Therefore, the Group adjusted the useful life of this group of assets from 5 to 3 years. There is no evidence that indicated that other useful lives should be revised.

 

Based on past events and future expectations, the Group identified that Pin Pads and POSs have a residual value at the end of their estimated useful life of 30% of the initial cost, except those POSs that are utilized to the micro-merchant market. The Group identified that there is an active market and therefore, deducted the residual value of the initial cost of this group of assets to determine its depreciable cost.

 

The Group concluded that no additional change on the straight-line depreciation method or estimates was deemed necessary.

 

The effect of the change in the useful life mentioned above was treated in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors as required by IAS 16 Property, Plant and Equipment which resulted in an increase of R$ 4,602 in the depreciation expense in the 2018 consolidated statement of profit or loss.

 

4.3.Share-based payments

 

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model and underlying assumptions, which depends on the terms and conditions of the grant and the information available at the grant date.

 

The Group uses certain methodologies to estimate fair value which include the following:

 

·estimation of fair value based on equity transactions with third parties close to the grant date;

 

·other valuation techniques including option pricing models such as Black-Scholes.

 

These estimates also require determination of the most appropriate inputs to the valuation models including assumptions regarding the expected life of a share option or appreciation right, expected volatility of the price of the Group’s shares and expected dividend yield.

 

4.4.Impairment of non-financial assets

 

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. Intangible assets with indefinite useful lives and goodwill are tested for impairment annually at the level of the CGU, as appropriate, and when circumstances indicate that the carrying value may be impaired. Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

 

F-34

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

 

The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow (“DCF”) model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill and other intangibles with indefinite useful lives recognized by the Group. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 13.

 

Technological obsolescence, suspension of certain services and other changes in circumstances that demonstrate the need for recording a possible impairment are also regarded in estimates.

 

4.5.Deferred income tax and social contribution

 

Deferred tax assets are recognized for all unused tax losses to the extent that sufficient taxable profit will likely be available to allow the use of such losses. Significant judgment from management is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits, together with future tax planning strategies.

 

4.6.Provisions for contingencies

 

Provisions for the judicial and administrative proceedings are recorded when the risk of loss of administrative or judicial proceeding is considered probable and the amounts can be reliably measured, based on the nature, complexity and history of lawsuits and the opinion of legal counsel internal and external.

 

Provisions are made when the risk of loss of judicial or administrative proceedings is assessed as probable and the amounts involved can be measured with sufficient accuracy, based on best available information. They are fully or partially reversed when the obligations cease to exist or are reduced. Given the uncertainties arising from the proceedings, it is not practicable to determine the timing of any outflow (cash disbursement).

 

4.7.Provision for antifraud losses

 

A provision is recorded based on the estimated losses related to warranties provided by the Group in relation to the antifraud product sold to clients, under which the Group assumes the risk of losses related to any chargeback occurring within 120 days following the transaction date.

 

Management estimates the related provision for future losses based on historical losses information, as well as recent trends that might suggest that past cost information may differ from future losses. The assumptions made in relation to the current year are consistent with those in the prior year. Factors that could impact the estimated loss information include the success of the Group’s fraud prevention initiatives. As of December 31, 2019, this provision had a carrying amount of R$ 925 (2018-R$ 2,861) and is recognized under Other liabilities.

 

4.8.Consolidation of structured entities

 

The Group considers the FIDC AR1, FIDC AR2, FIDC TAPSO and FIDC SOMA to be structured entities as defined by IFRS 10. The Group holds all subordinated quotas issued by the FIDCs AR, representing approximately 10% of the total outstanding quotas, FIDC TAPSO representing approximately 99% and FIDC SOMA representing 100%, while third-party partners hold all senior and mezzanine quotas, representing approximately 90% of the total outstanding quotas of FIDCs AR and 1% of TAPSO.

 

F-35

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

 

The bylaws of these FIDCs were established by us at their inception, and grant us significant decision-making authority over these entities, such as the right to determine which credits rights are eligible to be acquired by these FIDCs. In addition, senior and mezzanine quota holders receive a remuneration and must be fully redeemed by us at the maturity date. As sole holders of the subordinated quotas, the Group is entitled to the full residual value of the entities, if any, and thus the Group has the rights to their variable returns.

 

In accordance with IFRS 10, the Group concluded it controls FIDC AR1, FIDC AR2, FIDC TAPSO and FIDC SOMA, therefore, they are consolidated in the Group’s financial statements. The senior and mezzanine quotas, when applicable, are accounted for as a financial liability under “Obligations to FIDC quota holders” and the remuneration paid to senior and mezzanine quota holders is recorded as interest expense. See Note 18 for further details.

 

4.9.Fair value measurement of financial instruments

 

When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.

 

4.10. Leases - Estimating the incremental borrowing rate

 

The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).

 

4.11. Equipment rental - Estimating the expected life of merchants 

 

The recognition of revenue from equipment rental includes the preparation of estimates to determine the expected life of merchants, with the objective to recognize revenue on a straight-line basis and as a fixed monthly fee. The estimates are related to the average time that the merchant will process the transactions with Stone.

 

5.Business combinations

 

Acquisition of Equals S.A.

 

On April 25, 2016, the Company’s subsidiary StoneCo Brasil acquired a 30% interest in Equals S.A. (“Equals”) and an option to acquire up to an additional 20% interest for R$ 2,000 adjusted by inflation, exercisable in full or partially at any moment until April 24, 2019.

 

On September 4, 2018, the Group acquired control of Equals through the exercise of the option and the acquisition of an additional 6% interest of the outstanding equity interest in Equals. In addition, the Group acquired the remaining 44% interest through the issuance of the Company’s shares upon consummation of the Company’s IPO. As a result, the Group obtained the whole ownership of Equals.

 

F-36

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Equals’ activities are to provide financial reporting and reconciliation solutions to enable clients to monitor all payment flow data from their providers. The objective of the acquisition was to enable the Group to expand in the Brazilian payments market and to offer additional services and value added to its clients and business partners in the industry.

 

The consolidated financial statements include the results of Equals for the period from the acquisition date.

 

i)Consideration transferred

 

The fair value of the consideration transferred was as follows:

 

At September 4, 2018   
Cash consideration paid to the selling shareholders (a)   3,000 
Shares of the Company issued to selling shareholders (b)   22,000 
Total fair value of consideration transferred to selling shareholders   25,000 
Capital contribution related to option exercised (c)   2,184 
Fair value of previously held interest in Equals   22,816 
Total fair value of consideration   50,000 

 

(a)consideration paid in cash for the acquisition of additional 6% interest, representing 3,600 outstanding shares held by the selling shareholders.

 

(b)consideration price for the acquisition of the remaining 44% interest in Equals at fair value of R$ 22,000, through the issuance of 1,856 (after share split 233,856) shares of the Company, transferred to the selling shareholders after completion of the Company’s IPO.

 

(c)exercise of the option for, whereby 17,142 new shares of Equals were issued, representing an increase of 20% to the previously held interest.

 

As a result, in 2018, the Group recognized a gain of approximately R$ 21,441 for the difference between the previously held 50% interest in Equals, after option exercise, at fair value, in the amount of R$ 25,000, and its carrying amount, in the amount of R$ 3,559, including the capital contribution at option exercise. The gain was included in other operating income in the statement of profit or loss for the year ended December 31, 2018.

 

ii)Fair value measurement

 

The fair value of identifiable assets acquired and liabilities assumed of Equals on the acquisition date was as follows:

 

  

Fair value recognized on acquisition

Assets     
Cash and cash equivalents   60 
Trade accounts receivable   798 
Other current assets   312 
Receivables to related parties   1,057 
Property and equipment   428 
Intangible assets—Software (internally developed)   34,539 
Intangible assets—Customer relationship   2,103 
Intangible assets—Non-compete agreement   1,659 
Deferred tax assets   108 
    41,064 

 

F-37

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Liabilities     
Trade accounts payable   (419)
Labor and social security liabilities   (1,704)
Taxes payable   (225)
Payables to related parties   (244)
Deferred tax liabilities   (12,960)
    (15,552)
      
Net identifiable assets acquired   25,512 
Goodwill on acquisition   24,488 
Total consideration transferred   50,000 
      

 

Goodwill comprises the value of expected synergies and other benefits from combining the assets and activities of Equals with those of the Group and is entirely allocated to the single Cash Generating Unit (“CGU”) of the Group. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

Intangible assets acquired

 

Assets

 

Amount

 

Method

 

Expected

amortization 

period

 
Software (internally developed) 34,355 Multi-period Excess Earnings Method—MEEM 10 years
Customer relationship   2,103 Cost approach 3 years
Non-compete agreement   1,659 With and without method 5 years

  

The following intangible assets met the criteria in IAS 38—Intangible Assets for preliminary recognition:

 

iii)Revenue and profit contribution

 

From the acquisition date, Equals contributed total revenue and income of R$ 5,389 and pretax income of R$ 669 to the Group’s consolidated statement of profit and loss for the year ended December 31, 2018.

 

Had the business combination occurred at the beginning of 2018, Equals would have contributed total revenue and income of R$ 14,370 and pretax loss of R$ 385. Therefore, the Group’s consolidated total revenue and income would have been R$ 1,588,161 and the pretax income would have totaled R$ 441,071 for the year ended December 31, 2018.

 

iv)Purchase consideration—cash outflow

 

Consideration paid in cash    (3,000)
Net cash acquired    60 
Net cash flow on acquisition (a)    (2,940)

 

(a)Included in the cash flow from investing activities.

 

v)Acquisition-related costs

 

Acquisition-related transaction costs totaling R$ 100 were recognized in other expenses in the statement of profit or loss.

 

F-38

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

6.Cash and cash equivalents

 

   2019  2018
Short-term bank deposits - denominated in R$   910,080    235,488 
Short-term bank deposits - denominated in US$   58,262    62,441 
    968,342    297,929 

 

 

7.

Short-term investments

 

   2019  2018
Listed securities (a)          
  Bonds   2,927,002    2,752,743 
Unlisted securities (b)          
  Investment funds   9,787    9,328 
  Equity securities   240    8,518 
    2,937,029    2,770,589 

 

(a)Listed securities are comprised of public and private bonds with maturities greater than three months, indexed to fixed and floating rates. As of December 31, 2019, listed securities are mainly indexed to 100% CDI rate (2018 – 95% CDI). Liquidity risk is minimal.

 

(b)Unlisted securities are comprised of foreign investment fund shares, and ordinary shares in entities that are not traded in an active market. The Group elected to recognize the changes in fair value of the existing equity instruments through OCI. The change in fair value in 2019 of R$ (938) (2018 - R$ 954) was recognized in other comprehensive income.

 

Short-term investments are denominated in Brazilian reais and U.S. dollars.

 

8.Accounts receivable from card issuers

 

Accounts receivable are amounts due from card issuers regarding the transactions of clients with card holders, performed in the ordinary course of business. Accounts receivable are generally due within 12 months, therefore are all classified as current.

 

   2019  2018
Accounts receivable from card issuers (a)   13,595,133    9,195,466 
Accounts receivable from other acquirers (b)   478,917    54,968 
Allowance for expected credit losses   (7,236)   (5,826)
    14,066,814    9,244,608 

 

(a)Accounts receivable from card issuers, net of interchange fees, as a result of processing transactions with clients.

 

(b)Accounts receivable from other acquirers related to PSP (Payment Service Provider) transactions.

 

As of December 31, 2019, R$ 3,714,422 of the total Accounts receivable from card issuers are held by FIDC AR 1 and AR 2 (2018 – R$ 2,166,132). Accounts receivable held by FIDCs guarantee the obligations to FIDC quota holders.

 

F-39

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

The movement in the allowance for expected credit losses of accounts receivable from card issuers is as follows:

 

   2019  2018
At January 1   5,826    - 
Adoption of new accounting standard (IFRS 9)   -    760 
Charge for the year   1,771    5,066 
Reversal   (361)   - 
At December 31   7,236    5,826 

 

Impairment and risk exposure

 

In addition to complying with the criteria and policies of card associations for accreditation, the Group has a specific policy setting guidelines and procedures for the accreditation and maintenance process of the clients. The Group records an allowance for expected credit losses of accounts receivable from card issuers based on an expected credit loss model covering history of defaults and the expected nature and level of risk associated with receivables. See Note 3.6.1.4 and 4.1 for further details.

 

Information about the credit quality of accounts receivable and the Group’s exposure to credit risk, foreign currency risk and interest rate risk can be found in Note 27.

 

9.Trade accounts receivable

 

Trade accounts receivables are amounts due from clients mainly related to equipment rental and other services and Pin Pads & POS sales to other customers. Trade accounts receivable are generally due between 30 and 60 days, therefore are all classified as current.

 

   2019  2018
Accounts receivable from clients (a)   108,490    32,823 
Loans held for sale (b)   124,661    - 
Other trade accounts receivable   39,922    19,538 
Allowance for expected credit losses   (23,656)   (7,745)
    249,417    44,616 

 

(a)Comprised mainly of accounts receivable from equipment rental.

 

(b)Comprised of accounts receivable from credit solution.

 

The Group records an allowance for expected credit losses of trade receivables from the lease of equipment to clients based on an expected credit loss model covering history of defaults and the expected nature and level of risk associated with receivables. See Note 3.6.1.4 and 4.1 for further details.

 

The movement in the allowance for expected credit losses of trade accounts receivables is as follows:

 

   2019  2018
       
At January 1   7,745    5,048 
Charge for the year   35,695    12,257 
Reversal   (3,179)   (3,051)
Write-off   (16,605)   (6,509)
At December 31   23,656    7,745 

F-40

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

10.Recoverable taxes

 

   2019  2018
Withholding income tax on finance income (a)   33,344    52,836 
Contributions over revenue (b)   13,576    3,053 
Other taxes   3,506    1,029 
    50,426    56,918 

 

(a)This refers to income taxes withheld on financial income which will be offset against future income tax payable.

(b)Refers to credits taken on contributions on gross revenue for social integration program (PIS) and social security (COFINS) to be offset in the following period against tax payables.

 

11.Income taxes

 

(a)Reconciliation of income tax expense

 

The following is a reconciliation of income tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the years ended December 31, 2019, 2018 and 2017:

 

   2019  2018  2017
Profit (loss) before income taxes   1,090,655    442,339    (95,665)
Brazilian statutory rate   34%   34%   34%
Tax (expense) benefit at the statutory rate   (370,823)   (150,395)   32,526 
                
Additions (exclusions):               
Gain from entities not subject to the payment of income taxes   47,782    (3,283)   (37,098)
Interest on capital   10,102    -    - 
Other permanent differences   6,039    (2,871)   (3,805)
Equity pickup on associates   (275)   169    105 
Unrecorded deferred taxes   (2,030)   (652)   (1,332)
Use of tax losses previously unrecorded   5,163    2,689    218 
Unrealized gain on previously held interest on acquisition   -    7,290    - 
Tax incentives (i)   5,666    3,300    - 
Research and development tax benefit   8,188    4,026    - 
Other tax incentives   3,728    2,615    82 
Total income tax and social contribution (expense) gain   (286,460)   (137,112)   (9,304)
Effective tax rate   26%   31%   (10)%
                
Current income tax and social contribution   (217,228)   (154,882)   (5,682)
Deferred income tax and social contribution   (69,232)   17,770    (3,622)
Total income tax and social contribution (expense) gain   (286,460)   (137,112)   (9,304)

 

(i)Incentives to cultural and artistic activities (“Rouanet Law”), sports, child and adolescent rights fund and fund for the elderly.

 

F-41

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(b)Deferred income taxes

 

Net changes in deferred income taxes relate to the following:

 

   2019  2018
       
Beginning balance before adoption of new accounting standard   182,445    145,966 
Adoption of new accounting standard   -    24,362 
Beginning balance after adoption of new accounting standard   182,445    170,328 
Losses available for offsetting against future taxable income   (46,177)   (8,328)
Tax credit carryforward   (2,720)   18,762 
Tax deductible goodwill on non-controlling interest   61,127    - 
Temporary differences under FIDC   (27,806)   (16,095)
Share-based compensation   6,354    16,103 
Deferred income taxes arising from business combinations   5,890    (8,672)
Technological innovation benefit   (6,385)   (3,079)
Changes in FVOCI   7,758    7,198 
Others   1,608    6,228 
Final balance   182,094    182,445 
           
Deferred tax assets on tax losses   124,530    174,380 
Tax deductible goodwill on non-controlling interest   61,127    - 
Assets at FVOCI   39,060    31,302 
Tax credit carryforward   34,932    37,652 
Share-based compensation   26,158    19,804 
Temporary differences under FIDC   (68,099)   (40,293)
Deferred income taxes arising from business combinations   (30,961)   (36,851)
Technological innovation benefit   (9,464)   (3,079)
Others   4,811    (470)
Deferred tax, net   182,094    182,445 

 

Under Brazilian tax law, temporary differences and tax losses can be carried forward indefinitely, however the loss carryforward can only be used to offset up to 30% of taxable profit for the year.

 

(c)Unrecognized deferred taxes

 

The Group has accumulated tax loss carryforwards and other temporary differences in some subsidiaries in the amount of R$ 2,714 (2018 – R$ 5,439) for which a deferred tax asset was not recognized, and are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognized with respect of these losses as they cannot be used to offset taxable profits between subsidiaries of the Group, and there is no other evidence of recoverability in the near future.

 

F-42

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

12.Property and equipment

 

   Balance at 12/31/2017  Business combination  Additions  Disposals  Transfers  Balance at 12/31/2018  Additions  Disposals  IFRS 16 (i)  Balance at 12/31/2019
Cost                                                  
Pin Pads & POS   143,837    -    136,819    (25,180)   (515)   254,961    279,818    (21,846)   -    512,933 
IT equipment   55,999    576    18,542    (124)   361    75,354    16,963    (661)   -    91,656 
Facilities   18,232    -    466    (4,149)   6,576    21,125    1,617    -    -    22,742 
Machinery and equipment   12,168    2    1,587    (50)   515    14,222    2,459    (10)   -    16,671 
Furniture and fixtures   5,261    6    1,633    (245)   194    6,849    3,795    (156)   -    10,488 
Vehicles   414    -    -    (324)   -    90    -    -    -    90 
Construction in progress   7,131    -    -    -    (7,131)   -    1,039    (19)   -    1,020 
Right-of-use assets - Vehicles (i)   -    -    -    -    -    -    6,346    (1,673)   5,722    10,395 
Right-of-use assets - Offices (i)   -    -    -    -    -    -    69,856    (178)   35,213    104,891 
    243,042    584    159,047    (30,072)   -    372,601    381,893    (24,543)   40,935    770,886 
Depreciation                                                  
Pin Pads & POS   (37,757)   -    (44,698)   12,290    421    (69,744)   (79,849)   8,296    -    (141,297)
IT equipment   (7,660)   (152)   (13,971)   -    -    (21,783)   (14,345)   428    -    (35,700)
Facilities   (4,184)   -    (4,711)   1,336    -    (7,559)   (4,210)   -    -    (11,769)
Machinery and equipment   (3,059)   (1)   (2,413)   50    (421)   (5,844)   (3,279)   9    -    (9,114)
Furniture and fixtures   (691)   (3)   (690)   30    -    (1,354)   (838)   31    -    (2,161)
Vehicles   (60)   -    (18)   34    -    (44)   (13)   -    -    (57)
Right-of-use assets - Vehicles (i)   -    -    -    -    -    -    (4,872)   990    -    (3,882)
Right-of-use assets - Offices (i)   -    -    -    -    -    -    (18,343)   44    -    (18,299)
    (53,411)   (156)   (66,501)   13,740    -    (106,328)   (125,749)   9,798    -    (222,279)
                                                   
Property and equipment, net   189,631    428    92,546    (16,332)   -    266,273    256,144    (14,745)   40,935    548,607 

 

(i) Refers to IFRS 16 adoption. More details on Note 3.20.

 

F-43

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(a)Depreciation and amortization charges

 

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

 

   2019  2018  2017
          
Cost of services   100,070    54,203    31,224 
General and administrative expenses   49,358    38,130    25,984 
Selling expenses   13,968    -    - 
Depreciation and Amortization charges   163,396    92,333    57,208 
Depreciation charge   125,749    66,501    32,836 
Amortization charge (Note 13)   37,647    25,832    24,372 
Depreciation and Amortization charges   163,396    92,333    57,208 

 

Impairment loss and compensation

 

As of December 31, 2019, 2018 and 2017, there were no indicators of impairment of property and equipment.

 

F-44

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

13.Intangible assets

 

   Balance at 12/31/2017  Business combination  Additions  Disposals  Impairment  Balance at 12/31/2018  Additions  Disposals  Transfers  Balance at 12/31/2019
Cost                                                  
Goodwill - acquisition of subsidiaries   118,706    24,488    -    -    -    143,194    -    -    -    143,194 
Customer relationship   97,355    2,103    -    (30)   -    99,428    -    (60)   -    99,368 
Trademark use right   12,491    -    -    -    -    12,491    -    -    -    12,491 
Trademarks and patents   45    1,659    -    -    -    1,704    28    -    -    1,732 
Software   43,063    34,544    22,840    -    (4,764)   95,683    41,363    (25,000)   22,566    134,612 
Licenses for use - payment arrangements   5,527    -    5,910    -    -    11,437    88    (7)   -    11,518 
Software in progress   4,486    -    19,701    (7,071)   -    17,116    25,695    (213)   (22,566)   20,032 
Right-of-use assets - Software (i)   -    -    -    -    -    -    37,513    -    -    37,513 
Others   700    -    726    (700)   -    726    -    (726)   -    - 
    282,373    62,794    49,177    (7,801)   (4,764)   381,779    104,687    (26,006)   -    460,460 
Amortization                                                  
Customer relationship   (16,811)   -    (9,760)   -    -    (26,571)   (10,582)   60    -    (37,093)
Trademark use right   (12,491)   -    -    -    -    (12,491)   -    -    -    (12,491)
Trademarks and patents   -    -    (113)   -    -    (113)   (335)   -    -    (448)
Software   (17,030)   (5)   (13,311)   -    -    (30,346)   (19,847)   23,678    -    (26,515)
Licenses for use - payment arrangements   (1,236)   -    (2,278)   -    -    (3,514)   (2,533)   1    -    (6,046)
Right-of-use assets - Software (i)   -    -    -    -    -    -    (4,168)   -         (4,168)
Others   (717)   -    (370)   -    -    (1,087)   (182)   1,269    -    - 
    (48,285)   (5)   (25,832)   -    -    (74,122)   (37,647)   25,008    -    (86,761)
                                                   
Intangible assets, net   234,088    62,789    23,345    (7,801)   (4,764)   307,657    67,040    (998)   -    373,699 

 

(i) Refers to IFRS 16 adoption. More details on Note 3.20.

 

F-45

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Impairment of intangible assets

 

As of December 31, 2019, there were no indicators of impairment of finite-life intangible assets. As of December 31, 2018, the Group has recognized an impairment loss on software, in the amount of R$ 4,764.

 

The Group performs its goodwill impairment testing at the Group’s single CGU level, which is also a single operating and reportable segment.

 

The Group performed its annual impairment test as of December 31, 2019 and 2018 which did not result in the need to recognize impairment losses on the carrying value of goodwill.

 

The recoverable amount of the Group’s single CGU is determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. The pre-tax discount rate applied to cash flow projections is 9.4% (2018 - 11.8%) and the growth rate applied to perpetuity cash-flow is 5.0% (2018 - 6.0%) that considers long-term local inflation and long-term real growth.

 

The key assumptions used in value in use calculation and sensitivity to changes in assumptions are as follows:

 

·Average free cash flow to equity over the five-year forecast period; based on past performance and management’s expectations of market development and on current industry trends and including long-term inflation forecasts for each territory.

 

·Average annual growth rate over the five-year forecast period; based on past performance and management’s expectations of market development and on current industry trends and including long-term inflation forecasts for each territory.

 

·Considered a pre-tax discount rate applied to cash flow of 9.4% (2018 - 11.8%), based on long-term interest rate, equity risk premium, industry beta and other variables.

 

·Considered a perpetuity growth rate of 5.0% (2018 - 6.0%), based on long-term local inflation and real growth.

 

Therefore, the goodwill impairment testing considered, at once: a decrease of 10.0% of the free cash flow to equity in the first year, a decrease of 10.0% in the growth rate for the second until fifth year, a decrease of 250 basis points in perpetuity rate after the fifth year and an increase of 500 basis points in pre-tax discount rate, and it did not result in the impairment of the goodwill.

 

14.Accounts payable to clients

 

Accounts payable to clients represent amounts due to accredited clients related to credit and debit card transactions, net of interchange fees retained by card issuers and assessment fees paid to payment scheme networks as well as the Group’s net merchant discount rate fees which are collected by the Group as an agent.

 

15.Trade accounts payable

 

   2019  2018
       
Domestic trade accounts payable   94,887    115,672 
Foreign suppliers   290    1,736 
Other   2,648    428 
    97,825    117,836 

 

Accounts payable are unsecured and the average payment term is 45 days. The carrying amount of accounts payable approximate their fair value, due to their short-term nature.

 

F-46

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

16.Labor and social security liabilities

 

   2019  2018
       
Accrued annual payments and related social charges   85,675    70,063 
Labor liabilities and related social charges   50,770    26,669 
Total labor and social security liabilities   136,445    96,732 
Current   109,013    96,732 
Non current   27,432    - 

 

17.

Taxes payable

 

   2019  2018
       
Contributions over revenue (PIS and COFINS) (a)   26,613    22,212 
Taxes on services (ISS) (b)   6,839    9,504 
Withholding income tax (c)   6,130    8,527 
Withholding taxes from services taken (d)   2,527    4,838 
Income tax (IRPJ and CSLL) (e)   2,181    5,944 
Social security levied on gross revenue (INSS) (f)   221    123 
Other taxes and contributions   429    421 
    44,940    51,569 

 

(a)PIS and COFINS are invoiced to and collected from the Group’s customers and recognized as deductions to gross revenue against Tax liabilities, as the Group acts as agent collecting these taxes on behalf of the Brazilian federal government.

(b)ISS is recognized as deductions to gross revenue against Tax liabilities, as the Group acts as agent collecting these taxes on behalf of municipal governments.

(c)For some entities in the Group, advances for the payment of income tax expense is recognized during the tax year and are recognized as an asset under Recoverable taxes (Note 10).

(d)Amount relative to PIS, COFINS and CSLL, withheld from suppliers and paid by the Group on their behalf. These amounts are recognized as a tax liability, with no impact to the statement of profit or loss.

(e)The expense for current income tax is recognized in the statement of profit or loss under “Income tax and social contribution” against tax payable. However, for some entities in the Group, advances for the payment of income tax expense is recognized during the tax year and are recognized as an asset under Recoverable taxes (Note 10).

(f)The entities Equals and Mundipagg pay an INSS rate of 4.50% on gross revenue due to the benefits this regime offers to technology companies compared with social security tax on payroll.

 

F-47

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

18.Loans and financing

 

As of December 31, 2019, and 2018, loans and financing are as follows:

 

    Average annual interest rate %   Maturity   2019   2018
                 
Obligations to FIDC AR quota holders (a)   106.0% - 106.8% of CDI Rate*   Jun/20, Nov/20, Dec/20, Jul/21   2,070,542   6,408
Obligations to FIDC TAPSO quota holders (b)   115.0% of CDI Rate*   Mar/20   20,352   10,238
Leases (c)   CDI Rate* + 2.1% per year       -   783
Leases (c)   111.0% of CDI Rate*   Jul/20   1,497   1,496
Leases (c)   105.7% - 107.1% of CDI Rate*   Jan/20 - Jun/29   35,778   -
Bank borrowings (d)   108.0% - 121.3% of CDI Rate*   Jan/20 - Mar/20   1,777,083   750
Loans with private entities   109.8% of CDI Rate*   Sep/21   738,456   758,027
Debentures (e)   109.0% of CDI Rate*   Jul/22   394,997   -
Current portion of debt           5,038,705    777,702
                 
Obligations to FIDC AR quota holders (a)   106.0% - 106.8% of CDI Rate*   Jun/20, Nov/20, Dec/20, Jul/21   1,620,000   2,057,925
Leases (c)   111.0% of CDI Rate*   Jul/20   -   1,395
Leases (c)   105.7% - 107.1% of CDI Rate*   Jan/20 - Jun/29   87,483   -
Debentures (e)   109.0% of CDI Rate*   Jul/22   -   -
Non-current portion of debt           1,707,483    2,059,320
                 
Total debt           6,746,188    2,837,022

 

*“CDI Rate” means the Brazilian interbank deposit (Certificado de Depósito Interbancário) rate, which is an average of interbank overnight rates in Brazil.

 

(a)Obligations to FIDC AR quota holders

 

The FIDC AR1 and FIDC AR2 were launched in June 2017 and November 2017, respectively, and issued senior quotas through a public offering to qualified institutional investors. The purpose of these FIDCs is to acquire receivables arising from credit card transactions and fund the Group’s operations. The Group holds 100% of the subordinated quotas in these entities. Residual returns from these FIDCs, if any, are paid to subordinated quotas.

 

In 2017 three series of senior quotas were issued, with a total amount of up to R$ 2,059,500 and will mature in 2020. The payment of interest is made every six months and, at the end of the third annual period, the senior quotas must be fully redeemed. The benchmark return rate is 106.8% of the CDI rate.

 

In June 2019, the fourth series of senior quotas was issued, with an amount of up to R$ 1,620,000, and will mature in 2021. They were issued for 24 months, with a grace period of 18 months to repay the principal amount. During the grace period, the payment of interest will be made every six months. After this period, the amortization of the principal and the payment of interest will be monthly. The benchmark return rate is 106.0% of the CDI rate.

 

F-48

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(b)Obligations to FIDC TAPSO quota holders

 

In August 2018, the Group raised a total of R$ 10,000, by issuing one-year senior quotas of the FIDC TAPSO to a pool of institutional investors. The senior quotas had a benchmark return rate of 118.0% of the CDI rate per year and received interest payments every six months. In September 2019, these senior quotas were fully redeemed.

 

In October 2019, the Group raised a total of R$ 20,000, by issuing six-month mezzanine quotas of the FIDC TAPSO to an institutional investor. The mezzanine quotas have a benchmark return rate of 115.0% of the CDI rate per year and, at the end of the six months, they must be fully redeemed.

 

(c)Leases

 

The Group has lease contracts for various items of offices, vehicles and software in its operations (see Note 3.20). The Group’s obligations under its leases are secured by the lessor’s title to the leased assets. Generally, the Group is restricted from assigning and subleasing the leased assets.

 

(d)Bank borrowings

 

In December 2018 the Group had outstanding bank borrowings with an average interest of UMBNDES Rate + 4.0% per year. They were fully redeemed in 2019. During 2019 the Group increased its options of financial funding by issuing CCBs (Bank Credit Notes), maturing in 2020. The principal and the interests will be paid at maturity.

 

(e)Loans with private entities

 

On October 1, 2018, the Group entered into an agreement with SRC Companhia Securitizadora de Créditos Financeiros (“SRC”). The transaction was a revolving loan, at a discount rate equivalent to 103.0% of the CDI Rate, and had a maturity of 12 months. Accounts receivables from card issuers were used as collateral, in the equivalent amount of 106% of loan balance.

 

In October 2019 the Group renewed this loan contract for another two years, with a discount rate equivalent to 109.8% of the CDI Rate.

 

(f)Debentures

 

On June 12, 2019 Stone approved the issuance of simple, secured and non-convertible debentures, sole series, for public distribution, with restricted distribution efforts, as amended, in the total amount of up to R$ 400,000, received between June and July, maturing in 2022. The Debentures will be secured by Stone’s accounts receivable from card issuers and will bear interest at a rate of 109.0% of the CDI rate. The Debenture contains financial covenants which are under review.

 

F-49

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(g)Changes in loans and financing

 

   Balance at 12/31/2018  Additions  Payment  Interest  Balance at 12/31/2019
                
Obligations to FIDC AR quota holders (i)   2,064,333    1,620,000    (180,713)   186,922    3,690,542 
Obligations to FIDC TAPSO quota holders   10,238    20,000    (10,734)   848    20,352 
Leases (ii)   3,674    154,650    (38,023)   4,457    124,758 
Bank borrowings (iii)   750    2,561,360    (798,323)   13,296    1,777,083 
Debentures   -    397,478    (13,815)   11,334    394,997 
Loans with private entities   758,027    -    (66,717)   47,146    738,456 
    2,837,022    4,753,488    (1,108,325)   264,003    6,746,188 
Current   777,702                   5,038,705 
Non current   2,059,320                   1,707,483 

 

   Balance at 12/31/2017  Additions  Payment  Interest  Balance at 12/31/2018
                
Obligations to FIDC AR quota holders   2,065,026    -    (141,297)   140,604    2,064,333 
Obligations to FIDC TAPSO quota holders   -    10,000    -    238    10,238 
Leases   12,517    4,339    (14,296)   1,114    3,674 
Bank borrowings   4,354    -    (3,815)   211    750 
Loans with private entities   -    746,909    -    11,118    758,027 
    2,081,897    761,248    (159,408)   153,285    2,837,022 
Current   22,534                   777,702 
Non current   2,059,363                   2,059,320 

 

(i)Includes third series of senior quotas for FIDC AR II issued in June 2019 for 24 months.

(ii)Additions refer to IFRS 16 R$ 40,935 initial impact (see Note 3.20.1.1) and R$ 100,464 for the period of twelve months ended in December 31, 2019.

(iii)The balance mainly refers to issuances of Cédula de Crédito Bancário (“CCB”), maturing in 2020.

 

F-50

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

19.Transactions with related parties

 

Related parties comprise the Group’s parent companies, shareholders, key management personnel and any businesses which are controlled, directly or indirectly by the shareholders and directors over which they exercise significant management influence. Related party transactions are entered in the normal course of business at prices and terms approved by the Group’s management.

 

(a)Transactions with related parties

 

The following transactions were carried out with related parties:

 

   2019  2018
Sales of services          
Associates (legal and administrative services) (i)   11    159 
    11    159 
Purchases of goods and services          
Entity controlled management personnel (ii)   (10,029)   (7,730)
Associates (transaction services) (iii)   (451)   (397)
    (10,480)   (8,127)

 

(i)In 2019, related to services provided to VHSYS. In 2018, related to cost-sharing and checking account agreements with Equals S.A. incurred until the acquisition date.

(ii)Related to consulting and management services with Genova Consultoria e Participações Ltda., and travel services provided by Zurich Consultoria e Participações Ltda.

(iii)Related mainly to commission expenses paid to Collact due to new customer acquisition.

 

Services provided to related parties include legal and administrative services provided under normal trade terms and reimbursement of other expenses incurred in their respect.

 

The Group acquired under normal trade terms the following goods and services from entities that are controlled by members of the Group’s management personnel:

 

management and consulting services;

 

travel services; and

 

services related to card transactions.

 

(b)Year-end balances

 

The following balances are outstanding at the end of the reporting period in relation to transactions with related parties:

 

   2019  2018
Associates   -    13 
Loans to key management personnel   6,084    8,082 
Convertible loans   6,753    - 
Receivables from related parties   12,837    8,095 

 

As of December 31, 2019, there is no allowance for expected credit losses on related parties’ receivables. No guarantees were provided or received in relation to any accounts receivable or payable involving related parties.

 

The Group has outstanding loans with certain management personnel. The loans are payable in three to seven years from the date of issuance and accrue interest according to the National Consumer Price Index, the Brazilian Inter-Bank Rate or Libor plus an additional spread.

 

F-51

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(c)Key management personnel compensation

 

Management includes the legal directors of StoneCo plus key executives of the Group and compensation consists of fixed compensation, profit sharing and benefits plus any correlating social or labor charges and or provisions for such charges. Compensation expenses are recognized in profit or loss of the Group. For the year ended December 31, 2019 and 2018, compensation expense was as follows:

 

   2019  2018
Short-term benefits   11,902    5,330 
Share-based payments (Note 25)   18,878    19,941 
    30,780    25,271 

 

20.Provision for contingencies

 

The Group companies are party to labor and civil litigation in progress, which are being addressed at the administrative and judicial levels. For certain contingencies, the Group has made judicial deposits, which are legal reserves the Group is required to make by the Brazilian courts as security for any damages or settlements the Group may be required to pay as a result of litigation. The amount of the judicial deposits as of December 31, 2019 is R$ 15,541 (2018 - R$ 7,712), that are included in other assets in the non-current assets.

 

Probable losses, provided for in the statement of financial position

 

The provisions for probable losses arising from these matters are estimated and periodically adjusted by management, supported by the opinion of its external legal advisors. The amount, nature and the movement of the liabilities is summarized as follows:

 

   Civil  Labor  Total
Balance at December 31, 2017   425    61    486 
Additions   840    203    1,043 
Reversals   (252)   (13)   (265)
Payments   (22)   -    (22)
Balance at December 31, 2018   991    251    1,242 
Additions   10,303    1,810    12,113 
Reversals   (1,848)   (1,025)   (2,873)
Interests   142    38    180 
Payments   (712)   (386)   (1,098)
Balance at December 31, 2019   8,876    688    9,564 

 

MNLT, Stone, Pagar.me, Cappta, Mundipagg and Buy4 are parties to legal suits and administrative proceedings filed with several courts and governmental agencies, in the ordinary course of their operations, involving civil and labor claims.

 

Possible losses, not provided for in the statement of financial position

 

The Group has the following civil and labor litigation involving risks of loss assessed by management as possible, based on the evaluation of the legal advisors, for which no provision for estimated possible losses was recognized:

 

   2019  2018
 Civil    59,206    50,473 
 Labor    4,145    4,348 
 Total    63,351    54,821 

F-52

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

The nature of the litigations is summarized as follows:

 

Stone is party to an injunction filed by a financial institution against an accredited client in which Stone was called as a defendant, demanding Stone to refrain from prepayment of receivables related to any credits of the accredited client resulting from credit and debit cards, in addition to requesting that the amounts arising out of the transactions be paid at the bank account maintained at the financial institution that filed such lawsuit. The amount of the lawsuit as of December 31, 2019 is R$ 49,674 (2018 - R$ 44,776).

 

Stone, MNLT, Cappta, Mundipagg and Pagar.me are parties to legal suits filed in several Brazilian courts, in the ordinary course of their operations. These claims are related to: (i) chargeback related claims, which sums R$ 3,915 (2018 - R$ 2,205); (ii) issues related to the bank slip product, totaling R$ 440 (2018 – R$ 446); and (iii) disputes related to merchants of credit card receivables, totaling R$ 1,499 (2018 – R$ 555).

 

21.Equity

 

(a)Authorized capital

 

The Company has an authorized share capital of USD 50 thousand, corresponding to 630,000,000 authorized shares with a par value of USD 0.000079365 each. Therefore, the Company is authorized to increase capital up to this limit, subject to approval of the Board of Directors. The liability of each member is limited to the amount from time to time unpaid on such member’s shares.

 

(b)Subscribed and paid-in capital and capital reserve

 

In October 2018, immediately prior to the completion of the IPO, each of the ordinary voting shares and Class C shares (5,881,050 shares) were converted into Class B common shares, and each of the outstanding ordinary non-voting shares, as Class A common shares. Therefore, the Company has two share classes, Class A and Class B common shares, with the following rights:

 

each holder of Class A common shares is entitled to one vote per share on all matters to be voted on by shareholders generally, including the election of directors;

 

each holder of Class B common shares is entitled to 10 votes per share on all matters to be voted on by shareholders generally, including the election of directors;

 

the holders of our Class A common shares and Class B common shares are entitled to dividends and other distributions as may be recommended and declared from time to time by our board of directors out of funds legally available for that purpose, if any; and

 

upon our liquidation, dissolution or winding up, each holder of Class A common shares and Class B common shares will be entitled to share equally on a pro rata basis in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities.

 

The Articles of Association provide that at any time when there are Class A common shares in issue, Class B common shares may only be issued pursuant to: (a) a share split, subdivision or similar transaction or as contemplated in the Articles of Association; or (b) a business combination involving the issuance of Class B common shares as full or partial consideration. A business combination, as defined in the Articles of Association, would include, amongst other things, a statutory amalgamation, merger, consolidation, arrangement or other reorganization.

 

At the Extraordinary General Meeting of Shareholders held on October 11, 2018, the Company’s shareholders approved a capital stock share split with a ratio to be determined by the Board of Directors. On October 14, 2018, the Board of Directors of the Company approved the 126:1 (one hundred twenty-six for one) share split ratio. As a result of the share split, the Company’s historical financial statements have been revised to reflect number of shares and per share data as if the share split had been in effect for all periods presented.

 

F-53

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Below are the issuances and repurchases of shares during 2018 and 2019 (after giving effect to the share split and conversion mentioned above):

 

   Number of shares
   Class A (former Ordinary non-voting)  Class B (former Ordinary voting)  Class C (extinguished)  Total
At December 31, 2017   60,775,470    154,685,538    7,695,072    223,156,080 
                     
Issuance   4,276,916    -    -    4,276,916 
Initial public offering   54,902,209    (9,084,027)   -    45,818,182 
Vested awards   5,742,843    -    -    5,742,843 
Repurchase and cancellation   -    -    (1,814,022)   (1,814,022)
Reclassification   -    5,881,050    (5,881,050)   - 
                     
At December 31, 2018   125,697,438    151,482,561    -    277,179,999 
                     
Issuance   35,655    -    -    35,655 
Vested awards   151,182    -    -    151,182 
Reclassification   52,804,309    (52,804,309)   -    - 
                     
At December 31, 2019   178,688,584    98,678,252    -    277,366,836 

 

In 2017, the Company had capital contributions in which 21,909,132 ordinary non-voting shares (or Class A common shares after reclassification) were issued for an amount of R$527,531 to owners of the parent, and for an amount of R$ 1,483 to non-controlling interest.

 

In addition, during 2017, the Company repurchased 11,994,444 shares which were cancelled. Total consideration paid for these shares was R$ 280,825.

 

In January 2018, the Company received capital contributions for an amount of R$ 3,240 for the issuance of 110,250 ordinary non-voting shares (or Class A common shares after reclassification).

 

In July 2018, 1,814,022 Class C shares were repurchased by the Group for an initial consideration of R$ 63,230, which was subject to an additional payment upon the occurrence of certain events including the completion of an IPO, sale or private placement (“Capital Event”). Given the consummation of the IPO, such additional payment has been determined in R$ 79,210, calculated by multiplying the number of shares that have been redeemed by 90% of the share price in the Capital Event minus the initial consideration, paid on October 29, 2018, totalizing R$ 142,440.

 

As mentioned in Note 26, the Group granted 5,701,374 new awards of restricted share units (“RSUs”), stock options and incentive shares. Approximately 1,134,000 awards were reserved as anti-dilutive shares to be issued to the Company’s controlling shareholders pro-rata upon vesting of the granted RSUs and stock option award.

 

As a result of the completion of the IPO described in Note 1, new shares were issued in October 2018 as follows:

 

(i)45,818,182 new Class A common shares sold by the Company in the IPO;

 

(ii)4,906,456 new Class A common shares sold by the selling shareholders in the IPO (and the related conversion of Class B common shares in connection with such sale);

 

F-54

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

(iii)5,543,090 new Class A common shares as a result of the exercise of the underwriters’ option to purchase additional shares from the selling shareholders (and the related conversion of Class B common shares in connection with such sale);

 

(iv)4,166,666 new Class A common shares sold by the Company in the placement exempt from registration;

 

(v)5,333,202 new Class A common shares issued to certain employees upon consummation of the IPO in exchange for equity awards that they hold in subsidiaries and 939,708 are subject to a lock-up period;

 

(vi)146,806 new Class A common shares underlying outstanding RSUs that vested in connection with the IPO plus 28,979 new Class A common shares granted to the founder shareholders as anti-dilutive shares pro rata upon the vesting of such RSUs, both including additional RSU awards vested in connection with the exercise of the underwriters’ option to purchase additional shares from the selling shareholders (Note 26);

 

(vii)233,856 new Class A common shares as part of the purchase price consideration for the acquisition of the remaining 44.0% interest in Equals, effective upon the consummation of the IPO (Note 5);

 

During 2018, the Company received total capital contributions of R$ 4,229,153.

 

As of December 31, 2019, and 2018, all issued shares were paid in full.

 

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.

 

In April 2019, during the follow-on public offering, the vesting of some RSU awards was accelerated. Accordingly, Class A common shares were issued to our founder shareholders, as anti-dilutive shares. Also, in April, 2019, upon a lock-up period end, some shareholders converted Class B shares to Class A shares.

 

(c)Treasury shares

 

Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in equity.

 

In December 2019, the Company holds 6,870 Class A common shares in treasury.

 

(d)Special reserve

 

Due to the reverse merger of StoneCo Brasil by Stone (see Note 1.2) (an intragroup restructuring of Brazilian subsidiaries), the excess paid to acquire the remaining 10.1% of the outstanding shares of Stone in 2017 (R$ 179,323, as mentioned in Note 28 (a)) will be deductible for the purposes of income tax and social contribution on net income. Thus, Stone has recognized a special reserve in shareholders’ equity in the amount of R$ 61,127 and a deferred tax asset.

 

22.Earnings (loss) per share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) for the year attributed to the owners of the parent by the weighted average number of ordinary shares outstanding during the year.

 

During 2019 and 2018, the Group had outstanding grants and subsidiary preferred shares, which participated in profit or loss as follows:

 

Liability and equity classified Class C Shares (prior to share reclassification) granted to founders and executives on multiple dates from 2015 through 2017 were issued on July 7, 2017. Upon grant and prior to the issuance of those shares, the founders and executives held a right to participate evenly in dividends when declared on ordinary shares.

 

F-55

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

A subsidiary of the Group has outstanding liability classified preferred shares to certain employees and business partners. These preferred shares participate evenly with ordinary shareholders of the subsidiary in dividends of the subsidiary when declared.

 

As these awards participate in dividends, the numerator of the Earnings per Share (“EPS”) calculation is adjusted to allocate undistributed earnings (losses) as if all earnings (losses) for the year had been distributed. In determining the numerator of basic EPS, earnings (loss) attributable to the Group is allocated as follows:

 

   2019  2018  2017
          
Net income (loss) attributable to Owners of the Parent   803,232    301,232    (108,731)
Less: Net loss allocated to participating share grants of the Company   -    -    (2,025)
Less: Net loss allocated to participating shares of Group companies   -    (126)   (20)
Numerator of basic and diluted EPS   803,232    301,358    (106,686)

 

As of December 31, 2019, only the RSU and stock options are included in diluted EPS calculation for the year then ended.

 

As of December 31, 2018, the shares issued in connection with the acquisition of Equals were adjusted to basic and diluted EPS calculation since the acquisition date. On September 1, 2018, the Group granted RSU and stock options (Note 26), which are included in diluted EPS calculation for the year then ended.

 

As of December 31, 2017, the Group had no outstanding and unexercised options to purchase shares and, as such, basic and diluted EPS are the same for the year then ended.

 

The following table contains the earnings (loss) per share of the Group for the years ended December 31, 2019, 2018 and 2017 (in thousands except share and per share amounts):

 

   2019  2018  2017
          
Numerator of basic EPS   803,232    301,358    (106,686)
                
Equals’ acquisition   -    33,316    - 
Weighted average number of outstanding shares   277,320,157    232,499,264    215,571,771 
Denominator of basic EPS   277,320,157    232,532,580    215,571,771 
                
Basic earnings (loss) per share - R$   2.90    1.30    (0.49)
                
Numerator of diluted EPS   803,232    301,358    (106,686)
                
Equals’ acquisition   -    33,316    - 
Share-based payments   4,845,504    1,748,001    - 
Weighted average number of outstanding shares   277,320,157    232,499,264    215,571,771 
Denominator of diluted EPS   282,165,661    234,280,581    215,571,771 
                
Diluted earnings (loss) per share - R$   2.85    1.29    (0.49)

 

In accordance with the requirements of IAS 33 – Earnings per share, the denominator at each year was retrospectively adjusted to reflect the share split approved on October 14, 2018 (Note 21).

 

F-56

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

23.Total revenue and income

 

   2019  2018  2017
          
Transaction activities and other services   862,268    587,299    267,509 
(-) Taxes and contributions on revenue   (91,978)   (72,687)   (42,555)
(-) Other deductions   (14)   (10)   (739)
Net revenue from transaction activities and other services   770,276    514,602    224,215 
Equipment rental and subscription services   368,221    235,682    118,335 
(-) Taxes and contributions on revenue   (33,971)   (21,062)   (10,697)
(-) Other deductions   (2,685)   (941)   (2,686)
Net revenue from subscription services and equipment rental   331,565    213,679    104,952 
Financial income   1,352,064    842,025    434,251 
(-) Taxes and contributions on financial income   (64,304)   (40,703)   (22,073)
Financial income   1,287,760    801,322    412,178 
Other financial income   186,367    49,578    25,273 
Total revenue and income   2,575,968    1,579,181    766,618 
                
Timing of revenue recognition               
Recognized at a point in time   770,276    514,602    224,215 
Recognized over time   1,805,692    1,064,579    542,403 
Total revenue and income   2,575,968    1,579,181    766,618 

 

24.Expenses by nature

 

   2019  2018  2017
          
Personnel expenses (Note 25)   576,440    421,240    336,902 
Financial expenses (a)   353,451    301,065    237,094 
Transaction and client services costs (b)   185,396    163,561    126,870 
Depreciation and amortization (Note 12)   163,396    92,333    54,584 
Third parties services   69,579    42,875    32,932 
Marketing expenses and sales commissions (c)   71,811    40,890    26,521 
Facilities expenses   30,547    34,095    26,066 
Travel expenses   24,660    19,414    12,943 
Other   9,223    20,924    8,061 
Total expenses   1,484,503    1,136,397    861,973 

 

(a)Financial expenses include discounts on the sale of receivables to banks, interest expense on borrowings, foreign currency exchange variances, net and the cost of derivatives covering interest and foreign exchange exposure.

(b)Transaction and client services costs include card transaction capturing services, card transaction and settlement processing services, logistics costs, payment scheme fees and other costs.

(c)Marketing expenses and sales commissions relate to marketing and advertising expenses, and commissions paid to sales related partnerships.

 

F-57

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

25.Employee benefits

 

   2019  2018  2017
          
Wages and salaries   348,731    242,147    146,153 
Social security costs   117,604    70,988    36,577 
Profit sharing and annual bonuses   45,596    47,262    15,235 
Share-based payments   64,509    60,843    138,937 
    576,440    421,240    336,902 

 

The Group provides a standard benefit package to all employees, consisting primarily of health care plans, group life insurance, meal and food vouchers and transportation vouchers. The commission paid to salespeople are included in Wages and salaries.

 

26.Share-based payment

 

The Group provides benefits to employees (including executive directors) of the Group through share-based incentives. The following table outlines the key share-based awards expense and their respective equity or liability balances as of December 31, 2019, 2018 and 2017.

 

   Equity  Liability   
   Class C  RSU  Option  Incentive  Total  Class C  Incentive  Total  Total
Number of shares                           
As of December 31, 2016   1,444,212    -    -    -    1,444,212    3,545,388    -    3,545,388    4,989,600 
Granted   -    -    -    -    -    3,045,420    5,028,282    8,073,702    8,073,702 
Repurchased   (339,948)   -    -    -    (339,948)   -    -    -    (339,948)
As of December 31, 2017   1,104,264    -    -    -    1,104,264    6,590,808    5,028,282    11,619,090    12,723,354 
Granted   -    5,261,256    135,198    304,920    5,701,374    -    -    -    5,701,374 
Issued   -    (146,806)   -    -    (146,806)   -    -    -    (146,806)
Reclassified   6,590,808    -    -    5,028,282    11,619,090    (6,590,808)   (5,028,282)   (11,619,090)   - 
Repurchased   (1,814,022)   -    -    -    (1,814,022)   -    -    -    (1,814,022)
Converted   (5,881,050)   -    -    -    (5,881,050)   -    -    -    (5,881,050)
As of December 31, 2018   -    5,114,450    135,198    5,333,202    10,582,850    -    -    -    10,582,850 
Granted   -    9,437    5,160    -    14,597    -    -    -    14,597 
Issued   -    (159,751)   -    -    (159,751)   -    -    -    (159,751)
Cancelled   -    (529,240)   (106,722)   -    (635,962)   -    -    -    (635,962)
Repurchased   -    -    -    (3,838)   (3,838)   -    -    -    (3,838)
As of December 31, 2019   -    4,434,896    33,636    5,329,364    9,797,896    -    -    -    9,797,896 

 

Class C ordinary shares

 

The Group granted fully vested share awards from January 2015 to January 2017 entitling key founders and senior executives the issuance of Class C ordinary shares in the Group.

 

In July 2017, Class C Shares were issued to a holding vehicle in which the key founders and senior executives are shareholders.

 

F-58

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

In July 2018, 1,814,022 Class C shares were repurchased by the Group for an initial consideration of R$ 63,230, which was subject to an additional payment upon the occurrence of certain events including the completion of an IPO, sale or private placement (“Capital Event”). Given the consummation of the IPO, such additional payment has been determined in R$ 79,210, calculated by multiplying the number of shares that have been redeemed by 90% of the share price in the Capital Event minus the initial consideration, paid on October 29, 2018, totalizing R$ 142,440.

 

Incentive Shares

 

In 2017, certain key employees have been granted incentive shares, or the Co-Investment Shares, that entitle participants to receive a cash bonus which they, at their option, may use to purchase a specified number of preferred shares in StoneCo Brasil, which were then exchanged for common shares in DLP Par and after were exchanged upon consummation of the IPO, as mentioned in Note 21.

 

Incentive Shares are subject to a 10 year lock-up period after which participants have the right to sell their shares to a third-party buyer for the fair market value of the Company. If a participant ceases employment for any reason before the end of the 10 years lock-up period, the Company have the right to acquire the shares for the price originally paid by the participant, less an applicable discount as below.

 

Time remaining to the end of the Lock-up period

 
 

Discount

 
 

Monthly
Installments
 

 
7-10 years    25%  Up to 120
3-7 years    20%  Up to 60
0-3 years    15%  Up to 36

 

The Repurchase Right can be exercised at any time up to two years from the participant’s termination date. Once the lock-up period expires and if the participant terminates employment, the Company has a 90-day option to repurchase the shares at the then-current share price.

 

Based on the repurchase discount schedule the largest payout is 85% of the award’s grant date fair value should a participant leave before the 10-year lock-up period expires. The vesting tranches are broken into three separate tranches, which reflects the terms of the repurchase right and constitutes graded vesting features.

 

The first tranche represents 75% of the grant date fair value, recognized in full on the grant date. That is, if an employee voluntarily terminates employment up to 3 years from the grant date and the Company exercises its repurchase feature, the participant will receive a cash payment equal to 75% of the grant date fair value.

 

The second tranche represents 5% of the grant date fair value, recognized from grant date to the end of year 3. This represents the additional 5% potential repurchase payment if the employee satisfies 3 to 7 years of the lock-up period.

 

The third tranche represents 5% of the grant date fair value, recognized from grant date to the end of year 7. This represents the additional 5% potential repurchase payment if the employee satisfies at least 7 years of the lock-up period but leaves prior to the expiration of the lock-up period.

 

During 2019, 3,838 Class A common shares were repurchased as a participant left the Company prior to lock-up expiration.

 

Phantom Share plan

 

Under the Phantom Share plan granted on December 1, 2017 participants have the right to receive compensation in cash for the appreciation of StoneCo Brasil share price equivalent to the difference between the price per share at the date of grant and the price per share upon a qualifying settlement event. The participant must remain actively employed until the settlement event occurs in order to become vested in the award. A settlement event is defined as the entrance of a new shareholder into the Group who takes possession of more than 50% of voting rights. If the value of the incentive is negative, no amount will be owed to the participant. Therefore, the plan is accounted for as a cash settled award with a liability for the actual cash paid to the employees, which will be the fair value at settlement date. However, as of December 31, 2017, Management did not consider a settlement event probable. As such, no compensation expense has been recognized for this plan in the year ended December 31, 2017. In September 2018, these shares were converted to RSU awards and recognized in equity over the vesting period.

 

F-59

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Restricted share units

 

In September 2018, the Group granted new awards of restricted share units (“RSUs”). In addition, all outstanding Phantom Shares, which were originally granted on December 1, 2017, were converted to RSU awards. These awards are equity classified, the majority of the awards are subject to performance conditions, and the related compensation expense will be recognized over the vesting period. The Company issued 5,261,256 awards (including Phantom Shares converted to RSUs) as RSU, and, of which approximately 6% were vested until the IPO, 9% vest in 4 years, 18% vest in 5 years, 21% vest in 7 years, and 46% vest in 10 years. Afterwards, some employees that have not traded their shares on IPO, returned 11,601 shares to treasury to pay the withholding taxes. On the grant date the share price was US$ 24.00.

 

In April 2019 in connection with the follow-on offering, the Company accelerated the vesting of 151,182 Class A common shares, net of withholding taxes, underlying RSU awards. This relates to the acceleration of certain awards to allow recipients to participate in the offering and/or to sell Class A common shares in the open market on or around the closing of this offering.

 

In August 2019, the Group granted new 9,437 awards as RSUs and also cancelled 527,350. These new awards granted are similar to the granted in September 2018, except for the vesting period that are vested 15% until 5 years, 20% until 7 years and 65% until 10 years. On the grant date the share price was US$ 35.54.

 

In December 2019, the Company delivered 8,569 Class A common shares hold in treasury shares, net of withholding taxes, to a former employee also in the same period 1,890 awards were cancelled.

 

Stock options

 

In September 2018, the Group issued 135,198 awards as stock options, of which approximately 77% have exercise date in 5 years, 5% in 7 years and 18% in 10 years. During 2019, the group also cancelled 106,722 awards as employees left the Company. The strike price for the grant is US$ 24.00.

 

In August 2019 the Group granted new 5,160 awards, of which approximately 50% have exercise date in 3 years and 50% in 5 years. The strike price for the grant is US$ 30.00.

 

The fair value of each stock option granted was estimated at the grant date based on the Black-Scholes-Merton pricing model.

 

The total expense, including taxes and social charges, recognized for the programs for the year was R$ 64,509 (2018 - R$ 60,843).

 

27.Financial instruments

 

(i)Risk management

 

The Group’s activities expose it to a variety of financial risks: credit risk, market risk (including foreign exchange risk, cash flow or fair value interest rate risk, and price risk), liquidity risk and fraud risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to mitigate certain risk exposures. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken.

 

Risk management is carried out by a central treasury department (“Group treasury”) under policies approved by the Board of Directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, anti-fraud, use of derivative financial instruments and non-derivative financial instruments, and investment of surplus liquidity.

 

a)Credit risk

 

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Credit risk arises from the groups exposures to third parties, including cash and cash equivalents, derivative financial instruments and deposits with banks and other financial institutions, as well as from its operating activities, primarily related to accounts receivable from financial institutions licensed by card companies, including outstanding receivables and commitments.

 

F-60

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

The carrying amount of financial assets represents the maximum credit exposure.

 

Financial instruments and cash deposits

 

Credit risk from balances with banks and financial institutions is managed by the Group’s treasury department in accordance with the Group’s policy. Investments of surplus funds and use of derivative instruments are only conducted with carefully selected financial institutions.

 

Accounts receivable from card issuers

 

The Group, in accordance with the rules established by payment scheme networks, have instruments to mitigate the risks of accounts receivable from financial institutions licensed by card companies. The Group’s receivables from card issuers are backed by requirements on card issuers to maintain guarantees—collateral or bank—considering the credit risk of the issuer, sales volume and the residual risk of default of cardholders. This requirement is mandatory for all issuers determined to have credit risk and the amounts are reviewed periodically by the card companies and the Group. To-date, the Group has not incurred losses from card issuer receivables.

 

b)Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises mainly two types of risk: interest rate risk and currency risk. Financial instruments affected by market risk include loans and borrowings, deposits and derivative financial instruments.

 

Interest rate risk

 

This risk arises from the possibility of the Group incurring losses due to fluctuations in interest rates in respect of fair value of future cash flows of a financial instrument.

 

The Group’s interest rate risk arises mainly from short-term investments and long-term borrowings. Short-term investments contracted in Brazilian reais are mainly exposed to changes in the CDI rate. Borrowings are mainly exposed to interest rate fluctuations in the CDI and rates that are determined by Brazilian Central Bank.

 

Interest rate sensitivity

 

Interest rate risk is the risk that the fair value and future cash flows of a financial instrument fluctuates due to changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates arises primarily from short-term investments and both short and long-term borrowings subject in each case to variable interest rates, principally the CDI rate.

 

The Group conducted a sensitivity analysis of the interest rate risks to which the financial instruments are exposed as of December 31, 2019. For this analysis, the Group adopted as a probable scenario for the future interest rates of 5,78% for the CDI rate. As a result, financial income (with respect to short-term investments) and financial expense, net (with respect to both short and long-term borrowings) would be impacted as follows:

 

Transactions   Interest rate risk   Book value   Reasonably possible change   Impact on profit or loss before tax
 Short-term investments    CDI variation      2,758,265   10%   1,103
 Loans and financing      CDI variation    (2,910,550)   10%   (1,261)
 Obligations to FIDC quota holders    CDI variation    (3,710,894)   10%   (1,581)
                (1,738)

F-61

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)

 

Foreign currency risk

 

The Group from time to may enter into derivatives contracts in order to offset foreign currency exchange rate risk which arise from assets and liabilities that are primarily denominated in U.S. dollars and Euros. The Group’s foreign currency exposure gives rise to minimum market risks associated with exchange rate movements.

 

As the Group’s borrowings are denominated in Brazilian reais, there is no significant exposure to currency risk. Other liabilities denominated in U.S. dollars are related to other accounts payable by subsidiaries located in the United States, but without significant exchange risk.

 

The Group has accounts receivable denominated in U.S. dollars derived from transactions with credit cards issued abroad and captured at accredited establishments in Brazil, which are settled at issuing banks abroad through card companies, but without significant exchange risk.

 

The Group also has certain investments in foreign operations, denominated in currencies other than Group’s functional currency, and whose net assets are exposed to foreign currency translation risk.

 

As of December 31, 2019 there were foreign currency non-deliverable forwards, accounted for as derivative financial instruments and measure at fair value through profit or loss.

 

Foreign currency sensitivity

 

The following tables demonstrate the sensitivity to a reasonably possible change in U.S. dollar, with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the fair value of monetary assets and liabilities including non-designated foreign currency derivatives.

 

Transactions   Denomination currency   Book value   Reasonably possible change   Impact on profit or loss before tax
 Cash and cash equivalents - Deposits    U.S. dollar             58,262   10.00%   5,826
 Short-term investments - Equity securities    U.S. dollar        2,908,470   10.00%   290,847
 Short-term investments - Others    U.S. dollar             10,027   10.00%   1,003
        2,976,759       297,676

 

The Group’s exposure to foreign currency changes for all other currencies is not material.

 

c)Liquidity risk

 

Cash flow forecasting is performed in the operating entities of the Group and aggregated by the Group’s finance team. Group Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities at all times so that the Group does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal balance sheet ratio targets and, if applicable, external regulatory or legal requirements—for example, currency restrictions.

 

Surplus cash held by the operating entities over and above the balance required for working capital management is transferred to the Group’s treasury department. Group treasury department invests surplus cash in interest-earning bank accounts, time deposits, money market deposits and marketable securities, choosing instruments with appropriate maturities or sufficient liquidity to provide adequate margin as determined by the above-mentioned forecasts. At the balance sheet date, the Group held short term investments of R$ 2,937,029 (2018 - R$ 2,770,589) that are expected to readily generate cash inflows for managing liquidity risk.

 

The table below analyzes the Group’s non-derivative financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows.

 

F-62

StoneCo Ltd.

 

Notes to consolidated financial statements
December 31, 2019, 2018 and 2017
(In thousands of Brazilian Reais, unless otherwise stated)