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, 2021

 

Commission File Number: 001-38714

 

STONECO LTD.

(Exact name of registrant as specified in its charter)

 

4th Floor, Harbour Place

103 South Church Street, P.O. Box 10240

Grand Cayman, KY1-1002, Cayman Islands

+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, 2020 and 2019 and the three years ended December 31, 2020 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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.

 

F-1

Revenue from transaction activities, rental activities and financial income

 

Description of the Matter

 

As described in note 3.14, the Company recognizes revenues as each performance obligation is satisfied in accordance with IFRS 15. Total revenue from transaction activities totaled R$ 1,294,294, while revenue from subscription services and rental activities totaled R$ 428,290 and financial income related to discount fees for the prepayments to the client and financial income related to the interests of credit offered to the clients totaled R$ 1,700,945.

 

Auditing the Company’s revenue from transaction activities, rental activities and financial income is complex, since such activities are processed through a complex information technology environment and 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.

 

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, rental activities and financial income with discount fees for the prepayments to the clients and financial income related to the interests of credit offered to the clients. For example, we involved our Information Technology personnel 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, rental activities and discount fees for the prepayments to clients and interests of credit offered to the clients, our audit procedures included, among others: 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; and testing the collection of cash for the transactions. We also assessed the Company’s related disclosures in respect to its revenue from transaction activities, rental activities and financial income to the consolidated financial statements.

 

Business Combinations

 

Description of the Matter

 

As described in note 3.18 the Company completed seven acquisitions throughout 2020, that accounted for as business combinations. The Company determined the fair value of net assets acquired and estimated contingent consideration, when applicable, using valuation models and assumptions about future business performance (including growth rates, market share and technology evolution curves), market conditions and interest rates. Those assumptions are subject to significant estimation uncertainty.

 

Auditing the Company’s business combinations is complex due to the significant estimation uncertainty related to the assumptions used by management in determining the fair value of net assets acquired and liabilities assumed, including contingent consideration when applicable. Management projections and underlying assumptions are forward looking and could be affected by future economic events and market conditions.

 

How We Addressed the matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company accounting process for business combinations. For example, we tested controls over the identification, recognition and measurement of the fair value of assets acquired and liabilities assumed and tested controls over management assumptions.

 

To test the fair value of the net assets acquired and liabilities assumed, our audit procedures included, among others, evaluating the Company's financial information forecast model and testing the significant assumptions used in such model; testing the completeness and accuracy of the underlying data; comparing the significant assumptions to historical actual results (where applicable); comparing significant assumptions to market and economic trends and to the assumptions used to value similar assets in past acquisitions; comparing significant assumptions against industry benchmarks; involving our valuation specialists to assist in the evaluation of methodologies and models used by management and evaluating those models against the respective purchase agreements. We also assessed the Company’s related disclosures in respect to its business combinations to 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 11, 2021  

 

StoneCo Ltd.

 

Consolidated statement of financial position

As of December 31, 2020 and 2019 

(In thousands of Brazilian Reais)

 

   Notes  2020  2019
Assets             
Current assets             
Cash and cash equivalents  6   2,446,990    968,342 
Short-term investments  7   8,128,058    2,937,029 
Accounts receivable from card issuers  8   16,307,155    14,066,814 
Trade accounts receivable  9   1,415,850    249,417 
Recoverable taxes  10   56,365    50,426 
Prepaid expenses      67,658    12,463 
Derivative financial instruments   27(ii)   43,103    14,062 
Other assets      809,645    106,345 
       29,274,824    18,404,898 
Non-current assets             
Trade accounts receivable   9   382,106    - 
Receivables from related parties  19(b)   7,200    12,837 
Deferred tax assets  11(b)   138,697    192,781 
Prepaid expenses       51,164    - 
Other assets       85,571    44,685 
Investment in associates      51,982    28,242 
Property and equipment  12   717,234    548,607 
Intangible assets  13   1,039,886    373,699 
       2,473,840    1,200,851 
              
Total assets      31,748,664    19,605,749 
              
Liabilities and equity             
Current liabilities             
Accounts payable to clients  14   9,172,353    6,500,071 
Trade accounts payable  15   180,491    97,825 
Loans and financing  18   1,184,737    2,947,811 
Obligations to FIDC quota holders  18   1,960,121    2,090,894 
Labor and social security liabilities  16   173,103    109,013 
Taxes payable  17   106,835    44,940 
Derivative financial instruments  27(ii)   16,233    1,354 
Other liabilities      586,508    80,619 
       13,380,381    11,872,527 
Non-current liabilities             
Loans and financing   18   524,363    87,483 
Obligations to FIDC quota holders   18   2,414,429    1,620,000 
Deferred tax liabilities  11(b)   61,086    10,687 
Provision for contingencies  20   10,150    9,564 
Labor and social security liabilities   16   81,258    27,432 
Other liabilities       284,972    5,051 
       3,376,258    1,760,217 
              
Total liabilities      16,756,639    13,632,744 
              
Equity  21          
Issued capital      75    62 
Capital reserve      13,479,722    5,443,786 
Treasury shares      (76,360)   (90)
Other comprehensive income      (5,002)   (72,335)
Retained earnings      1,455,027    600,956 
Equity attributable to owners of the parent      14,853,462    5,972,379 
Non-controlling interests      138,563    626 
Total equity      14,992,025    5,973,005 
              
Total liabilities and equity      31,748,664    19,605,749 

 

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

 

F-2

StoneCo Ltd.

 

Consolidated statement of profit or loss

Years ended December 31, 2020, 2019 and 2018 

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Notes  2020  2019  2018
             
Net revenue from transaction activities and other services  23   1,144,086    770,276    514,602 
Net revenue from subscription services and equipment rental  23   388,033    331,565    213,679 
Financial income  23   1,647,017    1,287,760    801,322 
Other financial income  23   140,687    186,367    49,578 
Total revenue and income      3,319,823    2,575,968    1,579,181 
                   
Cost of services      (769,946)   (426,961)   (323,039)
Administrative expenses      (392,476)   (285,788)   (252,852)
Selling expenses      (505,902)   (360,612)   (190,177)
Financial expenses, net      (339,844)   (353,451)   (301,065)
Other operating expenses, net      (177,056)   (57,691)   (69,264)
   24   (2,185,224)   (1,484,503)   (1,136,397)
                   
Loss on investment in associates      (6,937)   (810)   (445)
Profit before income taxes      1,127,662    1,090,655    442,339 
                   
Current income tax and social contribution  11(a)   (216,886)   (217,228)   (154,882)
Deferred income tax and social contribution  11(a)   (73,330)   (69,232)   17,770 
Net income for the year      837,446    804,195    305,227 
                   
Net income (loss) attributable to:                  
Owners of the parent      854,071    803,232    301,232 
Non-controlling interests      (16,625)   963    3,995 
       837,446    804,195    305,227 
Earnings per share                  
Basic earnings per share for the year attributable to owners of the parent (in Brazilian Reais)  22   R$ 2.95    R$ 2.90    R$ 1.30 
Diluted earnings per share for the year attributable to owners of the parent (in Brazilian Reais)  22   R$ 2.91    R$ 2.85    R$ 1.29 

 

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

 

F-3

StoneCo Ltd.

 

Consolidated statement of other comprehensive income

Years ended December 31, 2020, 2019 and 2018 

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Notes  2020  2019  2018
             
Net income for the year      837,446    804,195    305,227 
Other comprehensive income                  
Other comprehensive income (loss) 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      28,726    (15,062)   (13,969)
Changes in the fair value of listed securities at fair value through other comprehensive income      -    (1)   - 
Exchange differences on translation of foreign operations      (410)   -    - 
Unrealized loss on cash flow hedge - highly probable future imports  27(iv)(e)   (1,512)   -    - 
Other comprehensive income (loss) 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   40,336    (938)   954 
Other comprehensive income (loss) for the year, net of tax      67,140    (16,001)   (13,015)
                   
Total comprehensive income for the year, net of tax      904,586    788,194    292,212 
                   
Total comprehensive income (loss) attributable to:                  
Owners of the parent      921,404    787,231    287,961 
Non-controlling interests      (16,818)   963    4,251 
       904,586    788,194    292,212 

 

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

 

F-4

StoneCo Ltd.

 

Consolidated statement of changes in equity

Years ended December 31, 2020, 2019 and 2018 

(In thousands of Brazilian Reais)

 

      Attributable to owners of the parent   
         Capital reserve               
   Notes  Issued capital  Additional paid-in capital  Transactions among shareholders  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, 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 
Capital increase  1.4   13    7,872,541    -    -    -    7,872,541    -    -    -    7,872,554    -    7,872,554 
Transaction costs  1.4   -    (39,964)   -    -    -    (39,964)   -    -    -    (39,964)   -    (39,964)
Share-based payments  26   -    -    -    -    31,296    31,296    -    -    -    31,296    212    31,508 
Issuance of shares for business acquisition  21 (b) / 5   -    34,961    -    -    -    34,961    -    -    -    34,961    -    34,961 
Repurchase of shares  21(c)   -    -    -    -    -    -    (76,270)   -    -    (76,270)   -    (76,270)
Repurchase and cancelation of shares  21(c)   -    -    -    -    (91)   (91)   -    -    -    (91)   -    (91)
Cash proceeds from non-controlling interest  28   -    -    135,055    -    -    135,055    -    -    -    135,055    95,843    230,898 
Dilution of non-controlling interest  28   -    -    2,138    -    -    2,138    -    -    -    2,138    (2,138)   - 
Non-controlling interests arising on a business combination  28   -    -    -    -    -    -    -    -    -    -    61,720    61,720 
Others      -    -    -    -    -    -    -    -    -    -    22    22 
Net income for the year      -    -    -    -    -    -    -    -    854,071    854,071    (16,625)   837,446 
Dividends paid      -    -    -    -    -    -    -    -    -    -    (904)   (904)
Other comprehensive income (loss) for the year      -    -    -    -    -    -    -    67,333    -    67,333    (193)   67,140 
Balance as of December 31, 2020      75    13,307,585    (86,483)   61,127    197,493    13,479,722    (76,360)   (5,002)   1,455,027    14,853,462    138,563    14,992,025 

 

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

 

F-5

StoneCo Ltd.

 

Consolidated statement of cash flows

Years ended December 31, 2020, 2019 and 2018 

(In thousands of Brazilian Reais)

 

   Notes  2020  2019  2018
Operating activities                  
Net income for the year      837,446    804,195    305,227 
Adjustments to reconcile net income (loss) for the year to net cash flows:                  
Depreciation and amortization  12(b)   256,294    163,396    92,333 
Deferred income tax and social contribution  11   73,330    69,232    (17,770)
Loss on investment in associates      6,937    810    445 
Interest, monetary and exchange variations, net      (283,899)   110,744    126,756 
Provision for contingencies      2,259    9,420    778 
Share-based payments expense      31,508    30,787    46,091 
Allowance for expected credit losses      35,632    33,926    14,272 
Impairment of intangible assets      -    -    4,764 
Loss on disposal of property, equipment and intangible assets      52,658    14,639    10,712 
Fair value adjustment in financial instruments at FVPL      (12,461)   (17,446)   - 
Fair value adjustment in derivatives      (5,758)   (12,099)   (609)
Remeasurement of previously held interest in subsidiary acquired      (2,992)   -    (21,441)
Others      -    -    (416)
Working capital adjustments:                  
Accounts receivable from card issuers      (2,081,945)   (4,779,467)   (3,990,395)
Receivables from related parties      8,688    (1,132)   3,986 
Recoverable taxes      (18,624)   (67,791)   (98,695)
Prepaid expenses      (106,359)   2,603    (4,675)
Trade accounts receivable and other assets      (1,362,356)   (284,982)   (36,855)
Accounts payable to clients      1,379,099    245,866    570,132 
Taxes payable      270,014    238,967    183,921 
Labor and social security liabilities      109,953    39,713    59,069 
Provision for contingencies      (2,193)   (1,098)   (22)
Other liabilities      31,790    (3,434)   50,910 
Interest paid      (177,589)   (268,453)   (141,447)
Interest income received, net of costs      1,172,781    1,191,136    514,788 
Income tax paid      (157,729)   (171,313)   (87,442)
Net cash (used in) / provided by in operating activities      56,484    (2,651,781)   (2,415,583)
                   
Investing activities                  
Purchases of property and equipment      (372,138)   (333,568)   (140,887)
Purchases and development of intangible assets      (82,965)   (66,381)   (44,838)
Acquisition of subsidiary, net of cash acquired      (247,429)   -    (2,940)
Proceeds from (acquisition of) short-term investments, net      (5,069,142)   (21,930)   (2,557,312)
Proceeds from the disposal of non-current assets      7,127    1,104    13,421 
Acquisition of interest in associates      (44,424)   (16,789)   (4,549)
Net cash used in investing activities      (5,808,971)   (437,564)   (2,737,105)
                   
Financing activities                  
Proceeds from borrowings  18   3,996,820    2,958,838    746,909 
Payment of borrowings      (5,381,130)   (801,849)   (3,665)
Payment to FIDC quota holders  18(a)   (2,059,500)   -    - 
Proceeds from FIDC quota holders  18   2,716,138    1,640,000    10,000 
Payment of leases  18   (41,373)   (38,023)   (14,296)
Capital increase, net of transaction costs      7,832,590    -    4,229,153 
Repurchase of shares  21(c)   (76,361)   (90)   (142,440)
Acquisition of non-controlling interests      (1,012)   (923)   (30,773)
Dividends paid to non-controlling interests      (904)   (4)   - 
Cash proceeds from non-controlling interest  28   230,898    -    - 
Net cash provided by financing activities      7,216,166    3,757,949    4,794,888 
                   
Effect of foreign exchange on cash and cash equivalents      14,969    1,809    13,777 
Change in cash and cash equivalents      1,478,648    670,413    (344,023)
                   
Cash and cash equivalents at beginning of year  6   968,342    297,929    641,952 
Cash and cash equivalents at end of year  6   2,446,990    968,342    297,929 
Change in cash and cash equivalents      1,478,648    670,413    (344,023)

 

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

 

F-6

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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 located at 4th Floor, Harbour Place, 103 South Church Street in George Town, Grand Cayman.

 

The Company is controlled by HR Holdings, LLC, which owns 61.1% of voting power, 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 services and software solutions to clients allowing them to conduct electronic commerce seamlessly across in-store, online, and mobile channels and helping them better manage their businesses, become more productive and sell more - both online and offline.

 

The consolidated financial statements were approved at the Audit Committee meeting on March 8, 2021.

 

1.1.Initial Public Offering

 

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.

 

1.2.2019 Follow-on

 

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.

 

1.3.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 through a total merger into Stone.

 

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-7

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

1.4.2020 Follow-on

 

On August 12, 2020, the Company filed a follow-on prospectus offering 31,481,250 of its Class A common shares, of a par value of US$0.000079365 per share, including the full exercise of the underwriters’ option to purchase 4,106,250 additional shares (“Offering”).

 

The Offering price was US$ 47.50 per Class A common share, resulting in gross proceeds of US$ 1,495,359 thousand. The Company received net proceeds of US$ 1,464,702 thousand (or R$ 7,872,554), after deducting US$ 30,657 thousand in underwriting discounts and commissions. Additionally, the Company incurred in US$ 7,278 thousand (or R$ 39,964) regarding other offering expenses.

 

The shares offered and sold in the Offering were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-3 (Registration No. 333-244404), which was declared effective by the Securities and Exchange Commission on August 17, 2020.

 

The Company intends to use the net proceeds from the Offering to finance the pending acquisition of Linx S.A (Note 1.5), and to pay related fees and expenses, as well as for general corporate purposes. If for any reason the acquisition of Linx S.A. is not consummated, the Company intends to use the net proceeds from the Offering for general corporate purposes. As of December 31, 2020, the amount is included in short term investments in the financial position.

 

1.5.Linx acquisition

 

On 17 November 2020, Linx held an Extraordinary General Meeting that approved the business combination between STNE Participações S.A. ("STNE Par") that holds the software investments business of the Group and Linx S.A. (“Linx”), a leading provider of retail management software in Brazil. The transaction is now pending antitrust approval (CADE) and certain other conditions. A compensatory break fee equal to R$ 453,750 thousand will be payable by the Group to Linx if the CADE does not approve the transaction.

 

Pursuant to the terms and subject to the conditions set forth in the Association Agreement and its amendments, each Linx Share issued and outstanding immediately prior to the consummation of the transaction will be automatically contributed to the Group in exchange for one newly issued redeemable STNE Par Class A Preferred Share and one newly issued redeemable STNE Par Class B Preferred Share. Immediately thereafter, each STNE Par Class A Preferred Share will be redeemed for a cash payment of R$33.56 updated pro rata die according to the CDI rate variation from the sixth month counted from August 11th, 2020 until the date of the effective payment and each STNE Par Class B Preferred Share will be redeemed for (i) 0.0126774 StoneCo Class A Common Share, or (ii) 0.0126774 BDR (Brazilian Depositary Receipt) (“StoneCo BDR”), provided that each 1 (one) StoneCo BDR will correspond to 1 (one) StoneCo Class A Share (the “Base Exchange Ratio”). The Base Exchange Ratio is calculated on a fully diluted basis, assuming a number of fully diluted shares of Linx of 179,058,617 on the transaction consummation date and represents a total consideration of R$38.06 for each Linx Share or the total amount of R$ 6,814,971, considering the share price of the StoneCo Shares as of November 16, 2020.

 

In 2020 the costs related to this transaction was R$ 28,369, recognized in the statement of profit or loss under administrative expenses.

 

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   2020   2019
DLP Capital LLC (“DLP Capital”)   USA   Holding company   100.00   100.00
DLP Par Participações S.A. (“DLP Par”)   Brazil   Holding company   100.00   100.00
MPB Capital LLC (“MPB Capital”)   USA   Investment company   100.00   100.00

 

 

 

F-8

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

            % Groups's equity interest
Entity name   Country of incorporation   Principal activities   2020   2019
STNE Participações S.A. (“STNE Par”)   Brazil   Holding company   100.00   100.00
STNE Participações em Tecnologia S.A. (“STNE Par Tec”)   Brazil   Holding company   100.00   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   100.00
Buy4 Sub LLC (“Buy4 LLC”)   USA   Cloud store card transactions   100.00   100.00
Cappta S.A. (“Cappta”) (i)   Brazil   Electronic fund transfer   56.73   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   100.00
Stone Sociedade de Crédito Direto S.A. (“Stone SCD”)   Brazil   Financial services   100.00   100.00
Stone Logística Ltda ("Stone Log")   Brazil   Logistic services   100.00   100.00
PDCA S.A. ("PDCA") (Note 28(d))   Brazil   Merchant acquiring   67.00   100.00
Linked Gourmet Soluções para Restaurantes S.A. (“Linked”) (Note 5)   Brazil   Technology services   58.10   -
MAV Participações S.A. (“MVarandas”) (Note 5)   Brazil   Technology services   100.00   -
Vitta Tecnologia em Saúde S.A. (“Vitta Group”) (Note 5)   Brazil   Health plan management   100.00   -
VittaPar LLC. (“Vitta Group”) (Note 5)   USA   Holding company   100.00   -
Vitta Corretora de Seguros Ltda. (“Vitta Group”) (Note 5)   Brazil   Insurance services   100.00   -
Vitta Serviços em Saúde LTDA. (“Vitta Group”) (Note 5)   Brazil   Health services   100.00   -
Vitta Saúde Administradora em Benefícios LTDA. (“Vitta Group”)   Brazil   Health services   100.00   -
MLabs Software Ltda. (“MLabs”) (Note 5)   Brazil   Social media services   51.50   -
Questor Sistemas S.A (“Questor”) (Note 5)   Brazil   Technology services   50.00   -
Sponte Informática S.A ("Sponte") (Note 5)   Brazil   Technology services   90.00   -
StoneCo CI Ltd (“Creditinfo Caribbean”) (Note 5)   Cayman Islands   Holding company   53.05   -
Creditinfo Jamaica Ltd (“Creditinfo Caribbean”) (Note 5)   Jamaica   Credit bureau services   53.05   -
Creditinfo Guyana Inc (“Creditinfo Caribbean”) (Note 5)   Guyana   Credit bureau services   53.05   -
Creditadvice Barbados Ltd (“Creditinfo Caribbean”) (Note 5)   Barbados   Credit bureau services   53.05   -
Stone Seguros S.A. (“Stone Seguros”) (ii)   Brazil   Insurance services   100.00   -
TAPSO FIDC ("FIDC TAPSO")   Brazil   Receivables investment fund   100.00   100.00
FIDC Bancos Emissores de Cartão de Crédito - Stone (“FIDC AR I”)  (Note 18 (a))   Brazil   Receivables investment fund   -   100.00
FIDC Bancos Emissores de Cartão de Crédito - Stone II (“FIDC AR II”)   Brazil   Receivables investment fund   100.00   100.00
FIDC Bancos Emissores de Cartão de Crédito - Stone III (“FIDC AR III”)  (Note 18 (a))   Brazil   Receivables investment fund   100.00   -
SOMA FIDC (“FIDC SOMA”)   Brazil   Receivables investment fund   100.00   100.00
SOMA III FIDC (“FIDC SOMA III”) (Note 18 (c))   Brazil   Receivables investment fund   100.00   -
STONECO EXCLUSIVO FIC FIM (“FIC FIM STONECO”) (iii)   Brazil   Investment fund   100.00   -

 

(i)In 2020, STNE Par has reduced its interest in Cappta by a repurchase of treasury shares made by another shareholder.

 

(ii)On November 18, 2020, the Group created a new company, Stone Seguros, which is being set up to offer insurance services to the Group's customers. As of December 22, 2020, and according to Ordinance No. 7,723 of the Superintendence of Private Insurance (“Susep”), Stone Seguros is authorized by Susep within a “Regulatory Sandbox” to operate for 36 months as an insurance company, oriented to offer innovative property and personal insurance products through proprietary channels. Stone Seguros remains non-operational. The Regulatory Sandbox is ruled by the Resolution No. 381/2020 of the Brazilian National Council of Private Insurance’s (CNSP), the Circular No. 598/2020 of Susep and the Eletronic Edital No. 2/2020 of Susep.

 

(iii)In December 2020, the Group completed the issuance of R$ 43,600 of FIC FIM STONECO quotas. The purpose of FIC FIM STONECO is to invest in quotas of FIDCs.

 

F-9

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

2.2.Associates

 

            % Groups's equity interest
Entity name   Country of incorporation   Principal activities   December 31, 2020   December 31, 2019
Linked Gourmet Soluções para Restaurantes S.A. (“Linked”) (Note 5) Brazil   Technology services   -   48.56
Collact Serviços Digitais Ltda. (“Collact”) (i)   Brazil   CRM   25.00   25.00
VHSYS Sistema de Gestão S.A. (“VHSYS”) (ii)   Brazil   Technology services   33.33   33.33
Alpha-Logo Serviços de Informática S.A. ("Tablet Cloud") (iii)   Brazil   Technology services   25.00   25.00
Trinks Serviços de Internet S.A. ("Trinks") (iv)   Brazil   Technology services   19.90   19.90
Delivery Much Tecnologia S.A. ("Delivery Much") (v)   Brazil   Food delivery marketplace   22.64   -

 

(i)On February 6, 2019, the Group acquired a 25% interest in Collact, a private company based in the State of São Paulo, Brazil, for R$ 1,667. Collact 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 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.

 

(ii)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. 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.

 

(iii)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 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.

 

(iv)On November 25, 2019, the Group acquired 19.9% interest in Trinks for R$ 4,493. 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.

 

(v)On July 3, 2020, the Group acquired 22.64% interest in Delivery Much Tecnologia S.A. ("Delivery Much"), for R$ 35,998. Delivery Much is a private company based in the State of Rio Grande do Sul, Brazil, which is a food delivery marketplace company focused on small-and-midsize cities, with which the Company expects to obtain synergies in its services to clients. The Group also holds options 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 27.36% interest in Delivery Much.

 

Each of the options has been evaluated in accordance with pre-determined formulas and R$ 7,220 were recorded in the consolidated statement of financial position as Derivative financial instruments.

 

F-10

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

  

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, accounts receivable from card issuers, some trade accounts receivable, derivative financial instruments and other liabilities related to contingent consideration 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.

 

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 and FIC FIM STONECO are structured entities under IFRS 10 – Consolidated Financial Statements and that the Group controls them. See 4.7 for further details.

 

F-11

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

  

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, and 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 its functional currency. Items included in the financial statements of each entity are measured using that functional currency. The functional currency for the majority of the Company’s subsidiaries is also the Brazilian real, except for Creditinfo Caribbean, which has their financial statements translated into Brazilian reais using (i) the exchange rates at the reporting date for assets and liabilities, (ii) an average exchange rate for profit and loss for the year, and (iii) the exchange rate at the transaction date for equity transactions. Exchange gains and losses arising from translating are recorded in other comprehensive income (“OCI”).

 

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

 

Monetary assets and liabilities denominated in foreign currencies are translated into each functional currency 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-12

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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-13

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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 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 effective hedging instruments.

 

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 listed and 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 (i) bonds and investment funds under short-term investments, which the Group had not irrevocably elected to classify at FVOCI, (ii) derivative financial instruments, and (iii) loans under trade accounts receivable which the Group has irrevocably elected to classify as FVPL.

 

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. 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.

 

F-14

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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, 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 – Financial Instruments. 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 derivative financial instruments and contingent consideration included in other liabilities.

 

F-15

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.6.2.2.2.Financial liabilities at amortized cost

 

After initial recognition, financial liabilities classified in this category 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.

 

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 and contingent consideration included in other liabilities. This category is the most relevant to the Group.

 

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

 

F-16

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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

 

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.

 

Some of the Group’s derivative financial instruments are used as cash flow hedge accounting instruments, and therefore, the effective portion of gains or losses arising from changes in the fair value of these derivatives are recognized in equity, in “Other comprehensive income”, and subsequently (when settled) reclassified to “Property and equipment”, in the statement of financial position. The ineffective portion is recognized in the statement of profit or loss, in “Financial expenses, net”.

 

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-17

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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 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” in the consolidated statement of profit or loss.

 

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-18

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

  Estimated useful
lives (years)
 
Pin Pads & POS 5
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. In 2020 the useful life was reviewed and changed, as described in note 4.2.

 

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 those described in item 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, 2020, and 2019, 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-19

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

  

  Estimate useful
life (years)
 
Software 5
Customer relationship 10
Trademarks and patents 1-5
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-20

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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, but not limited to, prepaid software licenses, certain consulting services, insurance premiums and prepaid marketing expenses.

 

3.13.Taxes

 

3.13.1.Current income and social contribution taxes

 

Income taxes are comprised mainly 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-21

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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”) (i)       1.65%  0.65% - 1.65 %  0.65%
Contribution on gross revenue for social security financing (“COFINS”) (i)       7.60%  3.00% - 7.60 %  4.00%
Taxes on service (“ISS”) (ii)      2.00% - 5.00%  —    
Social security levied on gross revenue (“INSS”) (iii)       4.50%  —    

 

(i)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.

 

(ii)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.

 

(iii)INSS is a social security charge levied on wages paid to employees. The subsidiaries Equals, Mundipagg, Cappta, Vitta Tecnologia em Saúde S.A and Questor 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.

 

F-22

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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.

 

3.14.Revenue and income

 

3.14.1.Revenue from contracts with clients

 

Revenue is recognized when the Group has transferred control of the services to the clients, in an amount that reflects the consideration the Group expects to collect in exchange for those services. The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the 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:

 

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.

 

F-23

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.14.1.2.Subscription services and Equipment rental

 

The Group provides (i) subscription services, such as reconciliation, business automatization solutions and others, 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. As of December 31, 2020, the Group had a carrying amount of R$ 90,832 (2019 – R$ 46,792) recognized under Other assets and R$ 36,737 (2019 – R$ 10,194) as amortization recognized in the statement of profit or loss.

 

3.14.2.Financial income

 

Comprised mainly of:

 

(i)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;

 

(ii)interest income on loans; and

 

(iii)fair value adjustment on loans designated at FVPL.

 

3.14.3.Other financial income

 

Mainly comprised of interest generated by short-term investments, indexed to fixed and floating rates.

 

F-24

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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.

 

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;

 

F-25

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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. 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.

 

F-26

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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

 

Several amendments and interpretations apply for the first time in 2020, 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.

 

3.20.1.1.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 Group has adopted the amendments on its effective date, January 1, 2020 and had no material impacts recognized in its financial statements.

 

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

 

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.

 

F-27

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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 Group has adopted the amendments on its effective date, January 1, 2020 and had no impacts recognized in its financial statements.

 

3.20.1.3.Revised Conceptual Framework for Financial Reporting

 

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

 

·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 January 1, 2020. These entities will need to consider whether their accounting policies are still appropriate under the revised Framework.

 

The Group has adopted the amendments on its effective date, January 1, 2020 and had no impacts recognized in its financial statements.

 

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.

 

F-28

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.20.2.1.Amendments to IAS 1: Classification of Liabilities as Current or Non-current

 

In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify:

 

·What is meant by a right to defer settlement

 

·That a right to defer must exist at the end of the reporting period

 

·That classification is unaffected by the likelihood that an entity will exercise its deferral right

 

·That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and must be applied retrospectively. The Group is currently assessing the impact the amendments will have on current practice and does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.20.2.2.Reference to the Conceptual Framework – Amendments to IFRS 3

 

In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations - Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements.

 

The Board also added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent liabilities that would be within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets or IFRIC 21 – Levies, if incurred separately.

 

At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation of Financial Statements.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022 and apply prospectively. The Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.20.2.3.Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37

 

In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making.

 

The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The Group is currently assessing the impact the amendments will have on current practice and does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

F-29

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.20.2.4.IFRS 9 – Financial Instruments – Fees in the ‘10 per cent’ test for derecognition of financial liabilities

 

As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment.

 

The amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The Group does not expect to have a material 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 represent 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.

 

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.

 

F-30

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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 September 2020, the Group reviewed the useful lives of its Property and Equipment and verified that its currently installed Pin Pads and POSs equipments are being used on average for 5 years, which is a longer period than the useful life previously estimated. The Group also reviewed the residual value of Pin Pads and POSs at the end of their estimated useful life and concluded that after this period of 5 years no residual value exists.

 

Therefore, the Group adjusted the useful life of this group of assets from 3 years with 30% of residual value to 5 years with no residual value.

 

The effect of the change in the useful life mentioned above was treated as change in an estimate in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors as required by IAS 16 – Property, Plant and Equipment and therefore should be applied prospectively. The change resulted in a decrease of R$ 14,538 in the depreciation expense in the consolidated statement of profit or loss for the period ended September 30, 2020, when the change was applied.

 

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

 

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-31

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(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 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. As of December 31, 2020, and 2019, the Group does not hold indefinite life intangible assets, except for goodwill.

 

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.Consolidation of structured entities

 

The Group considers the FIDC AR II, FIDC AR III, FIDC TAPSO, FIDC SOMA, FIDC SOMA III and FIC FIM STONECO to be structured entities as defined by IFRS 10. The participation of the Group in each of them is stated as follows:

 

 

Subordinated quotas –

held by the Group 

Senior and/or mezzanine quotas –

held by third parties

FIDC AR II Approximately 10% of the total outstanding quotas Approximately 90% of the total outstanding quotas
FIDC AR III Approximately 10% of the total outstanding quotas Approximately 90% of the total outstanding quotas
FIDC TAPSO Approximately 99% of the total outstanding quotas Approximately 1% of the total outstanding quotas
FIDC SOMA 100% of the total outstanding quotas None
FIDC SOMA III Approximately 15% of the total outstanding quotas Approximately 85% of the total outstanding quotas

 

  Single class of quotas
FIC FIM STONECO 100% held by the Group

 

The bylaws of these FIDCs and FIC FIM 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 the FIDCs. In addition, FIDC’s 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.

 

F-32

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

In accordance with IFRS 10, the Group concluded it controls FIDC AR II, FIDC AR III, FIDC TAPSO, FIDC SOMA, FIDC SOMA III and FIC FIM STONECO, 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.

 

4.8.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.

 

4.9.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).

 

4.10.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.

 

4.11.Business combination – Determining the amount of intangible assets, evaluating their useful life and contingent consideration

 

The process of accounting a business combination includes the use of (i) valuation techniques to determine the amounts of intangible assets identified, (ii) estimates to determine its useful life, and (iii) valuation techniques to estimate the contingent consideration included in the total consideration paid to acquire the companies. For more details about the business combination, please refer to Note 5.

 

F-33

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

5.Business combinations

 

(a)Financial position of business acquired

 

The allocation of assets acquired and liabilities assumed in the business combinations in the period are presented below:

 

Fair value 

Linked

(i) (*) 

  Mvarandas (ii) (*) 

Vitta Group

(iii) (*) 

 

MLabs

(iv) (**)

 

Questor

(v) (**)

 

Sponte

(vi) (**)

  Creditinfo Caribbean (vii) (**)  Total
Cash and cash equivalents   596    240    2,964    9,406    4,354    1,487    9,494    28,541 
Trade accounts receivable (viii)   473    8    504    944    1,664    824    2,181    6,598 
Property and equipment   167    68    304    1,695    1,575    811    800    5,420 
Intangible asset   2,266    -    1,295    -    1,119    9    3,669    8,358 
Intangible asset - Customer relationship (ix)   -    2,987    5,252    2,750    23,649    8,784    7,285    50,707 
Intangible asset - Software (ix)   -    2,775    737    -    4,437    -    -    7,949 
Intangible asset - Trademarks and patents (ix)   -    -    1,973    -    -    -    -    1,973 
Intangible asset - Exclusivity right (ix)   -    -    -    -    -    -    38,827    38,827 
Deferred tax assets   -    -    -    -    -    -    1,531    1,531 
Other assets   2,850    190    1,722    15,610    11,539    681    1,908    34,500 
Total assets   6,352    6,268    14,751    30,405    48,337    12,596    65,695    184,404 
                                         
Trade accounts payable   -    40    783    146    47    93    2,334    3,443 
Labor and social security liabilities   202    270    1,597    980    2,822    2,069    23    7,963 
Deferred tax liabilities   -    1,959    2,707    935    9,549    2,987    -    18,137 
Other liabilities   526    216    280    1,475    3,482    2,173    319    8,471 
Total liabilities   728    2,485    5,367    3,536    15,900    7,322    2,676    38,014 
                                         
Net assets and liabilities   5,624    3,783    9,384    26,869    32,437    5,274    63,019    146,390 
Consideration transferred (Note 5(c))   14,256    30,392    301,210    69,636    58,325    80,553    102,868    657,240 
Goodwill (x)   8,632    26,609    291,826    42,767    25,888    75,279    39,849    510,850 

 

(*)Identification and measurement of assets acquired, liabilities assumed, consideration transferred and goodwill are complete.

 

(**)Identification and measurement of assets acquired, liabilities assumed, consideration transferred and goodwill are preliminary.

 

(i)On April 15, 2020, the Group obtained the control of Linked through a step acquisition, which started on June 18, 2018, with the acquisition of 27.06% interest for R$ 2,366 fully paid by December 2018. During 2019, the Group acquired additional 21.50% interest through capital increase of R$ 5,181 fully paid by January 2020. Finally, on April 15, 2020, another capital increase in the amount of R$ 3,800 afforded the acquisition of Linked’s control with a 58.1% interest. Linked is an unlisted company based in São Paulo, Brazil, that develops software and services for the food service market, with which the Company expects to obtain synergies in its services to clients.

 

F-34

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(ii)On April 30, 2020, the Group acquired a 100% interest in MVarandas. MVarandas is an unlisted company based in João Pessoa, Brazil, that develops software and services for the food service market. Through this acquisition, the Group expects to obtain synergies in servicing its clients.

 

(iii)On May 29, 2020, the Group acquired a 100% interest in Vitta Tecnologia em Saúde S.A, VittaPar LLC, Vitta Corretora de Seguros LTDA and Vitta Serviços em Saúde LTDA. (all together described as “Vitta Group”) privates companies focused in health plan management, health services and insurance services, based in São Paulo, Brazil, with which the Group expects to obtain synergies in its services to clients.

 

(iv)On September 1, 2020, the Group acquired a 51.5% interest in MLabs. MLabs is an unlisted company based in São Paulo, Brazil, that develops software and services for social media management. Through this acquisition, the Group expects to obtain synergies in servicing its clients. The shareholders shall approve the stock option plan of Mlabs limited to 2.912% of the total share capital of MLabs. Therefore, after the referred approval, STNE Par shall hold 50% interest in MLabs.

 

(v)On October 1, 2020, the Group acquired a 50.0% interest in Questor. Questor is an unlisted company based in Santa Catarina, Brazil, that develops management software for accounting offices. Through this acquisition, the Group expects to obtain synergies in servicing its clients. The Group determined they had control based on the voting power over the main decisions of the company. 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 50.0% interest in Questor.

 

(vi)On November 5, 2020, the Group acquired a 90.0% interest in Sponte. Sponte is an unlisted company based in Paraná, Brazil, that develops management software for education. Through this acquisition, the Group expects to obtain synergies in servicing its clients.

 

(vii)On November 5, 2020, the Group acquired a 53.05% interest in StoneCo CI Ltd, Creditinfo Jamaica Ltd, Creditinfo Guyana Inc and Creditadvice Barbados Ltd. (all together described as “Creditinfo Caribbean”), private credit bureaus companies which the main products are credit reports, credit scores, monitoring, international business reports and a suite of value-added services, based in Cayman, Jamaica, Guyana and Barbados, respectively, with which the Company expects to grow in a developing market. The Group also holds an option to acquire an additional interest in the period from 2 to 5 years counted from the date of the initial acquisition, which will allow the Group to acquire an additional 46.95% interest in Creditinfo Caribbean.

 

(viii)The fair value of trade accounts receivable is R$ 6,598. The gross amount of trade accounts receivable is R$ 6,870 and it is expected that the full contractual amounts can be collected.

 

(ix)The Company carried out an assessment of fair value of the assets acquired in the business combination, having determined certain assets such as customer relationship, software, trademarks and patents, and exclusivity right. Details on the methods and assumptions adopted are described on Note 5(b).

 

(x)Goodwill comprises the value of expected synergies and other benefits from combining the assets and activities of the business acquired 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.

 

(b)Intangible assets arised from the business combination

 

The fair value of intangible assets identified in the business combination carried out in 2020 are detailed below, as well as whether the assessment is preliminary or final. The Company has up to 12 months after each of the acquisitions to conclude the assessment.

 

F-35

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

Customer relationship   Linked   MVarandas   Vitta Group   MLabs   Questor   Sponte   Creditinfo Caribbean
Amount    -   2,987   5,252     2,750     23,649     8,784   7,285
Method of evaluation   N/A   MEEM(*)   MEEM(*)   MEEM(*)   MEEM(*)   MEEM(*)   MEEM(*)
Estimated useful life (i)   N/A   9 years   13 - 19 years   5 years   6 years   6 years   10 years
Discount rate (ii)   N/A   14.05%   12.85%   15.57%   15.57%   15.57%   10.54%
Source of information   N/A   acquirer’s management internal projections   acquirer’s management internal projections   acquirer’s management internal projections   acquirer’s management internal projections   acquirer’s management internal projections   acquirer’s management internal projections
Assessment status   complete   complete   complete   preliminary   preliminary   preliminary   preliminary

 

(i)Useful lives were estimated based on internal benchmarks.

(ii)Discount rate used was equivalent to the weighted average cost of capital combined with the sector's risk.

(*)Multi-Period Excess Earnings Method (“MEEM”)

 

Software   Linked   MVarandas   Vitta Group   MLabs   Questor   Sponte   Creditinfo Caribbean
Amount     -   2,775   737   -     4,437     -     -
Method of evaluation   N/A   replacement cost   replacement cost   N/A   replacement cost   N/A   N/A
Estimated useful life (i)   N/A   10 years   10 years   N/A   3 years   N/A   N/A
Discount rate (ii)   N/A   14.55%   13.35%   N/A   15.57%   N/A   N/A
Source of information   N/A   historical data   historical data   N/A   historical data   N/A   N/A
Assessment status   complete   complete   complete   preliminary   preliminary   preliminary   preliminary

 

(i)Useful lives were estimated based on internal benchmarks.

(ii)Discount rate used was equivalent to the weighted average cost of capital combined with the sector's risk.

 

F-36

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

Trademarks and patents   Linked   MVarandas   Vitta Group   MLabs   Questor   Sponte   Creditinfo Caribbean
Amount     -      -    1,973         -      - 
Method of evaluation   N/A   N/A   royalty relief   N/A   N/A   N/A   N/A
Estimated useful life   N/A   N/A   indefinite   N/A   N/A   N/A   N/A
Discount rate (i)   N/A   N/A   13.85%   N/A   N/A   N/A   N/A
Source of information   N/A   N/A   acquirer’s management internal projections   N/A   N/A   N/A   N/A
Assessment status   complete   complete   complete   preliminary   preliminary   preliminary   preliminary

 

(i)Discount rate used was equivalent to the weighted average cost of capital combined with the sector's risk.

 

Exclusivity right   Linked   MVarandas   Vitta Group   MLabs   Questor   Sponte   Creditinfo Caribbean
Amount     -     -     -     -     -     -   38,827
Method of evaluation   N/A   N/A   N/A   N/A   N/A   N/A   WWM(*)
Estimated useful life (i)   N/A   N/A   N/A   N/A   N/A   N/A   10 years
Discount rate (ii)   N/A   N/A   N/A   N/A   N/A   N/A   10.54%
Source of information   N/A   N/A   N/A   N/A   N/A   N/A   acquirer’s management internal projections
Assessment status   complete   complete   complete   preliminary   preliminary   preliminary   preliminary

 

(i)Useful lives were estimated based on contractual terms.

(ii)Discount rate used was equivalent to the weighted average cost of capital combined with the sector's risk.

(*)With and Without Method (“WWM”)

 

F-37

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(c)Consideration transferred

 

The fair value of the consideration transferred on the business combination were as follows:

 

   Linked  MVarandas  Vitta Group  MLabs  Questor  Sponte  Creditinfo Caribbean  Total
Cash consideration paid to the selling shareholders in 2020   3,800    18,700    40,022    37,371    46,296    56,500    73,281    275,970 
Shares of the Company issued to selling shareholders (i)   -    -    34,961    -    -    -    -    34,961 
Cash consideration to be paid to the selling shareholders after 2020   -    1,495    -    15,110    3,031    6,500    -    26,136 
Non-controlling interest in the acquiree (ii)   2,356    -    -    13,031    16,219    527    29,587    61,720 
Fair value of previously held equity interest in the acquiree (iii)   8,100    -    -    -    -    -    -    8,100 
Call option in the acquiree (iv)   -    -    -    -    (10,891)   -    -    (10,891)
Contingent consideration (v) (vi) (vii) (viii) (ix)   -    10,197    226,227    4,124    3,670    17,026    -    261,244 
Total   14,256    30,392    301,210    69,636    58,325    80,553    102,868    657,240 

 

F-38

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(i)The Company issued 203,378 ordinary shares as consideration for the 100% interest in Vitta Group. The fair value of the shares is calculated with reference to the quoted price of the shares of the Company at the date of acquisition, which was US$ 31.68 (or R$ 171.91) per share. The fair value of the consideration given was therefore R$ 34,961.

 

(ii)The Group has elected to measure the non-controlling interests in the acquiree using the present ownership instruments’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets.

 

(iii)As a result of the step acquisition of Linked, the Group recognized a gain of approximately R$ 2,992 for the difference between the previously held 48.56% interest in Linked, at fair value, in the amount of R$ 8,184, and its carrying amount, in the amount of R$ 5,192. The gain was included in “Other operating expenses” in the statement of profit or loss for the period ended December 31, 2020.

 

(iv)The option has been evaluated in accordance with pre-determined formulas and R$ 10,891 was recorded in the consolidated statement of financial position as Derivative financial instruments.

 

(v)MVarandas’ contingent consideration will be transferred to the selling shareholders after the closing of the 2022 fiscal year and are determined by the valuation of MVarandas which will be defined considering multiples of the revenue recorded in 2022 less the payment made in 2020. The contingent consideration is limited to R$ 16,300.

 

(vi)Vitta Group’s contingent consideration will be transferred to the minority selling shareholders after the closing of the 2023 fiscal year and are determined by the valuation of Vitta Group, which will be defined considering multiples of the revenue recorded in 2023 less the payment made in 2020, additional investments and any other payments made by the Company to afford the subsidiaries’ operation.

 

(vii)MLabs’ contingent consideration will be transferred to the selling shareholders after the closing of the 2022 fiscal year and is determined based on predetermined formulas mainly based in the amount of revenue that the acquired company will have at the end of 2022. The contingent consideration is limited to R$ 11,741.

 

(viii)Questor’s contingent consideration will be transferred to the selling shareholders after the closing of the 2021 fiscal year and is determined based on predetermined formulas mainly based in the amount of revenue, number of new clients and profit margin that Questor will have at the end of 2021.

 

(ix)Sponte’s contingent consideration will be transferred to the selling shareholders after the closing of the 2023 fiscal year and is determined based on predetermined formulas mainly based in the amount of revenue that Sponte will have at the end of 2023. The contingent consideration is limited to R$ 31,500.

 

In order to evaluate the contingent consideration, the Group has considered different probabilities of scenarios and discounted future contractual cash flows at the interest rates available in the market that are available to the Group for similar financial instruments. As of December 31, 2020, R$ 269,162 (Note 27 (iii)) is included in non-current “Other liabilities” in the financial position.

 

(d)Acquisition-related costs

 

As of December 31, 2020, in the statement of profit or loss under administrative expenses the Group recognized R$ 819 of costs related to the acquisitions mentioned above.

 

(e)Revenue and profit contribution

 

The individual net revenue and net income from the acquisition date through each period end for all business combinations are presented below:

 

F-39

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

   Linked  MVarandas  Vitta Group  MLabs  Questor  Sponte  Creditinfo Caribbean
 Total revenue and income   900    2,869    12,247    9,230    8,506    3,876    2,675 
 Net Income (loss)   (4,200)   (1,070)   (1,469)   310    2,432    475    (567)

 

Total revenue and income and net income for the Group are presented below on a pro-forma basis assuming the acquisitions had occurred at the beginning of the year of each acquisition:

 

   2020
Pro-forma total revenue and income   3,388,052 
Pro-forma net income   850,099 

 

This pro-forma financial information is presented for informational purposes only and does not purport to represent what the Group's results of operations would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods.

 

6.Cash and cash equivalents

 

   2020  2019
       
Short-term bank deposits - denominated in R$   2,370,414    910,080 
Short-term bank deposits - denominated in US$   76,576    58,262 
    2,446,990    968,342 

 

7.

Short-term investments

 

   2020  2019
       
Listed securities          
  Bonds (a)   675,599    168,737 
  Equity securities (b)   970,353    - 
Unlisted securities          
  Bonds (a)   6,464,154    2,758,265 
  Investment funds (c)   10,136    9,787 
  Equity securities (b)   7,816    240 
    8,128,058    2,937,029 

 

(a)Comprised of public and private bonds with maturities greater than three months, indexed to fixed and floating rates. As of December 31, 2020, bonds of listed securities are mainly indexed in a range of 97.50% to 100% CDI rate (2019 – 100% CDI). Liquidity risk is minimal.

(b)Comprised of ordinary shares of listed and unlisted entities. The Group elected to recognize the changes in fair value of the existing equity instruments through OCI. The change in fair value in 2020 of R$ 40,336 (2019 - R$ (938)) was recognized in other comprehensive income.

(c)Comprised of foreign investment fund shares.

 

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

 

F-40

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

8.Accounts receivable from card issuers

 

Accounts receivable are amounts due from card issuers and acquirers 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.

 

   2020  2019
       
Accounts receivable from card issuers (a)   16,031,948    13,595,133 
Accounts receivable from other acquirers (b)   287,972    478,917 
Allowance for expected credit losses   (12,765)   (7,236)
    16,307,155    14,066,814 

  

(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, 2020, R$ 4,437,285 of the total Accounts receivable from card issuers are held by FIDC AR II and FIDC AR III (December 31, 2019 — R$ 3,714,422 held by FIDC AR I and FIDC AR II). Accounts receivable held by FIDCs guarantee the obligations to FIDC quota holders.

 

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

 

   2020  2019
       
At January 1   7,236    5,826 
Charge for the year   6,626    1,771 
Reversal   (1,097)   (361)
At December 31   12,765    7,236 

 

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 4.1.1 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.

 

F-41

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

9.Trade accounts receivable

 

Trade accounts receivables are amounts due from clients mainly related to loans designated at FVPL, equipment rental and other services.

 

   2020  2019
       
Loans designated at FVPL (a)   1,646,685    124,661 
Accounts receivable from clients (b)   130,059    108,490 
Other trade accounts receivable   53,675    39,922 
Allowance for expected credit losses   (32,463)   (23,656)
    1,797,956    249,417 
Current   1,415,850    249,417 
Non-current   382,106    - 

 

(a)The Company has started to directly offer credit to clients at the end of 2019. The Group has irrevocably elected to classify the loans at fair value with net changes recognized in the statement of profit or loss. The amount is held by FIDC SOMA and FIDC SOMA III.

 

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

 

The Group records an allowance for expected credit losses of trade accounts receivable 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 4.1.1 for further details.

 

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

 

   2020  2019
       
At January 1   23,656    7,745 
Charge for the year   30,372    35,695 
Reversal   (269)   (3,179)
Write-off   (21,296)   (16,605)
At December 31   32,463    23,656 

 

10.Recoverable taxes

 

   2020  2019
       
Withholding income tax on finance income (a)   39,413    33,344 
Contributions over revenue (b)   14,922    13,576 
Other taxes   2,030    3,506 
    56,365    50,426 

 

(a)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.

 

F-42

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

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, 2020, 2019 and 2018:

 

   2020  2019  2018
Profit before income taxes   1,127,662    1,090,655    442,339 
Brazilian statutory rate   34%   34%   34%
Tax expense at the statutory rate   (383,405)   (370,823)   (150,395)
                
Additions (exclusions):               
Different tax rates for companies abroad   98,376    47,782    (3,283)
Other permanent differences   (4,777)   6,039    (2,871)
Equity pickup on associates   (2,359)   (275)   169 
Unrecorded deferred taxes   (31,531)   (2,030)   (652)
Use of tax losses previously unrecorded   -    5,163    2,689 
Unrealized gain on previously held interest on acquisition   1,017    -    7,290 
Interest payments on net equity   12,276    10,102    - 
R&D Tax Benefits   13,107    8,188    4,026 
Other tax incentives   7,080    9,394    5,915 
Total income tax and social contribution expense   (290,216)   (286,460)   (137,112)
Effective tax rate   26%   26%   31%
                
Current income tax and social contribution   (216,886)   (217,228)   (154,882)
Deferred income tax and social contribution   (73,330)   (69,232)   17,770 
Total income tax and social contribution expense   (290,216)   (286,460)   (137,112)

 

(b)Changes in deferred income taxes

 

Net changes in deferred income taxes relate to the following:

 

   2020  2019  
At January 1   182,094    182,445   
Losses available for offsetting against future taxable income   (39,949)   (46,177)  
Tax credit carryforward   51,063    (2,720)  
Tax deductible goodwill   (12,226)   61,127   
Share-based compensation   6,535    6,354   
Assets at FVOCI   (14,020)   7,758   
Assets at FVPL   (69,357)   -   
Deferred income taxes arising from business combinations   (8,152)   5,890   
Temporary differences under FIDC   1,563    (27,806)  
Technological innovation benefit   (5,968)   (6,385)  
Others   (13,972)   1,608   
At December 31   77,611    182,094   

 

F-43

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(c)Deferred income taxes by nature

 

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

 

   2020  2019
Losses available for offsetting against future taxable income   84,581    124,530 
Tax credit carryforward   85,995    34,932 
Tax deductible goodwill   48,901    61,127 
Share-based compensation   32,693    26,158 
Assets at FVOCI   25,040    39,060 
Assets at FVPL   (75,288)   (5,931)
Deferred income taxes arising from business combinations   (39,113)   (30,961)
Temporary differences under FIDC   (66,536)   (68,099)
Technological innovation benefit   (15,432)   (9,464)
Others   (3,230)   10,742 
Deferred tax, net   77,611    182,094 

 

(d)Unrecognized deferred taxes

 

The Group has accumulated tax loss carryforwards and other temporary differences in some subsidiaries in the amount of R$ 36,906 (2019 – R$ 2,714) 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-44

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

12.

Property and equipment

 

(a)Changes in Property and equipment

 

   Balance at 12/31/2018  Additions  Disposals  IFRS 16 (iii)  Balance at 12/31/2019  Additions  Disposals  Transfers (i)  Business Combination (ii)  Balance at 12/31/2020
Cost                                                  
Pin Pads & POS   254,961    279,818    (21,846)   -    512,933    327,149    (66,131)   (37,176)   -    736,775 
IT equipment   75,354    16,963    (661)   -    91,656    35,642    (3,487)   -    4,433    128,244 
Facilities   21,125    1,617    -    -    22,742    5,680    (18)   10,635    1,485    40,524 
Machinery and equipment   14,222    2,459    (10)   -    16,671    983    (47)   -    635    18,242 
Furniture and fixtures   6,849    3,795    (156)   -    10,488    2,687    (110)   562    1,002    14,629 
Vehicles and airplane   90    -    -    -    90    16,033    -    -    138    16,261 
Construction in progress   -    1,039    (19)   -    1,020    10,280    (22)   (11,197)   -    81 
Right-of-use assets - Vehicles   -    6,346    (1,673)   5,722    10,395    15,098    (5,486)   -    -    20,007 
Right-of-use assets - Offices   -    69,856    (178)   35,213    104,891    37,042    (17,548)   -    2,186    126,571 
    372,601    381,893    (24,543)   40,935    770,886    450,594    (92,849)   (37,176)   9,879    1,101,334 
Depreciation                                                  
Pin Pads & POS   (69,744)   (79,849)   8,296    -    (141,297)   (119,310)   11,903    -    -    (248,704)
IT equipment   (21,783)   (14,345)   428    -    (35,700)   (21,362)   1,644    -    (2,383)   (57,801)
Facilities   (7,559)   (4,210)   -    -    (11,769)   (4,869)   6    -    (548)   (17,180)
Machinery and equipment   (5,844)   (3,279)   9    -    (9,114)   (4,630)   14    -    (410)   (14,140)
Furniture and fixtures   (1,354)   (838)   31    -    (2,161)   (1,408)   25    -    (338)   (3,882)
Vehicles and airplane   (44)   (13)   -    -    (57)   (1,363)   -    -    (124)   (1,544)
Right-of-use assets - Vehicles   -    (4,872)   990    -    (3,882)   (8,256)   5,232    -    -    (6,906)
Right-of-use assets - Offices   -    (18,343)   44    -    (18,299)   (24,137)   9,149    -    (656)   (33,943)
    (106,328)   (125,749)   9,798    -    (222,279)   (185,335)   27,973    -    (4,459)   (384,100)
Property and equipment, net   266,273    256,144    (14,745)   40,935    548,607    265,259    (64,876)   (37,176)   5,420    717,234 

 

(i)

In the second quarter of 2020, the Company started recording tax credits of PIS and COFINS at the time of the POS acquisition, in accordance with Brazilian tax law. Previously, the credit was taken due to the depreciation of the asset. Accordingly, the residual tax credit on assets in operation on June 30, 2020 was reclassified to recoverable taxes in the statement of financial position, with no impact on the statement of profit or loss. New acquisitions will be added to property and equipment net of tax credits, which will be recorded in the statement of profit or loss in line with the depreciation of the asset.

 

(ii)For more details about the business combination, please refer to Note 5.

 

(iii)Refers to adoption of IFRS 16 on January 1, 2019. After that, the new contracts are considered as a common addition.

 

F-45

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(b)Depreciation and amortization charges

 

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

 

   2020  2019  2018
          
Cost of services   162,202    100,070    54,203 
General and administrative expenses   59,593    49,358    38,130 
Selling expenses   34,499    13,968    - 
Depreciation and Amortization charges   256,294    163,396    92,333 
Depreciation charge   185,335    125,749    66,501 
Amortization charge (Note 13)   70,959    37,647    25,832 
Depreciation and Amortization charges   256,294    163,396    92,333 

 

(c)Impairment loss and compensation

 

As of December 31, 2020, 2019 and 2018, there were no indicators of impairment of property and equipment.

 

F-46

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

  

13.

Intangible assets

 

   Balance at 12/31/2018  Additions  Disposals  Transfers  Balance at 12/31/2019  Additions  Disposals  Transfers  Business Combination (i)  Balance at 12/31/2020
Cost                                                  
Goodwill - acquisition of subsidiaries   143,194    -    -    -    143,194    -    -    -    510,850    654,044 
Customer relationship   99,428    -    (60)   -    99,368    4,300    -    -    51,433    155,101 
Trademark use right   12,491    -    -    -    12,491    -    -    -    -    12,491 
Trademarks and patents   1,704    28    -    -    1,732    7    -    -    1,989    3,728 
Software   95,683    41,363    (25,000)   22,566    134,612    37,477    (11,899)   27,561    16,898    204,649 
Licenses for use - payment arrangements   11,437    88    (7)   -    11,518    9,035    -    -    4,697    25,250 
Exclusivity right   -    -    -    -    -    -    -    -    38,827    38,827 
Software in progress   17,116    25,695    (213)   (22,566)   20,032    32,654    (190)   (27,561)   1,311    26,246 
Right-of-use assets - Software   -    37,513    -    -    37,513    66,837    (37,513)   -    -    66,837 
Others   726    -    (726)   -    -    -    -    -    -    - 
    381,779    104,687    (26,006)   -    460,460    150,310    (49,602)   -    626,005    1,187,173 
Amortization                                                  
Customer relationship   (26,571)   (10,582)   60    -    (37,093)   (13,450)   -    -    -    (50,543)
Trademark use right   (12,491)   -    -    -    (12,491)   -    -    -    -    (12,491)
Trademarks and patents   (113)   (335)   -    -    (448)   (345)   -    -    -    (793)
Software   (30,346)   (19,847)   23,678    -    (26,515)   (34,099)   9,438    -    (4,332)   (55,508)
Licenses for use - payment arrangements   (3,514)   (2,533)   1    -    (6,046)   (4,240)   -    -    (3,009)   (13,295)
Exclusivity right   -    -    -    -    -    (647)   -    -    -    (647)
Right-of-use assets - Software   -    (4,168)   -    -    (4,168)   (18,178)   8,336    -    -    (14,010)
Others   (1,087)   (182)   1,269    -    -    -    -    -    -    - 
    (74,122)   (37,647)   25,008    -    (86,761)   (70,959)   17,774    -    (7,341)   (147,287)
                                                   
Intangible assets, net   307,657    67,040    (998)   -    373,699    79,351    (31,828)   -    618,664    1,039,886 

 

(i)For more details about the business combination, please refer to Note 5.

 

F-47

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

Impairment of intangible assets

 

As of December 31, 2020, and 2019, there were no indicators of impairment of finite-life intangible assets.

 

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, 2020 and 2019 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 10.54% (2019 - 9.4%) and the growth rate applied to perpetuity cash-flow is 5.0% (2019 - 5.0%) that considers long-term local inflation and long-term real growth.

 

The key assumptions used in value in use calculation 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 10.54% (2019 - 9.4%), based on long-term interest rate, equity risk premium, industry beta and other variables.

 

·Considered a perpetuity growth rate of 5.0% (2019 - 5.0%), based on long-term local inflation and real growth.

 

The sensitivity analysis of the goodwill impairment test 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

 

   2020  2019
       
Domestic trade accounts payable   178,050    94,887 
Foreign suppliers   156    290 
Other   2,285    2,648 
    180,491    97,825 

 

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

 

F-48

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

16.Labor and social security liabilities

 

   2020  2019
       
Accrued annual payments and related social charges   142,552    85,675 
Labor liabilities and related social charges   111,809    50,770 
Total labor and social security liabilities   254,361    136,445 
Current   173,103    109,013 
Non-current   81,258    27,432 

 

17.Taxes payable

 

   2020  2019
       
Income tax (IRPJ and CSLL) (e)   55,794    2,181 
Contributions over revenue (PIS and COFINS) (a)   23,502    26,613 
Withholding income tax (c)   12,021    6,130 
Taxes on services (ISS) (b)   8,635    6,839 
Withholding taxes from services taken (d)   5,969    2,527 
Social security levied on gross revenue (INSS) (f)   503    221 
Other taxes and contributions   411    429 
    106,835    44,940 

 

(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. 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). The majority of this amount refers to long-live assets and the settlement of the corresponding income tax will occur at the same time the assets are realized.

 

(f)The entities Equals, Mundipagg, Cappta, Vitta Tecnologia em Saúde S.A and Questor 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-49

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

18.Loans and financing

 

As of December 31, 2020, and 2019, loans and financing are as follows:

 

   Average annual interest rate %  Maturity  2020  2019
             
Obligations to FIDC AR quota holders (a)  106.0% of CDI Rate* /
CDI Rate* + 1.50%
  Jun/21, Aug/23   1,939,645    2,070,542 
Obligations to FIDC TAPSO quota holders (b)  CDI Rate* + 1.15%  Mar/21   20,476    20,352 
Leases (d)  111.0% of CDI Rate*  -   -    1,497 
Leases (d)  105.7% - 151.8% of CDI Rate*  Jan/21 - Jun/29   48,856    35,778 
Bank borrowings (e)  CDI Rate* + 0.68% /
CDI Rate* + 1.20%
  Jan/21 - Mar/21   390,830    1,777,083 
Loans with private entities (f)  109.8% of CDI Rate*  Sep/21   745,051    738,456 
Debentures (g)  109.0% of CDI Rate*  Jul/22   -    394,997 
Current portion of debt         3,144,858    5,038,705 
                 
Obligations to FIDC AR quota holders (a)  106.0% of CDI Rate* /
CDI Rate* + 1.50%
  Jun/21, Aug/23   2,174,670    1,620,000 
Obligations to FIDC SOMA III quota holders (c)  CDI Rate* + 4.0% /
CDI Rate* + 7.0%
  Dec/23   239,759    - 
Leases (d)  105.7% - 151.8% of CDI Rate*  Jan/21 - Jun/29   126,005    87,483 
Debentures (g)  109.0% of CDI Rate*  Jul/22   398,358    - 
Non-current portion of debt         2,938,792    1,707,483 
                 
Total debt         6,083,650    6,746,188 

 

*“CDI Rate” means the Brazilian interbank deposit (Certificado de Depósito Interbancário) rate, which is an average of interbank overnight rates in Brazil, the average rate of 2020 was 2.76% (2019 - 5.97%).

 

(a)Obligations to FIDC AR quota holders

 

The FIDC AR I and FIDC AR II 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 R$ 2,059,500 and maturity in 2020. The payment of interest was made every six months and, at the end of the third annual period, the senior quotas were fully redeemed. The benchmark return rate was 106.8% of the CDI rate. In June 2020, after the fully amortization of senior quotas, FIDC AR I was ended.

 

In June 2019, the fourth series of senior quotas was issued, with an amount of up to R$ 1,620,000, and maturity 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.

 

In August 2020, the first series of FIDC AR III senior quotas was issued, with an amount of up to R$ 2,500,000, and maturity in 2023. They were issued for 36 months, with a grace period of 15 months to repay the principal amount. During the grace period, the payment of interest will be made every three months. After this period, the amortization of the principal and the payment of interest will be every three months. The benchmark return rate is CDI + 1.5% per year.

 

F-50

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(b)Obligations to FIDC TAPSO quota holders

 

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 had a benchmark return rate of 115.0% of the CDI rate per year and, at the end of the six months, they would have been fully redeemed. However, in March 2020 the Group negotiated an amendment of the contract to postpone the payment date of the principal to March 2021, with a new benchmark return rate of CDI + 1.15% per year.

 

(c)Obligations to FIDC SOMA III quota holders

 

In December 2020, the Group completed the issuance of R$ 580,000 of FIDC SOMA III quotas, raising R$ 493,000 in third-party capital for its credit solution, of which R$ 246,500 were received in 2020. FIDC SOMA III is structured with senior and mezzanine quotas held by institutional investors for a 36-month period, while Stone holds the subordinated quotas. The senior quotas reached R$ 348,000 with a benchmark return rate of CDI + 4.0% per year. The mezzanine quotas reached R$ 145,000 and the benchmark return rate is CDI + 7.0% per year.

 

(d)Leases

 

The Group has lease contracts for various items of offices, vehicles and software in its operations. 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.

 

(e)Bank borrowings

 

During 2019 the Group increased its options of financial funding by issuing CCBs (Bank Credit Notes). The principal and the interests of this type of loan are paid at maturity. As of December 31, 2020, the outstanding was R$ 390,830, whose annual price range is from CDI + 0.68% to CDI + 1.20%.

 

(f)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, whose benchmark return rate was 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 benchmark return rate equivalent to 109.8% of the CDI rate.

 

(g)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 are secured by Stone’s accounts receivable from card issuers and bear interest at a rate of 109.0% of the CDI rate.

 

F-51

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2020, 2019 and 2018

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

(h)Changes in loans and financing

 

   Balance at 12/31/2019  Additions  Disposals  Payment  Interest  Business
Combination
  Balance at 12/31/2020
                      
Obligations to FIDC AR quota holders (i)   3,690,542    2,476,906    -    (2,169,073)   115,940    -    4,114,315 
Obligations to FIDC TAPSO quota holders   20,352    -    -    (514)   638    -    20,476 
Obligations to FIDC SOMA III quota holders (ii)   -    239,232    -    -    527    -    239,759 
Leases (iii)   124,758    118,977    (36,919)   (41,373)   7,826    1,592    174,861 
Bank borrowings (iv)   1,777,083    3,996,820    -    (5,422,211)   39,138    -    390,830 
Debentures   394,997    -    -    (8,769)   12,130    -    398,358 
Loans with private entities   738,456    -    -    (17,652)   24,247    -    745,051 
    6,746,188    6,831,935    (36,919)   (7,659,592)   200,446    1,592    6,083,650 
Current   5,038,705                             3,144,858 
Non-current   1,707,483                             2,938,792 
                                    
    Balance at 12/31/2018    Additions    Payment     Interest     Balance at 12/31/2019           
                                    
Obligations to FIDC AR quota holders   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   3,674    154,650    (38,023)   4,457    124,758           
Bank borrowings   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    -