6-K 1 vivitr2q22_6k.htm 6-K

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K

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

 

For the month of August, 2022

Commission File Number: 001-14475

TELEFÔNICA BRASIL S.A.
(Exact name of registrant as specified in its charter)

 

TELEFONICA BRAZIL S.A.  
(Translation of registrant’s name into English)

 

Av. Eng° Luís Carlos Berrini, 1376 -  28º andar
São Paulo, S.P.
Federative Republic of Brazil
(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F

X

 

Form 40-F

 

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes

 

 

No

X 

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes

 

 

No

X 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

TELEFÔNICA BRASIL S.A.

 

 

QUARTERLY INFORMATION

 

JUNE 30, 2022

 
 

(Free translation from the original issued in Portuguese. In the event of discrepancies, the Portuguese language version prevails)

 

 

Independent auditors’ review report on the consolidated and individual interim financial information

 

To the

Management and Shareholders of

Telefônica Brasil S.A.

São Paulo - SP

 

Introduction

 

We have reviewed the consolidated and individual interim financial information of Telefônica Brasil S.A. (“Company”), included in the Quarterly Information Form – “ITR” for the quarter ended June 30, 2022, which comprise the balance sheet as of June 30, 2022, and the related statements of income and comprehensive income for the three- and six-month periods then ended and changes in equity and cash flows for the six-month period then ended, in addition to the summary of the main accounting policies and other explanatory information.

 

The Company Management is responsible for preparing the consolidated and individual interim financial statements in accordance with the accounting standard CPC 21(R1) – Interim financial reporting and IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), and for presenting the aforementioned information in accordance with the standards issued by the Brazilian Securities Commission (CVM) that apply to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on such interim financial information based on our review.

 

Scope of the review

 

We conducted our review in accordance with Brazilian and International Standards for reviewing interim financial information (NBC TR 2410 and ISRE 2410 – Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of the interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with audit standards and, as a result, we cannot provide assurance that we have discovered all the significant matters that could have been identified by an audit. Accordingly, we do not express an audit opinion.

1 
 

(Free translation from the original issued in Portuguese. In the event of discrepancies, the Portuguese language version prevails)

 

 

Conclusion on the consolidated and individual interim financial information

 

Based on our review we are not aware of any facts that lead us to believe the consolidated and individual interim financial information included in the aforesaid “ITR” has not been prepared, in all material respects, in accordance with the accounting standard(R1) and IAS 34 applicable to the preparation of Quarterly Information –” ITR” and presented in accordance with the standards issued by the Brazilian Securities Commission (CVM).

 

Other matters

 

Statement of value added

 

The aforementioned quarterly financial information include consolidated and individual Statements of Value Added (DVA) for the six-month period ended June 30, 2022, which are the responsibility of Company’s Management and are presented as supplementary information for IAS 34 purpose. This financial statement was subject to review procedures conducted together with the review of the quarterly financial information, for the purpose to conclude whether it has been reconciled with the interim financial information and accounting records, as applicable, and if its form and content comply with the criteria set out in the accounting standard CPC09 – “Statements of Value Added”. Our review did not detect any facts that lead us to believe that the DVA has not been prepared, in all material respects, in accordance with the criteria established in this accounting standard and consistently in relation to the consolidated and individual interim financial statements taken as a whole.

 

Audit and review of the prior year and comparative period

 

The consolidated and individual balance sheets as of December 31, 2021, were audited by other independent auditors, who issued an unqualified report thereon dated February 18, 2022.

 

The accompanying consolidated and individual interim financial information for the quarter ended June 30, 2021, which comprise the related statements of income and comprehensive income for the three- and six-month periods then ended, and changes in equity and cash flows for the six-month period then ended, have been previously reviewed by other independent auditors who issued an unqualified report dated July 23, 2021.

 

2 
 

(Free translation from the original issued in Portuguese. In the event of discrepancies, the Portuguese language version prevails)

 

 

Other issues--Continued

 

The amounts related to the consolidated and individual statements of value added (DVA) for the six-month period ended June 30, 2021 have been subjected to the same review procedures by those independent auditors and, based on their review, those independent auditors have issued an audit opinion reporting that they are not aware of any facts that would lead them to believe that the DVA has not been prepared, in all material respects, consistently with the Company and consolidated interim financial information taken as a whole.

São Paulo, July 22, 2022.

 

 

Baker Tilly 4Partners Auditores Independentes S.S.

CRC 2SP-031.269/O-1

 

 

 

 

Nelson Varandas dos Santos

Accountant CRC 1SP-197.110/O-3

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TELEFÔNICA BRASIL S.A.
Balance Sheets
On June 30, 2022 and December 31, 2021
(In thousands of reais)                               (A free translation of the original in Portuguese)
                                         
      Company   Consolidated         Company   Consolidated
ASSETS Note   06.30.22   12.31.21   06.30.22   12.31.21   LIABILITIES AND EQUITY Note   06.30.22   12.31.21   06.30.22   12.31.21
                                         
Current assets      16,407,293    20,655,171    17,801,442    21,060,168   Current liabilities      24,103,328    22,321,331    25,587,690    22,459,398
Cash and cash equivalents 3    2,444,230    6,187,360    3,131,411    6,448,483   Personnel, social charges and benefits 15   937,699   848,819   993,748   888,324
Financial investments 4   953   30,109   953   30,109   Trade accounts payable 16    8,235,851    7,085,058    8,489,547    7,132,402
Trade accounts receivable 5    8,192,497    8,064,097    8,563,163    8,100,269   Income and social contribution taxes payable 8.b   15,285   -   26,151    3,068
Inventories 6   797,327   632,514   800,917   639,825   Taxes, charges and contributions payable 17    1,300,203    1,465,039    1,363,297    1,485,157
Prepaid expenses 7    1,592,552    1,004,786    1,741,556    1,006,425   Dividends and interest on equity 18.b    7,196,255    4,265,715    7,196,255    4,265,715
Income and social contribution taxes recoverable 8.a   440,111   376,750   450,783   382,386   Provisions and contingencies 19   814,128   698,098    1,562,133   702,314
Taxes, charges and contributions recoverable 9    2,298,113    3,704,407    2,322,822    3,716,169   Loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration 20    4,463,237    6,903,208    4,605,603    6,906,892
Judicial deposits and garnishments 10   89,445   105,876   90,547   106,963   Deferred revenue 21   572,591   599,873   761,545   604,646
Dividends and interest on equity 18.a   51,125   12,396   -   -   Derivative financial instruments 31.a   113,779    4,538   113,779    4,538
Derivative financial instruments 31.a   19,388    6,451   19,388    6,451   Other liabilities 22   454,300   450,983   475,632   466,342
Other assets 11   481,552   530,425   679,902   623,088                      
                                         
Non-current assets      100,748,279    94,611,264    102,208,335    94,603,365   Non-current liabilities      25,022,203    23,017,908    26,336,374    23,197,939
 Long-term assets      5,822,618    5,418,518    6,418,343    5,734,277   Personnel, social charges and benefits 15   31,059   21,522   31,102   21,533
 Financial investments 4   36,550   37,044   36,743   37,238   Income and social contribution taxes payable 8.b   99,639   97,668   99,639   97,668
 Trade accounts receivable 5   422,536   470,882   422,536   470,882   Taxes, charges and contributions payable 17    2,509,375    1,719,528    2,642,605    1,771,185
 Prepaid expenses 7   679,828   442,263   724,401   442,268   Deferred taxes 8.c    4,017,149    4,172,044    4,017,149    4,172,044
 Deferred taxes 8.c   -   -   357,822   121,748   Provisions and contingencies 19    5,747,822    5,602,382    6,325,777    5,720,928
 Income and social contribution taxes recoverable 8.a    2,692    2,692    2,692    2,692   Loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration 20    11,179,155    10,021,541    11,777,001    10,027,086
 Taxes, charges and contributions recoverable 9    1,403,975    1,340,869    1,410,034    1,340,872   Deferred revenue 21   171,226   153,839   171,361   153,864
 Judicial deposits and garnishments 10    2,563,724    2,560,421    2,730,724    2,724,215   Derivative financial instruments 31.a   72,779   69,022   72,779   69,022
 Derivative financial instruments 31.a   212,039   54,433   212,039   54,433   Other liabilities 22    1,193,999    1,160,362    1,198,961    1,164,609
 Other assets 11   501,274   509,914   521,352   539,929                      
Investments 12    6,317,682   707,008   337,535   356,290   TOTAL LIABILITIES      49,125,531    45,339,239    51,924,064    45,657,337
Property, plant and equipment 13    44,816,261    44,387,672    45,598,754    44,408,491                      
Intangible assets 14    43,791,718    44,098,066    49,853,703    44,104,307   Equity      68,030,041    69,927,196    68,030,041    69,927,196
                      Capital 23.a    63,571,416    63,571,416    63,571,416    63,571,416
                      Capital reserves 23.b   443,244   754,443   443,244   754,443
                    Revenue reserves 23.c    3,539,048    3,504,656    3,539,048    3,504,656
                      Retained earnings     424,494   -   424,494   -
                      Additional proposed dividends 23.d   -    2,028,524   -    2,028,524
                      Equity valuation adjustment 23.e   51,839   68,157   51,839   68,157
                                         
                      Non-controlling shareholders 23.h   -   -   55,672   79,000
                                         
                      TOTAL EQUITY      68,030,041    69,927,196    68,085,713    70,006,196
                                         
TOTAL ASSETS      117,155,572    115,266,435    120,009,777    115,663,533   TOTAL LIABILITIES AND EQUITY      117,155,572    115,266,435    120,009,777    115,663,533

 

4 
 
TELEFÔNICA BRASIL S.A.
Statements of Income
Three and six-month periods ended June 30, 2022 and 2021
(In thousands of reais, except earnings per share)
      (A free translation of the original in Portuguese)
                                   
      Company   Consolidated
      Three-month periods ended   Six-month periods ended   Three-month periods ended   Six-month periods ended
  Note   06.30.22   06.30.21   06.30.22   06.30.21   06.30.22   06.30.21   06.30.22   06.30.21
                                   
Net operating revenue 24    11,225,111    10,574,589    22,428,786    21,353,567    11,831,309    10,649,481    23,182,929    21,498,420
                                   
Cost of sales and services 25   (6,179,420)   (5,972,557)   (12,532,855)   (11,831,759)   (6,667,409)   (6,004,595)   (13,127,783)   (11,905,066)
                                   
Gross profit      5,045,691    4,602,032    9,895,931    9,521,808    5,163,900    4,644,886    10,055,146    9,593,354
                                   
Operating income (expenses)     (3,635,093)   (2,835,293)   (7,054,256)   (6,213,912)   (3,686,595)   (2,868,045)   (7,144,416)   (6,264,841)
Selling expenses 25   (2,975,536)   (2,951,321)   (5,870,117)   (5,899,845)   (3,027,734)   (2,952,886)   (5,923,304)   (5,912,366)
General and administrative expenses 25   (662,447)   (594,879)   (1,286,138)   (1,237,813)   (676,395)   (606,229)   (1,314,140)   (1,258,457)
Other operating income 26   354,503    1,789,631   648,511    2,072,701   357,069    1,789,629   650,247    2,072,318
Other operating expenses 26   (331,286)   (1,096,605)   (539,999)   (1,165,914)   (335,451)   (1,099,514)   (549,350)   (1,169,267)
Equity pickup 12   (20,327)   17,881   (6,513)   16,959   (4,084)   955   (7,869)    2,931
                                   
Operating income      1,410,598    1,766,739    2,841,675    3,307,896    1,477,305    1,776,841    2,910,730    3,328,513
                                   
Financial income 27   452,500   724,001   798,544   838,098   474,050   726,354   832,890   843,775
Financial expenses 27   (1,036,502)   (881,824)   (1,913,265)   (1,310,024)   (1,075,115)   (883,705)   (1,957,941)   (1,315,701)
                                   
Income before taxes     826,596    1,608,916    1,726,954    2,835,970   876,240    1,619,490    1,785,679    2,856,587
                                   
Income and social contribution taxes 8.d   (63,924)   (263,971)   (208,068)   (548,890)   (130,610)   (274,545)   (290,121)   (569,507)
                                   
Net income for the period     762,672    1,344,945    1,518,886    2,287,080   745,630    1,344,945    1,495,558    2,287,080
                                   
Attributable to:                                  
Controlling shareholders 23.i   762,672    1,344,945    1,518,886    2,287,080   762,672    1,344,945    1,518,886    2,287,080
Non-controlling shareholders 23.i   -    -    -    -    (17,042)   -    (23,328)   - 
                                   
Basic and diluted earnings per common share (in R$) 23.g   0.46   0.80   0.91   1.36                

 

 

5 
 
TELEFÔNICA BRASIL S.A.
Statements of Changes in Equity
Six-month periods ended June 30, 2022 and 2021
(In thousands of reais)                                   (A free translation of the original in Portuguese)  
        Capital reserves   Revenue reserves                        
    Capital   Share premium account   Other capital reserves   Treasury shares   Legal reserve   Tax incentive reserve   Retained earnings    Proposed additional dividends   Equity valuation adjustment   Parent Company equity   Non-controlling shareholders   Consolidated equity  
                                                   
Balance on December 31, 2020   63,571,416   63,074    1,229,730    (110,541)    3,073,334   76,345    -     1,587,518   65,888   69,556,764    -    69,556,764  
Payment of additional dividend for 2020    -    -    -    -    -    -    -   (1,587,518)    -   (1,587,518)    -   (1,587,518)  
Adjustment - Tax incentives    -    -    -    -    -   9,413   (9,413)    -    -    -     -    -   
Repurchase of common shares for maintenance in treasury    -    -    -    (143,263)    -    -    -    -    -    (143,263)    -    (143,263)  
Other comprehensive income    -    -    -    -    -    -    -    -    (13,354)    (13,354)    -    (13,354)  
Equity transactions    -    -    (14)    -    -    -    -    -    -    (14)    -    (14)  
Net income for the period    -    -    -    -    -    -    2,287,080    -    -    2,287,080    -    2,287,080  
Interim interest on equity    -    -    -    -    -    -   (1,330,000)    -    -   (1,330,000)    -   (1,330,000)  
Balance on June 30, 2021   63,571,416   63,074    1,229,716    (253,804)    3,073,334   85,758   947,667    -    52,534   68,769,695    -    68,769,695  
Unclaimed dividends and interest on equity    -    -    -    -    -    -   116,236    -    -   116,236    -   116,236  
Adjustment - Tax incentives    -    -    -    -    -   33,596    (33,596)    -    -    -     -    -   
Repurchase of common shares for maintenance in treasury    -    -    -    (352,732)    -    -    -    -    -    (352,732)    -    (352,732)  
Other comprehensive income    -    -    -    -    -    -   262,901    -   15,623   278,524    (3)   278,521  
Effects of equity in FiBrasil    -    -   2,182    -    -    -    -    -    -   2,182    -   2,182  
Effects of the sale of the investment in CloudCo Brasil    -    -   31,367    -    -    -    -    -    -   31,367   47,674   79,041  
Effects of the sale of the investment in IoTCo Brasil    -    -   34,644    -    -    -    -    -    -   34,644   41,336   75,980  
Equity transactions    -    -    (4)    -    -    -    -    -    -    (4)    -    (4)  
Net income for the period    -    -    -    -    -    -    3,952,284    -    -    3,952,284    (10,007)    3,942,277  
Allocation of income:                                                  
 Legal reserve    -    -    -    -   311,968    -    (311,968)    -    -    -     -    -   
 Interim interest on equity    -    -    -    -    -    -   (1,405,000)    -    -   (1,405,000)    -   (1,405,000)  
 Interim dividends    -    -    -    -    -    -   (1,500,000)    -    -   (1,500,000)    -   (1,500,000)  
 Additional proposed dividends    -    -    -    -    -    -   (2,028,524)    2,028,524    -    -     -    -   
Balance on December 31, 2021   63,571,416   63,074    1,297,905    (606,536)    3,385,302   119,354    -     2,028,524   68,157   69,927,196   79,000   70,006,196  
Payment of additional dividend for 2021    -    -    -    -    -    -    -   (2,028,524)    -   (2,028,524)    -   (2,028,524)  
Adjustment - Tax incentives    -    -    -    -    -   34,392    (34,392)    -    -    -     -    -   
Cancellation of common shares    -    -    (606,536)   606,536    -    -    -    -    -    -     -    -   
Repurchase of common shares for maintenance in treasury    -    -    -    (313,381)    -    -    -    -    -    (313,381)    -    (313,381)  
Other comprehensive income    -    -    -    -    -    -    -    -    (16,318)    (16,318)    -    (16,318)  
Effects of equity in FiBrasil    -    -   2,182    -    -    -    -    -    -   2,182    -   2,182  
Net income for the period    -    -    -    -    -    -    1,518,886    -    -    1,518,886    (23,328)    1,495,558  
Interim interest on equity    -    -    -    -    -    -   (1,060,000)    -    -   (1,060,000)    -   (1,060,000)  
Interim dividends    -    -    -    -    -    -    -    -    -    -     -    -   
Balance on June 30, 2022   63,571,416   63,074   693,551    (313,381)    3,385,302   153,746   424,494    -    51,839   68,030,041   55,672   68,085,713  

 

 

6 
 
TELEFÔNICA BRASIL S.A.
Statements of Other Comprehensive Income
Three and six-month periods ended June 30, 2022 and 2021
(In thousands of reais)   (A free translation of the original in Portuguese)
    Company   Consolidated  
    Three-month periods ended   Six-month periods ended   Three-month periods ended   Six-month periods ended  
    06.30.22   06.30.21   06.30.22   06.30.21   06.30.22   06.30.21   06.30.22   06.30.21  
Net income for the period    762,672   1,344,945   1,518,886   2,287,080    745,630   1,344,945   1,495,558   2,287,080  
                                   
Other comprehensive income (losses) that may be reclassified into income (losses) in subsequent periods    20,984    (28,670)    (16,284)    (13,239)    20,984    (28,670)    (16,284)    (13,239)  
Gains (losses) on derivative financial instruments    25,725    (19,653)    4,141    (6,153)    25,725    (19,653)    4,141    (6,153)  
Taxes    (8,747)    6,682    (1,408)    2,092    (8,747)    6,682    (1,408)    2,092  
                                   
Cumulative Translation Adjustments (CTA) on transactions in foreign currency    4,006    (15,699)    (19,017)    (9,178)    4,006    (15,699)    (19,017)    (9,178)  
                                   
Other comprehensive income (losses) not to be reclassified into income (losses) in subsequent periods   (54)   (86)   (34)   (115)   (54)   (86)   (34)   (115)  
Unrealized losses on financial assets at fair value through other comprehensive income   (81)   (130)   (51)   (174)   (81)   (130)   (51)   (174)  
Taxes    27    44    17    59    27    44    17    59  
                                   
Other comprehensive income    20,930    (28,756)    (16,318)    (13,354)    20,930    (28,756)    (16,318)    (13,354)  
                                   
Comprehensive income for the period - net of taxes    783,602   1,316,189   1,502,568   2,273,726    766,560   1,316,189   1,479,240   2,273,726  
                                   
Attributable to:                                  
Controlling shareholders    783,602   1,316,189   1,502,568   2,273,726    783,602   1,316,189   1,502,568   2,273,726  
Non-controlling shareholders   -   -   -   -    (17,042)   -    (23,328)   -  

 

 

 

7 
 
TELEFÔNICA BRASIL S.A.
Statements of Value Added
Six-month periods ended June 30, 2022 and 2021
(In thousands in reais)       (A free translation of the original in Portuguese)
    Company   Consolidated
    06.30.22   06.30.21   06.30.22   06.30.21
                 
                 
Revenues   29,048,409   29,451,916   29,944,653   29,617,614
Sale of goods and services   28,709,144   27,803,393   29,627,384   27,975,439
Other revenues   1,011,723   2,381,611   1,016,791   2,385,809
Provision for impairment of trade accounts receivable   (672,458)   (733,088)   (699,522)   (743,634)
                 
Inputs acquired from third parties    (10,660,654)    (10,846,069)    (11,137,394)    (10,879,431)
Cost of goods and products sold and services rendered    (7,271,936)    (6,759,399)    (7,741,258)    (6,795,608)
Materials, electric energy, third-party services and other expenses    (3,712,775)    (4,290,483)    (3,718,184)    (4,286,922)
Loss/recovery of assets    324,057    203,813    322,048    203,099
                 
Gross value added   18,387,755   18,605,847   18,807,259   18,738,183
                 
Withholdings    (5,999,499)    (5,914,668)    (6,171,077)    (5,918,718)
Depreciation and amortization    (5,999,499)    (5,914,668)    (6,171,077)    (5,918,718)
                 
Net value added produced   12,388,256   12,691,179   12,636,182   12,819,465
                 
Value added received in transfer    792,031    855,057    825,021    846,706
Equity pickup    (6,513)    16,959    (7,869)    2,931
Financial income    798,544    838,098    832,890    843,775
                 
Total undistributed value added   13,180,287   13,546,236   13,461,203   13,666,171
                 
Distribution of value added   13,180,287   13,546,236   13,461,203   13,666,171
                 
Personnel, social charges and benefits   2,643,064   2,309,352   2,744,674   2,369,878
Direct compensation   1,815,375   1,568,727   1,879,911   1,609,608
Benefits     722,198    637,897    753,331    654,093
Government Severance Indemnity Fund for Employees (FGTS)     105,491    102,728    111,432    106,177
Taxes, charges and contributions   6,531,673   7,096,217   6,688,151   7,149,476
Federal   2,077,111   2,542,802   2,216,978   2,590,883
State   4,342,130   4,422,162   4,345,315   4,423,437
Local    112,432    131,253    125,858    135,156
Debt remuneration   2,486,664   1,853,587   2,532,820   1,859,737
Interest   1,879,017   1,271,965   1,921,595   1,277,104
Rental    607,647    581,622    611,225    582,633
Equity remuneration   1,518,886   2,287,080   1,495,558   2,287,080
Interest on equity distribution   1,060,000   1,330,000   1,060,000   1,330,000
Retained profit    458,886    957,080    458,886    957,080
Non-controlling shareholders   -    -     (23,328)   - 

 

 

8 
 
TELEFÔNICA BRASIL S.A.
Statements of Cash Flows
Six-month periods ended June 30, 2022 and 2021
(In thousands in reais)       (A free translation of the original in Portuguese)
                 
    Company   Consolidated
    06.30.22   06.30.21   06.30.22   06.30.21
Cash flows from operating activities                
                 
Income before taxes   1,726,954   2,835,970   1,785,679   2,856,587
Adjustment for:                
Depreciation and amortization   5,999,499   5,914,668   6,171,077   5,918,718
Foreign exchange effects on derivative financial instruments    7,032    15,260    7,032    15,260
Interest/indexation accruals for assets and liabilities    373,183    607,103    379,784    608,205
Equity pickup    6,513    (16,959)    7,869    (2,931)
Gains on write-off/sale of assets   (339,333)   (233,016)   (339,449)   (232,475)
Provision for impairment - accounts receivable    672,458    733,088    699,522    743,634
Change in liability provisions    366,368    170,684    447,697    178,326
Write-off and reversals for impairment - inventories    11,195    21,692    13,014    21,864
Pension plans and other post-retirement benefits    20,499    30,545    21,217    31,544
Provisions for tax, civil, labor and regulatory contingencies    331,360    849,699    329,454    850,954
Interest expenses (loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration)    941,071    402,289    962,108    402,416
Others    (8,136)    (21,175)    (8,136)    (22,002)
                 
Changes in assets and liabilities                
Trade accounts receivable   (757,438)   (451,814)   (724,102)   (465,886)
Inventories   (176,007)    (63,063)   (174,107)    (64,387)
Taxes recoverable    310,452    (2,258,546)    287,573    (2,261,333)
Prepaid expenses   (474,681)   (450,424)   (478,415)   (450,614)
Other assets    74,863    (1,432)    (71,884)    (1,505)
Personnel, social charges and benefits    98,416    68,275    114,992    72,983
Trade accounts payable    355,430    605,477    311,507    644,998
Taxes, charges and contributions   1,024,307    761,762    958,321    767,285
Provisions for tax, civil, labor and regulatory contingencies   (507,962)   (556,965)   (549,219)   (563,245)
Other liabilities    (7,317)    76,516    114,495    74,074
    8,321,772   6,203,664   8,480,350   6,265,883
                 
Cash generated from operations   10,048,726   9,039,634   10,266,029   9,122,470
                 
Interest paid on loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration   (772,719)   (396,319)   (780,521)   (396,334)
Income and social contribution taxes paid   (285,202)    (55,298)   (333,407)    (69,668)
                 
Net cash generated by operating activities   8,990,805   8,588,017   9,152,101   8,656,468
                 
Cash flows from investing activities                
Additions to PP&E and intangible assets and others    (4,008,500)    (4,130,713)    (4,011,061)    (4,132,351)
Cash received from sale of PP&E items    394,611    247,410    392,764    247,410
Payment for acquisition of investments and capital contribution in subsidiary    (5,074,139)    (6,000)    (4,890,588)   -
Redemption of judicial deposits    73,334    69,733    74,630    69,562
Cash and cash equivalents from company acquisitions   -   -    64,056   -
Loan concessions to subsidiary        (8,200)       -
                 
Net cash used in investing activities    (8,614,694)    (3,827,770)    (8,370,199)    (3,815,379)
                 
Cash flows from financing activities                
Loan proceeds   1,000,000   -   1,000,000   -
Payment of loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration    (4,774,315)    (2,039,964)    (4,805,048)    (2,040,574)
Derivative financial instrument receipts    33,916    20,000    33,916    20,000
Derivative financial instrument payments    (65,011)    (26,417)    (65,011)    (26,417)
Repurchase of shares to be held in treasury   (313,381)   (143,263)   (313,381)   (143,263)
Dividend and interest on equity distributions paid   (450)   (295)   (450)   (295)
Capital sbscriptions made by noncontrolling shareholders in subsidiaries   -   -    51,000   -
Net cash used in financing activities    (4,119,241)    (2,189,939)    (4,098,974)    (2,190,549)
                 
Increase in cash and cash equivalents    (3,743,130)   2,570,308    (3,317,072)   2,650,540
                 
Cash and cash equivalents at the beginning of the period   6,187,360   5,517,354   6,448,483   5,762,081
Cash and cash equivalents at the end of theperiod   2,444,230   8,087,662   3,131,411   8,412,621

 

 

9 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
1)OPERATIONS

 

a) Background information

 

Telefônica Brasil S.A. (the “Company” or “Telefônica Brasil”) is a publicly-held corporation whose main corporate purpose is operating telecommunications services; development of activities necessary or complementary to the execution of such services, in accordance with the concessions, authorizations and permissions granted; exploration of value-added services; offering of integrated solutions, management and provision of services related to: (i) data centers, including hosting and co-location; (ii) storage, processing and management of data, information, texts, images, videos, applications and information systems and similar; (iii) information technology; (iv) information and communication security; and (v) electronic security systems; licensing and sublicensing of software of any nature, among others.

 

The Company’s principal offices are located at 1376, Engenheiro Luis Carlos Berrini Avenue, in the city and state of São Paulo, Brazil. It is a member of the Telefónica Group (“Group”), based in Spain which operates in several countries across Europe and Latin America.

 

On June 30, 2022, Telefónica S.A. (“Telefónica”), the Group holding company, held a total direct and indirect interest in the Company of 74.20% (73.58% on December 31, 2021).

 

The Company is registered with the Brazilian Securities Commission (“CVM”) and its shares are traded on the B3. It is also registered with the U.S. Securities and Exchange Commission (“SEC”) and its American Depositary Shares (“ADSs”), backed by its common shares, are traded on the New York Stock Exchange (“New York Stock Exchange ”-“ NYSE ”).

 

b) Operations

 

The Company renders services for: (i) Fixed Switched Telephone Service Concession Arrangement ("STFC"); (ii) Multimedia Communication Service ("SCM", data communication, including broadband internet); (iii) Personal Mobile Service ("SMP"); and (iv) Conditioned Access Service ("SEAC" - Pay TV) and Private Limited Service (“SLP”), throughout Brazil, through concessions and authorizations, in addition to other activities.

 

Service concessions and authorizations are granted by Brazil's Telecommunications Regulatory Agency ("ANATEL"), the agency responsible for the regulation of the Brazilian telecommunications sector under the terms of Law No. 9472 of July 16, 1997 - General Telecommunications Law ("Lei Geral das Telecomunicações" - LGT).

 

In accordance with the STFC service concession agreement, every two years, over the life of the agreement's 20-year term ending on December 31, 2025, the Company will pay a fee equivalent to 2% of its prior-year STFC revenue, net of applicable taxes and social contribution taxes (Note 22).

 

Before Law nº 13.879 / 2019 came into effect authorizations for the use of radio frequencies were commonly granted for 15 years and could be extended only once, for the same term. Following the normative changes in the aforementioned Law, successive extensions of authorization grants were allowed, though applicability to the current terms was only clarified by Decree nº 10.402 / 2020, which detailed the requirements related to the new successive extension regime and that the current authorizations are also covered by the new regime.

 

The Decree defined ANATEL’s parameters for evaluating the scope of extension requests, such as ensuring the efficient use of radio frequencies, competitive aspects, meeting the public interest and fulfilling obligations already assumed with ANATEL.

 

 

 

 

10 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Currently, each two years, following the first extension, the Company must pay a charge equivalent to 2% of revenues earned through the SMP provision in the year prior, net of taxes and social contributions (Note 22), and for certain terms, in the 15th year, the Company will pay only the equivalent of 1% of its prior-year revenue. The calculation considers the net revenue from Basic and Alternative Service Plans. In July 2018, ANATEL published Resolution No. 695 with a new public spectrum price regulation. This Resolution established new criteria for the costs of license extensions. The formula includes the authorization time, regional revenue and the spectrum used by the provider. Part of the payment can be converted into investment commitments.

Extension of authorizations for the 850 MHz bands

When deciding on the extension of authorizations for the 850 MHz bands, ANATEL through Judgment No. 510 of September 30, 2020, determined that (i) the Superintendence of Granting and Resources for Provision ("SOR") dealt with the requests for extension of authorizations for the use of radio frequencies in force in sub-bands A and B, proposing their primary granting until November 29, 2028, if legal and regulatory requirements are met; and that (ii) the extension value should be discounted to net present value, to reflect the economic value (market value) of the bands.

Having complied with the SOR procedures, the ANATEL Board through Judgment No. 618, of November 26, 2020, extended the term of the authorization for the right to use radio frequencies, for bands 869.0 to 880.0 MHz, 824.0 to 835.0 MHz, 890.0 to 891.5 MHz and 845.0 to 846.5 MHz, associated with Authorization Term No. 001/2006 / PVCP / SPV- ANATEL through to November 29, 2028. No exclusivity was granted, being on a primary basis and restricted to the provision area serving the State of Rio de Janeiro, pursuant to Act No. 7,281, of November 26, 2020. The extension granted for a period lesser than the maximum limit provided for by Law (20 years), in the opinion of ANATEL, was to promote a reorganization and readaptation of the channel. Alternative calculation methods (biannual charges and Resolution No. 695/2018, as approved in the Public Price Regulation for the Right to Use Radio Frequencies (“PPDUR”)) is justified on the grounds that the current regulatory instruments are not expected to involve a second extension. ANATEL further determined that 10% should be effectively paid in cash and the remaining 90% settled in the form of investments. Similarly, ANATEL extended the period of validity of authorizations for the right to use radio frequencies relating to the 869.0 to 880.0 MHz, 824.0 to 835.0 MHz, 890.0 to 891.5 MHz and 845.0 MHz bands at 846.5 MHz in the area of provision equivalent to the Federal District, associated with the Authorization Term No. 003/2006/PVCP/SPV-ANATEL. Extension authorizations were granted for the State of Rio de Janeiro, under term and payment conditions.

 

The Company and other providers appealed certain conditions for the renewal of the license, including the evaluation criteria and certain obligations. ANATEL dismissed the appeals and submitted the process to the Federal Audit Court for ratification of the calculations referring to the amount due for the extension. The process is currently under analysis by that Court of Auditors. The Terms of Authorization for the use of radio frequency bands are granted based on the results obtained in the respective auctions of radio frequency bands, carried out by ANATEL.

 

5G License Auctions

 

On December 3, 2021, ANATEL signed the Terms of Authorization for the Use of Blocks of Radiofrequencies Associated with SMP No. 86, 87 and 88/2021 (“Terms”), in the radio frequency sub-bands of 2,300 MHz to 2,390 MHz, 3,300 MHz to 3,700 MHz and 24.3 GHz to 27.5 GHz, resulting from auctions for the implementation of fifth generation technology ("5G"), held by ANATEL on November 4 and 5, 2021, for which the Company was the successful bidder.

 

These authorizations are valid for 20 years, starting on December 8, 2021, date of publication of the present extracts of the Terms in the Diário Oficial da União (“DOU”), against payment, associated with the authorizations for the provision of SMP, issued by Terms no. 78/2012/PVCP/SPV -ANATEL, n.º 05/2010/PVCP/SPV-ANATEL and N.º 06/2010/PVCP/SPV-ANATEL, renewable, successively, on an onerous basis, pursuant to Law 9472/1997.

 

In accordance with the procedures established within the scope of the Bidding Notice, the successful bidder operators jointly constituted the 3.5 GHz Band Management Entity (“EAF”). Similarly, the Entity Administering the Connectivity of Schools (“EACE”) was created by the winning providers.

 

As a requirement for obtaining the aforementioned authorizations, Company, as well as the other telecommunication service successful bidder providers, assumed a series of commitments. For the 2.3 GHz

11 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

and 3.5 GHz spectrum bands, such obligations include coverage commitments and fiber optic backbone network deployment in locations with little or no connectivity infrastructure. In addition, the winning bidders for the 3.5 GHz band must fund all activities related to the migration of satellite TV services from the C band to the Ku band (notably the migration of TVROs and mitigation of interference in the FSS systems), to the construction of six high-capacity info ways with the laying of sub fluvial cables for the Integrated and Sustainable Amazon Program (“PAIS”) and the implementation of private (fixed and mobile) communication networks reserved for the Federal Public Administration, with EAF responsible for the execution of said activities. The winners of the 26 GHz spectrum bands, in turn, will need to fund EACE's activities, aimed at broadband connectivity projects of public schools to be selected across the country.

 

The information on the authorizations for the use of radiofrequency bands for SMP granted to the Company is the same as in Note 1b) Operations, as disclosed in the financial statements for the year ended December 31, 2021.

 

c) Corporate events in 2022

 

c.1) Constitution of Digital Education Joint Venture

 

On April 8, 2022, the Company and Ânima Holding S.A. (“Ânima Educação”) formalized the creation of VivaE Educação Digital S.A., a joint venture servicing the area of digital education.

 

On that date, after the fulfillment of certain conditions precedent (including the approval of the operation, with final ruling by the Administrative Council of Economic Defense – CADE), the corporate documents and commercial agreements were finalized to enable the startup of the joint-venture operation. Operations will provide online qualification courses focused on lifelong learning and employability in areas such as Technology, Management, Business Administration and Tourism, offering to its customers personalized development paths, with up-to-date content that meets current job market demands, all through a digital education platform. Ânima Educação’s know-how in providing digital courses allied with Telefônica Brasil’s scale and distribution capacity, provide the joint venture with the means to leverage the job market, contributing to the development and independence of its students.

 

The joint venture was established on April 8, 2022, with a 50% equity interest owned by the Company and 50% by Ânima Educação, with contributions of R$6,000 each on the same date.

 

c.2) Acquisition of part of Oi UPI Mobile Assets

 

The Company, in compliance with and for the purpose of CVM Resolution No. 44/2021, informed its shareholders and the market in general that, on April 20, 2022, the Company, as one of the buyers, and Oi S.A. – in Judicial Recovery (successor by the incorporation of Oi Móvel S.A. – In Judicial Recovery) (“Oi”) as seller, completed the acquisition object of the Contract of Purchase and Sale of Shares and Other Covenants, concluded on January 28, 2021, as amended (“Contract”), through which the Company acquired all the shares issued by Garliava RJ Infraestrutura e Redes de Telecomunicações S.A. (“Garliava”), to which the portion of UPI Mobile Assets (as defined in the Contract) assigned to the Company under the Segregation and Division Plan attached to the Contract (“UPI Mobile Assets – Telefônica”).

 

This acquisition was subject to obtaining applicable corporate and regulatory authorizations, including from ANATEL and CADE. On January 31, 2022, ANATEL granted prior consent by imposing conditions (“Act of Consent”) for the operations contemplated in the Contract. On February 9, 2022, the Company informed its shareholders and market in general that the administrative court of the CADE, at a meeting held on the same date, approved, subject to the implementation of the Concentration Control Agreement (“ACC” and “CADE’s Approval”, respectively), the merger act No. 08700.000726/2021-08 submitted for its assessment due to the conclusion of the Contract.

 

On April 20, 2022, the Company made a payment of R$4,884,588, withholding R$488,458 equivalent to 10%. This withholding, as provided for in the Agreement, bears interest at the CDI rate until paid and is retained for post-closing price adjustment and indemnification arising from remaining events after the closing pursuant to the Agreement to be paid (in whole or in part) within 120 days.

12 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

The amount of R$110,205 was added to the acquisition price, also to be paid to Oi, subject to the meeting certain migration targets for customer bases and frequencies (among others) in the next 12 months.

 

Thus, the total amount of consideration transferred for the acquisition of the portion of UPI Ativos Móveis, still subject to adjustments, according to the conditions defined in the Agreement, is as follows:

 

In addition, the Company entered into other complementary payment commitments with Oi, as follows:

 

·R$147,551, paid in full on April 20, 2022, referring to the transition services to be provided for up to 12 months by Oi to Garliava (“Transition Services”), needed for the continuation of the mobile business operation conferred to Garliava, already reflected the withdrawal of certain costs related to transition services regarding the contract scope.

 

·R$179,000, referring to the net present value of the take-or-pay data transmission capacity contract, to be paid monthly over a 10-year period.

 

The Company’s share UPI Mobile Assets were composed of: (i) Clients: approximately 12.5 million (equivalent to 30% of the total customer base of the UPI Mobile Assets) - according to ANATEL’s February 2022 data; (ii) Spectrum: 43MHz a country wide population-weighted average (46% of UPI Mobile Assets' radiofrequency); and (iii) Infrastructure: contracts for the use of 2,700 mobile access sites (corresponding to 19% of UPI Mobile Assets' sites).

 

This transaction benefits the Brazilian telecommunications sector, broadening its capacity to make investments and foster innovative technologies in a sustainable and rational manner, contributing to the digitalization of the country through the construction and expansion of networks with cutting-edge technologies, such as 5G and fiber, which lead to services with better coverage and quality for users.

 

The transaction has the potential to generate synergies for the Company, through the optimization of operating costs and efficient allocation of investments from the integration of assets.

 

With the completion of the acquisition, as of April 20, 2022, the Company became the direct parent of Garliava. Garliava is headquartered in Brazil and operates in the provision of telecommunications services, in Brazil and abroad, especially Personal Mobile Service – SMP – and Multimedia Communication Service – SCM; in the provision of infrastructure and network maintenance and installation services and leases, including for the placement of equipment; in the retail and specialized wholesale trade of goods and/or services, own and of third parties, of telecommunications, communication, computer and other equipment, by any means, including through any physical and/or remote sales channels, such as own and third-party stores, door-to-door, telephone (telemarketing) and internet, among other activities related to or related to its corporate purpose.

 

In accordance with IFRS 3 (R) – Business Combinations, business acquisitions are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the fair values ​​of the transferred assets, the liabilities assumed on the acquisition date with the acquiree's former controlling shareholders and the interests issued in exchange for control of the acquiree. On the date of this individual and consolidated quarterly information, the Company is in the process of finalizing the report for the allocation of the purchase price (Purchase Price Allocation - PPA), by analyzing the fair value of the identifiable assets acquired and the liabilities assumed. The final analysis is expected to be completed shortly after Management has all factual relevant information, but not exceeding 12 months from the acquisition date.

 

13 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The fair value of the net assets acquired of R$1,985,414 and the goodwill generated on the acquisition date, which is still subject to final adjustments, are as below:

 

(1)Includes the allocation of the value of the write-down of property, plant and equipment (R$131,578).
(2)Includes the allocation of fair value assigned to the licenses (R$2,448,448) and customer portfolio (R$110,000).
(3)Includes the allocation of fair value assigned to tax contingent liabilities (R$453,697).
(4)Includes the allocation of the amount of deferred taxes levied on contingent liabilities (R$154,257).
(5)Goodwill recorded on the acquisition of Garliava based on expected synergies resulting from the business combination, which is under review and adjustments to determine the fair value of identifiable assets acquired and liabilities assumed from Garliava.

 

The methods and assumptions used to determine the fair values were:

 

Licenses

The fair value of the licenses was determined using the discounted cash flow method under the Income Approach, which considers the income-earning capacity of the identified asset or business. The premise of this approach is that the value of an asset or business can be measured by the present value of the net economic benefit (cash receipts minus cash expenses) to be received over its useful life. The fair value allocated to the licenses on the acquisition date was R$2,448,448, which is being amortized over the average term of 10.04 years, ranging from 5 years to 15 years.

Customer portfolio

The customer portfolio was valued using the MEEM method (“Multi-period Excess Earnings Method”), which is based on a calculation of discounting cash flows from future economic benefits attributable to the customer base, net of eliminations of the contribution obligations implied. in your generation. To estimate the remaining useful life of the customer base, an analysis was made of the average duration of customer relationships using a withdrawal rate method.

The purpose is to estimate a lifetime curve that predicts future turnover profiles associated with the current customer base. As an approximation of the customers' life curve, the so-called “Iowa curves” were considered. The fair value allocated to the customer portfolio on the acquisition date was R$110,000, which will be amortized on a straight-line basis, according to the useful life of each type of customer, over an average term of 6.45 years, ranging from 5 years to 8 years.

14 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Fair Value of Contingent Liabilities

 

Under IFRS 3(R) Business Combinations, the acquirer recognizes, at the acquisition date, contingent liabilities assumed in a business combination even when not probable that an outflow of resources will be required to settle the obligation, provided that it is a present obligation that arises from past events and its fair value can be measured reliably. Contingent liabilities at fair value of R$453,697 were recognized from this acquisition, which were determined based on the estimated cash outflow for settlement on the acquisition date.

 

Other information

 

Transaction costs incurred up to the closing of the transaction on April 20, 2022, by the Company are approximately R$49.6 million. These costs are not considered components of the consideration transferred, and were recognized as expenses in the periods in which the costs were incurred.

 

The fair value of accounts receivable for service rendering totaled R$394,894 as of acquisition date, which does not differ from the book value comprising the gross amount of R$407,361, net of estimated impairment losses totaling R$12,467.

 

From the acquisition date until the completion of this consolidated quarterly information, Garliava contributed R$377,990 of net operating revenue and R$18,934 of net income to the Company.

 

2)BASIS OF PREPARATION AND PRESENTATION OF INDIVIDUAL AND CONSOLIDATED QUARTERLY FINANCIAL INFORMATION 

 

a) Statement of compliance

 

The individual (Company) and consolidated quarterly financial statements were prepared and are presented in accordance with International Standard IAS 34 - Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB") consistent with CVM deliberations, applicable to the preparation of the quarterly financial statements.

 

All information of significance to the individual and consolidated quarterly financial information is disclosed and is consistent with that used by the Company’s management in the performance of its duties.

 

b) Basis of preparation and presentation

 

The individual and consolidated quarterly financial information were prepared on a historical cost basis (except where different criteria are required) and adjusted to reflect the valuation of assets and liabilities measured at fair value or considering the mark-to-market valuation when such valuations are required by IFRS.

 

Assets and liabilities are classified as current when it is probable that their realization or settlement will occur in the next 12 months. Otherwise, they are classified and shown as non-current. The only exception relates to the balances of deferred tax assets and liabilities, which are classified and fully shown as non-current.

 

The Statement of Cash Flows was prepared in accordance with IAS 7 - Statement of Cash Flows and reflects the changes in cash that occurred in the years presented using the indirect method.

 

The accounting standards adopted in Brazil require the presentation of the Statement of Value Added ("SVA"), individual and consolidated, while IFRS does not require this presentation. As a result, under IFRS standards, the SVA is being presented as supplementary information, without prejudice to the overall individual and consolidated quarterly financial information.

 

The individual and consolidated quarterly financial information compares the three and six-month periods ended June 30, 2022 and 2021, except for the balance sheets, that compare the positions as at June 30, 2022 and December 31, 2021.

 

15 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The Board of Directors authorized the issue of these individual and consolidated quarterly financial statements at the meeting held on July 22, 2022.

 

c) Functional and reporting currency

 

The individual and consolidated quarterly information for the quarters ended June 30, 2022 and 2021, are presented in thousands of Real/Reais (R$) (unless otherwise stated).

 

The Company’s functional and reporting currency is the Real (R$). Transactions in foreign currency are translated into Brazilian Reais as follows: (i) assets, liabilities and shareholders' equity (excluding capital stock and capital reserves) are translated at the closing exchange rate on the balance sheet date; (ii) expenses and revenues are translated at the average exchange rate, except for specific transactions that are converted by the transaction date rate; and (iii) the capital stock and capital reserves are converted at the transaction date rate.

 

Gains and losses from the conversion of investments abroad are recognized in the statement of comprehensive income. Gains and losses from the translation of monetary assets and liabilities between the exchange rate prevailing at the date of the transaction and the year-end closing (except for the conversion of investments abroad) are recognized in the statement of income.

 

d) Basis of consolidation

 

The Company holds direct and indirect equity interests in subsidiaries and jointly controlled.

 

Interests held in subsidiaries or joint ventures are measured under the equity method in the individual financial statements. In the consolidated financial statements, investments and all asset and liability balances, revenues and expenses arising from transactions and equity interest in subsidiaries are eliminated entirely. Investments in joint ventures are measured under the equity method in the consolidated financial statements.

 

Information on investees is presented in Note 12.

e) Segment reporting

 

Business segments are defined as components of a company for which separate financial information is available and regularly assessed by the operational decision-making professional in definition of how to allocate funds to an individual segment and in the assessment of segment performance. Considering that: (i) all officers and managers' decisions are based on consolidated reports; (ii) the Company and its subsidiaries’ mission is to provide their customers with quality telecommunications services; and (iii) all decisions related to strategic planning, finance, purchases, short- and long-term investments are made on a consolidated basis, the Company and its subsidiaries operate in a single operating segment, namely the provision of telecommunications services.

 

f) Significant accounting practices

 

Information presented in the explanatory notes in the December 31, 2021, annual financial statements when substantially unchanged has not been repeated in these individual and consolidated quarterly information.

 

The accounting policies adopted in the preparation of the Company's quarterly information for the quarter ended June 30, 2022, are consistent with those used in the preparation of the annual consolidated financial statements for the year ended December 31, 2021 and must be analyzed in conjunction with these financial statements.

 

The Company does not anticipate the early adoption of any accounting standards, pronouncement, interpretation or amendment issued before the mandatory effective dates.

 

 

 

 

16 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

g) Significant accounting judgments estimates and assumptions

 

The preparation of the individual and consolidated quarterly information requires the use of certain critical accounting estimates and the exercise of judgment by the Company's Management in the application of its accounting policies. These estimates are based on experience, best knowledge, information available at the end of the year and other factors, including expectations of future events that are believed to be reasonable in the circumstances. The settlement of transactions involving these estimates may result in amounts different from those recorded in the quarterly information due to the criteria inherent to the estimation process. The Company reviews its estimates at least annually

 

The significant estimates and judgments applied by the Company and its subsidiaries in the preparation of these quarterly financial statements are detailed in the following Notes: trade accounts receivable (Note 5); income and social contribution taxes (Note 8); property, plant and equipment (Note 13); intangible assets (Note 14); provision and contingencies (Note 20); net operating income (Note 25); pension plans and other post-employment benefits (Note 31); and financial instruments and risk and capital management (Note 32), disclosed in the financial statements for the year ended December 31, 2021.

 

3) CASH AND CASH EQUIVALENTS

(1)On June 30, 2022, and December 31, 2021, the individual and consolidated balances include R$52,458 and R$66,682, respectively, related to the Financial Clearing House, with a Telefónica Group company (Note 28).

 

(2)Highly liquid short-term investments basically comprise Bank Deposit Certificates (“CDB”) and Repurchase Agreements with first tier rated financial institutions, accruing interest at the Interbank Deposit Certificate (“CDI”) rate, with original maturities of up to three months, and with immaterial risk of change in value. Income from these investments is recorded as financial income. On June 30, 2022, the average remuneration of these short-term investments corresponded to 98.88% of the CDI (100.17% on December 31, 2021).

 

 

4) FINANCIAL INVESTMENTS

 

(1) Refers to financial investments in senior shares of FOR-TE Fundo de Investimento em Direitos Creditórios.

 

(2) Refer to financial investments in guarantees for lawsuits (Note 19).

 

 

 

 

17 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

5) TRADE ACCOUNTS RECEIVABLE

 

(1)Includes the amounts of contractual assets. On June 30, 2022, and December 31, 2021, the net consolidated balances of the contractual assets were R$137,575 and R$147,110, respectively.

 

(2)Refer to financial investments in guarantees for lawsuits.

 

Consolidated balances of non-current trade accounts receivable include:

(1)The maturity schedule of the nominal amounts and the present value of the Vivo TECH product does not exceed five years.

 

The following are amounts receivable, net of estimated losses for impairment of accounts receivable, by maturity:

 

(1)Includes the amounts of contractual assets.

 

On June 30, 2022, and December 31, 2021, no customer represented more than 10% of trade accounts receivable, net.

 

18 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The following table shows the changes in estimated losses for impairment of accounts receivable.

 

6)INVENTORIES

(1)This includes, among others, mobile phones, Simcards (chip) and IT equipment in stock, among others.

 

(2)Additions and reversals of estimated impairment losses and inventory obsolescence are included in cost of goods sold (Note 25).

 

 

7)PREPAID EXPENSES

 

(1)Refers to the remaining portion of the Inspection and Operation Fee amounts, which will be fully amortized by the end of 2022.

 

19 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
8)INCOME AND SOCIAL CONTRIBUTION TAXES

 

a) Income and Social Contribution taxes recoverable

 

b) Income and Social Contribution taxes payable

 

The non-current amounts of R$99,639 and R$97,668, recorded On June 30, 2022, and December 31, 2021, respectively, refer to the taxes classified in IFRIC 23 - Uncertainties about Income Tax Treatments (Note 8.e).

 

c) Deferred taxes

 

Significant components of deferred income and social contribution taxes are as follows:

 

 

20 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

 

21 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
(1)Under Brazilian tax legislation these may be offset against 30% of the annual taxable income but otherwise have no expiry date. In 2021, the Company recognized R$1,405,565 in deferred income tax and social contribution assets, arising from the decision of the Federal Supreme Court (“STF”) in an Extraordinary Appeal determining that interest received on receivables for overpaid taxes should not be subject to Income Tax and Social Contribution (Note 8), item f), as disclosed in the December 31, 2021, financial statements.

 

(2)Amounts that will be realized upon payment of provision, occurrence of impairment losses for trade accounts receivable, or realization of inventories, as well as upon reversal of other provision.

 

(3)Refers to deferred taxes arising from the disposal of CloudCo Brasil and IoTCo Brasil in 2021,

 

On June 30, 2022, deferred tax assets (income and social contribution tax losses) were not recognized in the subsidiaries' (Recicla V, TGLog and TIS) accounting records, in the amount of R$70,753 (R$71,126 on December 31, 2021), as it is not probable that future taxable profits will be sufficient for offset for the tax loss carryforward assets.

 

d) Reconciliation of income tax and social contribution expense

 

The Company and its subsidiaries recognize income and social contribution taxes on a monthly basis, on an accrual basis, and pay taxes based on estimates, as per the tax auxiliary trial balance. Taxes calculated on profits to the balance sheet date of the quarterly financial statements are recorded in liabilities or assets, as applicable.

 

The reconciliation of the tax expense using the statutory tax rate of 34% (income tax of 25% and social contribution tax of 9%) is shown in the table below for the periods of three and six months ended June 30, 2022, and 2021.

 

 

22 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

e) Uncertainties about Income Tax Treatments

 

The Company and its subsidiaries are defending several assessments filed by the Federal Revenue of Brazil (“RFB”) for allegedly incorrect deductions of expenses, mainly related to the amortization of goodwill, at various administrative and judicial levels, in the amount of R$18,814,155 on June 30, 2022 (R$18,176,115 on December 31, 2021). Management, supported by the position of its legal advisors, believes that a large part of these deductions will likely be accepted in decisions of higher courts of last resort (acceptance probability greater than 50%).

 

When the Company and its subsidiaries believes that the probability of acceptance by the tax authority is less than 50%, a non-current tax and social contribution liability is recognized. The amount recognized was R$99,639 on June 30, 2022 (R$97,668 on December 13, 2021). These claims involve compensation for overpayment of income tax and social contribution not approved by the RFB.

 

 

9) TAXES, CHARGES AND CONTRIBUTIONS RECOVERABLE

 

(1)Includes ICMS credits from the acquisition of property and equipment, available to offset over 48 months; requests for refund of ICMS paid on invoices that were subsequently cancelled; for the rendering of services; tax substitution; and tax rate difference; among others. Non-current consolidated amounts include credits arising from the acquisition of property and equipment of R$614,507 and R$578,290 on June 30, 2022 and December 31, 2021, respectively.

 

(2)The Company has two lawsuits for recognition of the right to exclude ICMS from the calculation basis of contributions to PIS and COFINS (including lawsuit of a company since merged - Telemig), which cover several periods between February 2002 and December 2019. On May 13, 2021, the Federal Supreme Court (“STF”) issued a decision on the Leading Case RE 574706. The lawsuits became final on June 25, 2021, and on May 27, 2022. As a result of the decisions, the Company recognized in 2021 a credit in the amount of R$2,269,391. On June 30, 2022, the balance in current assets was R$652,144 (R$1,579,117 as of December 31, 2021).
23 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

(3)Withholding income tax (“IRRF”) credits on short-term investments, interest on equity and others, which are used as deduction in operations for the period and social contribution tax withheld at source on services provided to public agencies.

 

10)JUDICIAL DEPOSITS AND GARNISHMENTS

 

When a court grants suspension of a tax liability, judicial deposits are required to be made in escrow to secure the continuance of the claims under discussion.

 

Judicial deposits are recorded at historical cost-plus legal indexation/interest accruals.

 

 

The escrow deposits (classified by tax balances) as on June 30, 2022, and December 31, 2021, are as below. The information regarding judicial deposits is the same as in Note 10) Judicial Deposits and Garnishments, disclosed in the financial statements for the year ended December 31, 2021.

 

 

 

24 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
11)OTHER ASSETS

 

(1) On June 30, 2022 and December 31, 2021, includes R$525,084 and R$559,499, respectively, referring to the sale of FiBrasil, Cloud Co and IoT Co, which took place in 2021.

 

(2) On June 30, 2022, and December 31, 2021, includes R$42,956 and R$90,538, respectively, referring to the distribution of the PBS-A surplus.

 

12) INVESTMENTS

 

a)Information on investees

 

The information related to subsidiaries and jointly controlled entities is the same as in Note 12) Investments, as disclosed in the financial statements for the fiscal year ended December 31, 2021, except for the creation of the digital education joint venture (“VIVAE”) and for the acquisition of part of UPI's mobile assets, as described in note 1.c.2).

 

As on June 30, 2022, and December 31, 2021, the Company held direct equity interests in subsidiaries and jointly controlled, as follows:

 

 

Summary financial information of the direct and jointly controlled subsidiaries in which the Company has an interest is presented below:

 

25 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Balance sheets:

 

Statements of income:

 

26 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
b)Changes in investments

 

27 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
13)PROPERTY, PLANT AND EQUIPMENT

 

a) Balances and changes

 

 

28 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

(1)Infrastructure, includes R$35,823 and R$245,237 in 2022 and 2021, respectively, referring to the cancellation of lease agreements

 

(2)Refers to the balance of assets that were used for the Company's corporate structure in FiBrasil in 2021.

 

b) Depreciation rates

 

The Company carried out, with the help of a specialized company, assessments of the useful lives applied to its fixed assets using the direct comparative method of market data. The works indicated the need for changes in the useful life and annual depreciation rates of some groups of assets. These changes in the accounting estimate reduced the depreciation expense for the period ended June 30, 2022, by R$141,446.

 

Changes in lease balances, included in property and equipment (Note 13.a), were as follows:

 

 

29 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
c)Additional information on leases

 

Changes in the balances for leases, included in Note 13.a, were as follows:

 

d) Property and equipment items pledged in guarantee

 

On June 30, 2022, the Company had property and equipment pledged in guarantee for lawsuits, of R$81,053 (R$78,631 on December 31, 2021).

 

e) Concession balance

 

The 1988 Fixed Commuted Telephone Service concession model, adopted following the privatization of the telecommunications sector, fostered improved telecommunications services in Brazil. Over the last 20 years, concessionaires have promoted the expansion and universalization of fixed telephony service, which, prior to privatization, was expensive and offered poor customer service.

 

It is in the interest of the regulatory bodies to seek a satisfactory economic-financial equilibrium of the contracts upon renewal.

30 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

As a satisfactory consensus was not achieved, the Company filed an arbitration claim on July 1, 2021, with ANATEL. On July 10, 2021, it was submitted to the International Chamber of Commerce to initiate arbitration against ANATEL, as provided for in the concession agreement and pursuant to Law 9,307/1996 and the General Telecommunications Law.

 

On March 21, 2022, the Company presented its opening arguments in the arbitration proceeding requiring, among other issues, the recognition of events that occurred during the concession agreement that need to be rebalanced in the Company’s favor and the restoration of the sustainability of the agreement, as well as compensation for the period in which the contract terms were untenable.

 

Arbitration is an agile and technically adequate method for resolving complex conflicts in concluding the current fixed telephone service concession contracts. It is not practicable at this time to predict the outcome of this arbitration process.

 

f) Adaptation of the Model

 

On October 4, 2019, Law 13.879/2019 (enacted from PLC 79/2016) was published, which introduced changes in the telecommunication’s regulatory framework, by allowing fixed telephony concessionaires to migrate from a concession regime to an authorization regime with lower regulatory charges, including those associated with the continuity and universalization of the STFC in the concession area, as well as any restrictions on the goods associated with its provision.

 

In accordance with this Law, ANATEL presented on July 5, 2022, a methodology with an estimate of the economic value associated with the adaptation of the concession instrument for authorization, to be validated by the Federal Audit Court, a value that, after being confirmed, will be converted into investment projects to be defined by ANATEL.

 

g) Reversible assets

 

The concession contract for the Company's Switched Fixed Telephone Service provides that the assets essential to the provision of such service in the concession area, such as switching, transmission and public use terminals, external network equipment, equipment for energy and systems equipment and operation support are considered as reversible assets (returnable).

 

On April 12, 2021, Resolution 744 was published in the DOU, approved by the Ministry of Telecommunications and by the Board of Directors of ANATEL on April 4, 2021, which deals with the Regulation of Continuity of Provision of Switched Fixed Telephone Service Intended for Use of the General Public under the Public Regime (“RCON”).

 

The Resolution, which became effective on May 3, 2021, addresses how the continuity of STFC services under the concession regime are treated upon the termination of the Company STs STFC concession contract; the assets that are used for the provision of multiple services, among which the STFC under the public system, will be subject to a contract for assignment of right of use, under fair and reasonable economic conditions, between the Company and the new Concessionaire or the Federal Government, should they wish to make use of such assets to maintain the continuity of STFC provision under the public regime.

 

Those assets, that in addition to being essential, are effectively and exclusively used to ensure the continuity and timely provision of STFC under the public regime, will be reverted to the Public Authority, according to the terms of the RCON, if such service continues to be provided, either by the Federal authority, or by a new Concessionaire, under a public agreement. Hence, the assets for the exclusive use of the STFC and, therefore, subject to the reversal regime provided for in the regulation, constitute a residual and decreasing asset of the Company.

 

 

Hence, the Concessionaire's assets, at the end of the concession contract on December 31, 2025, will not be returned to the Federal Government as defined through specific contracts already provided for in the

31 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

operational manual of the Continuity Regulation, approved by Decision No. 269/2021/COUN/SCO, which complements provisions of the Continuity Regulation.

 

Although Resolution 744 requires a list of Reversible Assets ("RBR") to be submitted to ANATEL, such obligation, upon approval under the contractual model described above, is merely informative, in order to maintain transparency of the assets used by the Concessionaire in the provision of STFC under the public regime.

 

14) INTANGIBLE ASSETS

 

a) Balances, changes and amortization rates

 

 

32 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

(1)Refers to the balance of assets used for the Company's corporate structure in FiBrasil in 2021.

 

(2)Licenses refer to the acquisition of 5G licenses (in 2021) and extensions of authorizations for the right to use radio frequencies for SMP exploration in the Federal District and in the State of Rio de Janeiro (in 2021 and 2022).

 

(3) Proportional write-offs of goodwill refer to the sale of investments by FiBrasil, CloudCo Brasil and IoTCo Brasil in 2021.

 

b) Amortization rates

 

The table below shows the annual amortization rates for the periods ended June 30, 2022.

 

 

 

33 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
15)PERSONNEL, SOCIAL CHARGES AND BENEFITS

 

16)TRADE ACCOUNTS PAYABLE

17) TAXES, CHARGES AND CONTRIBUTIONS PAYABLE

 

(1) Refers to the remaining balances for 2022, 2021 and 2020 which, according to decisions of the Federal Regional Court of the First Region, rendered on March 18, 2020, and March 10, 2021, the payments are temporarily suspended. In December 2021, the total amount was transferred to non-current due to adjustment to the realization term.

 

18)DIVIDENDS AND INTEREST ON EQUITY (IOE)

 

a)   Dividends and interest on equity receivable

 

On June 30, 2022, and December 31, 2021, the Company had R$51,125 and R$12,396, respectively, receivable from Terra Networks.

 

34 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

For the purposes of the statement of cash flow, interest on equity and dividends received from the subsidiary are classified as "Investing Activities".

 

b)   Dividends and interest on equity payable

 

b.1) Balances:

b.2) Changes:

For the purposes of the statement of cash flow, interest on equity and dividends paid to shareholders are recognized in "Financing Activities".

 

35 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

19) PROVISIONS AND CONTINGENCIES

 

The Company and its subsidiaries are parties to administrative and judicial proceedings and labor, tax, regulatory and civil claims filed at different court levels. Management of the Company and its subsidiaries, under the advice of its legal counsel, recognized provision for proceedings for which an unfavorable outcome is considered probable.

 

Changes in the provisions for cases with a probable risk of loss, in addition to contingent liabilities and provision for dismantling are as follows:

 

 

36 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

(1)Contingent liabilities (PPA) in 2021: mainly due to the reversal of PIS and COFINS on unrecorded subscription / SVAs.

 

(2)Refers to the provision of fines for cancellation of lease agreements for Garliava, arising from the sale or shutdown of sites.

 

a) Labor provision and contingencies

 

The labor provisions and contingencies involve several labor claims of former employees and former outsourced employees (these claiming subsidiary or joint liability), which claim, among others: differences in overtime pay, variable remuneration, salary parity, additional unhealthy or dangerous.

 

b) Tax provision and contingencies

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

b.1) Tax provisions

 

Management, under advice of legal counsel, believes that the following losses present probable risk of loss for the federal, state, municipal and regulatory (FUST) tax proceedings:

 

Federal taxes

 

The Company and/or its subsidiaries are party to administrative and legal proceedings at the Federal level relating to: (i) claims for the non-ratification of compensation and refund requests formulated; (ii) IRRF and CIDE on remittances abroad related to technical and administrative assistance and similar services, as well as royalties; (iii) withholding income tax on interest on equity; (iv) Social Investment Fund (Finsocial) offset amounts; (v) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9,718/1998; (vi) ex-tariff, cancellation of the benefits under CAMEX Resolution No. 6, increase in the import duty from 4% to 28%; and (vii) INSS on constitutional third of vacations.

 

State taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings at the State level relating to ICMS, regarding: (i) disallowance credits; (ii) non-taxation of alleged telecommunications services; (iii) tax credit for challenges/disputes over telecommunication services not provided or wrongly charged (Agreement 39/01); (iv) rate differential; (v) leasing of infrastructure for internet services (data); (vi) outflows of goods with prices lower than those of acquisition; (vii) non-taxation discounts to customers; and (viii) unmeasured services.

 

Municipal taxes

 

The Company and/or its subsidiaries are party to Municipal tax proceedings, at the judicial level, relating to: (i) Property tax (“IPTU”); (ii) Services tax (“ISS”) on equipment leasing services, non-core activities and supplementary activities; and (iii) withholding of ISS on contractors' services.

 

FUST


The Company and/or its subsidiaries have judicial proceedings related to the non-inclusion of interconnection expenses and industrial exploitation of a dedicated line in the calculation basis of FUST.

 

b.2) Possible risk of loss - tax contingencies

 

Management, under advice of legal counsel, believes that the risk of loss for the following federal, state, municipal and regulatory (FUST, FUNTTEL and FISTEL) is possible:

 

Federal taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the Federal level, which are awaiting decision at different court levels.

 

The more significant of these proceedings are: (i) contested non approval of requests for compensation submitted by the Company; (ii) INSS (a) SAT, social security amounts owed to third parties (INCRA and SEBRAE); (b) meals to employees, withholding of 11% (assignment of workforce); and (c) Stock Options - requirement of social security contributions on amounts paid to employees under the stock option plan; (iii) deduction of COFINS on swap operation losses; (iv) PIS and COFINS: (a) accrual basis versus cash basis; (b) levies on value-added services; and (c) monthly subscription services; (v) IPI levied on shipment of fixed access units from the Company's establishment; (vi) Financial transaction tax (IOF) - on loan transactions, intercompany loans and credit transactions; and (vii) IRRF on capital gain on the sale of the GVT Group to the Company.

 

 

 

38 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

State taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the State level, related to ICMS, which are awaiting decision in different court levels: (i) rental of movable property; (ii) reversal of previously unused credits; (iii) service provided outside São Paulo State paid to São Paulo State; (iv) co-billing; (v) tax substitution with a fictitious tax base (tax guideline); (vi) use of credits on acquisition of electric power; (vii) secondary activities, value added and supplementary services; (viii) tax credits related to claims/challenges regarding telecommunications services not provided or mistakenly charged (Agreement 39/01); (ix) deferred collection of interconnection (“DETRAF” - Traffic and Service Provision Document); (x) credits derived from tax benefits granted by other states; (xi) disallowance of tax incentives related to cultural projects; (xii) transfers of assets among business units owned by the Company; (xiii) communications service tax credits used in provision of services of the same nature; (xiv) card donation for prepaid service activation; (xv) reversal of credit from return and free lease in connection with assignment of networks (used by the Company itself and exemption of public bodies); (xvi) CDR/DETRAF fine; (xvii) own consumption; (xviii) exemption of public bodies; (xix) discounts granted; (xx) advertising services; and (xxi) monthly subscription, which is in the STF with declaration liens and the Company awaits the judgment of the STF on the request for modulation.

 

Municipal taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the Municipal level, which are awaiting decision at different court levels.

 

The more significant of these proceedings are: (i) ISS on: (a) non-core activity, value-added and supplementary services; (b) withholding at source; (c) call identification and mobile phone licensing services; (d) full-time services, provision, returns and cancelled tax receipts; (e) data processing and antivirus; (f) charge for use of mobile network and lease of infrastructure; (g) advertising services; and (h) services provided by third parties; (ii) IPTU; (iii) land use tax; and (iv) various municipal charges.

 

FUST, FUNTTEL and FISTEL

 

Universal Telecommunications Services Fund ("FUST")

 

Writs of mandamus were filed seeking the right to exclude revenues from interconnection and Industrial Use of Dedicated Line (“EILD”) in the FUST tax base, according to Abridgment No. 7 of December 15, 2005, as it does not comply with the provisions contained in the sole paragraph of Article 6 of Law No. 9,998/2000, which are awaiting a decision from Higher Courts.

 

Various administrative and judicial charges by ANATEL in administrative scope for the constitution of the tax credit related to interconnection, EILD and other revenues that do not originate from the provision of telecommunication services.

 

On June 30, 2022, the consolidated amount totaled R$4,823,450 (R$4,694,276 on December 31, 2021).

 

Fund for Technological Development of Telecommunications ("FUNTTEL")

 

Proceedings have been filed for the right not to include interconnection revenues and any others arising from the use of resources that are party of the networks in the FUNTTEL calculation basis, as determined by Law 10,052/2000 and Decree No. 3,737/2001, thus avoiding improper application of Article 4, paragraph 5, of Resolution 95/2013.

 

There are several notifications of charges from the Ministry of Communications in administrative actions for constitution of the tax credit related to the interconnection, network resources and other revenues that do not originate from the provision of telecommunication services.

 

On June 30, 2022, the consolidated amount totaled R$848,921 (R$790,057 on December 31, 2021).

 

 

39 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Telecommunications Inspection Fund ("FISTEL")

 

There are judicial actions for the collection of TFI on: (i) extensions of the term of validity of the licenses for use of telephone exchanges associated with the operation of the fixed switched telephone service; and (ii) extensions of the period of validity of the right to use radiofrequency associated with the operation of the telephone service personal mobile service.

 

On June 30, 2022, the consolidated amount totaled R$2,067,087 (R$2,017,422 on December 31, 2021).

 

c) Civil provision civil contingencies

 

c.1) Civil provisions

Management, under advice of legal counsel, believes that the following civil proceedings will result in probable losses:

 

·The Company is a party to proceedings involving rights to the supplementary amounts from shares calculated on community telephony plants and network expansion plans since 1996 (supplement of share proceedings). These proceedings are at different stages: lower courts, court of justice and high court of justice. On June 30, 2022, the provision was R$142,777 (R$130,163 on December 31, 2021).

 

·The Company and/or its subsidiaries are party to various civil proceedings related to individual consumerist nature level, relating to the non-provision of services and/or products sold. On June 30, 2022, the provision was R$214,428 (R$367,334 on December 31, 2021).

 

·The Company and/or its subsidiaries are party to various civil proceedings of a collective consumerist and also non-consumer nature at administrative and judicial levels, all arising in the ordinary course of business. On June 30, 2022, the provision was R$684,600 (R$438,474 on December 31, 2021).

 

c.2) Possible losses - civil contingencies

Management, under advice of legal counsel, believes that the risk of losses is possible for the following civil proceedings:

 

·Collective Action filed by SISTEL Participants' Association (“ASTEL”) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the PAMA and claim for the reestablishment of the prior "status quo". This proceeding is still in the appeal phase and awaits a decision on the Interlocutory Appeal filed by the Company against the decision on possible admission of the appeal to higher and supreme courts filed in connection with the Court of Appeals' decision, which partially changed the decision rendering the matter groundless. In parallel, the parties formulated an agreement, filed though pending court approval. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability because it entails the return to the prior plan conditions.

 

 

 

40 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
·Public Civil Action proposed by the National Federation of Associations of Retirees, Pensioners and Participants in Pension Funds in the Telecommunications Sector (“FENAPAS”), in which ASTEL is an assessor against Sistel, the Company and other operators, to annul the spin-off of the PBS pension plan. The action is claiming, in summary, the “dismantling of the supplementary pension system of Fundação Sistel”, which originated several specific PBS mirror plans, and corresponding allocations of resources from the technical surplus and tax contingency existing at the time of the spin-off. After upholding the lawsuit in the first degree and confirming the sentence at the appellate level, the Company filed an appeal for clarification. Concurrently, the National Superintendence of Complementary Social Security (“PREVIC”) intervened in the process, which caused the case to be sent to the Federal Court. The process is awaiting receipt at the Federal Court. The Federal Court then summoned PREVIC to manifest itself in the records and, successively, to the parties and the FENAPAS. The case records were submitted for conclusion, where they await decision. No value has been attributed nor orders settled due to their non-enforceability as it involves a return to SITEL’s spun-off collection related to telecommunications operators of the former Telebrás System.

 

·The Company and its subsidiaries are party to other civil claims, at several levels, related to service rendering rights. Such claims have been filed by individual consumers, civil associations representing consumer rights of consumers or by the Consumer Protection (“PROCON”), as well as by the Federal and State Public Prosecutor's Office. The Company is also party to other claims of several types related to the ordinary course of business.

 

·Intellectual Property: Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda. (“Lune”), a Brazilian company, filed lawsuits on November 20, 2001, against 23 wireless carriers claiming to own the patent for "Bina", a caller ID. The purpose of the lawsuit was to interrupt provision of such service by carriers and to seek indemnification equivalent to the amount paid by consumers for using the service.

 

An unfavorable decision was handed down determining that the Company should refrain from selling mobile phones with the Bina ID service, subject to a daily fine of R$10 in the event of non-compliance. Furthermore, according to that decision, the Company must pay indemnification for royalties, to be calculated on settlement. Motions for Clarification were proposed by all parties and Lune's motions for clarification were accepted since an injunctive relief in this stage of the proceedings was deemed applicable. A bill of review appeal was filed in view of the current decision which granted a stay of execution suspending the unfavorable decision until final judgment. A bill of review was filed in view of the sentence handed down on September 30, 2016, by the 4th Chamber of the Court of Justice of the Federal District, in order to annul the lower court sentence and remit the proceedings back to the lower court for a new examination. The expert investigation was carried out and the claim was dismissed. Appeals have been filed by the parties, pending judgment. Management is unable to reasonably estimate a liability with respect to this claim at this time.

 

·The Company, together with other operators that provide telecommunications services, is a defendant in discussions that contest the practice that operators adopt of imposing a limited period for the use of prepaid minutes. That is, the plaintiff alleges that the minutes of the prepaid package must not expire after the end of a specific period, and that they can be used at any time by the consumer. The request of the Federal Public Ministry was not accepted, and the processes are awaiting judgment of appeal by the Federal Regional Court (“TRF”) of the 1st Region.

 

d) Regulatory provision and contingencies

 

41 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

d.1) Regulatory provisions

Management, under advice of legal counsel, believes the likelihood of loss of the following regulatory proceedings is probable:

The Company is a party to administrative proceedings initiated mainly by ANATEL on the grounds of alleged non-compliance with obligations in the sectoral regulations, as well as in lawsuits that discuss, in the great majority, sanctions applied by ANATEL at the administrative level. The proceedings include the obligation to pay the onerous fee for the mobile service (the payment, due every two years, relating to the right of use of SMP), Company's obligations related to non-observance of the rights of consumers of telecommunications services, the achievement of ANATEL's quality indicators, and the achievement of targets contained in the spectrum auction notice for service coverage.

 

A dispute arose as to which revenues should be considered for the payment of amounts due for the renewal of radio frequencies in relation to the payment of SMP charges. The Company, together with its legal advisors, concluded that a probable loss is estimated of R$629 million on the payment of the SMP burden in relation to data revenue, due to the existence of unfavorable decisions at ANATEL in 2021 and in the courts with an unlikely prognosis of review, as the Company decided to begin collecting such amounts in favor of ANATEL, as of the 2022 collection.

 

d.2) Possible risk of losses - regulatory contingencies

Management, under advice of legal counsel believes the likelihood of loss of the following regulatory proceedings is possible:

The Company is a party to administrative proceedings filed by ANATEL (other agents, including other operators, also have claims against the Company) alleging non-compliance with the obligations set forth in industry regulations, as well as legal claims which discuss the mostly sanctions applied by ANATEL at the administrative level.

Significant cases with possible risks of loss in the regulatory contingency portfolio include:

·Litigation regarding the revenues to be included in the calculation of the amount of encumbrance due to the extension of radio frequencies associated with the SMP and the STFC concession (except for SMP data revenues, as informed in item d.1, of this Note). In ANATEL's view, the calculation of the encumbrance should be based on 2% on the entire economic benefit arising from the provision of STFC/SMP service. In the Company's view, however, revenues that are not part of STFC/SMP service plans, such as interconnection, revenues earned in the 15th year of the licenses' validity, and others, should not be considered in the calculation of the burden. As a result of this divergence of understanding, the Company filed administrative and legal actions to challenge ANATEL's charges.

 

·In May 2018, the Company filed a lawsuit to annul the ANATEL final decision, of March of the same year, in the records of the Procedure for Determining Noncompliance with Obligations (“PADO”) for alleged violations of the fixed telephony regulation. The principal amount of the fine imposed by ANATEL, and object of the lawsuit, totals R$199,075. On June 30, 2022, and December 31, 2021, amount including interest and indexation accruals totaled approximately R$517,801 and R$499,415, respectively. The Company believes that the fine imposed is illegal and not due based, fundamentally, on the following defense arguments: (i) ANATEL's error in determining the universe of users considered in the fine (the number of users affected is less than that considered by the ANATEL) and (ii) the calculation of the penalty is disproportionate and baseless. The process was sent for analysis and decision by the CADE Court; the MPF has yet to issue its opinion.

 

42 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

·Administrative proceeding pending at CADE, allegedly coordinated action between the companies Claro, Oi Móvel and Company, which comprised the Rede Correios Consortium to compete in the electronic trading session no. 144/2015, carried out by the Brazilian Post and Telegraph Company; as well as alleged price discrimination by Company in relation to services offered to BT Brasil Serviços de Telecomunicações Ltda. (“BT”), contravening competitive protocols. In its defense, Company (i) states that the formation of consortia to participate in public tenders is legal and can promote competition; and (ii) demonstrates that there is no basis for allegation of discriminatory conduct, since: (a) the Company was not the only alternative to BT's supplier; and (b) prices of the service offered by the consortium cannot be compared to those quoted by BT, as they are of a difference technical nature, pricing and quantity of resources involved. On March 8, 2021, the Technical Note of the General Superintendence issued an opinion on the configuration of infractions of the economic order practiced by the companies. The process was forwarded by the technical area to the CADE Court and is awaiting analysis of the Council's decision.

 

·Term of Conduct Adjustment ("TAC") signed with ANATEL on February 28, 2022, effective for 4 years from publication in the DOU, on March 3, 2022. The TAC includes 24 PADOs relating to Quality, Interruptions and Users' Rights, who’s estimated and applied fines were exchanged for investments in 14 conduct adjustment commitments and an additional commitment to build a fiber backbone route. With the entry into force of the TAC and the consequent filing of said PADOs that comprise it, in the six-month periods ended June 30, 2022, there were write-offs of R$42 million and R$324 million in cases with probable and possible chances of loss, respectively.

 

20) LOANS, FINANCING, DEBENTURES, LEASE, 5G LICENSES, CONTINGENT CONSIDERATION AND CONTRACTUAL RETENTION

 

On June 30, 2022, the contractual terms of the loans, financing, debentures and leases are the same as in Note 21) Loans, Financing, Debentures, Leases and 5G Licenses, disclosed in the financial statements for the fiscal year ended December 31, 2021.

 

a) Loans, financing, debentures, lease, 5G licenses information, contingent consideration and contractual retention

 

a.1) Loans and financing – Financial Institutions

 

Certain financing agreements with the financial institutions have interest rates lower than those prevailing in the market. These operations fall within the scope of IAS 20 and therefore the subsidies granted up to December 31, 2017, were adjusted to present value and deferred in accordance with the useful lives of the financed assets. These contracts are guaranteed by the sale of financed assets.

43 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The grants on January 1, 2018, adjusted to present value, were recorded in property, plant and equipment and are being depreciated according to the useful lives of the financed underlying assets.

 

On April 8, 2022, a foreign currency denominated loan was obtained from Citibank (US dollar), through Law No. 4.131, of US$ 213,413 thousand, equivalent to R$1,000,000, maturing on September 28, 2023, remunerated at 3.1546% p.a. Interest will be paid semi-annually and principal will be paid at the end of the transaction. On April 8, 2022, a swap agreement was signed, exchanging the debt remuneration for CDI + 0.70% p.a.

 

a.2) Financing - Suppliers

 

Through bilateral agreements with suppliers, the Company obtained extension of the terms for payment of trade accounts payable at a cost based on the fixed CDI rate for the corresponding periods, with the net cost equivalent to between 98.9% to 120.8% of the CDI on June 30, 2022, and December 31, 2021.

 

a.3) Debentures

 

The 5th issue was settled on February 8, 2022, maturity date. The total settlement amount was R$1,039,012, of which R$1,000,000 is principal and R$39,012 is interest.

 

a.4) Leases

 

The Company has agreements in which it is a lessee for: (i) lease of structures (towers and rooftops) arising from sale and leaseback transactions; (ii) lease of Built to Suit ("BTS") sites to install antennas and other equipment and transmission facilities; (iii) lease of information technology equipment and (iv) lease of infrastructure and transmission facilities associated with the power transmission network, offices, stores and commercial properties. The net carrying amount of the assets has remains unchanged until their sale, and a liability is recognized corresponding to the present value of mandatory minimum installments as per the agreement.

 

The balances of the lease payables are as follows:

 

(1)On June 30, 2022, and December 31, 2021, the present value of balances payable, included R$68,754 and R$70,845, respectively, referring to lease agreements with Telefónica Group companies (Note 28).

 

The following is a schedule of the amounts payable on leases On June 30, 2022:

 

44 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The weighted annual interest rate on lease contracts On June 30, 2022, is 9.30%, with an average maturity of 5.76 years.

 

The present value of lease agreements is measured by discounting future fixed payment flows, which do not include projected inflation, at market interest rates, estimated using the Company's intrinsic risk spread.

 

The discount yield curves used are constructed based on observable data. Market interest rates were extracted from B3, and the Company's risk spread is estimated from debt securities issued by companies with comparable risk. The final discount curve reflects the Company's incremental loan interest rate.

 

a.5) ​​5G licenses

 

On December 3, 2021, Term authorizations were signed with ANATEL from its auctions for the implementation of 5G technology, the Company having presented successful bids. These authorizations are valid for 20 years associated with authorizations for the provision of SMP, renewable successively, for consideration, under the terms of Law No. 9,472/1997 (Note 1.b).

 

These Terms are guaranteed by insurance contracts.

 

a.6) Contractual retention Oi – Acquisition of Garliava

 

As provided for in the clause of the Agreement for the Purchase and Sale of Shares and Other Covenants, entered into on January 28, 2021, between the Company and Oi, 10% of the acquisition price was withheld in the amount of R$488,458. This amount bears interest at the CDI rate (100%) from the closing date to the date of effective payment and must be fully paid to Oi. This is expected to occur within 12 months.

 

a.7) Contingent consideration – Acquisition of Garliava

 

As provided for in the Share Purchase Agreement and Other Covenants, signed between the Company and Oi, part of the transaction price is conditioned to the achievement of certain objectives/goals. The Company evaluated and concluded that all will be met and the target will be achieved. As a result, the fair value of these commitments represents R$110,205, which bears interest at the CDI rate (100%) from the closing date to the date of effective payment and must be paid in full to Oi within 12 months. During the period ended June 30, 2022, R$47,500 was paid.

 

b) Repayment schedule

 

The balances by year of maturity of the non-current amounts of leases and 5G licenses are as follows:

 

c) Changes

 

Balances by year of maturity of the non-current amounts of loans, financing, leases, 5G licenses, contractual retention and contingent consideration are as follows:

45 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

d) Additions and payments

 

The following is a summary of additions and payments made during the quarter ended June 30, 2022.

 

46 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
21)DEFERRED REVENUE

 

(1)Refers to the balance of contractual liabilities of customers which are, deferred when linked to performance obligations.

 

(2)Includes the net balances of the residual values from sale of non-strategic towers and rooftops, transferred to income as the conditions for recognition are met.

 

22) OTHER LIABILITIES

(1)Includes the cost of renewing STFC and SMP licenses and SMP licenses and the extension of the authorization to use radio frequencies for the exploitation of SMP in the State of Rio de Janeiro and Federal District (Notes 1.b and 14).
(2)This refers to payroll withholdings and taxes withheld from interest on equity and on provision of services.

 

23)EQUITY

 

a) Capital

 

Pursuant to its Articles of Incorporation, the Company is authorized to increase its share capital up to 1,850,000,000 common shares. The Board of Directors is authorized to deliberate any increase and consequent issue of new shares within this limit.

 

Brazilian Corporation Law (Law nº 6404/1976, Article 166, item IV) - establishes that capital may be increased by an Extraordinary Shareholders’ Meeting Resolution by modifying the Articles of Incorporation, if the authorized capital increase limit has been reached.

 

The shareholders will have preemptive rights to subscribe for a capital increase, in proportion to the number of shares they own. By resolution of the Board of Directors, the preemptive right in the issuance of shares, convertible debentures and subscription bonus, whose placement may be made through sale on the Stock Exchange or public subscription, exchange for shares in a public offer for acquisition may be excluded control, under the terms of articles 257 and 253 of the Corporation Law, as well as enjoy tax incentives, under the terms of special legislation, as provided for in article 172 of the Corporation Law.

47 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

Subscribed and paid-in capital on June 30, 2022, and December 31, 2021, amounted to R$63,571,416, represented by shares, all common, book-entry and without par value.

Share ownership on June 30, 2022, was as follows:

b) Capital reserves

 

The information on the capital reserves, is the same as in Note 24) Equity, item b), disclosed in the financial statements for the year ended December 31, 2021.

 

Treasury shares changes in the in the six-month periods ended June 30, 2022, were:

 

·Cancellation of treasury shares: at a meeting held by the Company's Board of Directors, held on February 18, 2022, the cancellation of 14,046,652 common shares was approved, as of December 31, 2021, in the amount of R$606,536. This cancellation was recorded as a contra entry to “Capital Reserves”.

 

·Share Repurchase Program: buyback of 6,286,200 common shares, in the total amount of R$313,381, arising from the Company's Own Share Repurchase Program (Note 23.f).

 

The balance of this item as of June 30, 2022, was R$443,244 (R$754,443 as of December 31, 2021).

 

c) Income reserves

 

The information on the income reserves, is the same as in Note 24) Equity, item c), disclosed in the financial statements for the year ended December 31, 2021.

 

The balance of this item as of June 30, 2022, was R$3,539,048 (R$3,504,656 as of December 31, 2021).

 

d) Dividend and interest on equity

 

The amounts of interest on own capital per share are calculated and presented net of withholding income tax (IRRF). Tax immune shareholders received interest on full equity, without withholding income tax.

 

d.1) Interim interest on equity for 2022

 

At meetings of the Company's Board of Directors, ad referendum of the General Shareholders' Meeting ("AGM") to be held in 2023, approved the distribution of interim interest on equity, related to the year of 2022, pursuant to article 26 of the Company's Bylaws, Article 9 of Law No. 9,249 / 95 and CVM Resolution No. 683/12, which will be imputed to the minimum mandatory dividend for the 2022 fiscal year, as follows:

48 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

d.2) Interest on Equity and Dividends for 2021

 

At the AGM held on April 26, 2022, the financial statements and allocations of income for the year 2021 were approved by majority vote of the holders of common shares. The details of the allocation of income are the same as those disclosed in Note 24 ) Shareholders' Equity, item d), disclosed in the financial statements for the fiscal year ended December 31, 2021.

 

At the time of the acquisitions of own shares held in treasury under the Company's Share Buyback Program, which took place in the in the six-month periods ended March 31, 2022, the Company released a Notice to the Market on April 26, 2022, informing that the value per common share of the proposed additional dividend in the amount of R$2,028,524 was updated to 1.21200233929. This dividend will be paid on October 18, 2022, being credited individually to shareholders, subject to the shareholding position contained in the Company's records at the end of April 26, 2022.

 

d.3) Unclaimed dividends and interest on equity

 

Pursuant to Article 287, paragraph II, item “a” of Law No. 6404, of December 15, 1976, the dividends and interest on equity unclaimed by shareholders are subject to a statute of limitation of three years, as from the initial payment date. The Company reverses the amount of unclaimed dividends and IOE to equity once the statute of limitation expires.

 

In the six-month periods ended June 30, 2022, and 2021, there were no reversals under the statute of limitations for dividends or interest on equity.

 

e) Other comprehensive income

 

Financial assets at fair value through other comprehensive income: These refer to changes in fair value of financial assets available for sale.

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Derivative financial instruments: These refer to the effective part of cash flow hedges up to the balance sheet date.

 

Currency translation effects for foreign investments: This refers to currency translation differences arising from the translation of financial statements of Aliança (joint venture).

 

Changes in other comprehensive income, net of taxes, were as below:

f) Company Share Repurchase Program

 

On February 22, 2022, the Company's Board of Directors, in accordance with article no. 15, item XV of the Bylaws and CVM Instruction no. 567, approved a new Share Repurchase Program of the Company, which has as its objective the acquisition of common shares issued by the Company for subsequent cancellation, sale or maintenance in treasury, without reducing share capital. This is designed to increase shareholder value by efficiently investing the available cash resources and optimizing the capital allocation of the Company.

 

The repurchase will be carried out using the capital reserve balance included in the Company's latest Annual Financial Statements as of December 31, 2021, and considering the exceptions referred to in article 7, § 1, of ICVM 567/2015 (R$649 .4 million).

 

This program will be in effect until February 22, 2023, with acquisitions carried out at B3, at market prices, observing legal and regulatory limits, and it is up to the Company's management to decide the moment and number of shares to be acquired, respecting the limits provided for in the Program and in the applicable regulations.

 

During the in the six-month periods ended June 30, 2022, 6,286,200 common shares were acquired for R$313,381.

 

g) Earnings per share

 

Basic and diluted earnings per share were calculated by dividing net profit attributed to the Company’s shareholders by the weighted average number of outstanding common and preferred shares. The Company does not hold potentially dilutable shares in circulation that could result in the dilution of earnings per share.

 

The table shows the calculation of earnings per share for the periods ended June 30, 2022 and 2021:

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

h) Non-controlling shareholders

 

Following the partial sales (49.99%) of CloudCo Brasil and IoTCo Brasil in 2021, the consolidated information includes the interest held by controlling and non-controlling shareholders. controllers, as follows:

 

i) Reconciliation of parent company and consolidated net income

 

A reconciliation of the parent company's and consolidated net income, for the quarter ended June 30, 2022, is presented following the partial sales (49.99%) of CloudCo Brasil and IoTCo Brasil in 2021:

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
24)NET OPERATING REVENUE

 

 

(1) Includes telephone services, use of interconnection network, data and SVA services, cable TV and other services.

 

(2) Includes sale of goods (handsets, SIM cards and accessories) and equipment of “Vivo Tech”.

 

No single customer accounted for more than 10% of gross operating revenues in the quarters ended June 30, 2022, and 2021.

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

25) OPERATING COSTS AND EXPENSES

 

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

(1)Includes consolidated lease depreciation of R$1,423,011 and R$1,314,098 for the quarters ended June 30, 2022 and 2021, respectively (Note 13.c).

 

26)OTHER OPERATING INCOME (EXPENSES)

(1)For the three-and six-month periods ended June 30, 2021, includes tax credits, in the amount of R$1,548,686, arising from the decision rendered by the STF on May 13, 2021 for Leading Case RE574706 and decisions on lawsuits, in favor of the Company, which recognized PIS and COFINS tax credits (Note 9).

 

(2)The amounts for the 1st half of 2021 include the effects of the reversal of PIS and COFINS on subscription/SVAs.

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

27) FINANCIAL INCOME (EXPENSES)

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

(1)For the three-and six-month periods ended June 30, 2021, includes the interest/indexation accruals of R$573,356 from the decision rendered by the STF on May 13, 2021 for Leading Case RE574706 and decisions on lawsuits, in favor of the Company, which recognized PIS and COFINS tax credits (Note 9).

 

(2)Includes consolidated leases charges of R$608,692 and R$381,321 for the quarters ended June 30, 2022 and 2021, respectively (Note 20.d).

 

28) BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

a)Balances and transactions with related parties

 

The main balances of assets and liabilities with related parties arises from transactions with member companies of the controlling group carried out at the prices and other commercial conditions agreed in contracts between the parties. These refer to:

a)Fixed and mobile telephony services provided by Telefónica Group companies.

 

b)Consulting service for the construction of a fiber optic network.

 

c)Installments receivable on the sale of equity interest and capital contributions.

 

d)Corporate services passed through at the cost effectively incurred.

 

e)Right to use certain software licenses and maintenance and support contracted.

 

f)International transmission infrastructure for several data circuits and roaming services contracted.

 

g)Adquira Sourcing platform - online solution to for purchase and sale of various goods and services.

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
h)Cost Sharing Agreement for digital business

 

i)Financial Clearing House roaming, inflows of funds for payments and receipts from roaming operation.

 

j)Data communication services and integrated solutions.

 

k)Long distance calling and international roaming services.

 

l)Amounts to be reimbursed by SP Telecomunicações Participações as a result of contractual clause of the purchase of Terra Networks equity interest.

 

m)Brand fee for assignment of rights to use the brand.

 

n)Rental of buildings, data circuit and/or infrastructure.

 

o)Factoring transactions, credit facilities for services provided by the Group's suppliers.

 

p)Contracts or agreements assigning user rights for cable ducts, optical fiber duct rental services, and right-of-way related occupancy agreements with several highway concessionaires.

 

q)Amounts receivable from the sale of assets.

 

r)Tower operations sold Telxius Torres Brasil. The operation consists of the sale of infrastructure assets owned by the Company, together with the assignment of shared use contracts, with the subsequent assignment of the use of space for infrastructures to the Company. As a result of the sale of the tower division of Telxius Telecom S.A. to American Tower International, Inc., in 2021, the assets and liabilities are no longer presented as related parties and are presented in the statement of income from January to May 2021.

 

The Company and its subsidiaries sponsor pension plans and other post-employment benefits for its employees with Visão Prev and Sistel (Note 30).

 

Telefônica Corretora de Seguros (“TCS”) acts as intermediary in transactions between insurance companies and the Company and its subsidiaries in the acquisition of insurance for cell phones, operational risks, general liability, guarantee insurance, among others. There are no balances arising from insurance intermediation between TCS and the Company and its subsidiaries.

 

The following table summarizes the consolidated balances with related parties:

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

b)Management compensation

 

Consolidated key management compensation paid by the Company to its Board of Directors and Statutory Officers for the quarters ended June 30, 2022, and 2021 totaled R$16,323 and R$15,698, respectively. This includes R$10,616 (R$9,692 on June 30, 2021) for salaries, benefits and social charges and R$5,707 (R$6,006 on June 30, 2021) for variable compensation.

 

These amounts were recorded as personnel expenses in General and administrative expenses (Note 25).

 

For the quarters ended June 30, 2022 and 2021, the Directors and Officers did not receive any pension, retirement or similar benefits.

 

29)SHARE-BASED PAYMENT PLANS

 

Telefónica, the Company´s parent, has its own share-based payment plans which are also offered to management and employees of its subsidiaries, including the Company and its subsidiaries.

 

The details of these plans are the same as in Note 30) Share-Based Payment Plans, as disclosed in the financial statements for the fiscal year ended December 31, 2021.

 

The main plans in effect on June 30, 2022, are detailed below:

·Talent for the Future Share Plan (“TFSP”), for its Senior Managers, Managers and Experts at a global level

The 2020-2022 cycle (January 1, 2020, to December 31, 2022): includes 140 active executives with potential rights to receive 112,400 shares of Telefónica.

 

The 2021-2023 cycle (January 1, 2021, to December 31, 2023): includes 176 active executives with potential rights to receive 302,500 shares of Telefónica.

 

The 2022-2024 cycle (January 1, 2022, to December 31, 2024): includes 141 active executives with potential rights to receive 301,000 shares of Telefónica.

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
·Perform Share Plan (“PSP”), for its Vice-Presidents and Directors at the global level

The 2020-2022 cycle (January 1, 2020, to December 31, 2022): includes 78 active executives (including 3 executives appointed under the Company's by-laws), with the potential right to receive 483,779 shares of Telefónica.

 

The 2021-2023 cycle (January 1, 2021, to December 31, 2023): includes 86 active executives (including 3 executives appointed under the Company's by-laws), with the potential right to receive 1,714,088 shares of Telefónica.

 

On June 30, 2022, and December 31, 2021, the consolidated liability balances of these plans were R$107,481 and R$109,682, respectively, including taxes.

 

30)PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

 

The plans sponsored by the Company and its subsidiaries and the related benefits by types are as follows:

 

 

The details of these plans are the same as in Note 31) Pension Plans and Other Post-Employment Benefits, as disclosed in the financial statements for the fiscal year ended December 31, 2021.

 

The changes in consolidated balances of the surplus and deficit plans were as follows:

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

31)FINANCIAL INSTRUMENTS AND RISK AND CAPITAL MANAGEMENT

 

a) Derivative transactions

The derivative financial instruments contracted by the Company are mainly used for hedging against foreign exchange risk from assets and liabilities in foreign currency and the effects of inflation on leases indexed to the IPCA. There are no derivative financial instruments held for speculative purposes, possible currency risks are hedged.

Management believes that the Company's internal controls for its derivatives are adequate to control risks associated with each strategy for the market. Gains/losses obtained or sustained by the Company in relation to its derivatives show that its risk management has been appropriate.

Whilst these derivative contracts qualify for hedge accounting, the hedged item is adjusted to fair value, offsetting the result of the derivatives, pursuant to the rules of hedge accounting. This hedge accounting applies both to financial liabilities and probable cash flows in foreign currency.

Derivatives contracts include specific penalties for breach of contract. Breach of contract provided for in agreements made with financial institutions leads to the anticipated liquidation of the contract.

 

On June 30, 2022, and December 31, 2021, the Company held no embedded derivatives contracts.

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

a.1) Fair value of derivative financial instruments

The valuation method used to calculate the fair value of financial liabilities (if applicable) and derivative financial instruments was the discounted cash flow method, based on expected settlements or realization of liabilities and assets at market rates prevailing at the balance sheet date.

 

The fair values of the positions in Reais are calculated by projecting future inflows from transactions using B3 yield curves and discounting these flows to present value using market DI rates for swaps announced by B3.

 

The market values of foreign exchange derivatives were obtained using the market exchange rates in effect at the balance sheet date and projected market rates obtained from the currency's coupon-rate yield curves. The linear convention of 360 calendar days was used to determine coupon rates of positions indexed in foreign currencies, while the exponential convention of 252 business days was used to determine coupon rates for positions indexed to CDI rates.

 

Consolidated derivatives financial instruments shown below are registered with B3 and classified as swaps, usually, that do not require margin deposits.

(1)Foreign currency swaps (Euro and CDI x Euro) (R$86,059)) and (US$ and CDI x US$) (R$197,381) - maturing through August 19, 2022, to hedge currency risk affecting net amounts payable (carrying amount R$90,520 in Euros and LIBOR) and receivables (carrying amount R$110,540 in US$).

 

(2)Foreign currency swap (dollar and CDI x dollar) (R$1,112,621) – swap operations contracted with maturities up to September 23, 2023, with the objective of protecting against exchange variation risks of the flow’s payable on the loan of Law No. 4,131 (book value of R$1,112,621 in US dollars).

 

(3)IPCA x CDI swaps (R$221,793) - maturing in 2033 to hedge risk of change in the to IPCA (carrying amount R$221,793).
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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 
(4)NDF US$ x R$ (R$171,793) - forward operations contracted with maturity up to December 21, 2022, to protect against risks of exchange rate volatility in service contracts (book value of R$ R$171,793 in dollars).

 

Swaps maturing after June 30, 2022, are as follows:

 

For the purposes of preparing its financial statements, the Company adopted the fair value hedge accounting methodology for its foreign currency swaps x CDI and IPCA x CDI for hedging or financial debt. Under this arrangement, both derivatives and hedged risk are recognized at fair value.

 

On June 30, 2022, and 2021, the derivatives transactions generated a positive net result of R$15,541 and a negative net result of R$16,320, respectively (Note 27).

 

a.2) Sensitivity analysis of the Company’s risk variables

CVM Resolution 475/2008 requires listed companies to disclose sensitivity analyses for each type of financial instruments market risk that management believes to be significant at the end of each period, including all derivative financial instrument transactions.

 

Each financial instrument derivative transactions were assessed, and assumptions included a probable base scenario and a further two stressed scenario that could adversely impact the Company.

 

For the probable scenario, at the maturity dates for each of the transactions, the market rates sourced from B3 yield curves (currencies and interest rates) were used plus data from the IBGE, Central Bank, FGV, among others. In the probable scenario, there is no impact on the fair value of the above-mentioned derivatives. For scenarios II and III, as per the CVM rule, risk variables were stressed by 25% and 50% respectively.

 

Since the Company only holds derivatives to hedge its foreign currency assets and liabilities, changing scenarios are tracked by the corresponding hedged items the effects are almost non-existent. For these transactions, the Company reported the consolidated net exposure in each of the above-mentioned three scenarios on June 30, 2022.

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The assumptions used by the Company for the sensitivity analysis on June 30, 2022, were as follows:

For calculation of the net exposure for the sensitivity analysis, all derivatives were considered at market value and hedged items designated for hedges for accounting purposes were also considered at fair value.

 

The fair values shown in the table above are based on the portfolio position on June 30, 2022, but do not reflect an estimate for realization due to the dynamism of the market, which is constantly monitored by the Company. The use of different assumptions could significantly affect the estimates.

 

b) Fair value

The Company and its subsidiaries assessed their financial assets and liabilities in relation to market values using available information and appropriate valuation methodologies. However, both the interpretation of market data and the selection of valuation methods require considerable judgment and reasonable estimates to produce the most adequate realization value. As a result, the estimates shown do not necessarily indicate amounts that could be realized in the current market. The use of different assumptions for the market and/or methodologies may have a material effect on estimated realization values.

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The fair values of all assets and liabilities are classified within the fair value hierarchy described below, based on the lowest level of information that is significant to the fair value measurement as a whole:

 

Level 1: quoted market prices (unadjusted) in active markets for identical assets or liabilities to which the Company and its subsidiaries may have access on the measurement date.

 

Level 2: valuation techniques using lower level of information to measure the fair value directly or indirectly observable; and


Level 3: valuation techniques when lower level of information is not available to measure the fair value.

 

There were no transfers of fair value assessments between these Levels.

 

For the purposes of disclosing fair value, the Company and its subsidiaries determined classes of assets and liabilities based on the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy.

 

The tables below present the composition and classification of financial assets and liabilities on June 30, 2022, and December 31, 2021.

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

c) Capital management

 

The purpose of the Company's capital management is to ensure maintenance of a high credit rating and an optimal capital ratio to support the Company's business and maximize shareholder value.

 

The Company manages its capital structure by making adjustments and adapting to current economic conditions. In seeking such equilibrium, the Company may pay dividends, obtain new loans, issue debentures and contract derivatives. For the quarter ended June 30, 2022, there were no changes in capital structure objectives, policies or processes.

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The Company’s debt structure includes loans, financing, debentures, leases, 5G licenses, contractual retention and contingent consideration arising from the acquisition of Garliava (note 1.c.2) and transactions with derivatives, less cash and cash equivalents, financial investments and accounts receivable for credit rights (FIDC).

 

d) Risk management policy

 

The Company and its subsidiaries are exposed to several market risks as a result of its commercial operations, debts contracted to finance its activities and debt-related financial instruments.

 

d.1) Currency Risk

 

The Company is exposed to the foreign exchange risk for financial assets and liabilities denominated in foreign currencies, which may generate a smaller amount receivable or larger amount payable depending on the exchange rate in the period.

 

Hedging transactions were executed to minimize the risks associated with exchange rate on financial assets and liabilities in foreign currencies. This balance is subject to daily changes due to the dynamics of the business. However, the Company intends to cover the net balance of these assets and obligations (US$31,703 thousand, €15,744 thousand and £66 thousand paid by June 30, 2022, and US$21,129 thousand, €14,124 thousand and £66 thousand paid by December 31, 2021) to mitigate its foreign exchange risks.

 

d.2) Interest and Inflation Risk

 

This risk may arise from an unfavorable change in the domestic interest rate, which may adversely affect financial expenses from the portion of debentures referenced to the CDI and liability positions in derivatives (currency hedge and IPCA) pegged to floating interest rates (CDI).

To reduce exposure to the floating interest rate (CDI), the Company and its subsidiaries invested cash equivalents of R$3,042,314 and R$6,344,942 on June 30, 2022, and December 31, 2021, respectively, mostly in short-term CDI-based financial investments (CDBs). The carrying amounts of these instruments approximate their fair values, as they may be redeemed in the short term.

d.3) Liquidity Risk

 

Liquidity risk consists of the possibility that the Company might not have sufficient funds to meet its commitments due to the different timing and settlement terms of its rights and obligations.

 

The Company structures the maturity dates of non-derivative financial contracts (Note 20), and respective derivatives to avoid optimize liquidity.

 

The Company’s cash flow and liquidity are managed on a daily basis by the operating departments to ensure that cash flows and contracted funding, when necessary, are sufficient to meet scheduled commitments in to mitigate liquidity risk.

 

The maturity profile of consolidated financial liabilities includes future principal and interest amounts up to the maturity date. For fixed rate liabilities, interest was calculated based on the indices established in each contract. For floating rate liabilities, interest was calculated based on the market forecast for each period.

 

d.4) Credit Risk

 

The credit risk arises from the possibility of the Company and its subsidiaries incurring losses due to difficulty in receiving amounts billed to their customers and sales of prepaid handsets and cards that have been pre-activated for the distribution network.

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

The credit risk on accounts receivable is diversified and mitigated by strict control of the customer base. The Company constantly monitors the level of accounts receivable from invoiced services and limits bad credit risk by interrupting telephone services if bills are past due. The mobile customer base predominantly uses the prepaid system, which requires purchase of credits beforehand and therefore does not pose credit risk. Exceptions are made for emergency services that must be maintained for security or national defense.

 

Credit risk on sales of pre-activated prepaid handsets and cards is managed through a prudent policy for granting credit, using modern credit scoring methods, analyzing financial statements and consultations to commercial databases, in addition to requesting guarantees.

 

The Company and its subsidiaries are also subject to credit risk arising from their investments, letters of guarantee received as collateral for certain transactions and receivables from derivative transactions. The Company and its subsidiaries control the credit limits granted to each counterpart and diversify this exposure across first-tier financial institutions as per current credit ratings of financial counterparties.

 

d.5) Environmental Risks

 

The Company's operations and properties are subject to various environmental laws and regulations that govern environmental licenses and registrations, protection of fauna and flora, atmospheric emissions, waste management and remediation of contaminated areas, among others. If the Company is unable to comply with current and future legal requirements, or identify and manage new or existing environmental liabilities, it may incur significant costs, which include investigation and remediation costs, indemnities, compensation, conduct adjustment, fines, suspension of activities and other penalties, investments to improve our facilities or change our operations, as well as reputational damage.

 

The identification of new significant environmental issues, changes in assessment criteria by regulatory agencies, more restrictive laws and regulations or other unforeseen events may result in significant environmental liabilities. The occurrence of any of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. According to article 75 of Law No. 9,605/1998, the maximum fine for non-compliance with the environmental law is R$50,000, plus losses related to embargoes or administrative sanctions, in addition to indemnities and repairs for damages caused to the environment.

 

Climate change poses a series of potential environmental risks for telecommunications operators, such as the Company, both from a regulatory and physical point of view. The increase in the intensity and frequency of extreme precipitation events, cyclones, floods and fires may damage, suspend or interrupt the Company's transmission operations for an indefinite period. If successive serious natural disasters occur, the Company may not have sufficient resources to repair its infrastructure in a timely and cost-effective manner.

 

In a simulation an increase in temperature directly affected the operational conditions of the Company's network equipment, causing failures, accelerated wear and loss of assets and, therefore, increases the risks of service interruptions. Cooling equipment essential for the Company's operation. Therefore, global warming may also increase the need for cooling with higher energy use and operating costs.

 

The telecommunications industry is not heavily reliant on fossil fuels but is very dependent on electricity for its networks. An increase in electricity prices due to scarcity of natural resources could have a significant impact on the Company's operating expenses. The estimated economic impact of this risk classifies it as substantive.

 

To manage climate risks, the Company encourages energy efficiency programs and plans for renewable energy and distributed energy generation. . It also has a dedicated business continuity area, guided by the Global Business Continuity Regulation (“GBC”), which prescribes the preventive risk management, ensuring the resilience of its operations before any possible interruption. The Company manages and monitors environmental risks through annual audits with an external certification body and reports annually in its integrated report.

 

d.6) Risks Relating to the Brazilian Telecommunications Industry and the Company

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

 

The Company's business is subject to extensive regulation, including any regulatory changes that may occur during the terms of the concession agreements and the Company's authorizations to provide telecommunication services in Brazil. ANATEL, oversees, among other matters: industry policies and regulations; licensing (including licensing of spectrum and bidding processes); fees and tariffs; competition, incentives and restrictions (including the Company's ability to grow by acquiring other telecommunications businesses); service, technical and quality standards; consumer rights; penalties and other sanctions related to interconnection and agreements; and obligations related to the universalization of services.

 

The Brazilian telecommunications regulatory framework is continuously evolving. The interpretation and enforcement of regulations, the assessment of compliance with regulations and the flexibility of regulatory authorities are all marked by uncertainty. The Company operates under authorizations and a concession from the Brazilian government, and the ability to maintain these authorizations and concession is a precondition to the Company's success. However, because of the changing nature of the Brazilian regulatory framework, the Company cannot guarantee that ANATEL will not adversely modify the terms of the Company's authorizations and/or licenses. Accordingly, the Company’s operating authorizations and licenses, must meet specific requirements and maintain minimum quality, coverage and service standards. Any failure to comply with these requirements may result in the imposition of fines, penalties and/or other regulatory responses, including the termination of the Company's operating authorizations and concession. Any partial or total termination of any of the Company's operating authorizations and licenses or the Company's concession would have a material adverse effect on the Company's business, financial condition, revenues, results of operations and prospects.

 

In recent years, ANATEL has reviewed and introduced regulatory changes, especially regarding asymmetric competition measures and interconnection fees charged among local providers of telecommunications services. Asymmetric competition measures may include regulations aimed at rebalancing markets where one participant has significantly different market share over other competitors. The adoption of disproportionately asymmetric measures could have a material adverse effect on the Company's business, financial condition, revenues, results of operations and prospects.

 

ANATEL's Regulatory Agenda 2021-2022 contains the revision of the General Plan of Competition Goals - PGMC (Resolution No. 600, of November 8, 2012, updated by Resolution No. 694, of 17 of July 2018) uniting in a single normative instrument a set of measures aimed at promoting competition and milestones for future reassessments on the performance of sectoral competition, four years, with the reassessment of the Relevant Markets in the sector, the asymmetric regulatory measures and the holders of Significant Market Power – PMS previously established by the regulation itself.

 

Complementing the PGMC review, UPI's recent acquisition of the mobile assets of OI MÓVEL S.A. by the three largest operators in the Brazilian SMP market (Vivo, Claro and TIM) (“Operation”), raised competition concerns identified by ANATEL and CADE, which imposed regulatory remedies in order to preserve the conditions of competition in the relevant markets affected by the Operation, among which: (i) Reference Offer in the Relevant National Roaming Market; (ii) Reference Offer for exploring the Personal Mobile Service – SMP through Virtual Network (MVNO); (iii) Offer of Temporary and Onerous Assignment of Radio Frequency Use Rights; (iv) Industrial Network Exploration Offer.

 

Disproportionately asymmetric measures could materially harm the Company's business, financial condition, revenues, results of operations and prospects.

 

Interconnection fees are an important part of the Company's revenue and cost bases. These fees are charged among telecommunications service providers in order to allow and remunerate the interconnected use of their networks. To the extent that changes to the rules governing interconnection fees reduce of fees the Company can receive, or ability to collect such fees, the Company's businesses, financial conditions, revenues, results of operations and prospects could be adversely affected.

 

 

Therefore, the Company's business, results of operations, revenues and financial conditions could be negatively affected by the actions of the Brazilian authorities, including, in particular, the following: the introduction of new or stricter operational and/or service requirements; the granting of operating licenses in the

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

Company’s areas; limitations on interconnection fees the Company may charge to other telecommunications service providers; imposition of significant sanctions or penalties regarding failures to comply with regulatory obligations; delays in the granting of, or the failure to grant, approvals for rate increases; and antitrust limitations imposed by ANATEL and CADE.

 

d.7) Insurance Coverage

 

The policy of the Company and its subsidiaries, as well as the Telefónica Group, is to contract insurance coverage for all assets and liabilities with significant and high-risk amounts, based on Management's judgment and following Telefónica corporate program guidelines.

 

On June 30, 2022, the maximum limits of claims (established pursuant to the agreements of each entity consolidated by the Company) for significant assets, liabilities or interests covered by insurance and their respective amounts were R$900,000 for operational risks (including business interruption) and R$75,000 for general civil liability.

 

The independent auditors' scope of work does not cover reviewing the sufficiency of the insurance coverage, which was determined by the Company's Management and which it considers sufficient to cover potential claims.

 

d.8) Compliance

The Company complies with Brazilian anti-corruption laws and regulations in the jurisdictions in which its securities traded. In particular, the Company is subject, in Brazil, to the Law n 12.846/2013 and, in the United States, to the U.S. Foreign Corrupt Practices Act of 1977.

Although the Company has internal policies and procedures designed to ensure compliance with these anti-corruption laws and regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and regulations) for which the Company may be ultimately held responsible. Violations of anti-corruption laws and regulations could lead to financial penalties, damage to the Company’s reputation or other legal consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition. 

The Company develops and implements initiatives to ensure the continuous improvement of its compliance program, through an organizational and governance structure that guarantees a performance based on ethics, transparency and respect for applicable laws and standards.

32) CONTRACTUAL COMMITMENTS AND GUARANTEES

 

a)   Contractual commitments

 

The Company has unrecognized contractual commitments arising from the purchase of goods and services, which mature on several dates, with monthly payments.

 

On June 30, 2022, the total nominal values equivalent to the full contract period were:

 

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NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

b)   Guarantees

 

On June 30, 2022, the Company had guarantees for several commitments with ANATEL, suppliers and legal proceedings:

33) SUPPLEMENTAL CASH FLOW INFORMATION

 

The following is a reconciliation of the consolidated cash flow financing activities for the quarters ended June 30, 2022, and 2021.

 

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NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

34) SUBSEQUENT EVENTS

 

7th Issue of the Company's debentures

 

On July 14, 2022, the payment of the 7th issue of the Company's debentures, in two series, of the unsecured type, in the total par value of R$3,500,000, was completed and the settlement of the respective public offering was concluded with restricted efforts.

 

• The 1st series, in the nominal amount of R$1,500,000, bears interest at CDI + 1.12% p.a. Interest will be paid in semiannual installments as of January 12, 2023 and the principal will mature on July 12 of 2025.

 

• The 2nd series, in the nominal amount of R$2,000,000, bears interest at CDI + 1.35% p.a. Interest will be paid in semiannual installments as of January 12, 2023 and the principal will mature on July 12 of 2027.

 

The debentures have a sustainability component (Debentures linked to Environmental, Social and Corporate Governance ("ESG") performance, classifying them as "sustainability-linked", under the terms of the International Capital Market Association in the Sustainability-Linked Bond Principles, June 2020 release.

 

 

 

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Telefônica Brasil S. A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED QUARTERLY INFORMATION

Three and six-month periods ended June 30, 2022

(In thousands of Reais, unless otherwise stated)

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

TELEFÔNICA BRASIL S.A.

Date:

August 15, 2022

 

By:

/s/ João Pedro Carneiro

 

 

 

 

Name:

 João Pedro Carneiro

 

 

 

 

Title:

Investor Relations Director