Procaps S A : and subsidiaries (The Group) - Form 6-K

December 26, 2023 at 10:29 pm

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income
For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

		For the three months ended September 30			For the nine months ended September 30
	Notes	2023			2022			2023		2022
Revenue	5	$	118,410			$	110,403		$	312,629		$	308,453
Cost of sales			(50,007	)			(42,845	)		(136,976	)		(121,139	)
Gross profit			68,403				67,558			175,653			187,314

Sales and marketing expenses			(29,440	)			(25,875	)		(71,608	)		(71,697	)
Administrative expenses			(25,779	)			(24,337	)		(72,500	)		(77,737	)
Finance (expenses) income, net	7		(2,968	)			22,748			(8,099	)		18,539
Other income (expenses), net	8		1,218				(9,706	)		34,803			(13,209	)
Income before tax			11,434				30,388			58,249			43,210

Income tax expense	9		(3,235	)			(7,808	)		(16,475	)		(11,104	)
Income for the period		$	8,199			$	22,580		$	41,774		$	32,106

Income for the period attributable to:
Owners of the Company			8,194				22,580			41,769			32,106
Non-controlling interests			5				-			5			-

Earnings per share:
Basic and diluted, income for the period attributable to ordinary equity holders of the Company (USD) ¹			0.08				0.22			0.41			0.32

The Group reports net earnings per share in accordance with IAS 33 - Earnings Per Share. Basic income per share is calculated by dividing the income attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the period. No dilutive effect has been identified for the three and nine months ended September 30, 2023 and 2022. The weighted average number of ordinary shares used as the denominator in calculating basic earnings per share for the three and nine months ended September 30, 2023 and 2022 is 101,051,020 and 101,109,572, respectively.

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

	For the three months ended September 30			For the nine months ended September 30
	2023			2022			2023		2022
Income for the period	$	8,199			$	22,580		$	41,774		$	32,106

Other comprehensive income/(loss)
Items that will not be reclassified to profit or loss:
Remeasurement of net defined benefit liability		(69	)			-			(152	)		-
Items that will be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations		113				(3,513	)		3,137			(4,279	)
Net investment hedge		(1,010	)			-			(3,482	)		-
Other comprehensive income/(loss) for the period		(966	)			(3,513	)		(497	)		(4,279	)
Total comprehensive income for the period	$	7,233			$	19,067		$	41,277		$	27,827

Total comprehensive income/(loss) for the period attributable to:
Owners of the Company		7,228				19,077			41,272			27,827
Non-controlling interests		5				(10	)		5			-

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Statement of Financial Position

As of September 30, 2023 and December 31, 2022

(In thousands of United States Dollars, unless otherwise stated)

	Notes	As of September 30, 2023			As of December 31, 2022
Assets
Non-current assets
Property, plant and equipment, net	11		97,194				73,965
Right-of-use assets, net			40,163				39,013
Goodwill			5,790				5,791
Intangible assets, net	10		41,315				32,208
Investments in joint ventures			2,028				1,505
Other financial assets			4,127				210
Deferred tax assets, net			7,398				6,974
Other assets			2,185				3,078
Total non-current assets		$	200,200			$	162,744
Current assets
Cash			17,558				43,003
Trade and other receivables, net	13		143,050				129,602
Inventories, net	12		98,242				96,833
Amounts owed by related parties, net			2,158				2,474
Current tax assets, net			25,662				21,187
Other current assets			3,411				4,344
Other financial assets			8,273				-
Total current assets		$	298,354			$	297,443
Total assets		$	498,554			$	460,187

Liabilities and Stockholders' Equity (Deficit)
Equity (Deficit)
Share capital			1,011				1,011
Share premium			377,677				377,677
Reserves			49,288				45,743
Accumulated deficit			(354,234	)			(391,513	)
Accumulated other comprehensive loss			(34,356	)			(33,859	)
Equity (deficit) attributable to owners of the company		$	39,386			$	(941	)
Non-controlling interest			(932	)			(937	)
Total equity (deficit)		$	38,454			$	(1,878	)
Non-Current liabilities
Borrowings	14		220,682				28,410
Warrant liabilities	16		2,861				10,916
Shares held in escrow	17		23,312				40,064
Deferred tax liabilities, net			3,373				7,821
Other liabilities			6,942				6,480
Total non-current liabilities		$	257,170			$	93,691
Current liabilities
Borrowings	14		69,238				257,525
Derivative financial liabilities			3,114				-
Trade and other payables			89,759				90,187
Amounts owed to related parties			4,122				2,914
Current tax liabilities, net			23,619				6,133
Provisions	15		138				138
Other liabilities			12,940				11,477
Total current liabilities		$	202,930			$	368,374
Total liabilities and stockholders' equity (deficit)		$	498,554			$	460,187

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Statement of Changes in Equity

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

	Attributable to equity holders of the Group
	Issued Capital		Share premium			Treasury shares reserve ¹		Reserves ²		Accumulated deficit		Other Comprehensive Income			Total		Non- controlling interest		Total equity (deficit)
Balance as of January 1, 2022	$	1,011		$	377,677		$	-		$	42,749		$	(431,059	)	$	(27,778	)	$	(37,400	)	$	(940	)	$	(38,340	)
Income for the period		-			-			-			-			32,106			-			32,106			-			32,106
Transfer reserves		-			-			-			2,994			(2,994	)		-			-			-			-
Other comprehensive income		-			-			-			-			-			(4,279	)		(4,279	)		-			(4,279	)
Balance as of September 30, 2022	$	1,011		$	377,677		$	-		$	45,743		$	(401,947	)	$	(32,057	)	$	(9,573	)	$	(940	)	$	(10,513	)

Balance as of January 1, 2023		1,011			377,677			-			45,743			(391,513	)		(33,859	)		(941	)		(937	)		(1,878	)
Income for the period		-			-			-			-			41,769			-			41,769			5			41,774
Transfer reserves		-			-			-			4,495			(4,495	)		-			-			-			-
Other comprehensive income		-			-			-			-			-			(497	)		(497	)		-			(497	)
Non-controlling interest		-			-			-			-			5			-			5			-			5
Treasury shares acquired		-			-			(950	)		-			-			-			(950	)		-			(950	)
Balance as of September 30, 2023		1,011			377,677			(950	)		50,238			(354,234	)		(34,356	)		39,386			(932	)		38,454

¹	Comprises the cost of the Company's shares held by the Group. As of September 30, 2023, the Group held 235,406 of the Company's shares.

²	Includes the appropriate values from net income to comply with legal provisions related to asset protection according to applicable jurisdictions with cumulative earnings.

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

Procaps Group, S.A. and subsidiaries (The Group)

Unaudited Condensed Consolidated Interim Statement of Cash Flows

For the nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

		For the nine months ended September 30
	Notes	2023			2022
Operating activities
Income for the period		$	41,774			$	32,106
Adjustments to reconcile net income with cash flow from operating activities before changes in working capital:
Depreciation of property, plant and equipment	11		4,196				4,481
Depreciation of right-of-use assets			4,671				4,539
Amortization of intangibles	10		4,136				3,365
Income tax expense	9		16,475				11,104
Finance expenses, net	7		8,099				(18,539	)
Unrealized currency exchange rate differences			(15,178	)			-
Share of result of joint ventures			(503	)			239
Net loss (gain) on sale and disposal of property, plant and equipment	11		48				(503	)
Net loss on disposal of intangibles	10		51				-
Inventory provision	12		8,446				2,475
Provision for bad debt	13		1,878				1,830
Provisions	15		90				9
Cash flow from operating activities before changes in working capital			74,183				41,106

Changes in working capital:
Trade and other receivables, net			(3,729	)			(13,020	)
Amounts owed by related parties, net			1,325				(1,555	)
Inventories, net			5,254				(22,851	)
Current tax assets, net			(1,440	)			(10,073	)
Other current assets			928				(5,803	)
Trade and other payables			11,407				32,800
Amounts owed to related parties			563				1,637
Current tax liabilities, net			1,259				(1,625	)
Other liabilities			271				7,573
Provisions	15		(99	)			(408	)
Other financial assets			(12,190	)			36
Other assets			1,233				83
Cash generated from operations			78,965				27,900

Interest paid			(2,565	)			(1,261	)
Income tax paid			(5,468	)			(4,589	)
Cash flow provided by operating activities		$	70,932			$	22,050

Investing activities
Acquisition of property, plant and equipment	11		(11,421	)			(15,293	)
Proceeds from sale of property, plant and equipment			-				2,653
Acquisition of intangibles	10		(8,979	)			(7,757	)
Advances to related parties			-				(138	)
Proceeds from related parties			29				-

Cash flow used in investing activities		$	(20,371	)		$	(20,535	)

Financing activities
Proceeds from borrowings	14		69,742				77,253
Payments on borrowings	14		(112,470	)			(97,290	)
Payments to related parties			-				(6,625	)
Interest paid on borrowings	14		(24,569	)			(10,028	)
Payment of lease liabilities	14		(4,866	)			(4,858	)
Repurchase of treasury shares			(950	)			-
Payments of derivative financial liabilities			(368	)			-

Cash flow used in financing activities		$	(73,481	)		$	(41,548	)

Net decrease in cash			(22,920	)			(40,033	)
Cash at beginning of the period			43,003				72,112
Effect of exchange rate fluctuations			(2,525	)			(4,864	)
Cash at end of the period		$	17,558			$	27,215
Non-cash financing and investing activities ¹		$	43,924			$	42,328

Non-cash investing and financing activities include new lease liabilities $2,365 (for the nine months ended September 30, 2022: $8,793), invoices from suppliers financed via reverse factoring classified as Trade and other payables $5,283 (for the nine months ended September 30, 2022: $3,427), invoices from suppliers financed via reverse factoring classified as Borrowings $33,162 (for the nine months ended September 30, 2022: $30,108) and derivative financial liabilities $3,114 (for the nine months ended September 30, 2022: $0).

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 1. General Company Information

Procaps Group, S.A, (the "Company"), a public limited liability company (société anonyme) governed by the laws of the Grand Duchy of Luxembourg and its subsidiaries (collectively "the Group") primarily engages in developing, producing, and marketing pharmaceutical solutions. Further information about the Group's business activities, reportable segments and key management personnel of the Group is included in Note 5. Revenue, Note 6. Segment reporting and Note 19. Key management personnel, respectively.

The Group's principal subsidiaries as of September 30, 2023 and December 31, 2022, are set out below. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business.

	Place of	Ownership interests held by:
	business/country	The Group			Non-controlling interests
Name of entity	of incorporation	2023			2022		2023	2022		Principal activities
Procaps S.A.	Colombia		100	%		100	%	-	%		-	%	Manufacturing and distribution of prescription and over-the-counter pharmaceutical products.
C.I. Procaps S.A.	Colombia		100	%		100	%	-	%		-	%
Procaps S.A. de C.V	El Salvador		100	%		100	%	-	%		-	%
Softcaps - Colbras	Brazil		100	%		100	%	-	%		-	%
Diabetrics Healthcare S.A.S.	Colombia		100	%		100	%	-	%		-	%	Diabetes solutions and chronic disease management tool.

There are no significant restrictions on the ability of the Group to access or use assets to settle liabilities.

The Unaudited Condensed Consolidated Interim Financial Statements of the Group for the three and nine months ended September 30, 2023 and 2022 comprise the Group and its interest in joint ventures, investments and operations.

The Unaudited Condensed Consolidated Interim Financial Statements are presented in USD (the Group's presentation currency) and all amounts are rounded to the nearest thousands of USD, unless otherwise stated.

Emerging Growth Company Status

The Group is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The Group will remain an emerging growth company until the earliest of:

●

The last day of the first fiscal year (a) following the fifth anniversary of a public equity offering, (b) in which its annual gross revenue totals at least $1.07 billion or (c) when the Group is deemed to be a large, accelerated filer, which means the market value of the Group's ordinary shares held by non-affiliates exceeds $700.0 million as of the prior September 30th; and

●	The date on which the Group has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Ongoing Military Operation in Ukraine and Related Sanctions

The ongoing military operation in Ukraine and the related sanctions targeted against the Russian Federation have disrupted international commerce and the global economy. In 2023, a subsidiary of the Group located in Colombia entered into a standard, arms-length commercial agreement with a Russian entity and began the sale and shipment of goods to Russia, which is permissible under the current US sanctions to Russia as established by the Office of Foreign Assets Control (OFAC). The Group does not hold any investments or assets in Russia and the sales to Russia for the nine months ended September 30, 2022 represent less than 1% of the total sales of the Group. The Group performed an initial compliance diligence before engaging in transactions and as of September 30, 2023, management evaluated if any risk associated with these transactions existed and concluded that there were no financial or any other risks identified. The Group does not have any other direct exposure to Ukraine, Russia or Belarus considering there are not any additional existing operations or sales in those locations, but management will continue to monitor new implementations of US restrictions and prohibitions related to transactions with Russia.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The duration and severity of the effects on the Group and the global economy are inherently unpredictable. Management will continue to monitor the effects of the war in Ukraine and its potential further impacts, including global supply chain disruptions, inflation, and rising interest rates, when making certain estimates and judgments relating to the preparation of the Unaudited Condensed Consolidated Interim Financial Statements of the Group.

Grupo Somar and Pearl Mexico Acquisition

Refer to the last annual Consolidated Financial Statements as of and for the year ended December 31, 2022 (the "last annual financial statements") for background information on the Acquisition of Grupo Somar and Pearl Mexico. Following the failure of the transaction to close on December 31, 2022, the Group provided the sellers a formal notice on January 1, 2023 terminating the Stock Purchase Agreement (the "SPA") in accordance with the terms thereof.

Bridge Loan Credit Agreement

Following the Group's termination of the SPA, the Group advised the joint arrangers and book runners on January 1, 2023 of its desire to terminate the transaction documents (including, without limitation, the commitments under the bridge credit agreement and, for the avoidance of doubt, any commitments under the commitment letter) and pay all outstanding obligations, amounting to $5,719, under the bridge credit agreement and any other transaction document as of January 10, 2023.

Note 2. Basis of preparation and accounting

These Unaudited Condensed Consolidated Interim Financial Statements of the Group as of September 30, 2023 have been prepared on a going concern basis, and in accordance with IAS 34 Interim Financial Reporting, and should be read in conjunction with the last annual financial statements. They do not include all of the information required for a complete set of financial statements prepared in accordance with IFRS Standards. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual financial statements.

These Unaudited Condensed Consolidated Interim Financial Statements were authorized for issue by the Group's Audit Committee on December 26, 2023.

Note 2.1. Going concern

Management identified the following events and conditions which cast significant doubt on the Group's ability to continue as a going concern:

As of December 31, 2022, the Group was in breach of certain of the covenants included under the Note Purchase Agreement ("NPA"), the Syndicated Loan Agreement and the BTG Credit Agreement. Refer to the last annual financial statements for further details regarding the breach of each covenant. Although none of the lenders declared an event of default under the applicable agreements, these breaches resulted in the lenders having the right to require immediate repayment of the applicable indebtedness and as a result, the Group classified the respective indebtedness, amounting to $139,155 in the aggregate, to current liabilities as of December 31, 2022.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

On March 28, March 31 and May 2, 2023 the Group obtained Waiver Agreements ("Waivers" or "Waiver") from each lender under the NPA, the Syndicated Loan Agreement and the BTG Credit Agreement for the applicable covenant breaches. Under the terms of the Waivers, the lenders permanently waived their rights to accelerate the repayment of the loans related to the events of default as of December 31, 2022. In addition, the Group executed Waivers with the lenders to adjust the applicable covenant ratios for the periods ending March 31, June 30, and September 30, 2023, if applicable, as noted further within Note 14. Borrowings. For the period ending December 31, 2023, the applicable covenant ratios in the original borrowing arrangements are unmodified.

On June 30, 2023, the Group obtained an Additional Waiver under the NPA (the "Additional Waiver") in anticipation of a potential breach of the Indebtedness Indicator and EBITDA Interest Coverage ratios contained within the March 31, 2023 Waiver. The Additional Waiver with the lenders adjusts the Indebtedness Indicator and EBITDA Interest Coverage ratios for the periods ended June 30, and September 30, 2023, as further noted within Note 14. Borrowings.

Working capital

As of September 30, 2023, the Group had a net working capital surplus (excess of current assets over current liabilities) of $95,424 (working capital deficit of $70,931 as of December 31, 2022).

Management's assessment

Management assessed the Group's cash flow projections, ability to meet future covenants and other measures of liquidity for the next twelve months from the balance sheet date. Based on the Group's cash flow projections and adjusted financial covenant ratios as a result of the Waivers and Additional Waiver, Management believes they will have sufficient funds to repay their obligations as they fall due and to meet its financial covenants. However, due to the uncertainty caused by current economic conditions, including recent growth in inflation, increased interest rates, volatility in foreign exchange rates and industry price regulations, there is material uncertainty regarding the Group's ability to meet its financial covenants. The Group's failure to comply with such financial covenants would result in an event of default, which if that were to occur would materially and adversely affect the Group's business, financial condition, liquidity and results of operations. In that event, the Group would seek additional waivers or alternative financing arrangements. As a result of these material uncertainties, Management concluded the above conditions and events raise significant doubt about the Group's ability to continue as a going concern.

Management has implemented or is in the process of implementing the following plans to mitigate the effect of these events and conditions:

Cost saving and revenue growth

The Group has implemented certain measures with an aim to reduce its operating costs and generate additional revenue in 2023 including: 1) strict controlling and reducing business marketing and advertising expenses; 2) reducing headcount across multiple business units; and 3) focus on increasing sales volumes for core products and sell trademarks and sanitary records to generate additional revenue.

Renegotiation of existing loans

On August 16, 2023, the Group successfully renegotiated the terms of the Syndicated Loan Agreement with Bancolombia and Davivienda, which extends the maturity date until 2029. In addition, on August 18, 2023, the Group renegotiated their short-term loan with BTG into a thirty-month loan. Refer to Note 14. Borrowings for further details regarding these renegotiated loans. The Group has the ability to further renegotiate existing loans to maintain and meet its liquidity needs and requirements. However, the Group's ability to renegotiate with its lenders is not within the Group's control. As of the date of these Unaudited Condensed Consolidated Interim Financial Statements, the Group cannot assure that it will be able to reach an agreement with its lenders, or to waive any potential non-compliance.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Additional measures

If the effect of the above actions does not continue to generate sufficient liquidity for the Group to meet its contractual obligations, Management has identified additional measures which could be implemented to further reduce costs and increase total revenues in order to provide sufficient cash flow to meet obligations as they fall due including: 1) reduce discretionary spending on research and development, marketing and capital expenditures; 2) sell additional trademarks and sanitary records; and 3) further reduce headcount.

Summary

Management has evaluated the Group's capital position, its ability to continue in the normal course of business for the foreseeable future and ability to meet its financial obligations for the next twelve months from the balance sheet date. While Management believes that their cost savings, revenue growth, and loan renegotiation will allow the group to be able to meet its financial obligations and finance its growth, there is no assurance that these plans can be successfully implemented to generate the liquidity required to meet the Group's need. Failure to successfully implement these plans may have a material adverse effect on the Group's business, results of operations and financial position, and may materially adversely affect its ability to continue as a going concern. As a result, Management concluded there is material uncertainty related to the events and conditions noted above that cast significant doubt on the entity's ability to continue as a going concern.

However, Management believes that the Group will be successful in implementing the above plan and, accordingly, have prepared the Unaudited Condensed Consolidated Interim Financial Statements on a going concern basis. As a result, the Unaudited Condensed Consolidated Interim Financial Statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Group be unable to continue as a going concern.

Note 3. Summary of significant accounting policies

Note 3.1. Change in accounting policy

Except as described below, the accounting policies applied in these Unaudited Condensed Consolidated Interim Financial Statements are the same as those applied in the Group's last annual financial statements.

The policy for recognizing and measuring income taxes in the interim periods is consistent with that applied in the previous interim period and is described in Note 9. Income tax.

Note 3.1.1. Derivative financial instrument and hedge accounting

Derivative financial instruments are initially measured at fair value. Subsequent to initial recognition, they are measured at fair value, and changes therein are generally recognized in profit or loss.

The Group designates certain derivatives as hedging instruments to hedge foreign currency exposure related to net investments in foreign operations. At the inception of the hedge relationship, the Group documents the economic relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking the hedge.

Hedges of net investments in foreign operations

When a derivative instrument or a non-derivative financial liability is designated as the hedging instrument in a hedge of a net investment in a foreign operation, the effective portion of changes in the fair value of a derivative or foreign exchange gains and losses for a non-derivative is recognized as Exchange differences on translation of foreign operations in Other Comprehensive Income and presented under such concept within Equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the 'Other income (expense), net' line item. Gains and losses on the hedging instrument accumulated in Other Comprehensive Income are reclassified to profit or loss on the disposal or partial disposal of the foreign operation.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 3.2. New and amended IFRS Standards that are effective for the current period

Certain new accounting standards, interpretations or amendments to accounting standards are effective for annual periods beginning after January 1, 2023. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective in the preparation of these Unaudited Condensed Consolidated Interim Financial Statements.

The Group adopted the following accounting standard amendments from January 1, 2023. The evaluation performed by management determined that these amendments did not result in a significant impact in relation to the Group's Unaudited Condensed Consolidated Interim Financial Statements.

Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) - Effective January 1, 2023

The amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements provide guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for entities to disclose their 'significant' accounting policies with a requirement to disclose their 'material' accounting policies and adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures.

The amendments had no impact on the Group's Unaudited Condensed Consolidated Interim Financial Statements, but are expected to affect the accounting policy disclosures in the Group's annual Consolidated Financial Statements.

Definition of Accounting Estimate (Amendments to IAS 8) - Effective January 1, 2023

The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. The distinction between the two is important because changes in accounting policies are applied retrospectively, whereas changes in accounting estimates are applied prospectively.

The Group has determined the amendment has no significant impact in its Unaudited Condensed Consolidated Interim Financial Statements.

Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction - Amendments to IAS 12 Income Taxes - Effective January 1, 2023

The amendments to IAS 12 Income Tax narrow the scope of the initial recognition exception, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences such as leases and decommissioning liabilities. The amendments had no impact on the Group's Unaudited Condensed Consolidated Interim Financial Statements.

Global minimum top-up tax - Amendments to IAS 12 Income Taxes - Effective December 31, 2023

The Group has not adopted International Tax Reform- Pillar Two Model Rules- Amendments to IAS 12 upon their release on 23 May 2023. The amendments provide a temporary mandatory exemption from deferred tax accounting for top-up tax, which is effective immediately, and require new disclosures about the Pillar Two exposure from December 31, 2023. The mandatory exemption applies retrospectively. However, because no new legislation to implement the top-up tax was enacted or substantively enacted as of December 31, 2022, in any jurisdiction in which the Group operates and no related deferred taxes were recognized at that date, the retrospective application has no impact on the Group's Unaudited Condensed Consolidated Interim Financial Statements..

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

This Amendment, which modified IAS 12 - Income Taxes, applies to income taxes arising from tax legislation enacted to implement the rules of the Pillar I and II model published by the Organization for Economic Cooperation and Development (OECD). The rules of this model ensure that large multinational companies are subject to a minimum tax rate of 15%. The minimum tax is calculated based on financial accounting standards and is based on two main components: profits and taxes paid. The Amendment grants companies temporary relief from accounting for deferred taxes arising from the Organization for Economic Cooperation and Development (OECD) international tax reform.

It may be applicable for annual periods beginning on or after January 2023, but not for interim periods ending on or before December 31, 2023.

Note 4. Critical accounting judgements and key sources of estimation uncertainty

In preparing these Unaudited Condensed Consolidated Interim Financial Statements, management has made judgments, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily observable in other sources. The estimates and underlying assumptions are based on historical experience and other relevant factors. Actual results may differ from these estimates.

The significant judgements made by Management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the Group's last annual financial statements.

Note 5. Revenue

The Group recognizes its revenues from the transfer of goods and services to the fulfillment of its performance obligations. The Group's revenue for the three and nine months ended September 30, 2023 includes $806 and $2,885 (For the three and nine months ended September 30, 2022: $2,585 and $11,433) in revenue recognized from intellectual property licensing and dossier generation.

Disaggregation of revenue from contracts with customers

Revenue from contracts with customers is disaggregated by primary geographical market and major products (refer to Note 6. Segment reporting) and by timing of revenue recognition in the table below.

	Reportable segments
Three months ended September 30, 2023		NextGel			Procaps Colombia		CAN	CASAND		Diabetrics			Total

Segment revenue			66,800			39,254		23,357			25,976			12,101		167,488
Inter-segment revenue			(32,210	)		(145	)	(7,570	)		(4,053	)		(5,100	)	(49,078	)
Revenue from contracts with customers			34,590			39,109		15,787			21,923			7,001		118,410

Timing of revenue recognition
Goods transferred at a point in time			33,784			39,109		15,787			21,923			7,001		117,604
Services transferred over time			806			-		-			-			-		806
Total revenue from contracts with customers			34,590			39,109		15,787			21,923			7,001		118,410

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

	Reportable segments
For the three months ended September 30, 2022		NextGel			Procaps Colombia		CAN	CASAND		Diabetrics			Total

Segment revenue			68,373			38,020		23,564			22,311			6,770		159,038
Inter-segment revenue			(31,939	)		(1,179	)	(9,122	)		(4,599	)		(1,796	)	(48,635	)
Revenue from contracts with customers			36,434			36,841		14,442			17,712			4,974		110,403

Timing of revenue recognition
Goods transferred at a point in time			33,754			36,911		14,442			17,737			4,974		107,818
Services transferred over time			2,680			(70	)	-			(25	)		-		2,585
Total revenue from contracts with customers			36,434			36,841		14,442			17,712			4,974		110,403

	Reportable segments
For the nine months ended September 30, 2023		NextGel			Procaps Colombia		CAN	CASAND		Diabetrics			Total

Segment revenue			174,232			107,088		56,975			70,970			28,861		438,126
Inter-segment revenue			(82,701	)		(380	)	(17,809	)		(12,008	)		(12,599	)	(125,497	)
Revenue from contracts with customers			91,531			106,708		39,166			58,962			16,262		312,629

Timing of revenue recognition
Goods transferred at a point in time			88,646			106,708		39,166			58,962			16,262		309,744
Services transferred over time			2,885			-		-			-			-		2,885
Total revenue from contracts with customers			91,531			106,708		39,166			58,962			16,262		312,629

	Reportable segments
For the nine months ended September 30, 2022		NextGel			Procaps Colombia		CAN	CASAND		Diabetrics			Total

Segment revenue			191,411			110,822		61,086			61,502			26,507		451,328
Inter-segment revenue			(96,717	)		(2,528	)	(18,539	)		(14,128	)		(10,963	)	(142,875	)
Revenue from contracts with customers			94,694			108,294		42,547			47,374			15,544		308,453

Timing of revenue recognition
Goods transferred at a point in time			87,285			106,956		40,288			46,947			15,544		297,020
Services transferred over time			7,409			1,338		2,259			427			-		11,433
Total revenue from contracts with customers			94,694			108,294		42,547			47,374			15,544		308,453

Revenue recognized from goods transferred at a point in time include revenues related to "sales of goods" and "sales of trademarks and sanitary provisions". Revenue recognized from services transferred over time include revenues related to "intellectual property licensing" and "dossier generation". Revenues, other than sales of goods, are not material to the group.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 6. Segment reporting

Segment information is presented at a combination of geographical segments and business units, consistent with the information that is available and evaluated regularly by the chief operating decision maker.

The Group operates its business through five segments which are its reportable segments for financial reporting purposes: Procaps Colombia, Central America North ("CAN"), Central America South and North Andes ("CASAND"), NextGel and Diabetrics. Segment management, the respective Vice Presidents, are responsible for managing performance, underlying risks and operations. Management uses a broad set of performance indicators to measure segment performance and to make decisions around resource allocation.

The Group's customer revenue recognition (external revenue) policy has been consistent with inter-segment revenue generated.

	NextGel		Procaps Colombia		CAN	CASAND
Three months ended September 30, 2023	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations		External		Total	Inter- segment eliminations	External		Total		Inter- segment eliminations	External
Revenue		66,800		(32,210	)	34,590		39,254		(145	)	39,109		23,357		(7,570	)	15,787	25,976	(4,053	)	21,923
Contribution margin ¹		13,571		(192	)	13,379		9,065		(38	)	9,027		3,214		(421	)	2,793	9,151	4,175		13,326

	Diabetrics		Corporate		Total
Three months ended September 30, 2023	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations			External		Total	Inter- segment eliminations		External
Revenue		12,101		(5,100	)	7,001		-			-		-			167,488		(49,078	)	118,410
Contribution margin ¹		832		(514	)	318		(101	)		221		120			35,732		3,231		38,963
Administrative expenses		-		-		-		25,779			-		25,779			25,779		-		25,779
Finance expenses		-		-		-		2,968			-		2,968			2,968		-		2,968
Other (income) expenses, net		-		-		-		(1,218	)		-		(1,218	)		(1,218	)	-		(1,218	)
Income (loss) before tax																8,203		3,231		11,434

	NextGel		Procaps Colombia		CAN	CASAND
Three months ended September 30, 2022	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations		External		Total	Inter- segment eliminations	External		Total		Inter- segment eliminations	External
Revenue		68,373		(31,939	)	36,434		38,020		(1,179	)	36,841		23,564		(9,122	)	14,442	22,311	(4,599	)	17,712
Contribution margin ¹		16,605		(644	)	15,961		12,605		1		12,606		5,051		(1,854	)	3,197	3,523	4,535		8,058

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

	Diabetrics		Corporate		Total
Three months ended September 30, 2022	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations			External		Total	Inter- segment eliminations		External
Revenue		6,770		(1,796	)	4,974		-			-		-			159,038		(48,635	)	110,403
Contribution margin ¹		1,834		23		1,857		(2,666	)		2,670		4			36,952		4,731		41,683
Administrative expenses		-		-		-		24,337			-		24,337			24,337		-		24,337
Finance (income) expenses		-		-		-		(22,748	)		-		(22,748	)		(22,748	)	-		(22,748	)
Other (income) expenses, net		-		-		-		9,706			-		9,706			9,706		-		9,706
Income (loss) before tax																25,657		4,731		30,388

	NextGel		Procaps Colombia		CAN	CASAND
Nine months ended September 30, 2023	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations		External		Total	Inter- segment eliminations	External		Total		Inter- segment eliminations	External
Revenue		174,232		(82,701	)	91,531		107,088		(380	)	106,708		56,975		(17,809	)	39,166	70,970	(12,008	)	58,962
Contribution margin ¹		35,135		(1,784	)	33,351		29,458		(105	)	29,353		10,481		949		11,430	17,669	12,327		29,996

	Diabetrics		Corporate		Total
Nine months ended September 30, 2023	Total		Inter- segment eliminations		External	Total		Inter- segment eliminations			External		Total	Inter- segment eliminations		External
Revenue		28,861		(12,599	)	16,262			-			-		-			438,126		(125,497	)	312,629
Contribution margin ¹		820		(934	)	(114	)		(14,176	)		14,205		29			79,387		24,658		104,045
Administrative expenses		-		-		-			72,500			-		72,500			72,500		-		72,500
Finance expenses		-		-		-			8,099			-		8,099			8,099		-		8,099
Other (income) expenses, net		-		-		-			(34,803	)		-		(34,803	)		(34,803	)	-		(34,803	)
Income (loss) before tax																	33,591		24,658		58,249

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

	NextGel		Procaps Colombia		CAN	CASAND
Nine months ended September 30, 2022	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations		External		Total	Inter- segment eliminations	External		Total		Inter- segment eliminations	External
Revenue		191,411		(96,717	)	94,694		110,822		(2,528	)	108,294		61,086		(18,539	)	42,547	61,502	(14,128	)	47,374
Contribution margin ¹		52,380		(8,715	)	43,665		37,310		156		37,466		14,096		(2,505	)	11,591	9,560	10,345		19,905

	Diabetrics		Corporate		Total
Nine months ended September 30, 2022	Total		Inter- segment eliminations		External	Total	Inter- segment eliminations			External		Total	Inter- segment eliminations		External
Revenue		26,507		(10,963	)	15,544		-			-		-			451,328		(142,875	)	308,453
Contribution margin ¹		3,266		(70	)	3,196		(729	)		523		(206	)		115,883		(266	)	115,617
Administrative expenses		-		-		-		77,737			-		77,737			77,737		-		77,737
Finance (income) expenses		-		-		-		(18,539	)		-		(18,539	)		(18,539	)	-		(18,539	)
Other (income) expenses, net		-		-		-		13,209			-		13,209			13,209		-		13,209
Income (loss) before tax																43,476		(266	)	43,210

¹	Contribution margin is determined by subtracting sales and marketing expenses from gross profit. The Group's customer revenue recognition (external revenue) policy has been consistent with inter-segment revenue generated.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Major customer

The Group does not have revenue from a single customer comprising more than ten percent of its consolidated revenue.

Geographical information

In presenting geographical information, the Group's revenue is based on the geographical location of the customers.

	For the three months ended September 30		For the nine months ended September 30
	2023		2022			2023		2022
South America	$	78,429		$	73,514		$	213,533	$	206,670
Central America		24,370			22,101			63,850		64,647
North America		12,877			11,870			29,439		29,174
Europe		2,734			2,918			5,807		7,962
Total	$	118,410		$	110,403		$	312,629	$	308,453

Seasonality of operations

The Group has been subject to normal seasonal fluctuations that generate less income during the first half of the year. In general, there are no significant variations on sales to customers throughout the year.

Cease of operation of a subsidiary of the Group

On September 5, 2023, the Group ceased its Rymco operations, which is part of its Procaps Colombia segment. For the nine months ended September 30, 2023, Rymco contributed to the results of the Group $1,767 of revenue (for the nine months ended September 30, 2022: $5,592), $4,470 of sales and marketing expenses (for the nine months ended September 30, 2022: $936) and $6,512 of net loss before tax (for the nine months ended September 30, 2022: $2,423).

Note 7. Finance expenses, net

	For the three months ended September 30			For the nine months ended September 30
	2023			2022			2023		2022
Banking expenses	$	(313	)		$	(187	)	$	(1,099	)	$	(561	)
Bank fees		(570	)			(161	)		(1,072	)		(572	)
Other financial expenses¹		(3	)			(353	)		(615	)		(782	)
Net fair value gain/(loss) of warrant liabilities²		1,600				1,151			8,056			1,787
Net fair value gain/(loss) of shares held in escrow²		7,087				28,583			16,752			36,315
Interest expense		(10,769	)			(6,285	)		(30,121	)		(17,648	)
Total	$	(2,968	)		$	22,748		$	(8,099	)	$	18,539

¹	For the three and nine months ended September 30, 2023, interest on lease liabilities amounted to $3 and $615 (for the three and nine months ended September 30, 2022: $353 and $782).

²	Refer to Note 16. Warrant liabilities, Note 17. Shares in escrow and Note 18. Financial instruments for further information related to net fair value gains for the nine months ended September 30, 2023.

Net fair value gains recognized in Finance expenses, net for the three and nine months ended September 30, 2023 and 2022 are unrealized.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 8. Other income (expenses), net

	For the three months ended September 30			For the nine months ended September 30
	2023			2022			2023		2022
Currency exchange rate differences¹	$	2,480			$	(9,000	)	$	16,874		$	(12,188	)
Economic emergency contribution expenses		(334	)			(322	)		(971	)		(1,002	)
Fines, surcharges, penalties and taxes assumed		(135	)			(131	)		(255	)		(226	)
Donations		(472	)			(100	)		(787	)		(273	)
Other²		(321	)			(153	)		19,942			480
Total	$	1,218			$	(9,706	)	$	34,803		$	(13,209	)

The increase in currency exchange rate differences income (expense) for the three and nine months ended September 30, 2023 is mainly related to a decrease of 3% and 16% (increase for the three and nine months ended September 30, 2022 11% and 15%) in the Colombian Pesos/USD exchange rate for the period and the Group's Colombian entities' liability position towards USD.

Includes income from a legal settlement with a third party to recover costs incurred relating to a business opportunity with such third party. The open receivable balance as of September 30, 2023 is included within Other financial assets in the Consolidated Interim Statement of Financial Position. The amount, counter party and any further details can't be disclosed due to contractual restrictions within the settlement agreement.

Note 9. Income tax

Income tax recognized through profit or loss

Income tax expense is recognized at an amount determined by multiplying the profit before tax for the interim reporting period by management's best estimate of the weighted-average annual income tax rate expected for the full financial year, adjusted for the tax effect of certain items recognized in full in the interim period. As such, the effective tax rate in the Unaudited Condensed Consolidated Interim Financial Statements may differ from management's estimate of the effective tax rate for the annual financial statements.

The Group's consolidated income (loss) before tax for the three and nine months ended September 30, 2023 amounts to $11,434 and $58,249 (for the three and nine months ended September 30, 2022: $30,388 and 43,210. The income tax expense for the three and nine months ended September 30, 2023 was $3,235 and $16,475 (for the three and nine months ended September 30, 2022: $7,808 and $11,104). The Group's consolidated effective tax rate with respect to continuing operations for the nine months ended September 30, 2023 was 28.28% (for the nine months ended September 30, 2022: 25.7%) The change in the consolidated effective tax rate was mainly caused by the following factors: (i) Optimization of the use of tax credits, tax rate changed from 25% up to 30% in Colombia, and (ii) by concentration of profits in countries where the tax rate is higher.

The tax rate used for the nine months ended September 30, 2023 represents the tax rate of 35% (for the nine months ended September 30, 2022: 35%) on the taxable income payable by the most representative entities of the Group in Colombia, in accordance with the tax laws of said jurisdiction. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdiction.

Global minimum top-up tax

On October 8, 2021, 136 countries reached an agreement for a two-pillar approach to international tax reform.

Specifically, Pillar Two Global Anti-Base Erosion Rules propose four new taxing mechanisms under which multinational enterprises would pay a minimum level of tax: the subject to tax rule, a tax treaty-based rule that generally proposes a minimum tax on certain cross-border intercompany transactions that otherwise are not subject to a minimum level of tax; the income inclusion rule; the under taxed payments rule; and the qualified domestic minimum top-up tax, which generally propose a minimum tax on the income arising in each jurisdiction in which the Group operates.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The Group operates in several jurisdictions, but it has been determined that the UPE (Ultimate Parent Entity) is located in Luxembourg. Luxembourg has not yet to enact legislation to implement the global minimum top-up tax.

Nevertheless, the Group has already started the analysis of its impact focusing primarily on Swiss and Colombia where the business is subject to tax at a statutory rate of 12% and 35% respectfully. However, and as indicated before, since legislation has not been enacted there is no current tax impact as of September 30, 2023.

Regarding the amendments to IAS 12 (International Tax Reform-Pillar Two Model Rules), since no new legislation to implement the top-up tax was enacted or substantially enacted as of December 31, 2022 in any of the jurisdictions where the Group operates, no related deferred taxes were recognized at that date, hence the retrospective application has no impact on the Group's Unaudited Condensed Consolidated Interim Financial Statements.

On Sunday, June 18, 2023, the Swiss electorate and on August 4, 2023 Luxembourg, published draft law to implement the global minimum tax.

Note 10. Intangible assets, net

Cost	Total
Balance as of January 1, 2022	$	53,926
Additions		1,396
Additions from internal developments		6,361
Foreign currency exchange		(5,785	)
Balance as of September 30, 2022	$	55,898

Balance as of January 1, 2023	$	57,831
Additions		2,195
Additions from internal developments		6,784
Derecognition of assets		(52	)
Foreign currency exchange		7,922
Transfers		(139	)
Balance as of September 30, 2023	$	74,541

Accumulated amortization	Total
Balance as of January 1, 2022	$	23,755
Amortization expense		3,365
Foreign currency exchange		(2,500	)
Balance as of September 30, 2022	$	24,620

Balance as of January 1, 2023	$	25,623
Amortization expense		4,136
Foreign currency exchange		3,467
Balance as of September 30, 2023	$	33,226

As of September 30, 2022
Net book value	$	31,278
As of September 30, 2023
Net book value	$	41,315

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

For the three and nine months ended September 30, 2023 and 2022, amortization expenses were recognized within the Unaudited Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income as administrative expenses.

Foreign currency exchange corresponds to the effect of translating the intangible asset amounts attributable to the subsidiaries of the Group whose functional currencies are different from that of the Group.

Note 11. Property, plant and equipment, net

Cost	Total
Balance as of January 1, 2022	$	116,654
Additions		15,293
Disposals		(4,147	)
Effect of exchange differences in foreign currency		(10,608	)
Transfers		(439	)
Balance as of September 30, 2022	$	116,753

Balance as of January 1, 2023	$	121,898
Additions		18,320
Disposals		(594	)
Effect of exchange differences in foreign currency		14,737
Transfers		841
Balance as of September 30, 2023	$	155,202

Accumulated depreciation	Total
Balance as of January 1, 2022	$	44,016
Disposals		(1,997	)
Depreciation expense		4,481
Effect of exchange differences in foreign currency		(3,875	)
Balance as of September 30, 2022	$	42,625

Balance as of January 1, 2023	$	47,933
Disposals		(546	)
Depreciation expense		4,196
Effect of exchange differences in foreign currency		5,937
Transfers		488
Balance as of September 30, 2023	$	58,008

As of September 30, 2022
Net book value	$	74,128
As of September 30, 2023
Net book value	$	97,194

For the nine months ended September 30, 2023, depreciation expense was recognized as follows: $3,263 was recognized as cost of goods sold (for the nine months ended September 30, 2022: $3,207) and $933 (for the nine months ended September 30, 2022: $1,274) within administrative expense.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Financial Commitments

As of September 30, 2023, the Group has commitments to acquire capital expenditures for $4,831 (as of September 30, 2022: $8,183).

Note 12. Inventories, net

	As of September 30, 2023			As of December 31, 2022
Raw materials and supplies	$	48,864			$	42,701
Products in process		5,859				7,412
Finished products and merchandise		42,368				41,492
Inventory in transit		10,220				11,531
Subtotal	$	107,311			$	103,136
Less: Provision		(9,069	)			(6,303	)
Total	$	98,242			$	96,833

Inventories recognized as cost of goods sold for the nine months ended September 30, 2023 amounted to $136,976 (for the nine months ended September 30, 2022: $121,139). Inventories used as samples for the nine months ended September 30, 2023 amounted to $4,057 (for the nine months ended September 30, 2022: $5,382), were recognized as marketing expenses.

Write-downs of inventories to net realizable value and obsolescence adjustments for the nine months ended September 30, 2023 amounted to $8,446 (for the nine months ended September 30, 2022: $2,475), were recognized within sales expenses.

Note 13. Trade and other receivables, net

	As of September 30, 2023			As of December 31, 2022
Trade receivables, net of discounts ¹	$	144,674			$	126,456
Other receivables		13,863				15,211
Impairment of trade and other receivables ²		(15,487	)			(12,065	)
Trade receivables, net of discounts and impairment	$	143,050			$	129,602

¹	Discount and return provision amounts to $15,781 (as of December 31, 2022: $13,443).

²	Total impairment balance is comprised of $12,965 (as of December 31, 2022: $10,768) for trade receivables and $2,522 (as of December 31, 2022 $1,297) for other receivables.

Refer to Note 18. Financial instruments for the Group's disclosures on credit risk management and expected credit losses.

The Group has entered into factoring arrangements to sell certain trade receivables to third parties under recourse programs, retaining all risk and rewards incidental to the trade receivables, so no derecognition of the financial assets has been performed. Trade receivables which collateralize factoring obligations as of September 30, 2023 amounts to $3,982 (as of December 31, 2022: $2,547).

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 14. Borrowings

	As of September 30, 2023			As of December 31, 2022
Borrowings at amortized cost^(a)
Syndicated term loan (1)	$	60,558			$	38,626
Other term loan (2)		75,333				95,720
Lease liabilities (3)		34,906				34,192
Factoring obligations (4)		4,236				2,317
Bank overdrafts (5)		(113	)			80
Notes (6)		115,000				115,000
Total Interest bearing liabilities	$	289,920			$	285,935

Current		69,238				257,525
Non- Current	$	220,682			$	28,410

^(a)	Borrowings at amortized cost are unsecured, with the exception of factoring obligations which are collateralized by trade receivables. Refer to Note 13. Trade and other receivables, net.

1. Syndicated term loan

	Currency	Range of Interest	Maturity Year	As of September 30, 2023			As of December 31, 2022
Syndicated term loan	COP	IBR + 5.3%	2023-2025	$	-			$	39,156
New Banco Credit Agreement	COP	IBR +8.5%	2029		61,133				-
Amortized cost	COP	N/A	2029		(575	)			(530	)
Total Syndicated term loan				$	60,558			$	38,626

On November 20, 2018, Procaps S.A. entered into a syndicated term loan agreement (the "Syndicated Loan Agreement") with the following banks: Portion in Colombian pesos (COP) - Davivienda and Bancolombia; US dollar portion (USD) - Banco de Credito del Peru, Bancolombia Panama and Banco Sabadell. The total value of the syndicated loan amounts to $200,434 million COP (portion in COP) and $35 million USD (portion in USD), Fiduciaria Bancolombia acts as the agent of the loan. C.I. Procaps S.A., Procaps S.A. de C.V, Biokemical S.A., Pharmarketing S.A. (Panama), Pharmarketing Salvador S.A. de C.V., Pharmarketing S.A. (Guatemala S.A.), C.D.I. Salvador S.A. de C.V., C.D.I. Nicaragua S.A., C.D.I. Guatemala S.A., Pharmarketing Dominicana SRL, and Pharmarketing Costa Rica S.A., act as co-debtors, while Pharmayect S.A., Inversiones Crynssen S.A.S., Inversiones Ganeden S.A.S., Inversiones Henia S.A.S., Inversiones Jades S.A.S., and Industrias Kadima S.A.S., act as guarantors.

The resources obtained were used for advance payment and/or novation of some obligations to be refinanced. The conditions of the loan had a term of 5 years for installment payments and the interest rates agreed are as follows: IBR + 5.30% for the portion in COP and Libor + 4.80% for the USD portion.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The significant covenants required by the Syndicated Loan Agreement are as follows:

Financial covenants

●	Indebtedness Indicator (Indebtedness/EBITDA) of Procaps, S.A. as of September 30 and December 31 of each year, during the loan term, must be less than or equal to 3.5 times. If the indicator is greater than 3.0 and less than 3.5, it proceeds to the extent that this value is originated by causes other than additional debt and the justification of the increase must be presented to the agent.

●	Short-term leverage ratio of Procaps, S.A. < 1.0 on the last day of each semester.

●	EBITDA ratio / financial expenses of Procaps, S.A. = or > 3.0 on the last day of each semester.

Other covenants

●	The Syndicated Loan Agreement establishes that each of the jointly obligated parties, unless they have the express, prior and written authorization of the Agent, will refrain from incurring any type of financial debt when the proforma indebtedness indicator, once acquired the additional financial debt, is greater than 3.0 times and maintaining any type of financial debt when the pro forma indebtedness indicator, once the national debt is acquired, is greater than 3.5 times.

●	Each of the joint obligated parties, except with express, prior and written authorization of the Agent to do otherwise, will refrain from contracting finance and/or operating lease obligations with purchase option with a joint balance payable greater than $85,000,000 (Eighty-Five Billion Pesos, local currency) or its equivalent in another currency. For purposes of clarity, the reclassification of obligations as financial lease obligations by application of the Accounting Standards will not consume the balance set forth herein and may not be renewed.

●	The payment of dividends is restricted to anyone other than the jointly obligated parties.

The Syndicated Loan Agreement establishes that, in the event of breach of covenants by the debtor, the lenders shall be entitled to declare early maturity of the debts.

As mentioned in Note 2.1. Going concern, as of December 31, 2022, the Group was not in compliance with certain covenants under the Syndicated Loan Agreement. As a result, as of December 31, 2022, $19,665 unpaid principal balance previously classified as non-current borrowings, was reclassified to current borrowings within the Group's Consolidated Statement of Financial Position.

On May 2, 2023 the Group obtained a Waiver for the loan covenant breaches described above. Under the terms of the Waiver, the lenders agreed to waive the event of default as of December 31, 2022.

Additionally, as mentioned in Note 2.1. Going concern, on August 16, 2023, the Group renegotiated the terms of the Syndicated Loan Agreement which extends the maturity date until 2029.

On August 16, 2023, Procaps S.A. and other subsidiaries of the Group as guarantors (collectively, the "Obligors") entered into a Credit Agreement with Bancolombia S.A. and Banco Davivienda S.A (the "New Banco Credit Agreement"). The New Banco Credit Agreement provides for a loan of up to $247,817 million COP and the proceeds are to be used exclusively for the prepayment or the novation of existing indebtedness of the Group, including the Syndicated Loan Agreement. The New Banco Credit Agreement provides for a term of six-years, and interest accrues thereunder at a rate equal to the Colombian Central Bank's reference rate (for a three-month tenor) plus 8.50% per annum.

The New Banco Credit Agreement contains customary affirmative and negative covenants, including limitations on the ability of the Group to incur additional debt, guarantee other obligations, grant liens on assets, make investments or acquisitions, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or consolidations, engage in transactions with affiliates, and enter into certain restrictive agreements.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Additionally, the New Banco Credit Agreement requires the Group's compliance with the following financial covenants, each measured on a trailing twelve-month basis on the final day of each fiscal quarter of the Group:

●	Consolidated debt to consolidated EBITDA ratio of no greater than 3.50:1:00 (other than for the twelve-month period ended September 30, 2023, for which the ratio shall be no greater than 4.30:1.00); and

●	Ratio of consolidated EBITDA to consolidated interest expense of greater than 3.00:1.00 (other than for the twelve-month period ended September 30, 2023, for which the ratio shall be greater than 1.90:1.00).

●	Additionally, the Obligors are required to maintain combined total assets and combined EBITDA equal to no less than 80% of the Group's consolidated total assets and consolidated EBITDA, respectively, as of September 30 and December 31 of each year.

Management continuously monitors the observation of these obligations and complied as of the date of these Unaudited Condensed Consolidated Interim Financial Statements.

2. Other term loan

	Currency	Range of Interest	Maturity Year	As of September 30, 2023		As of December 31, 2022
Other term loan	COP	IBR+ 8.5%, 17.5-23.5% (2022: IBR+ 5.0%, DTF+ 3%, 13.99%-25.3%)	2022-2025	$	11,313		$	9,549
	COP	IBR + 2.25%- IBR 7.25% (2022: IBR+2.25%-10.2%)	2022-2025		14,628			21,267
	Soles	8.0% - 14.50% (Fixed) (2022: 8.0% - 12.79% (Fixed))	2022-2024		5,448			6,837
	Reales	9.84% - 18% N.A.	2023-2024		1,225			2,176
	USD	SOFR + (3%-5.8%) (2022: SOFR+ (4.80%-5.80%))	2023		21,423			23,454
	USD	7%-19.78% N.A. (2022: 6.36%-16.8%)	2022-2025		21,296			32,437
Amortized cost
Total Other term loans				$	75,333		$	95,720

On June 28, 2022, Procaps, S.A. (the "Company") entered into a credit agreement with BTG to borrow $8,672. The covenants required by the loan contract are:

●	The Company's consolidated Indebtedness Indicator (Indebtedness / EBITDA) should not be greater than 3.5x.

●	The Company's consolidated EBITDA/Finance expense should not be less than 3x.

As mentioned in Note 2.1. Going concern, as of December 31, 2022, the Group was not in compliance with the loan covenants related to the BTG Credit Agreement. As a result, the $4,490 unpaid principal balance previously classified as a non-current borrowings, was reclassified to current borrowings within the Group's Consolidated Statement of Financial Position as of December 31, 2022.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

On March 28, 2023 the Group obtained a Waiver for the loan covenant breach. Under the terms of the Waiver, BTG Pactual agreed to waive the event of default as of December 31, 2022. For the period ending September 30, 2023, as part of the Waiver negotiations, the lenders agreed to adjust the covenant ratios as noted below (the covenants will return to the original terms from December 31, 2023, onwards). Further, before September 30, 2023, the Group negotiated with BTG to change the covenant reporting entity to be the Group instead of the Company:

●	The Group's consolidated Indebtedness Indicator (Indebtedness / EBITDA) must not be greater than 4.5x (original covenant: greater than 3.5x).

●	The Group's consolidated EBITDA/Finance expense must not be less than 1.8x (original covenant: less than 3.0x).

As a result, the unpaid principal balance is classified as non-current borrowings as of September 30, 2023.

Along with the BTG Credit Agreement, the Group borrowed $19,000 on October 14, 2022 as part of a short-term agreement with BTG Pactual which is payable in 2023. Additionally, as mentioned in Note 2.1. Going concern, on August 18, 2023, the Group renegotiated their short-term agreement with BTG into a thirty-month loan.

On August 18, 2023, the Group entered into a Credit Agreement with Banco BTG Pactual S.A.-Cayman Branch. (the "New BTG Credit Agreement"). The New BTG Credit Agreement provides for a loan of up to $19 million USD and the proceeds are to be used exclusively for the prepayment of existing indebtedness of the Group, including short term debt dated October 13, 2022. The New BTG Credit Agreement provides for a term of 30 months, and interest accrues thereunder at a rate equal to SOFR (for a three-month tenor) plus 5.80%.

The New BTG Credit Agreement requires the Group's compliance with the following financial covenants, each measured on a trailing twelve-month basis on the final day of each fiscal quarter of the Group:

●	Consolidated debt to consolidated EBITDA ratio of no greater than 3.50:1:00 (other than for the twelve-month period ended September 30 and December 31, 2023, for which the ratio shall be no greater than 4.30:1.00); and

●	Ratio of consolidated EBITDA to consolidated interest expense of greater than 3.00:1.00 (other than for the twelve-month period ended September 30 and December 31, 2023, for which the ratio shall be greater than 1.90:1.00).

Management continuously monitors the observation of these obligations and complied as of the date of these Unaudited Condensed Consolidated Interim Financial Statements.

3. Lease liabilities

	Currency	Range of Interest	Maturity Year	As of September 30, 2023		As of December 31, 2022
Lease liabilities	COP	IBR+(3.82%-7.3%), DTF + 5.5% (2022: DTF + (5,18% - 10,11%) T.A., IBR+7.5%)	2022-2030	$	10,471		$	10,475
	COP	IBR+ (4.2%-8.2%) (2022: DTF+ 4.54%-10.42 T.A.	2022-2025		3,975			3,653
	USD	0.75%-21.48%, DTF+5.50%, IBR+4.10% (2022: 0.75%-21.48%)	2023-2032		20,460			14,787
	COP	1.91%-12.23%, IBR+4.68%	2023		-			4,703
	Reales	0.70-8.72% (Fixed)	2023-2024		-			574
Total Lease Liabilities				$	34,906		$	34,192

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

4. Factoring obligations

	Currency	Range of Interest	Maturity Year	As of September 30, 2023		As of December 31, 2022
Portfolio factoring	COP	DTF+7% (2022: DTF+8%)	2023	$	1,805		$	1,508
	COP	2.15% n.m.a (2022: 15.0% - 27% N.A.)	2023		2,431			809
Total Factoring				$	4,236		$	2,317

5. Bank overdraft

	Currency	Range of Interest	Maturity Year	As of September 30, 2023			As of December 31, 2022
Overdrafts and credit cards	COP	19.68% - 32% E.A. (Fixed)	2023	$	(262	)		$	80
	USD		2023		149				-
Total bank overdrafts and credit cards				$	(113	)		$	80

6. Notes

On November 12, 2021, the Group closed the private placement offering of $115 million aggregate principal amount of 4.75% guaranteed senior notes (the "Senior Notes") issued by Procaps, S.A., a subsidiary of the Group, due November 12, 2031, pursuant to the NPA entered into on November 5, 2021 with The Prudential Insurance Company of America, Prudential Annuities Life Assurance Corporation, Healthspring Life & Health Insurance Company, Inc. and Cigna Health and Life Insurance Company Inc.

The Senior Notes are a senior unsecured obligations of Procaps, S.A. and unconditionally guaranteed by Procaps Group, S.A. and the following subsidiaries of the Group: C.I. Procaps, S.A., Diabetrics Healthcare S.A.S., Pharmayect S.A., Procaps, S.A. de C.V., Biokemical, S.A. de C.V., Colbras Indústria e Comércio Ltda., and Sofgen Pharmaceuticals LLC.

Debt issuance costs related to the Senior Notes of $2,142, comprised of commissions payable to the initial purchasers of $1,390 and attorneys' costs of $752, were allocated to the liability of the Notes based on their relative values. Issuance incremental costs are part of the effective rate and amortized to interest expense using the effective interest method over the contractual term.

As mentioned in Note 1. General Company Information, the Notes Payoff did not occur on or prior to November 30, 2022, therefore triggering the 3.75% per annum waiver fee on the outstanding principal amount of Senior Notes, raising the interest rate from 4.75% to 8.50%. As a result, the Group has treated the rate increase as a debt extinguishment, derecognised a liability in the amount of $113,400, expensed $1,600 in unamortized transaction costs, and recognized a new liability in the amount of $115,000 as of December 31, 2022.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The Senior Notes require Procaps, S.A., the Group and the following subsidiaries of the Group: C.I. Procaps, S.A., Diabetrics Healthcare S.A.S., Pharmayect S.A., Procaps, S.A. de C.V., Biokemical, S.A. de C.V., Colbras Indústria e Comércio Ltda., and Sofgen Pharmaceuticals LLC. to comply with the following financial ratios:

●	The consolidated total debt of Procaps, S.A., the Group and the other obligors thereunder to consolidated EBITDA for the last twelve months of 3.50:1.00 or less (Indebtedness Indicator), measured at certain dates of determination and;

●	An EBITDA interest coverage ratio (calculated as the consolidated EBITDA for the last twelve months of Procaps, S.A. and the other obligors thereunder divided by the consolidated interest expenses of Procaps, S.A. and the other obligors thereunder) in excess of, or equal to, 3.00:1.00, calculated at certain dates of determination.

●	Short-term leverage ratio equal to or less than 1.00

Complying with the Note Purchase Agreement protocols and as a result of the more favorable provisions of the Syndicated Loan Agreement, the Group gave notice on April 7, 2022 that specific provisions related to reporting covenants, affirmative covenants, negative covenants, events of default, and mandatory prepayment events, as set forth in the Syndicated Loan Agreement, shall apply to the Senior Notes.

As mentioned in Note 2.1. Going concern, as of December 31, 2022, the Group was not in compliance with the financial covenants related to the Senior Notes. As a result, the $115,000 unpaid principal balance previously classified as a non-current borrowings, was reclassified to current borrowings within the Group's Consolidated Statement of Financial Position as of December 31, 2022.

On March 31, 2023 the Group obtained a Waiver for the NPA covenant breaches described above. Under the terms of the Waiver, the noteholders agreed to waive the event of default as of December 31, 2022. For the periods ending March 31, June 30 and September 30, 2023, as part of the Waiver negotiations, the lenders agreed to adjust the covenant ratios as noted below (the covenants. will return to the original terms from December 31, 2023, onwards):

●	The consolidated total debt of Procaps, S.A., the Group and the other obligors thereunder to consolidated EBITDA for the last twelve months of 4.00:1.00 or less (original covenant: 3.50:1.00 or less).

●	An EBITDA interest coverage ratio in excess of, or equal to, 2.20:1.00 (original covenant: in excess of, or equal to, 3.00:1.00).

●	Short-term leverage ratio equal to or less than 1.60:1:00 (original covenant: equal to or less than 1.00:1.00).

As mentioned in Note 2.1. Going concern, as of September 30, 2023 the Group obtained an Additional Waiver under the NPA in anticipation of a potential breach of the covenant ratios contained within the March 31, 2023 Waiver. For the periods ending June 30 and September 30, 2023, the lenders agreed to adjust the covenant ratios as noted below (the covenants will return to the original terms from December 31, 2023, onwards):

●	The consolidated total debt of Procaps, S.A., the Group and the other obligors thereunder to consolidated EBITDA for the last twelve months of 4.30:1.00 or less (original covenant: 3.50:1.00 or less).

●	An EBITDA interest coverage ratio in excess of, or equal to, 1.90:1.00 (original covenant: in excess of, or equal to, 3.00:1.00).

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The Additional Waiver was obtained on June 30, 2023, therefore, the unpaid principal balance is classified as non-current borrowings as of September 30, 2023.

	Currency	Range of Interest	Maturity Year	As of September 30, 2023		As of December 31, 2022
The Prudential Insurance Company Of America	USD	8.50% (Fixed)	2031	$	60,020		$	60,020
Prudential Annuities Life Assurance Corporation	USD	8.50% (Fixed)	2031		29,980			29,980
Healthspring Life & Health Insurance Company, Inc	USD	8.50% (Fixed)	2031		18,350			18,350
CIGNA Health and Life Insurance Company	USD	8.50% (Fixed)	2031		6,650			6,650
Total Senior Notes				$	115,000		$	115,000

Note 15. Provisions and contingencies

	2023			2022
Contingencies
Balance as of January 1	$	138			$	501
Effect of changes in foreign exchange rates		9				9
Provisions made		90				9
Provisions used		(99	)			(408	)
Balance as of September 30	$	138			$	111

The Group recognizes provisions for contingencies that are probable of requiring an outflow of resources due to adverse effects. The Group recognized the estimated probable losses against the company for labor, administrative and tax litigation, which are calculated based on the best estimate of the disbursement required to cancel the obligation. Such contingencies are disclosed with possible adverse effects for the entity, as follows:

Legal provisions

Softcaps legal proceedings - The total balance of $56 (as of September 30, 2022: $68) is comprised of labor, administrative, and civil ligation. There are no tax litigation provisions recognized as of September 30, 2023 and 2022.

The remaining balance of $61 (as of September 30, 2022:$43) is for labor litigation in the following entities: Procaps, S.A., Unimed del Perú, and Diabetrics; and $21 is for tax litigation in CDI Nicaragua.

Contingencies

Procaps SA de CV legal proceedings - The General Tax Directorate of El Salvador (DGII), determined that the company failed to declare taxable and presumed income from revenue obtained and loans made to non-domiciled companies in 2018, the proposed tax charge and sanction amounts to $1,087. Also, the DGII determined that the company incurred in the infraction of non-intentional evasion due to the incorrect filing of the "VAT" declarations for 2019. The proposed tax charge and penalty amounts to $348.

However, the Group's external advisor indicates that it is not probable for this claim to proceed, therefore, there is no provision for the effect of this contingency.

CDI Nicaragua legal proceedings - The tax authority of Nicaragua (Administración de Renta Linda Vista), determined that the Company applied discounts not related to taxable income generation in 2018. Also the company reported higher cost of sales for undocumented purchases not deductible for income tax purposes in 2018, the proposed tax burden and penalty amounts to $534.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

However, the Group's external advisor indicates that it is not probable for this claim to proceed, therefore, there is no provision for the effect of this contingency.

Rymco Medical legal proceedings - The customer Fundación Los Andes requested a refund of $370 for low quality and incorrect lifetime of the products sold by Rymco Medical. The legal team indicates that it is not probable for this claim to proceed, therefore, there is no provision for the effect of this contingency.

Note 16. Warrant liabilities

	As of September 30, 2023		As of December 31, 2022
Public warrants	$	2,200		$	9,200
Private warrants¹		661			1,716
	$	2,861		$	10,916

¹	Private warrants include 2,875,000 held by the former SPAC sponsors deposited in an escrow account.

Note 16.1. Public warrants

	As of September 30, 2023			As of December 31, 2022
As of January 1	$	9,200			$	16,000
Fair value remeasurement		(7,000	)			(6,800	)
Balance as of September 30/December 31	$	2,200			$	9,200

The fair value of the Public Warrants decreased for the nine months ended September 30, 2023 by $7,000 (decreased for the year ended December 31, 2022: $6,800). Refer to Note 7. Finance expenses, net.

Note 16.2. Private warrants

	As of September 30, 2023			As of December 31, 2022
As of January 1	$	1,716			$	7,112
Fair value remeasurement		(1,055	)			(5,396	)
Balance as of September 30/December 31	$	661			$	1,716

The fair value of the Private Warrants decreased for the nine months ended September 30, 2023 by $1,055 (decreased for the year ended December 31, 2022: $5,396). Refer to Note 7. Finance expenses, net.

Note 17. Shares in escrow

	As of September 30, 2023			As of December 31, 2022
As of January 1	$	40,064			$	101,859
Fair value remeasurement		(16,752	)			(61,795	)
Balance as of September 30/December 31	$	23,312			$	40,064

The fair value of the Shares in escrow decreased for the nine months ended September 30, 2023 by $16,752 (decreased for the year ended December 31, 2022: $61,795). Refer to Note 7. Finance expenses, net.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 18. Financial instruments

18.1 Accounting classification and fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When measuring fair value, the Group uses observable market data whenever possible. Fair values are categorized into different levels in a hierarchy based on the inputs used in the valuation techniques as follows:

●	Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

●	Level 2: inputs are observable either directly (e.g. as prices) or indirectly (e.g. derived from prices).

●	Level 3: fair value measurements incorporate significant inputs that are based on unobservable market data.

The following table shows the carrying amounts of financial assets and financial liabilities. The amortized cost basis of the financial assets and liabilities not measured at fair value approximates their fair value.

	As of September 30, 2023		As of December 31, 2022
	FVTPL¹		FVOCI²			Amortized cost³		FVTPL¹	Amortized cost³
Financial assets not measured at fair value
Trade and other receivables, net	$	-		$	-		$	143,050	$	-	$	129,602
Amounts owed by related parties, net		-			-			2,159		-		2,474
Cash		-			-			17,558		-		43,003
Other financial assets		-			-			12,400		-		210
Total financial assets not measured at fair value	$	-		$	-		$	175,167	$	-	$	175,289

Financial liabilities measured at fair value
Warrant liabilities	$	2,861		$	-		$	-	$	10,916	$	-
Shares held in escrow		23,312			-			-		40,064		-
Derivative financial liabilities		-			3,114			-		-		-
Total financial liabilities measured at fair value	$	26,173		$	3,114		$	-	$	50,980	$	-
Financial liabilities not measured at fair value
Borrowings		-			-			289,920		-		285,934
Trade and other payables		-			-			89,759		-		90,187
Amounts owed to related parties		-			-			4,123		-		2,914
Total financial liabilities not measured at fair value	$	-		$	-		$	383,802	$	-	$	379,035

¹	The fair value of the exhibited figures as of September 30, 2023 is comprised of $2,200 Level 1 (as of December 31, 2022: $9,200) and $23,973 Level 3 (as of December 31, 2022: $41,780).

²	The fair value of the exhibited figures as of September 30, 2023 is Level 2.

³	The fair value of the exhibited figures is similar to their amortized cost as of September 30, 2023 and December 31, 2022, respectively.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

18.2 Measurement of fair values

The following tables show the valuation techniques used in measuring Level 3 fair values for financial instruments in the Unaudited Condensed Consolidated Interim Statement of Financial Position, as well as the significant unobservable inputs used.

Significant unobservable

Relationship between significant unobservable

Sensitivity of significant unobservable input to
fair value

Type

Fair value

Valuation Technique

input

input to fair value

+5%

-5%

Private warrants

100

The fair value of the Private Warrants is estimated using the Black-Scholes option pricing formula for European calls, since the underlying stock is not expected to pay dividends over the term of the Warrants.

Volatility of 38.9% (2022: 36.6%)

The higher (lower) the volatility, the higher (lower) the fair value.

Private warrants in escrow

561

The fair value of the Private Warrants in escrow is estimated using Monte Carlo simulation in a risk-neutral framework assuming a Geometric Brownian Motion for the future stock price.

Volatility of 38.9% (2022: 37.5%)

The higher (lower) the volatility, the higher (lower) the fair value.

532

173

Shares held in escrow

23,312

The fair value of the shares to be delivered is estimated using Monte Carlo simulation in a risk-neutral framework assuming a Geometric Brownian Motion for the future stock price.

Volatility of 42.0% (2022: 36.5%)

The higher (lower) the volatility, the higher (lower) the fair value.

23,631

22,962

18.3 Financial risk management

The Group has exposure to the following risks arising from financial instruments:

●	Credit risk

●	Liquidity risk

●	Market risk, including currency and interest rate risk

18.3.1. Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure of the Group. The carrying amount is presented net of impairment losses. None of the receivable balances as of September 30, 2023 and December 31, 2022 constitutes a significant concentration of credit risk. There are no other single customers representing more than 10% of total gross trade receivables as of September 30, 2023 and December 31, 2022.

Expected credit losses

The average credit period on the sale of medicines is 60 to 120 days. In some cases, depending on market conditions and strategy, longer payment periods are granted. No interest surcharge is made on commercial accounts receivable.

The Group has recognized a provision for doubtful accounts. The Group evaluates the impairment of its accounts receivable for the expected credit loss model, where it determines its value based on the probability of default, the loss due to default (i.e., the extent of the loss in case of default) and the exposure, by the application of the 'simplified method' for trade receivables without a significant financing component. The assessment of the probability of default and the loss due to default is mainly based on historical data and adjust historical loss rates to reflect information about current conditions and reasonable and supportable forecasts of future economic conditions.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

As of September 30, 2023	Current (not past due)			1-30 days past due			31-60 days past due		61-90 days past due		91-120 days past due			More than 120 days past due			Total
Weighted-average loss rate		0.36	%			2.26	%		3.62	%		5.19	%			11.08	%		83.19	%		14.48	%
Gross carrying amount		123,848				17,220			9,620			4,200				2,627			30,724			188,239
Impairment loss allowance		(443	)			(390	)		(348	)		(218	)			(291	)		(25,559	)		(27,249	)
	$	123,405			$	16,830		$	9,272		$	3,982			$	2,336		$	5,165		$	160,990

December 31, 2022	Current (not past due)			1-30 days past due			31-60 days past due		61-90 days past due		91-120 days past due			More than 120 days past due			Total
Weighted-average loss rate		0.39	%			3.42	%		4.50	%		14.25	%			19.89	%		83.88	%		14.07	%
Gross carrying amount		124,219				11,816			3,864			1,958				890			26,605			169,352
Impairment loss allowance		(483	)			(404	)		(174	)		(279	)			(177	)		(22,317	)		(23,834	)
	$	123,736			$	11,412		$	3,690		$	1,679			$	713		$	4,288		$	145,518

As of September 30, 2023 no impairment losses were recognized for balances in connection with related parties. However, as of September 30, 2023 and December 31, 2022, an allowance is maintained for open balances referred to goods sold to Industrias Intercaps de Venezuela C.A. and Laboratorios Vivax Pharmaceuticals C.A., due to the critical political and social situation that the location country of precedence is experiencing.

18.3.2.Market Risk

Net Investment Hedges

A foreign currency exposure arises from the Group's net investment in its subsidiary Procaps, S.A., that is a Colombian Peso functional currency entity. The risk arises from the fluctuation in spot exchange rates between the Colombian Peso and the USD, which causes the amount of that net investment to vary.

Part of the Group's net investment in Procaps, S.A. is hedged by average rate forward contracts (pay Colombian Peso and receive USD), which mitigates the foreign currency risk arising from the subsidiary's net assets. The forward contracts are designated as hedging instruments for the changes in the value of the net investment that are attributable to changes in the Colombian Peso/USD spot rate. The counterparty is a top-tier financial institution with low credit risk.

The hedged risk in the net investment hedge is the risk of a weakening Colombian Peso against the USD that will result in a reduction in the carrying amount of the Group's net investment in Procaps, S.A. The Group has established a hedge ratio of 1:1 where the notional amounts of the hedging instruments match the carrying amount of the hedged net investment.

The Group assesses hedge effectiveness qualitatively, as the critical terms (i.e., the notional amount and underlying exchange rate) of the hedging instruments are closely aligned with those of the hedged net investment in Procaps, S.A. It is expected that the value of the hedging instruments and the value of the hedged net investment will systematically change in opposite directions in response to movements in the Columbian Peso/USD exchange rate.

The main potential sources of ineffectiveness identified by the Group in these hedging relationships are timing mismatches, forward points used to calculate the settlement amount of the hedging instruments which are not reflected in the value changes of the hedged net investment, and changes in the Group's and/or derivative counterparty's credit that would result in movements in fair value of the hedging instruments that would not be reflected in the movements in the value of the hedged net investment.

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

The amounts related to items designated as hedging instruments were as follows:

Average Currency Forward Contracts (Sell COP)	Settlement Date	Forward Exchange rate		Notional amount (COP)		Notional amount (USD)
Less than 3 months	10/3/2023		4,715		42,800,000,000		10,492,768
3-6 months	1/3/2024		4,791		48,837,000,000		11,972,787

As of September 30, 2023

Carrying amount

Line item in the statement of financial position where the hedging instrument

Change in value used for calculating hedge

Average Currency Forward Contracts (Sell COP)

Assets

Liabilities

is included

ineffectiveness

Less than 3 months

1,511

Derivative Financial Liability

492

3-6 months

1,603

Derivative Financial Liability

518

	As of September 30, 2023
Average Currency Forward Contracts (Sell COP)	Change in value of hedging instruments recognized in OCI		Hedge ineffectiveness recognized in PL		Line item in profit or loss that includes hedge ineffectiveness
Less than 3 months		492		-		Other income (expenses), net
3-6 months		518		-		Other income (expenses), net

The amounts related to items designated as hedged items were as follows:

As of September 30, 2023

Change in value used for calculating hedge ineffectiveness

Foreign currency translation reserve for continued hedges

Balances remaining in the foreign currency translation reserve from hedging relationships for which hedge accounting is no longer applied

Net Investment in Procaps S.A.

1,010

3,482

Note 19. Key management personnel

Transactions with directors and executive board management members

Total management compensation included in the Unaudited Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income are as follows:

	For the three months ended September 30		For the nine months ended September 30
	2023		2022			2023		2022
Short-term employee benefits		943			647			2,452		1,781
Consulting fees		688			678			1,921		2,417
	$	1,631		$	1,325		$	4,373	$	4,198

Procaps Group, S.A. and subsidiaries (The Group)

Notes to Unaudited Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2023 and 2022

(In thousands of United States Dollars, unless otherwise stated)

Note 20. Events after the reporting period

Management has considered subsequent events through the date these Unaudited Condensed Consolidated Interim Financial Statements were issued and identified the following events that require disclosure.

Hamas-Israel conflict

The recent global tensions arising from the Hamas-Israel war may result in disruptions in the broader global economic environment.

As of the date of issuance of these Unaudited Condensed Consolidated Interim Financial Statements, the Group does not have any direct exposure to Israel considering there are not any existing operations or sales in those locations.

Although the Group does not currently operate in Israel or Gaza, the duration and severity of the effects on its business and the global economy are inherently unpredictable. Management will continue to monitor the effects of the war in Israel and its potential further impacts, including global supply chain disruptions, inflation, and rising interest rates, when making certain estimates and judgments relating to the preparation of the Consolidated Financial Statements of the Group.

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Procaps Group SA published this content on 26 December 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 December 2023 22:28:42 UTC.

Market Closed - Nasdaq Other stock markets 21:30:00 10/05/2024 BST			5-day change	1st Jan Change
2.72 ^USD	-1.45%		-3.55%	-33.17%

05-01	Procaps Group S.A. Provides Earnings Guidance for the Year Ended December 31, 2023	CI
03-04	Procaps Group S.A. Announces Formation of Strategic Committee to Explore Value Creation Alternatives	CI

Procaps Group S.A. Provides Earnings Guidance for the Year Ended December 31, 2023	05-01	CI
Procaps Group S.A. Announces Formation of Strategic Committee to Explore Value Creation Alternatives	03-04	CI
Procaps Group Announces Formation of Strategic Committee to Explore Value Creation Alternatives	03-03	CI
Hoche Partners Pharma Holding S A Issues a Letter to Procaps Group, S A	02-20	CI
Declaration of Voting Results by Procaps Group, S A	01-24	CI
Hoche Partners Sends a Letter to Procaps Group	01-12	CI
Procaps Group S.A. Provides Earnings Guidance for the Full Year 2023	12-26	CI
Procaps Group S.A. Reports Earnings Results for the Third Quarter and Nine Months Ended September 30, 2023	12-26	CI
Tranche Update on Procaps Group S.A.'s Equity Buyback Plan announced on June 1, 2023.	12-26	CI
Procaps Group Teams Up With Genomma Lab to Manufacture, Market Softgel Products in Latin America	11-30	MT
Procaps Group and Genomma Lab Announce Strategic Agreement to Manufacture and Market Softgel Products in Latin America	11-29	CI
Procaps Group Names Jose Antonio Vieira as CEO	11-22	MT
Procaps Group S.A. Announces Executive Changes, Effective January 15, 2024	11-22	CI
Procaps Group S.A. Appoints Sandra Sanchez Y Oldenhage as A Director	23/10/23	CI
Transcript : Procaps Group S.A. - Special Call	10/10/23
Procaps Group S.A.(NasdaqGM:PROC) dropped from S&P Global BMI Index	18/09/23	CI
Procaps Group, S.A. Announces the Expansion of Its Oncology Portfolio	07/09/23	CI
Brookline Capital Downgrades Procaps to Hold From Buy, Price Target is $4.50	06/09/23	MT
Transcript : Procaps Group S.A., Q2 2023 Earnings Call, Sep 05, 2023	05/09/23
Earnings Flash (PROC) PROCAPS GROUP S.A. Posts Q2 Revenue $110M	05/09/23	MT
Procaps Group S.A. Announces Resignation of Mr. Alejandro Weinstein from the Board of Directors	05/09/23	CI
Procaps Group S.A. Reports Earnings Results for the Second Quarter and Six Months Ended June 30, 2023	05/09/23	CI
Procaps Group S.A. Reports Earnings Results for the First Quarter Ended March 31, 2023	06/06/23	CI
Procaps Group Q1 Earnings, Revenue Decline	06/06/23	MT
Procaps Group S.A. commences an Equity Buyback Plan for 11,282,418 shares, representing 10% of its issued share capital, under the plan approved on June 28, 2022.	31/05/23	CI

	1st Jan change	Capi.
PROCAPS GROUP S.A.	-33.17%	307M
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ABBVIE INC.	+3.73%	284B
ASTRAZENECA PLC	+16.70%	240B
NOVARTIS AG	+8.78%	208B
ROCHE HOLDING AG	-7.93%	200B
AMGEN INC.	+7.68%	166B

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