Filed Pursuant to Rule 424(b)(3)

Registration Statement No. 333-261366

 

November 14, 2022

 

PROSPECTUS SUPPLEMENT NO. 6

 

 

23,375,000 ORDINARY SHARES and

110,303,689 ORDINARY SHARES

Offered by Selling Securityholders

 

This prospectus supplement amends the prospectus dated May 6, 2022, as supplemented on May 24, 2022, June 15, 2022, August 30, 2022, September 2, 2022 and November 4, 2022 (the “Prospectus”), of Procaps Group, S.A., a public limited liability company (société anonyme) governed by the laws of the Grand Duchy of Luxembourg, having its registered office at 9, rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg, and registered with the Luxembourg Trade and Companies’ Register (Registre de Commerce et des Sociétés, Luxembourg) under number B 253360 (the “Company”), that relates to the (i) issuance of up to 23,375,000 ordinary shares, with a nominal value of $0.01 per share (“Ordinary Shares”) that may be issued upon exercise of warrants to purchase Ordinary Shares (the “Warrants”) at an exercise price of $11.50 per Ordinary Share and (ii) resale of up to 110,303,689 Ordinary Shares by the Selling Securityholders (as defined in the Prospectus) identified in the Prospectus, as amended and supplemented from time to time.

 

This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information included in Exhibit 99.2 of our current report on Form 6-K filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2022, which is set forth below. This prospectus supplement should be read in conjunction with the Prospectus, which is to be delivered with this prospectus supplement.

 

The Ordinary Shares are listed on the Nasdaq Stock Market (the “Nasdaq”) under the ticker symbol “PROC.” The closing sale price on the Nasdaq for the Ordinary Shares on November 11, 2022 was $7.00 per share. The Warrants are listed on Nasdaq under the ticker symbol “PROCW.” The closing sale price on the Nasdaq for the Warrants on November 11, 2022 was $0.7478 per warrant.

 

Investing in the Ordinary Shares involves risks. See “Risk Factors” beginning on page 16 of the Prospectus and under similar headings in any amendments or supplements to the Prospectus.

 

Neither the SEC nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The date of this Prospectus Supplement No. 6 is November 14, 2022.

 

 

 

 

 

 

 

 

 

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

 

Unaudited Condensed Consolidated Interim Financial Statements for the three and

 

nine months ended September 30, 2022 and 2021

 

 

 

 

 

 

 

 

 

 

 

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, 2022 and 2021

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

 

      For the three months ended
September 30
   For the nine months ended
September 30
 
   Notes  2022   2021   2022   2021
As restated1
 
Revenue  5  $110,403   $106,829   $308,453   $283,206 
Cost of sales      (42,845)   (44,577)   (121,139)   (123,152)
Gross profit      67,558    62,252    187,314    160,054 
                        
Sales and marketing expenses      (25,875)   (22,841)   (71,697)   (61,191)
Administrative expenses      (24,337)   (21,011)   (77,737)   (64,670)
Finance income/(expense), net  7   22,748    (50,651)   18,539    (79,242)
Other expenses, net  8   (9,706)   (75,024)   (13,209)   (77,096)
Income/(Loss) before tax      30,388    (107,275)   43,210    (122,145)
                        
Income tax expense  9   (7,808)   (3,566)   (11,104)   (6,342)
Income/(Loss) for the period     $22,580   $(110,841)  $32,106   $(128,487)
                        
Income/(Loss) for the period attributable to:                       
Owners of the Company      22,580    (110,897)   32,106    (128,865)
Non-controlling interests          56        378 
                        
Earnings per share:                       
Basic, income/(loss) for the period attributable to ordinary equity holders of the Company2      0.22    (1.14)   0.32    (1.32)

 

 

1Refer to Note 2.2. Restatement of Previously Issued Financial Statements

 

2The Group reports net earnings per share in accordance with IAS 33 - Earnings Per Share. Basic income/(loss) per share is calculated by dividing the income/(loss) 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, 2022 and 2021. 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, 2022 is 101,109,572 (for the three and nine months ended September 30, 2021: 97,143,272).

 

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

 

2

 

 

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, 2022 and 2021

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

 

   For the three months ended
September 30
   For the nine months ended
September 30
 
   2022   2021   2022   2021
As restated1
 
Income/(Loss) for the period  $22,580   $(110,841)  $32,106   $(128,487)
                     
Other comprehensive (loss)/income                    
Items that will not be reclassified to profit or loss:                    
Remeasurement of net defined benefit liability               84 
Income tax relating to items that will not be reclassified subsequently to profit or loss               (29)
Net of Tax               55 
Items that will be reclassified subsequently to profit or loss:                    
Exchange differences on translation of foreign operations   (3,513)   567    (4,279)   (3,949)
Other comprehensive (loss)/income for the period, net of tax   (3,513)   567    (4,279)   (3,894)
Total comprehensive income/(loss) for the period  $19,067   $(110,274)  $27,827   $(132,381)
                     
Total comprehensive income/(loss) for the period attributable to:                    
Owners of the Company   19,077    (110,330)   27,827    (132,759)
Non-controlling interests   (10)   56        378 

 

 

1Refer to Note 2.2. Restatement of Previously Issued Financial Statements

 

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

 

3

 

 

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

Unaudited Condensed Consolidated Interim Statement of Financial Position

As of September 30, 2022 and December 31, 2021

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

 

   Notes  As of
September 30,
2022
   As of
December 31,
2021
 
Assets           
Non-current assets           
Property, plant and equipment, net  11   74,128    72,638 
Right-of-use assets      41,039    40,167 
Goodwill      6,668    6,803 
Intangible assets  10   31,278    30,171 
Investments in joint ventures      2,195    2,443 
Other financial assets      220    256 
Deferred tax assets      7,839    7,067 
Other assets      4,448    4,531 
Total non-current assets     $167,815   $164,076 
Current assets             
Cash      27,215    72,112 
Trade and other receivables, net  13   129,284    117,449 
Inventories, net  12   100,361    79,430 
Amounts owed by related parties      2,698    1,147 
Current tax assets      32,155    22,082 
Other current assets      11,643    5,839 
Total current assets     $303,356   $298,059 
Total assets     $471,171   $462,135 
              
Liabilities and Stockholders’ Equity (Deficit)             
Equity (Deficit)             
Share capital      1,011    1,011 
Share premium      377,677    377,677 
Reserves      45,743    42,749 
Accumulated deficit      (401,947)   (431,059)
Accumulated other comprehensive loss      (32,057)   (27,778)
Equity (deficit) attributable to owners of the company     $(9,573)  $(37,400)
Non-controlling interest      (940)   (940)
Total equity (deficit)     $(10,513)  $(38,340)
Non-Current liabilities             
Borrowings  14   170,818    178,720 
Warrant liabilities  16   21,325    23,112 
Shares held in escrow  17   65,543    101,859 
Deferred tax liabilities      2,409    6,070 
Other liabilities      2,138    2,750 
Total non-current liabilities     $262,233   $312,511 
Current liabilities             
Borrowings  14   83,039    74,646 
Trade and other payables, net      95,272    85,381 
Amounts owed to related parties      3,523    8,450 
Current tax liabilities      21,080    11,756 
Provisions  15   111    501 
Other liabilities      16,426    7,230 
Total current liabilities     $219,451   $187,964 
Total liabilities and stockholders’ equity (deficit)     $471,171   $462,135 

 

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

 

4

 

 

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

Unaudited Condensed Consolidated Interim Statement of Changes in Equity

For the nine months ended September 30, 2022 and 2021

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

 

   Attributable to equity holders of the Group 
   Issued
Capital
As restated1
   Share
premium
As restated1
   Reserves 2   Accumulated
deficit
As restated1
   Other
Comprehensive
Income
   Total
As restated1
   Non-
controlling
interest
   Total equity
(deficit)
As restated1
 
Balance as of January 1, 2021  $2,001   $54,412   $39,897   $(327,344)  $(24,421)  $(255,455)  $777   $(254,678)
Loss for the period               (128,865)       (128,865)   378    (128,487)
Transfer reserves           (8)   8                 
Other comprehensive income                   (3,894)   (3,894)       (3,894)
Non-controlling interest               378        378        378 
Termination of put option agreement   903    297,796                298,699        298,699 
Subtotal  $2,904   $352,208   $39,889   $(455,823)  $(28,315)  $(89,137)  $1,155   $(87,982)
Capital restructuring of Crynssen Pharma Group Limited (at exchange ratio of 1:33.4448)   (1,933)   1,933                         
Subtotal - Restructured  $971   $354,141   $39,889   $(455,823)  $(28,315)  $(89,137)  $1,155   $(87,982)
Acquisition of Union Acquisition Corp. II   202    174,738                174,940        174,940 
Shares held in Escrow   (117)   (106,247)               (106,364)       (106,364)
Redemption of redeemable shares   (45)   (44,955)               (45,000)       (45,000)
Balance as of September 30, 2021  $1,011   $377,677   $39,889   $(455,823)  $(28,315)  $(65,561)  $1,155   $(64,406)
                                         
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)

 

 

1Refer to Note 2.2. Restatement of Previously Issued Financial Statements

 

2Includes 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 consolidated condensed interim financial statements.

 

5

 

 

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

Unaudited Condensed Consolidated Interim Statement of Cash Flows

For the nine months ended September 30, 2022 and 2021

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

 

      For the nine months ended
September 30
 
   Notes  2022   2021
As restated1
 
Operating activities           
Income/(Loss) for the period     $32,106   $(128,487)
Adjustments to reconcile net gain (loss) with net cash from operating activities:             
Depreciation of property, plant and equipment  11   4,481    4,184 
Depreciation of right-of-use assets      4,539    3,281 
Amortization of intangibles  10   3,365    5,892 
Income tax expense  9   11,104    6,342 
Finance (income)/expense  7   (18,539)   79,242 
IFRS 2 Share-based payment expense (listing expense)  8       73,917 
Share of result of joint ventures      239    (371)
Net (gain)/loss on sale of property, plant and equipment  11   (503)   710 
Inventory provision  12   2,475    3,263 
Provision for bad debt  13   1,830    741 
Provisions  15   9    1,182 
Cash flow from operating activities before changes in working capital      41,106    49,896 
              
(Increase)/decrease in operating assets and liabilities:             
Trade and other receivables      (13,020)   (14,271)
Amounts owed by related parties      (1,555)   (835)
Inventories      (22,851)   (15,523)
Current tax assets      (10,073)   (4,540)
Other current assets      (5,803)   (563)
Trade and other payables      32,800    23,435 
Amounts owed to related parties      1,637    (252)
Current tax liabilities      (1,625)   (1,120)
Other liabilities      7,573    20,309 
Provisions  15   (408)   (1,182)
Other financial assets      36    321 
Other assets      83    (946)
Cash generated from operations      27,900    54,729 
              
Interest paid      (1,261)   (1,373)
Dividends received          300 
Income tax paid      (4,589)   (2,711)
Cash flow provided by operating activities     $22,050   $50,945 
              
Investing activities             
Acquisition of property, plant and equipment  11   (15,293)   (10,933)
Proceeds from sale of property, plant and equipment      2,653    26 
Acquisition of intangibles  10   (7,757)   (5,898)
Advances to related parties      (138)    
Cash flow used in investing activities     $(20,535)  $(16,805)
              
Financing activities             
Proceeds from borrowings  14   77,253    125,335 
Payments on borrowings  14   (97,290)   (115,642)
Payments to related parties      (6,625)   (3,577)
Interest paid on borrowings  14   (10,028)   (10,316)
Payment of lease liabilities  14   (4,858)   (4,354)
Redeemed shares          (45,000)
Cash obtained in acquisition          129,986 
              
Cash flow (used in) generated from financing activities     $(41,548)  $76,432 
              
Net (decrease) increase in cash      (40,033)   110,572 
Cash at beginning of the period      72,112    4,229 
Effect of exchange rate fluctuations      (4,864)   (14,609)
Cash at end of the period     $27,215   $100,192 
              
Non-cash financing and investing activities2     $42,328   $44,137 

 

 

1Refer to Note 2.2. Restatement of Previously Issued Financial Statements

 

2Non-cash investing and financing activities include acquisition of right-of-use assets $8,793 (for the nine months ended September 30, 2021: $948), invoices from suppliers financed via reverse factoring classified as Trade and other payables $3,427 (for the nine months ended September 30, 2021: $846) and invoices from suppliers financed via reverse factoring classified as Borrowings $30,108 (for the nine months ended September 30, 2021: $42,343).

 

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

 

6

 

 

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, 2022 and 2021

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

 

Note 1. General Company Information

 

Procaps Group S.A., a public limited liability company (société anonyme) governed by the laws of the Grand Duchy of Luxembourg and its subsidiaries (“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, 2022 and December 31, 2021, 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.

 

     Ownership interests held by:    
   Place of
business/country
  The Group   Non-controlling
interests
    
Name of entity  of incorporation  2022   2021   2022   2021   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 (previously Laboratorios Lopez 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 consolidated condensed interim financial statements of the Group for the three and nine months ended September 30, 2022 and 2021 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.

 

Reverse reorganization

 

On September 29, 2021, Crynssen Pharma Group Limited, a private limited liability company registered under the laws of Malta with company registration number C59671 and with registered office at Ground Floor, Palace Court, Church Street, St. Julians STJ 3049, merged with Union Acquisition Corp, a special purpose acquisition company (“SPAC’) domiciled in the Cayman Islands, and Procaps Group, S.A, the ultimate parent company after the merger and which ordinary shares are listed and traded under ‘PROC’ at the NASDAQ in New York City, NY, USA (the “Transaction”).

 

7

 

 

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, 2022 and 2021

(In thousands of United States Dollars, 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 June 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 may have an impact on the European economies and globally. The Group does not have any significant direct exposure to Ukraine, Russia or Belarus considering there are not any existing operations or sales in those locations.

 

However, the impact on the general economic situation may require revisions of certain assumptions and estimates. This may lead to material adjustments to the carrying value of certain assets and liabilities including property plant and equipment, intangible assets, goodwill, warrant liabilities and shares held in escrow within the next financial year. At this stage, management is not able to reliably estimate the impact as events are unfolding day-by-day, but to date, the impact, if any, has not been significant.

 

The longer-term impact may also affect trading volumes, cash flows and our supply of critical components among our manufacturing facilities in El Salvador, Colombia, Brazil, and the U.S. Such disruptions could negatively affect our ability to provide critical components to affiliates or produce pharmaceutical products for customers, which could increase our costs, require capital expenditures, and harm our results of operations and financial condition.

 

Nevertheless, at the date of these financial statements, the Group continues to meet its obligations as they fall due and therefore, continues to apply the going concern basis of preparation.

 

8

 

 

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, 2022 and 2021

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

 

Grupo Somar and Pearl Mexico Acquisition

 

On May 16, 2022, Procaps Group, S.A. entered into a Stock Purchase Agreement (the “SPA”) with AI Global Investments PCC Limited (Netherlands), a protected cell company limited by shares organized under the laws of the Island of Guernsey (“PCC”), acting for and on behalf of the Soar Cell, Triana Capital S.A. de C.V., a corporation organized under the laws of Mexico (“Triana”), AI Pearl (Netherlands) B.V., a private limited company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands (“Pearl Holding Seller”), Perrigo Ireland 7 DAC, a company duly organized and validly existing under the laws of the Republic of Ireland (“Pearl Ireland”, and together with PCC, Triana and Pearl Holding Seller, each a “Seller” and collectively, the “Sellers”), AI Soar (Netherlands) BV, a (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands (“Somar Holding Company”), Química y Farmacia S.A. de C.V., a Sociedad Anónima de Capital Variable duly organized and validly existing under the laws of Mexico (“Quifa”), PDM Acondifarma S.A. de C.V., a Sociedad Anónima de Capital Variable duly organized and validly existing under the laws of Mexico (“PDM”), Gelcaps Exportadora de México S.A. de C.V., a Sociedad Anónima de Capital Variable duly organized and validly existing under the laws of Mexico (“Gelcaps”, and together with Quifa and PDM, “Pearl Mexico”) and Grupo Farmacéutico Somar S.A.P.I. de C.V., a Sociedad Anónima Promotora de Inversión de Capital Variable organized under the laws of Mexico (“Somar” and together with Somar Holding Company, “Grupo Somar”, and together with Pearl Mexico, the “Targets”).

 

Somar specializes in the production of generic and own-brand pharmaceutical products, sold mainly to the private sector, with most of its operations within Mexico. Pearl Mexico specializes in the production and sale of pharmaceutical products, organic chemicals, biological products and over the counter products, with most of its operations within Mexico.

 

Pursuant to the SPA, the Group will acquire all of the issued and outstanding capital stock of the Targets from the Sellers, in exchange for an estimated upfront consideration in the form of:

 

a.An aggregate amount of cash in U.S. dollars equal to approximately $303.0 million, subject to customary adjustments for working capital, net debt and other items (the “Closing Cash Consideration Payment”), which will be allocated to each Seller in accordance with the percentages set forth in the SPA; and

 

b.A vendor loan receivable in an aggregate amount in U.S. dollars equal to approximately $24.3 million (the “Stock Consideration Receivables” and together with the Closing Cash Consideration Payment, the “Closing Consideration Payments”), which will be allocated to Triana and PCC in accordance with the percentages set forth in the SPA.

 

On the closing (the “Closing”) of the transactions contemplated by the SPA (the “Acquisition”), the Group shall issue to PCC and Triana, pursuant to the terms of the SPA and those certain Stock Consideration Subscription Agreements to be entered into on or about the date of the Closing, between the Group and each of PCC and Triana (the “Stock Consideration Subscription Agreements”), approximately 3,081,730 ordinary shares of the Group, nominal value $0.01 per share (the “Ordinary Shares”), based on a price per Ordinary Share of $7.8878 (the volume-weighted average price per share, rounded to the nearest four decimal points, of Ordinary Shares quoted on the Nasdaq (as reported on Bloomberg L.P. under the function “VWAP”), for the period of 30 consecutive trading days ending on the trading day immediately prior to the date of the SPA) (the “Closing Stock Consideration Payment”), which shall be paid-up by each of PCC and Triana by way of set-off against the respective portions of the Stock Consideration Receivables held by PCC and Triana against the Group, in accordance with article 420-23 of the Luxembourg Law on Commercial Companies dated 10 August 1915, as amended.

 

9

 

 

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, 2022 and 2021

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

 

Additionally, at the Closing, the Group shall pay the Sellers an aggregate amount of cash in U.S. dollars, as converted based on the exchange rate of MXN$20.5693 to US$1.00 (the “Applicable Exchange Rate”), equal to 70.0% of PCC’s good faith estimate of the valued added tax receivables of Pearl Mexico and its subsidiaries that have been reported to the tax authorities as a result of the filing of any value-added tax return on or prior to the date of the Closing (the “Filed VAT Receivables”), minus MXN$48,177,093, and subject to certain adjustments set forth in the SPA.

 

In addition to the upfront consideration paid or issued at the Closing, the Sellers have a right to receive a contingent payment in U.S. dollars, as converted based on the Applicable Exchange Rate, in the amount by which the gross profit of Targets and its subsidiaries for the fiscal year ended December 31, 2022 exceeds MXN$1,490,000,000, multiplied by 3.85, with a maximum amount payable of MXN$300,000,000.

 

The transaction, which has been approved by the board of directors of the Group and the Sellers, is expected to close in the fourth quarter of 2022, subject to the satisfaction or waiver of customary closing conditions at or prior to the closing of the transaction, including the receipt of all consents, approvals, orders and authorizations of any governmental authority required in connection with the execution or performance of the SPA, including any regulatory antitrust approvals.

 

Debt Commitment Letter

 

Concurrently with the execution of the SPA, the Group, as borrower, entered into a Commitment Letter with Bank of America, N.A., BofA Securities, Inc., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc. (“Commitment Letter”) for a bridge loan of up to $485 million (the “Bridge Loan”), which will be guaranteed by each existing and future direct and indirect material subsidiary of the Group, and the Targets and each of their subsidiaries upon the Closing. The Bridge Loan will also be secured by a pledge from the Group of its shares in the Targets. The proceeds of the Bridge Loan will be used, together with the Group’s cash on hand, to finance the cash portion of the purchase price of the Acquisition (including related fees and expenses) and, in the event necessary, to prepay certain of the Group’s existing debt. The Bridge Loan will accrue interest at a rate of Term SOFR plus a spread between 5.00%-7.25%, determined according to the time the Bridge Loan has been outstanding and the credit rating of the Group, and will mature 12 months after the initial disbursement to the Group in connection with the Acquisition.

 

10

 

 

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, 2022 and 2021

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

 

Pursuant to the terms of the Commitment Letter, while the Bridge Loan is outstanding, the Group, as the borrower, and the subsidiary guarantors, will be subject to customary affirmative, negative and financial covenants which will, among other things, (i) restrict, subject to certain exceptions, the Group’s ability to incur debt or grant liens; sell or transfer title to operating assets; pay dividends and distributions; engage in mergers and consolidations; guarantee, indemnify or assume the liabilities of third parties; change its fiscal year reporting; engage in certain transactions with affiliates; change its lines of business; or amend its organizational documents, and (ii) require the Group and the subsidiary guarantors to maintain a minimum interest coverage ratio of 3.0x EBITDA at all times, and a maximum leverage ratio of 4.25x to 4.75x EBITDA, according to the time the Bridge Loan has been outstanding, calculated on an annual basis. Additionally, the Bridge Loan may be prepaid by the Group or refinanced at any time, without penalty. The Group must prepay the Bridge Loan with, (i) subject to certain exceptions, all proceeds from asset sales or the occurrence of debt by the Borrower and its subsidiaries, and (ii) 75% of net cash proceeds from any issuances of equity or equity-like instruments by the Group.

 

Note 2. Basis of preparation and accounting

 

These unaudited consolidated condensed interim financial statements of the Group as of September 30, 2022 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 Group’s last annual consolidated financial statements as at and for the year ended December 31, 2021 (“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 November 10, 2022.

 

Note 2.1. Going concern

 

Management has, at the time of approving the accompanying unaudited consolidated condensed interim financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thereby these unaudited consolidated condensed interim financial statements have been prepared on a ‘going concern’ basis.

 

As of September 30, 2022, the following matters have been considered by management in determining the reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

 

As of September 30, 2022, the Group retains a negative equity position of $10,513 while it improved significantly during the period (as of December 31, 2021: negative equity of $38,340). This improvement is related to the comprehensive income for the nine months ended September 30, 2022 of $27,827. The negative equity balance as of September 30, 2022 is primarily driven by the classification of the Holdco Ordinary Shares held in escrow as a financial liability and does not impact the Group’s future operations and there are no further obligations to the Group.

 

11

 

 

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, 2022 and 2021

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

 

For the nine months ended September 30, 2022, the Group recognized income of $32,106 (for the nine months ended September 30, 2021: a loss of $128,487). The Group generated $22,050 of cash in operating activities for the nine months ended September 30, 2022 (for the nine months ended September 30, 2021: $50,945) after changes in working capital. As of September 30, 2022, the Group reported positive working capital of $83,905 (as of December 31, 2021: $110,095).

 

As of September 30, 2022, the Group had cash of $27,215 (as of December 31, 2021: $72,112). Currently, the Group maintains financing lines, which, together with the expected internal generation of funds, will allow it to finance its growth and working capital needs.

 

Management has evaluated its capital position and its ability to continue its normal course of business for the foreseeable future and ability to meet its financial obligations for the next twelve months. The Group projects it will generate excess cash over its current financial obligations through its current cash position and operating cash generated. The excess cash will be available to meet the Group’s investment and capital expenditure objectives.

 

Note 2.2 Restatement of Previously Issued Financial Statements

 

Factoring and reverse factoring arrangements

 

Subsequent to the issuance of the Group’s Unaudited Condensed Consolidated Interim Financial Statements for the periods ended September 30, June 30 and March 31, 2021, the Group revisited the classification of factoring and reverse factoring arrangements previously classified as part of Trade and other payables, net. As a result, management has identified the following errors that were concluded to be material to the previously issued financial statements.

 

The Group’s factoring arrangements with recourse are treated as ’secured borrowing’ transactions since the Group has not transferred substantially all risks and rewards. A secured borrowing transaction is to be classified together with other borrowings. Previously, the Group classified certain factoring arrangements as Trade and other payables, net. Upon reassessing the facts and circumstances, the Group concluded that these should be reclassified to Borrowings (current). Based on this analysis of the factoring arrangements, the Group made the following adjustments to correct the errors identified:

 

As of September 30, 2021, the Group decreased Trade and other payables, net and increased Borrowings (current) by $5,885.
   
For the nine months ended September 30, 2021, the Group reclassified the cash flow impacts of the factoring arrangements from operating cash flows (net cash flow impact of $1,455), to Proceeds from borrowings (cash flow impact of $3,293) and to Payments on borrowings (cash flow impact of $1,838).

 

12

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

The Group’s reverse factoring arrangements have both characteristics of operating and financing. Under IFRS 9 there is no explicit guidance as to when to classify a reverse factoring arrangement as operating or financing debt. The assessment involves judgment and careful consideration of all relevant facts and circumstances per arrangements. Previously, the Group classified all reverse factoring arrangements as Trade and other payables, net. Upon reassessing the facts and circumstances, the Group concluded that some reverse factoring arrangements are more akin to financing arrangements due to the fact the Group pays interest which it normally does not to suppliers. Therefore, the Group has reclassified such arrangements from Trade and other payables, net to Borrowings (current). Based on this analysis of the reverse factoring arrangements, the Group made the following adjustments to correct the errors identified:

 

As of September 30, 2021, the Group decreased Trade and other payables, net and increased Borrowings (current) by $17,863.

 

For the nine months ended September 30, 2021, the Group reclassified the $33,703 cash flow impact related to the reverse factoring arrangements that possess financing characteristics from operating to financing cash flows.

 

Reverse reorganization

 

Subsequent to the issuance of the Group’s Unaudited Condensed Consolidated Interim Financial Statements for the periods ended September 30, June 30 and March 31, 2021, the Group revisited the appropriate accounting for the Transaction mentioned in Note 1. General Company Information. As a result, management has identified the following errors that were concluded to be material to the previously issued financial statements.

 

The Transaction would be appropriate to account for as a restructuring using book value accounting in Procaps Group, S.A. (“Holdco”) consolidated financial statements, on the basis that there has been no business combination between Crynssen Pharma Group Limited (“OpCo”) and Holdco. Shareholders’ equity of the Group prior to the Transaction is retrospectively adjusted as a capital restructuring for the equivalent number of shares received and on a pro rata basis for prior reporting periods, for purposes of calculating earnings per share. Retained earnings and relevant reserves of the Group are carried forward after the transaction. Simultaneously, on the effectiveness of the Transaction, September 29, 2021, the put option agreements were terminated in exchange for new equity instruments in Procaps Group SA. The fair value of the OpCo was estimated using a combination of a market and income approach under IFRS 13. The excess between the fair value of the shares and equity instruments issued and the net assets acquired is treated as an expense under IFRS 2 (the “listing expense”). Any difference to shareholders’ equity of the Group arising from the restructuring of share capital and equity instruments issued is recorded in equity under share premium. Based on these conclusions, the Group made the following adjustments to correct the errors identified:

 

For the nine months ended September 30, 2021, the Group increased the loss for the period by $73,917

 

As of September 30, 2021, the Group decreased total equity and increased total liabilities by $100,711.

 

For the nine months ended September 30, 2021, the Group reclassified the $6,599 cash flow impact related to the reverse reorganization from financing to operating activities.

 

The following tables reflect the impact of corrections discussed above, related to factoring, reverse factoring and reverse reorganization, to the specific financial statements line items presented in the Group´s previously reported unaudited consolidated interim financial statements, as “Restatement Adjustments”.

 

13

 

 

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, 2022 and 2021

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

  

I. Effect of the restatement

 

The restatement of the Consolidated Statement of Profit or Loss for the historical interim periods resulted in the following impacts:

 

  

Unaudited Condensed Consolidated Interim Statement of Profit or Loss
For the nine months ended September 30, 2021

 
Profit or loss, restated  As reported   Restatement Adjustments   As restated 
Other expenses, net   (3,179)   (73,917)   (77,096)
(Loss)/Income before tax   (48,228)   (73,917)   (122,145)
(Loss)/Income for the period   (54,570)   (73,917)   (128,487)

 

The restatement of the Consolidated Statement of Changes in Equity for the historical interim periods resulted in the following impacts:

 

  

Unaudited Condensed Consolidated Interim Statement of Changes in Equity
For the nine months ended September 30, 2021

 
   As reported 
   Issued Capital   Share premium   Accumulated deficit   Total   Total equity (deficit) 
Loss for the period           (54,948)   (54,948)   (54,570)
Share redemption and issuance in business combination   (873)   201,304    148,638    349,069    349,069 
Balance as of September 30, 2021   1,128    255,716    (233,268)   35,150    36,305 

 

  

Unaudited Condensed Consolidated Interim Statement of Changes in Equity
For the nine months ended September 30, 2021

 
   Restatement Adjustments 
   Issued Capital   Share premium   Accumulated deficit   Total   Total equity (deficit) 
Loss for the period           (73,917)   (73,917)   (73,917)
Share redemption and issuance in business combination   873    (201,304)   (148,638)   (349,069)   (349,069)
Termination of put option agreements1   903    297,796         298,699    298,699 
Subtotal   1,776    96,492    (222,555)   (124,287)   (124,287)
Capital restructuring of Crynssen Pharma Group Limited (at exchange ratio of 1:33.4448)1   (1,933)   1,933             
Subtotal - restructured   (157)   98,425    (222,555)   (124,287)   (124,287)
Acquisition of Union Acquisition Corp. II1   202    174,738        174,940    174,940 
Shares held in escrow1   (117)   (106,247)       (106,364)   (106,364)
Redemption of redeemable shares1   (45)   (44,955)       (45,000)   (45,000)
Balance as of September 30, 2021   (117)   121,961    (222,555)   (100,711)   (100,711)

 

  

Unaudited Condensed Consolidated Interim Statement of Changes in Equity
For the nine months ended September 30, 2021

 
   As restated 
   Issued Capital   Share premium   Accumulated deficit   Total   Total equity (deficit) 
Loss for the period           (128,865)   (128,865)   (128,487)
Termination of put option agreements1   903    297,796        298,699    298,699 
Subtotal   2,904    352,208    (455,823)   (89,137)   (87,982)
Capital restructuring of Crynssen Pharma Group Limited (at exchange ratio of 1:33.4448)1   (1,933)   1,933             
Subtotal - restructured   971    354,141    (455,823)   (89,137)   (87,982)
Acquisition of Union Acquisition Corp. II1   202    174,738        174,940    174,940 
Shares held in escrow1   (117)   (106,247)       (106,364)   (106,364)
Redemption of redeemable shares1   (45)   (44,955)       (45,000)   (45,000)
Balance as of September 30, 2021   1,011    377,677    (455,823)   (65,561)   (64,406)

 

 
1For further details, refer to Note 23.1 in the Group’s consolidated financial statements for the year ending December 31, 2021.

 

14

 

 

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, 2022 and 2021

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

 

The restatement of the Consolidated Statement of Financial Position for the historical interim periods resulted in the following impacts:

 

  

Unaudited Condensed Consolidated Interim Statement of Financial Position
As of September 30, 2021

 
       Restatement Adjustments     
Balance Sheet, restated  As reported   Factoring and reverse factoring   Reverse reorganization   As restated 
Non-Current liabilities                    
Warrant liabilities   33,950         (4,987)   28,963 
Shares held in escrow            105,698    105,698 
Total non-current liabilities   151,696        100,711    252,407 
Current liabilities                    
Borrowings   116,713    23,748         140,461 
Trade and other payables, net   132,462    (23,748)        108,714 
Total current liabilities   276,747            276,747 

 

The restatement of the Cash Flow Statement for the historical interim periods resulted in the following impacts:

 

   Unaudited Condensed Consolidated Interim Statement of Cash Flows 
   For the nine month period ending September 30, 2021 
       Restatement Adjustments     
   As reported   Factoring and reverse factoring1   Reverse reorganization   As restated 
Operating activities                
Loss for the period   (54,570)        (73,917)   (128,487)
Adjustments to reconcile net loss with net cash from operating activities:                    
IFRS 2 Share-based payment expense (listing expense)           73,917    73,917 
(Increase)/decrease in operating assets and liabilities:                    
Trade and other payables   (10,975)   34,410        23,435 
Other liabilities   13,710        6,599    20,309 
Interest paid       (1,373)       (1,373)
Cash flow provided by (used in) operating activities   11,309    33,037    6,599    50,945 
                     
Financing activities:                    
Proceeds from borrowings   122,042    3,293        125,335 
Payments on borrowings   (80,101)   (35,541)       (115,642)
Interest paid on borrowings   (9,527)   (789)       (10,316)
Redeemed shares           (45,000)   (45,000)
Cash obtained from acquisition   91,585        38,401    129,986 
Cash Flow generated from (used in) financing activities   116,068    (33,037)   (6,599)   76,432 

 

 
1The restatement adjustment related to Trade and other payables consists of errors related to reverse factoring of $33,703, factoring of $(1,455), interest paid on reverse factoring of $789 and interest paid on lease liabilities of $1,373.

 

Note 3. Summary of significant accounting policies

 

Note 3.1. Change in accounting policy

 

The accounting policies applied in these unaudited condensed consolidated interim financial statements are the same as those applied in the Group’s consolidated financial statements as at and for the year ended December 31, 2021. 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.

 

15

 

 

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, 2022 and 2021

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

 

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

 

The Group adopted the following accounting standard amendments from January 1, 2022. The evaluation performed by management determined that these amendments did not result in a significant impact in relation to the Group as of September 30, 2022

 

Reference to the Conceptual Framework – Amendments to IFRS 3 - Effective January 1, 2022

 

Minor amendments were made to IFRS 3 Business Combinations to update the references to the Conceptual Framework for Financial Reporting and add an exception for the recognition of liabilities and contingent liabilities within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 21 Levies. The amendments also confirm that contingent assets should not be recognized at the acquisition date.

 

No business combinations were consummated for the nine months ended September 30, 2022 and therefore, this amendment has not impacted the Group.

 

Onerous Contracts – Cost of Fulfilling a Contract - Amendments to IAS 37 - Effective January 1, 2022

 

The amendment to IAS 37 clarifies that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts. Before recognizing a separate provision for an onerous contract, the entity recognizes any impairment loss that has occurred on assets used in fulfilling the contract.

 

Due to the nature of contractual arrangements with customers, this amendment has not impacted the Group.

 

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) - Effective January 1, 2022

 

The amendment to IAS 16 Property, Plant and Equipment (“PP&E”) prohibits an entity from deducting from the cost of an item of PP&E any proceeds received from selling items produced while the entity is preparing the asset for its intended use. It also clarifies that an entity is ‘testing whether the asset is functioning properly’ when it assesses the technical and physical performance of the asset. The financial performance of the asset is not relevant to this assessment.

 

Entities must disclose separately the amounts of proceeds and costs relating to items produced that are not an output of the entity’s ordinary activities.

 

The Group did not sell any items produced by PP&E while the entity was preparing such asset for its intended use and therefore, this amendment has not impacted the Group.

 

16

 

 

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, 2022 and 2021

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

 

Annual Improvements to IFRS Standards 2018-2020 - Effective January 1, 2022

 

The following improvements were finalized in May 2020:

 

IFRS 9 Financial Instruments – clarifies which fees should be included in the 10% test for the derecognition of financial liabilities. No significant financial instruments were modified during the nine months ended September 30, 2022 and therefore, this improvement has not impacted the Group.

 

IFRS 16 Leases – amendment of illustrative example 13 to remove the illustration of payments from the lessor relating to leasehold improvements in order to remove any confusion about the treatment of lease incentives. No payments were received from lessors related to leasehold improvements during the nine months ended September 30, 2022 and therefore, this amendment has not impacted the Group.

 

Note 3.3. Recent accounting pronouncements not yet adopted

 

Certain new accounting standards and interpretations have been published that are not mandatory for the nine months ended September 30, 2022 and have not been early adopted by the Group. As of the issue date of these unaudited condensed consolidated interim financial statements, the following new and revised IFRS standards have been issued, which will impact the Group’s unaudited financial statements upon adoption, but are not yet effective:

 

Classification of Liabilities as Current or Non-current (Amendments to IAS 1) - Effective January 1, 2023

 

The narrow-scope amendments to IAS 1 Presentation of Financial Statements clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date (e.g. the receipt of a waiver or a breach of covenant).

 

The amendments also clarify what IAS 1 means when it refers to the ’settlement’ of a liability. The amendments could affect the classification of liabilities, particularly for entities that previously considered management’s intentions to determine classification and for some liabilities that can be converted into equity.

 

The amendments must be applied retrospectively in accordance with the normal requirements in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The Group is in the process of performing its assessment of the impacts of the new standard and anticipate a change in the classification of warrants and shares held in escrow upon adoption from non-current to current liabilities. However, early adoption was not elected.

 

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) - Effective January 1, 2024

 

The amendments require a seller-lessee to subsequently measure lease liabilities arising from a leaseback in a way that it does not recognize any amount of the gain or loss that relates to the right of use it retains. The new requirements do not prevent a seller-lessee from recognizing in profit or loss any gain or loss relating to the partial or full termination of a lease. The Group is in the process of performing its assessment of the impacts of the new standard. However, early adoption was not elected.

 

17

 

 

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, 2022 and 2021

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

 

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 consolidated financial statements as at and for the year ended December 31, 2021.

 

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, 2022 includes $2,585 and $11,433, respectively, (for the three and nine months ended September 30, 2021: $1,048 and $2,158, respectively) 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     
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 three months ended September 30 2021  NextGel   Procaps Colombia   CAN   CASAND   Diabetrics   Total 
                         
Segment revenue   65,835    41,281    19,949    16,790    10,086    153,941 
Inter-segment revenue   (34,401)   (408)   (5,830)   (3,640)   (2,833)   (47,112)
Revenue from contracts with customers   31,434    40,873    14,119    13,150    7,253    106,829 
                               
Timing of revenue recognition                              
Goods transferred at a point in time   30,386    40,873    14,119    13,150    7,253    105,781 
Services transferred over time   1,048                    1,048 
Total revenue from contracts with customers  $31,434   $40,873   $14,119   $13,150   $7,253   $106,829 

 

18

 

 

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, 2022 and 2021

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

 

  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 

 

  Reportable segments     
For the nine months ended September 30, 2021  NextGel   Procaps Colombia   CAN   CASAND   Diabetrics   Total 
                         
Segment revenue   170,997    110,450    42,547    48,032    31,211    403,237 
Inter-segment revenue   (87,097)   (992)   (11,371)   (9,750)   (10,821)   (120,031)
Revenue from contracts with customers   83,900    109,458    31,176    38,282    20,390    283,206 
                               
Timing of revenue recognition                              
Goods transferred at a point in time   81,742    109,458    31,176    38,282    20,390    281,048 
Services transferred over time   2,158                    2,158 
Total revenue from contracts with customers  $83,900   $109,458   $31,176   $38,282   $20,390   $283,206 

 

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.

 

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.

 

19

 

 

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, 2022 and 2021

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

 

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

 

  NextGel   Procaps Colombia   CAN   CASAND 
For the 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 

 

  Diabetrics   Corporate   Total 
For the 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 expenses               (22,748)       (22,748)   (22,748)       (22,748)
Other expenses               9,706        9,706    9,706        9,706 
Income (loss) before tax                                 25,657    4,731    30,388 

 

  NextGel   Procaps Colombia   CAN   CASAND 
For the three months ended September 30, 2021  Total  

Inter-

segment
eliminations

   External   Total  

Inter-

segment
eliminations

   External   Total  

Inter-

segment
eliminations

   External   Total  

Inter-

segment
eliminations

   External 
Revenue   65,834    (34,400)   31,434    41,281    (408)   40,873    19,949    (5,830)   14,119    16,790    (3,640)   13,150 
Contribution margin 1   17,054    (2,105)   14,949    12,399    (116)   12,283    5,180    203    5,383    1,639    3,240    4,879 

 

  Diabetrics   Corporate   Total 
For the three months ended September 30, 2021  Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External 
Revenue   10,086    (2,833)   7,253                153,940    (47,111)   106,829 
Contribution margin 1   1,926    11    1,937    (238)   218    (20)   37,960    1,451    39,411 
Administrative expenses               21,011        21,011    21,011        21,011 
Finance expenses               50,651        50,651    50,651        50,651 
Other expenses               75,024        75,024    75,024        75,024 
Income (loss) before tax                                 (108,726)   1,450    (107,275)

 

20

 

 

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, 2022 and 2021

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

 

  NextGel   Procaps Colombia   CAN   CASAND 
For the 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 
For the 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 expenses               (18,539)       (18,539)   (18,539)       (18,539)
Other expenses               13,209        13,209    13,209        13,209 
Income (loss) before tax                                 43,476    (266)   43,210 

 

  NextGel   Procaps Colombia   CAN   CASAND 
For the nine months ended September 30, 2021  Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External 
Revenue   170,997    (87,097)   83,900    110,450    (992)   109,458    42,547    (11,371)   31,176    48,032    (9,750)   38,282 
Contribution margin 1   43,824    (5,996)   37,828    33,690    26    33,716    8,681    1,182    9,863    5,378    8,483    13,861 

 

  Diabetrics   Corporate   Total 
For the nine months ended September 30, 2021  Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External   Total  

Inter-

segment eliminations

   External 
Revenue   31,211    (10,821)   20,390                403,237    (120,031)   283,206 
Contribution margin 1   4,472        4,472    (7,201)   6,324    (877)   88,844    10,019    98,863 
Administrative expenses               64,670        64,670    64,670        64,670 
Finance expenses               79,242        79,242    79,242        79,242 
Other expenses               77,096        77,096    77,096        77,096 
Income (loss) before tax                                 (132,164)   10,019    (122,145)

 

 
1Contribution 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.

 

21

 

 

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, 2022 and 2021

(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 information based on geographical segments, segment revenue is based on the geographical location of the customers.

 

   For the three months ended
September 30
   For the nine months ended
September 30
 
   2022   2021   2022   2021 
South America   73,514    73,221    206,670    200,737 
Central America   22,101    19,709    64,647    45,843 
North America   11,870    12,125    29,174    30,126 
Europe   2,918    1,774    7,962    6,500 
Total  $110,403   $106,829   $308,453   $283,206 

 

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.

 

Note 7. Finance income/(expense), net

 

   For the three months ended
September 30
   For the nine months ended
September 30
 
   2022   2021   2022   2021 
Banking expenses   (187)   (192)   (561)   (719)
Bank fees   (161)   (277)   (572)   (1,075)
Other financial expenses1   (353)   (131)   (782)   (505)
Net fair value gain of warrant liabilities2   1,151        1,787     
Net fair value gain of shares held in escrow2   28,583        36,315     
Interest expense3   (6,285)   (50,051)   (17,648)   (76,943)
Total  $22,748   $(50,651)  $18,539   $(79,242)

 

 
1For the three and nine months ended September 30, 2022, interest on lease liabilities amounted to $353 and $782, respectively (for the three and nine months ended September 30, 2021: $131 and $505, respectively).
   
2Refer 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, 2022.
   
3Decrease of interest expense is mainly related to the termination of the put option agreements on the effectiveness of the Transaction on September 29, 2021 (see Note 1. General Company Information). For the three and nine months ended September 30, 2021, interest on put options amounted to $8,082 and $23,506, respectively. Additionally, an extinguishment loss of $35,920 was recognized on the effectiveness of the Transaction, reflecting the re-negotiated commencement date for the annual return of the obligation under the Put Option Agreement with Hoche. For the three and nine months ended September 30, 2022, interest expense includes only interest over borrowings.

 

22

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 8. Other expense, net

 

   For the three months ended
September 30
   For the nine months ended
September 30
 
   2022   2021   2022   2021 
Currency exchange rate differences1   (9,000)   (588)   (12,188)   (2,337)
Economic emergency contribution expenses   (322)   (308)   (1,002)   (859)
Fines, surcharges, penalties and taxes assumed   (131)   (177)   (226)   (352)
Donations   (100)   (108)   (273)   (323)
Listing expense2 (as restated)       (73,917)       (73,917)
Other   (153)   74    480    692 
Total  $(9,706)  $(75,024)  $(13,209)  $(77,096)

 

 

1The increase in currency exchange rate differences expense for the three and nine months ended September 30, 2022 and 2021 is mainly related to an increase of 11% and 15%, respectively, in the Colombian Pesos/USD exchange rate for the period and the Group’s Colombian entities’ liability position towards USD.

 

2Corresponds to the difference between the fair value of the net assets received through the SPAC and the value of the equity interest issued, adjusted by dilutive effect of shares held in escrow at a weighted average fair value per share. Refer to Note 2.2. Restatement of Previously Issued Financial Statements for further information.

 

Note 9. Income tax

 

Income tax recognized through profit or loss

 

Income tax expense is recognized at an amount determined by multiplying the profit (loss) 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 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, 2022 amounts to $30,388 and $43,210, respectively (for the three and nine months ended September 30, 2021: $(107,275) and $(122,145), respectively). The income tax expense for the three and nine months ended September 30, 2022 was $7,808 and $11,104, respectively (for the three and nine months ended September 30, 2021: $3,566 and $6,342, respectively). The Group’s consolidated effective tax rate with respect to continuing operations for the nine months ended September 30, 2022 was 25.7% (for the nine months ended September 30, 2021: 5.2%) The change in the consolidated effective tax rate was mainly caused by the following factors: tax base increase according to modifications in the composition of annual profit (loss) projections within different entities of the Group with different jurisdictions, increase in Colombian tax rate and impacts of the reverse reorganization on the prior period tax rate.

 

The tax rate used for the three and nine months ended September 30, 2022 represents the tax rate of 35% (for the three and nine months ended September 30, 2021: 31%) 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.

 

23

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 10. Intangible assets

 

Cost

  Total 
Balance as of January 1, 2021  $48,622 
Additions   1,599 
Additions from internal developments   4,299 
Foreign currency exchange   (2,789)
Balance as of September 30, 2021  $51,731 
      
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 

 

Accumulated amortization  Total 
Balance as of January 1, 2021  $21,038 
Amortization expense   5,892 
Foreign currency exchange   47 
Balance as of September 30, 2021  $26,977 
      
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 
      
As of September 30, 2021     
Net book value  $24,754 
As of September 30, 2022     
Net book value  $31,278 

 

For the three and nine months ended September 30, 2022 and 2021, amortization expenses were recognized within the Statement of Profit or Loss as administrative expenses.

 

24

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 11. Property, plant and equipment, net

 

Cost  Total 
Balance as of January 1, 2021  $115,291 
Additions   10,933 
Disposals   (1,273)
Effect of exchange differences in foreign currency   (8,783)
Reclassifications   611 
Balance as of September 30, 2021  $116,779 
      
Balance as of January 1, 2022  $116,654 
Additions   15,293 
Disposals   (4,147)
Effect of exchange differences in foreign currency   (10,608)
Reclassifications   (439)
Balance as of September 30, 2022  $116,753 

 

Accumulated depreciation  Total 
Balance as of January 1, 2021  $44,956 
Disposals   (537)
Depreciation expense   4,184 
Effect of exchange differences in foreign currency   (3,083)
Balance as of September 30, 2021  $45,520 
      
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 
      
As of September 30, 2021     
Net book value  $71,259 
As of September 30, 2022     
Net book value  $74,128 

 

For the nine months ended September 30, 2022, $3,207 was recognized as cost of goods sold (for the nine months ended September 30, 2021: $2,894) and $1,274 (for the nine months ended September 30, 2021: $1,290) was recognized as administrative expense.

 

Financial Commitments

 

As of September 30, 2022, the Group has commitments to acquire capital expenditures for $8,183 (as of September 30, 2021: $3,645).

 

25

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 12. Inventories, net

 

   As of
September 30,
2022
   As of
December 31,
2021
 
Raw materials and supplies  $39,402   $38,024 
Products in process   8,515    6,240 
Finished products and merchandise   46,800    31,791 
Inventory in transit   10,545    9,645 
Subtotal  $105,262   $85,700 
Less: Provision   (4,901)   (6,270)
Total  $100,361   $79,430 

 

Inventories recognized as cost of goods sold for the nine months ended September 30, 2022 amounted to $121,139 (for the nine months ended September 30, 2021: $123,152). Inventories used as samples for the nine months ended September 30, 2022 amounted to $5,382 (for the nine months ended September 30, 2021: $3,681), were recognized as marketing expenses.

 

Write-downs of inventories to net realizable value and obsolescence adjustments for the nine months ended September 30, 2022 amounted to $2,475 (for the nine months ended September 30, 2021: $3,263), were recognized as a provision expense.

 

Note 13. Trade and other receivables, net

 

   As of
September 30,
2022
   As of
December 31,
2021
 
Trade receivables, net of discounts 1  $122,175   $111,071 
Impairment of trade and other receivables   (11,184)   (8,755)
Other receivables   18,293    15,133 
Trade receivables, net of discounts and impairment  $129,284   $117,449 

 

 

1Discount and return provision amounts to $8,501 (as of December 31, 2021: $7,345).

 

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

 

26

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 14. Borrowings

 

   As of
September 30,
2022
   As of
December 31,
2021
 
Unsecured borrowings at amortized cost        
Syndicated term loan (1)  $40,429   $46,505 
Other term loan (2)   61,231    51,593 
Lease liabilities (3)   34,662    31,747 
Factoring obligations (4)   3,595    10,609 
Bank overdrafts (5)   662    55 
Notes (6)   113,278    112,857 
Total Interest bearing liabilities  $253,857   $253,366 
           
Current   83,039    74,646 
Non- Current  $170,818    178,720 

 

Refer to Note 7. Finance income/(expense), net for the accrual of interest for the three and nine months ended September 30, 2022 and 2021.

 

1. Syndicated term loan

 

   Currency  Range of
Interest
  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
Syndicated term loan  COP  IBR+ 5.3%  (Variable)  2023-2025  $41,030   $39,521 
Syndicated term loan  USD  Libor+ 4.8% (Variable)  2025  $   $7,850 
Amortized cost  COP  N/A  2025  $(601)  $(866)
Total Syndicated term loan           $40,429   $46,505 

 

Main covenants required by the loan contract:

 

Financial commitments

 

Indebtedness Indicator (Indebtedness/EBITDA) as of June 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 < 1.0 on the last day of each semester.
   
EBITDA ratio / financial expenses = or > 3.0 on the last day of each semester.

 

27

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Other commitments

 

The syndicated credit 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.

 

Management continuously monitors the observation of these obligations and complied as of the date of these financial statements.

 

2. Other term loan

 

   Currency  Range of Interest  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
Other term loan  COP  IBR+ 5.0%, DTF+ 3%, 12.11%-18%  2022-2026  $9,867   $9,442 
   COP  IBR+1.40%-6.98%  2022-2025  $19,630   $17,552 
   COP  3.93%-7.44% (Fixed)  2022-2023  $2,010   $ 
   SOL  1.1% - 12.94% (Fixed)  2022-2024  $4,465   $5,953 
   Reales  9.84% - 18% (Fixed)  2023-2024  $2,764   $1,762 
   USD  SOFR+ (4.80%-5.80%)  2023  $4,453   $739 
   USD  4.04%-7.14%  2022-2025  $18,042   $16,145 
Total Other term loans           $61,231   $51,593 

 

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

 

Procaps, S.A.’s consolidated Indebtedness Indicator (Indebtedness / EBITDA) should not be greater than 3.5x.
   
Procaps, S.A.’s consolidated EBITDA/Finance expense should not be less than 3x.

 

Management continuously monitors the observation of these obligations and was in compliance as of the date of these financial statements.

 

28

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

3. Lease liabilities

 

   Currency  Range of Interest  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
Lease liabilities  COP  DTF + (6.5% - 10,11%) T.A., IBR+ (3.82-7.5%)  2022-2030  $8,895   $10,334 
   COP  DTF + (5.50%-10.06%) T.A.  2022-2025  $5,287   $6,662 
   USD  0.70%-21.48%, IBR+4.10%  2022-2032  $16,537   $9,374 
   COP  1.91%-9.58%, IBR+4.68%  2022-2026  $3,912   $5,315 
   Reales  14.64% - 15.48%  2023  $31   $62 
Total Lease Liabilities           $34,662   $31,747 

 

4. Factoring obligations

 

   Currency  Range of Interest  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
Portfolio factoring  COP  DTF+8%  2022  $1,707   $1,383 
   COP  15.0% - 21.0%  N.A.(Fixed)  2022  $1,888   $6,390 
   USD  Libor+7%  2022  $   $2,836 
Total Factoring           $3,595   $10,609 

 

5. Bank overdraft

 

   Currency  Range of Interest  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
Overdrafts and credit cards  COP  19.68% - 32% E.A.  (Fixed)  2022  $662   $55 

 

6. Notes

 

The Senior Notes require Procaps, S.A. and the other obligors thereunder to comply with the following financial ratios:

 

A consolidated total debt of Procaps, S.A. and the other obligors thereunder to consolidated EBITDA for the last twelve months of 3.50:1.00 or less, 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.

 

29

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Complying with the Note Purchase Agreement protocols and as a result of the more favorable provisions of the Syndicated Existing Credit Facility, 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 Existing Credit Facility Agreement, shall apply to the Senior Notes.

 

As of September 30, 2022, Procaps, S.A. was in compliance with all of the financial covenants related to the Notes, and management expects that Procaps, S.A. will be able to maintain compliance with the financial covenants in the future.

 

The Senior Notes are classified as long-term debt on the Group’s unaudited consolidated condensed interim balance sheets and will be classified as such until the Senior Notes are within one year of maturity.

 

   Currency  Range of Interest  Maturity Year  As of
September 30,
2022
   As of
December 31,
2021
 
The Prudential Insurance Company Of America  USD  4.75% (Fixed)  2031  $59,122   $58,906 
Prudential Annuities Life Assurance Corporation  USD  4.75% (Fixed)  2031  $29,531   $29,423 
Healthspring Life & Health Insurance Company, Inc  USD  4.75% (Fixed)  2031  $18,075   $18,007 
CIGNA Health and Life Insurance Company  USD  4.75% (Fixed)  2031  $6,550   $6,521 
Total Senior Notes           $113,278   $112,857 

 

7. Bridge Loan

 

As of September 30, 2022, the Group has not drawn down funds from the Bridge Loan. Refer to Note 1. General Company Information for more information on the Bridge Loan.

 

Note 15. Provisions and contingencies

 

   2022   2021 
Contingencies        
Balance as of January 1  $501   $1,829 
Effect of changes in foreign exchange rates   9    (166)
Provisions made   9    1,182 
Provisions used   (408)   (1,182)
Balance as of September 30  $111   $1,663 

 

30

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

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 $68 (as of September 30, 2021: $607 ) is comprised of $38 (as of September 30, 2021: $80 ) for labor litigation, $30 ( as of September 30, 2021: $173 ) for administrative and civil litigation. As of September 30, 2021, balance for tax litigation amounted to $354, there are no tax litigation provisions recognized as of September 30, 2022.

 

Procaps legal proceedings – The total balance of $43 (as of September 30, 2021: $737) is for labor litigation.

 

Note 16. Warrant liabilities

 

   As of
September 30,
2022
   As of
December 31,
2021
 
Public warrants   17,000    16,000 
Private warrants1   4,325    7,112 
   $21,325   $23,112 

 

 

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

 

Note 16.1. Public warrants

 

   2022   2021 
As of January 1  $16,000   $ 
Acquired public warrants       21,600 
Fair value remeasurement   1,000    (5,600)
Balance as of September 30  $17,000   $16,000 

 

The fair value of the Public Warrants increased for the nine months ended September 30, 2022 by $1,000 (decreased for the year ended December 31, 2021: $5,600). Refer to Note 7. Finance income/(expense), net.

 

31

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 16.2. Private warrants

 

   2022   2021 
As of January 1  $7,112   $ 
Acquired private warrants       7,363 
Fair value remeasurement   (2,787)   (251)
Balance as of September 30  $4,325   $7,112 

 

The fair value of the Private Warrants decreased for the nine months ended September 30, 2022 by $2,787 (for the year ended December 31, 2021: $251). Refer to Note 7. Finance income/(expense), net.

 

Note 17. Shares in escrow

 

   2022   2021 
As of January 1  $101,859   $ 
Escrowed shares       106,364 
Fair value remeasurement   (36,316)   (4,505)
Balance as of September 30  $65,543   $101,859 

 

The fair value of the Shares in escrow decreased for the nine months ended September 30, 2022 by $36,316 (for the year ended December 31, 2021: $4,505). Refer to Note 7. Finance income/(expense), net.

 

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.

 

32

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

   As of September 30,
2022
   As of December 31,
2021
 
   FVTPL1   Amortized cost2   FVTPL1   Amortized cost2 
Financial assets not measured at fair value                
Trade and other receivables, net       129,284        117,449 
Amounts owed by related parties       2,698        1,147 
Cash       27,215        72,112 
Other financial assets       220        256 
Total financial assets not measured at fair value  $   $159,417   $   $190,964 
                     
Financial liabilities measured at fair value                    
Warrant liabilities   21,325        23,112     
Shares held in escrow   65,543        101,859     
Total financial liabilities measured at fair value   86,868        124,971     
Financial liabilities not measured at fair value                    
Borrowings       253,857        253,365 
Trade and other payables, net       95,272        85,381 
Amounts owed to related parties       3,523        8,450 
Total financial liabilities not measured at fair value  $   $352,652   $   $347,196 

 

 

1The fair value of the exhibited figures as of September 30, 2022 is comprised of $17,000 level 1 (as of December 31, 2021: 16,000) and $69,868 level 3 (as of December 31, 2021: 108,971).

 

2The fair value of the exhibited figures is similar to their amortized cost as of September 30, 2022 and December 31, 2021, respectively.

 

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 statement of financial position, as well as the significant unobservable inputs used.

 

Type  Valuation Technique  Significant unobservable input  Inter-relationship between significant unobservable input and fair value measurement
Warrants  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  The estimated fair value would increase (decrease) if the expected volatility were higher (lower).
Shares held in escrow  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  The estimated fair value would increase (decrease) if the expected volatility were higher (lower).

 

33

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

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, 2022 and December 31, 2021 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, 2022 and December 31, 2021.

 

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.

 

September 30, 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   0.47%   2.21%   4.09%   7.41%   7.78%   82.70%   14.04%
Gross carrying amount   118,417    11,361    4,277    2,091    1,002    26,282    163,430 
Impairment loss allowance   (552)   (251)   (175)   (155)   (78)   (21,736)   (22,947)
   $117,865   $11,110   $4,102   $1,936   $924   $4,546   $140,483 

 

December 31, 2021  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   0.60%   2.11%   2.35%   3.38%   3.26%   67.43%   14.67%
Gross carrying amount   98,776    11,265    3,147    1,981    1,843    30,578    147,590 
Impairment loss allowance   (591)   (238)   (74)   (67)   (60)   (20,620)   (21,650)
   $98,185   $11,027   $3,073   $1,914   $1,783   $9,958   $125,940 

 

As of September 30, 2022 no impairment losses were recognized for balances in connection with related parties. However, as of September 30, 2022 and December 31, 2021, an allowance is maintained for open balances referred to goods sold to Industrias Intercaps de Venezuela and Laboratorios Vivax Pharmaceuticals, due to the critical political and social situation that the location country of precedence is experiencing.

 

34

 

 

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, 2022 and 2021
(In thousands of United States Dollars, unless otherwise stated)

 

Note 19. Key management personnel

 

Transactions with directors and executive board management members

 

Total management compensation included in the unaudited consolidated condensed interim statement of profit or loss are as follows:

 

   For the three months ended
September 30
   For the nine months ended
September 30
 
   2022   2021   2022   2021 
Short-term employee benefits   647    583    1,781    1,592 
Consulting fees   678    834    2,417    1,971 
   $1,325   $1,417   $4,198   $3,563 

 

Note 20. Events after the reporting period

 

Management has considered subsequent events through the date these consolidated financial statements were issued and identified the following events that require disclosure.

 

Regulatory Antitrust Approval for the Acquisition

 

On October 3, 2022, the Federal Economic Competition Commission in Mexico (“COFECE”) provided Procaps Group, S.A. regulatory antitrust approval for the acquisition of Grupo Somar and Pearl Mexico. The COFECE approval allows Procaps Group, S.A. six months to close the transaction, with an option to extend that period for an additional six months upon a justified request.

 

Bridge Loan Credit Agreement

 

On October 11, 2022, Procaps Group, S.A., as borrower, and Procaps S.A., Procaps, S.A., de C.V., Diabetrics Healthcare S.A.S., and Sofgen Pharmaceuticals LLC, as guarantors, entered into a Credit Agreement with Bank of America, N.A., BofA Securities, Inc., JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc., acting as book runners and joint arrangers (“Bridge Loan Credit Agreement”), for the Bridge Loan. The Bridge Loan Credit Agreement’s terms are consistent with the terms of the Commitment Letter disclosed within Note 1. General Company Information. The Bridge Loan Credit Agreement effectively replaced the Commitment Letter upon its execution.

 

Senior Note Amendment

 

In connection with Procaps Group, S.A.’s previously announced acquisition of Grupo Somar and Pearl Mexico, Procaps Group, S.A. intends to prepay in full the aggregate principal amount of the 4.75% guaranteed senior notes due November 12, 2031 (the “Senior Notes”) issued by Procaps, S.A., Procaps Group, S.A.’s subsidiary, pursuant to a note purchase agreement (the “NPA”) entered into on November 5, 2021, with the noteholders thereunder (collectively, the “Noteholders”), together with interest accrued thereon to the date of such prepayment and the make-whole amount determined for the date of such prepayment pursuant to the NPA (the “Notes Payoff”). Procaps Group, S.A. previously expected that the closing of the acquisition of Grupo Somar and Pearl Mexico would occur on October 14, 2022, and accordingly, pursuant to the requirements of the NPA, delivered advance notice to the Noteholders of the Notes Payoff to occur on such date. As a result of a delay in the closing of the acquisition of Grupo Somar and Pearl Mexico, the expected borrowing under the Bridge Loan Credit Agreement did not occur, and Procaps Group, S.A. was unable to complete the Notes Payoff on the date scheduled, which technically constituted an event of default under the NPA. The Noteholders informed Procaps Group, S.A. that they would not exercise any rights or remedies under the NPA due to such technical default pending entry into an amendment to the NPA formally waiving such default, and Procaps S.A., Procaps Group, S.A., the other obligors under the Senior Notes and the Noteholders executed temporary waivers in connection therewith. On November 1, 2022, Procaps S.A., Procaps Group, S.A., the other obligors under the Senior Notes and the Noteholders entered into an amendment to the NPA (the “NPA Amendment”), formally waiving the technical default and which also (i) provides Procaps Group, S.A. the ability, until November 30, 2022, to prepay the Senior Notes with two business days’ notice, (ii) provides that the make-whole amount under the NPA shall in no case be less than USD 1,488,204.60, and (iii) provides that, if the Notes Payoff does not occur on or prior to November 30, 2022, a waiver fee of 3.75% per annum on the outstanding principal amount of Senior Notes outstanding shall (a) accrue from (and including) October 14, 2022 and (b) be payable to the Noteholders on the 12th day of February, May, August and November in each year (commencing on February 12, 2023), on the maturity date of such Senior Note and on each other date on which interest on such Senior Note is due and payable in accordance with the terms of the NPA and such Senior Note.

 

 

35