UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 001-40860

________________________

Olaplex Holdings, Inc.

(Exact name of registrant as specified in its charter)

________________________


Delaware						87-1242679
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

Address not applicable1

(Address of principal executive offices and zip code)

(310) 691-0776

(Registrant’s telephone number, including area code)

________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

OLPX

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☒	Smaller reporting company	☐

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, ~~2021,~~2022, registrant had ~~648,124,642~~649,181,334 shares of common stock, par value $0.001 per share, outstanding.

1 Olaplex Holdings, Inc. is a fully remote company. Accordingly, it does not maintain a principal executive office.

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OLAPLEX HOLDINGS, INC.

~~Quarterly Report on Form 10-Q~~

~~For the Quarterly Period Ended September 30, 2021~~

TABLE OF CONTENTS


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets ~~– September 30, 2021 and December 31, 2020~~	6
	Condensed Consolidated Statements of Operations and Comprehensive Income ~~- Three and Nine Months Ended September 30, 2021 and 2020~~	7
	Condensed Consolidated Statements of Changes in ~~Members’~~ Equity	8
	Condensed Consolidated Statements of Cash ~~Flows- Nine Months Ended September 30, 2021 and 2020~~Flows	9
	Notes to Condensed Consolidated Financial Statements ~~– September 30, 2021~~	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2619
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4230
Item 4.	Controls and Procedures	4331
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	4532
Item 1A.	Risk Factors	4532
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4532
Item 3.	Defaults Upon Senior Securities	4532
Item 4.	Mine Safety Disclosures	4532
Item 5.	Other Information	4532
Item 6.	Exhibits	4633
Signatures		4734

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements contained in or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts. When used in this document, words such as “may,” “will,” “could,” “should,” “intend,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “target,” “predict,” “project,” “seek” and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

Examples of forward-looking statements include, among others, statements we make regarding: our financial position and operating results; business plans and ~~objectives;~~objectives, including geographic expansion and omnichannel strategy; general economic and industry trends; business prospects; future product development; growth and expansion opportunities; ~~cybersecurity profile;~~impacts on our supply chain; and expenses, working capital and liquidity. We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward- looking statements we make.

The forward-looking statements in this Quarterly Report on Form 10-Q are predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, including such statements taken from third party industry and market reports. You should understand that the following important factors, in addition to those discussed in the section “Risk Factors” included in the Company’s ~~final prospectus, dated September 29, 2021, filed with~~Annual Report on Form 10-K for the ~~SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on October 1,~~year ended December 31, 2021 (the ~~“IPO~~

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~~Prospectus”~~“2021 Form 10-K”), could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements, including the following:

•our ability to execute on our growth strategies and expansion opportunities;

•increased competition causing us to reduce the prices of our products or to increase significantly our marketing efforts in order to avoid losing market share;

•impacts on our ~~existing~~business due to the sensitivity of our business to unfavorable economic and any future indebtedness, including our ability to comply with affirmative and negative covenants under the Credit Agreement to which we will remain subject, until maturity, and our ability to obtain additional financing on favorable terms or at all;business conditions;

•our dependence on a limited number of customers for a significant portion of our net sales;

•our ability to effectively market and maintain a positive brand ~~image;~~

•~~changes in consumer preferences or changes in demand for haircare products or other products we may develop;~~image and expand our brand awareness;

•our ability to accurately forecast consumer demand for our products;

•our ability to attract new customers and encourage consumer spending across our product portfolio;

•changes in consumer preferences or changes in demand for hair care products or other products we may develop;

•our ability to maintain favorable relationships with suppliers and manage our supply chain, including obtaining and maintaining shipping distribution and raw materials at favorable pricing;

•our relationships with and the performance of distributors and retailers who sell our products to ~~haircare~~hair care professionals and other customers;

•~~impacts~~the impact of material cost increases and other inflation and our ability to pass on such increases to our ~~business due to the sensitivity of our business to unfavorable economic and business conditions;~~customers;

•our ability to develop, manufacture and effectively and profitably market and sell future products;

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•~~failure of markets~~our ability to ~~accept~~anticipate and effectively respond to market trends, including with respect to new product introductions;

•our ability to successfully implement new or additional marketing efforts;

•our ability to attract and retain senior management and other qualified personnel;

•regulatory changes and developments affecting our current and future products;

•our existing and any future indebtedness, including our ability to comply with affirmative and negative covenants under the 2022 Credit Agreement (as defined herein) to which we will remain subject, until maturity, and our ability to obtain additional financing on favorable terms or at all;

•increasing cost of debt and our ability to service our existing indebtedness and obtain additional capital to finance operations and our growth opportunities;

•impacts on our business from political, regulatory, economic, trade, and other risks associated with operating internationally including volatility in currency exchange rates, and imposition of tariffs;

•our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others;

•the impact of ~~material cost and other inflation and our ability to pass on such increases to our customers;~~

•~~the impact of~~ changes in laws, regulations and administrative policy, including those that limit United States (“U.S.”) tax benefits or impact trade agreements and tariffs;

•the outcome of litigation and governmental proceedings;

•impacts on our business from the COVID-19 pandemic; and

•the other factors identified in the “Risk Factors” section of the ~~IPO Prospectus.~~2021 Form 10-K.

These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or

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achievements may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated, expected, intended, planned or projected. We discuss many of these risks in greater detail in the “Risk Factors” section ofincluded in the ~~IPO Prospectus.~~2021 Form 10-K. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Unless required by ~~United States~~U.S. federal securities laws, we neither intend nor assume any obligation to update these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

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PART I - FINANCIAL INFORMATION

ITEM 1. ~~FINANCIAL STATEMENTS~~Financial Statements

OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except ~~shares)~~per share and share data)

(Unaudited)


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Assets	Assets					Assets
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	121,479	$	10,964	Cash and cash equivalents	$	249,399	$	186,388
Accounts receivable, net of allowances of $6,867 and $1,362		59,283		14,377
Accounts receivable, net of allowances of $14,976 and $8,231						Accounts receivable, net of allowances of $14,976 and $8,231	93,286		40,779
Inventory	Inventory	69,088		33,596		Inventory	151,283		98,399
Other current assets	Other current assets	8,182		2,422		Other current assets	3,277		9,621
Total current assets	Total current assets	258,032		61,359		Total current assets	497,245		335,187
Property and equipment, net	Property and equipment, net	806		34		Property and equipment, net	614		747
Intangible assets, net	Intangible assets, net	1,054,962		1,092,310		Intangible assets, net	1,007,267		1,043,344
Goodwill	Goodwill	168,300		168,300		Goodwill	168,300		168,300
Deferred taxes		6,978		10,830
Investment in nonconsolidated entity		4,500		—
Deferred taxes, net						Deferred taxes, net	12,876		8,344
Other assets						Other assets	10,498		4,500
Total assets	Total assets	$	1,493,578	$	1,332,833	Total assets	$	1,696,800	$	1,560,422

Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current Liabilities:	Current Liabilities:					Current Liabilities:
Accounts payable	Accounts payable	$	14,303	$	16,815	Accounts payable	$	23,126	$	19,167
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	30,894		9,862		Accrued expenses and other current liabilities	26,031		17,332
Accrued sales and income taxes						Accrued sales and income taxes	16,096		12,144
Current portion of long-term debt	Current portion of long-term debt	20,112		20,112		Current portion of long-term debt	6,750		20,112
Current portion of Related Party payable pursuant to Tax Receivable Agreement						Current portion of Related Party payable pursuant to Tax Receivable Agreement	16,557		4,157
Total current liabilities	Total current liabilities	65,309		46,789		Total current liabilities	88,560		72,912
Related Party payable pursuant to Tax Receivable Agreement	Related Party payable pursuant to Tax Receivable Agreement	232,893		—		Related Party payable pursuant to Tax Receivable Agreement	208,582		225,122
Long-term debt	Long-term debt	742,371		755,371		Long-term debt	655,662		738,090
Total liabilities	Total liabilities	1,040,573		802,160		Total liabilities	952,804		1,036,124

Contingencies (Note 14)		0		0
Contingencies (Note 11)						Contingencies (Note 11)

Stockholders’ equity (Notes 1 and 12):
Common stock, $0.001 par value per share; 2,000,000,000 shares authorized, 648,124,642 and 647,888,387 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		648		648
Stockholders’ equity (Notes 1 and 9):						Stockholders’ equity (Notes 1 and 9):
Common stock, $0.001 par value per share; 2,000,000,000 shares authorized, 649,112,823 and 648,794,041 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively						Common stock, $0.001 par value per share; 2,000,000,000 shares authorized, 649,112,823 and 648,794,041 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	649		648
Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding	Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding	—		—		Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding	—		—
Additional paid-in capital	Additional paid-in capital	300,884		530,025		Additional paid-in capital	310,193		302,866
Accumulated other comprehensive income						Accumulated other comprehensive income	1,931		—
Retained earnings	Retained earnings	151,473		—		Retained earnings	431,223		220,784
Total stockholders’ equity	Total stockholders’ equity	453,005		530,673		Total stockholders’ equity	743,996		524,298
Total liabilities and stockholders’equity		$	1,493,578	$	1,332,833
Total liabilities and stockholders’ equity						Total liabilities and stockholders’ equity	$	1,696,800	$	1,560,422

The accompanying notes are an integral part of these ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements

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OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(amounts in thousands, except per share and share data)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Net sales	Net sales	$	161,624	$	89,447	$	431,867	$	189,055	Net sales	$	176,454	$	161,624	$	573,553	$	431,867
Cost of sales:	Cost of sales:									Cost of sales:
Cost of product (excluding amortization)	Cost of product (excluding amortization)	32,462		24,569		83,859		79,236		Cost of product (excluding amortization)	45,484		32,462		140,999		83,859
Amortization of patented formulations	Amortization of patented formulations	1,680		2,102		6,399		4,567		Amortization of patented formulations	1,142		1,680		5,091		6,399
Total cost of sales	Total cost of sales	34,142		26,671		90,258		83,803		Total cost of sales	46,626		34,142		146,090		90,258
Gross profit	Gross profit	127,482		62,776		341,609		105,252		Gross profit	129,828		127,482		427,463		341,609
Operating expenses:	Operating expenses:									Operating expenses:
Selling, general, and administrative	Selling, general, and administrative	30,257		8,215		75,323		23,291		Selling, general, and administrative	30,807		30,257		79,232		75,323
Amortization of other intangible assets	Amortization of other intangible assets	10,182		10,182		30,547		29,643		Amortization of other intangible assets	10,329		10,182		30,890		30,547
Acquisition costs		—		488		—		16,499

Total operating expenses	Total operating expenses	40,439		18,885		105,870		69,433		Total operating expenses	41,136		40,439		110,122		105,870
Operating income	Operating income	87,043		43,891		235,739		35,819		Operating income	88,692		87,043		317,341		235,739
Interest (expense)		(14,987)		(9,794)		(46,052)		(28,577)
Other (expense) income, net		(213)		(29)		(417)		(155)
Interest expense										Interest expense	(10,499)		(14,987)		(30,653)		(46,052)
Other expense, net										Other expense, net
Loss on extinguishment of debt										Loss on extinguishment of debt	—		—		(18,803)		—
Other expense, net										Other expense, net	(2,251)		(213)		(3,852)		(417)
Total other expense, net										Total other expense, net	(2,251)		(213)		(22,655)		(417)
Income before provision for income taxes	Income before provision for income taxes	71,843		34,068		189,270		7,087		Income before provision for income taxes	75,942		71,843		264,033		189,270
Income tax provision	Income tax provision	15,252		5,753		37,797		1,197		Income tax provision	15,179		15,252		53,594		37,797
Net income	Net income	$	56,591	$	28,315	$	151,473	$	5,890	Net income	$	60,763	$	56,591	$	210,439	$	151,473
Comprehensive income		$	56,591	$	28,315	$	151,473	$	5,890

Net income per share:	Net income per share:									Net income per share:
Basic	Basic	$	0.09	$	0.04	$	0.23	$	0.01	Basic	$	0.09	$	0.09	$	0.32	$	0.23
Diluted	Diluted	$	0.08	$	0.04	$	0.22	$	0.01	Diluted	$	0.09	$	0.08	$	0.30	$	0.22
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	648,124,642		647,888,387		648,082,081		631,143,589		Basic	649,099,780		648,124,642		648,963,625		648,082,081
Diluted	Diluted	690,711,782		653,036,893		689,108,272		632,877,840		Diluted	691,257,654		690,711,782		691,585,787		689,108,272

Other comprehensive income:										Other comprehensive income:
Unrealized gain on derivatives, net of income tax effect										Unrealized gain on derivatives, net of income tax effect	$	1,931	$	—	$	1,931	$	—
Total other comprehensive income:										Total other comprehensive income:	1,931		—		1,931		—
Total comprehensive income:										Total comprehensive income:	$	62,694	$	56,591	$	212,370	$	151,473

The accompanying notes are an integral part of these ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements

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OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(amounts in thousands, except number of shares)

(Unaudited)

Shares
(Note 1) Amount Additional Paid
in Capital Retained
Earnings Total Equity
Balance - December 31, 2020 647,888,387 $ 648 $ 530,025 $ — $ 530,673
Issuance of common stock 236,255 — 633 — 633
Net income — — — 94,882 94,882
Share-based compensation expense — — 1,174 — 1,174
Balance – June 30, 2021 648,124,642 $ 648 $ 531,832 $ 94,882 $ 627,362
Net income — — — 56,591 56,591
Tax receivable agreement — — (232,893) — (232,893)
Share-based compensation expense — — 1,945 — 1,945
Balance – September 30, 2021 648,124,642 $ 648 $ 300,884 $ 151,473 $ 453,005


	Shares (Note 1)	Amount		Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Equity
Balance - December 31, 2021	648,794,041	$	648	$	302,866	$	—	$	220,784	$	524,298
Net income	—	—		—				61,961		61,961
Conversion of cash-settled units to stock-settled stock appreciation rights	—	—		1,632				—		1,632
Exercise of stock-settled stock appreciation rights	117,180	—		348				—		348
Shares withheld and retired on exercise of stock-settled stock appreciation rights	(55,244)	—		(920)				—		(920)
Share-based compensation expense	—	—		1,696				—		1,696
Balance – March 31, 2022	648,855,977	648		305,622		—		282,745		589,015
Net income	—	—		—				87,715		87,715
Exercise of stock options	231,846	1		739				—		740
Share-based compensation expense	—	—		1,727				—		1,727
Balance – June 30, 2022	649,087,823	649		308,088		—		370,460		679,197
Net income	—	$	—	$	—	—		$	60,763	$	60,763
Exercise of stock options	25,000	$	—	$	74	—		$	—	$	74
Share-based compensation expense	—	$	—	$	2,031	—		$	—	$	2,031
Unrealized gain on derivatives	—	$	—	$	—	1,931		$	—	$	1,931
Balance – September 30, 2022	649,112,823	$	649	$	310,193	$	1,931	$	431,223	$	743,996


		Shares (Note 1)	Amount		Additional Paid in Capital		Retained Earnings		Total Equity			Shares (Note 1)		Amount			Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Equity
Balance - January 1, 2020		0	0		0		0		0
Balance - December 31, 2020											Balance - December 31, 2020	647,888,387		$	648		$	530,025	$	—	$	—	$	530,673
Issuance of common stock	Issuance of common stock	647,888,387	$	648	$	959,220	$	—	$	959,868	Issuance of common stock	236,255		—			633		—		—		633
Net loss		—	—		—		(22,425)		(22,425)
Share-based compensation expense		—	—		421		—		421
Balance – June 30, 2020		647,888,387	$	648	$	959,641	$	(22,425)	$	937,864

Net income	Net income	—	—		—		28,315		28,315		Net income	—		—			—		—		45,531		45,531
Share-based compensation expense	Share-based compensation expense	—	—		516		—		516		Share-based compensation expense	—		—			627		—		—		627
Balance – September 30, 2020		647,888,387	$	648	$	960,157	$	5,890	$	966,695
Balance – March 31, 2021											Balance – March 31, 2021	648,124,642		648			531,285		—		45,531		577,464
Net income											Net income	—		—			—		—		49,351		49,351
Share-based compensation expense											Share-based compensation expense	—		—			547		—		—		547
Balance – June 30, 2021											Balance – June 30, 2021	648,124,642		648			531,832		—		94,882		627,362
Net income											Net income	—		—			—		—		56,591		56,591
Tax receivable agreement											Tax receivable agreement	—		—			(232,893)		—		—		(232,893)
Share-based compensation expense											Share-based compensation expense	—		—			1,945		—		—		1,945
Balance – September 30, 2021											Balance – September 30, 2021	648,124,642	PY	$	648	PY	$	300,884	$	—	$	151,473	$	453,005

The accompanying notes are an integral part of these ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements

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OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	151,473	$	5,890	Net income	$	210,439	$	151,473
Adjustments to reconcile net income to net cash from operations provided by operating activities:	Adjustments to reconcile net income to net cash from operations provided by operating activities:					Adjustments to reconcile net income to net cash from operations provided by operating activities:
Amortization of patent formulations	Amortization of patent formulations	6,399		4,567		Amortization of patent formulations	5,091		6,399
Amortization of other intangibles	Amortization of other intangibles	30,547		29,643		Amortization of other intangibles	30,890		30,547
Inventory write-off and disposal						Inventory write-off and disposal	5,958		—

Depreciation of fixed assets	Depreciation of fixed assets	87		—		Depreciation of fixed assets	233		87
Amortization of fair value of acquired inventory		—		44,519

Amortization of debt issuance costs	Amortization of debt issuance costs	2,084		1,277		Amortization of debt issuance costs	2,955		2,084
Deferred taxes	Deferred taxes	3,852		(3,321)		Deferred taxes	(4,532)		3,852
Share-based compensation expense	Share-based compensation expense	3,119		937		Share-based compensation expense	5,454		3,119
Changes in operating assets and liabilities, net of effects of acquisition:
Loss on extinguishment of debt						Loss on extinguishment of debt	18,803		—
Other operating						Other operating	147		—
Changes in operating assets and liabilities, net of effects of acquisition (as applicable):						Changes in operating assets and liabilities, net of effects of acquisition (as applicable):
Accounts receivable, net	Accounts receivable, net	(44,906)		(13,198)		Accounts receivable, net	(52,507)		(44,906)
Inventory	Inventory	(35,090)		(2,488)		Inventory	(57,132)		(35,090)
Other current assets	Other current assets	(5,760)		(2,825)		Other current assets	6,344		(5,760)
Accounts payable	Accounts payable	9,165		3,882		Accounts payable	3,959		9,165
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	9,355		15,626		Accrued expenses and other current liabilities	14,283		9,355
Other assets/liabilities						Other assets/liabilities	(8,578)		—
Net cash provided by operating activities	Net cash provided by operating activities	130,325		84,509		Net cash provided by operating activities	181,807		130,325

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of property and equipment	Purchase of property and equipment	(859)		(58)		Purchase of property and equipment	(100)		(859)
Purchase of software						Purchase of software	(1,612)		—
Purchase of investment in nonconsolidated entity	Purchase of investment in nonconsolidated entity	(4,500)		—		Purchase of investment in nonconsolidated entity	—		(4,500)
Business acquisition, net of acquired cash		—		(1,381,582)

Net cash used in investing activities	Net cash used in investing activities	(5,359)		(1,381,640)		Net cash used in investing activities	(1,712)		(5,359)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from the issuance of stock	Proceeds from the issuance of stock	633		959,867		Proceeds from the issuance of stock	—		633
Proceeds from Revolver		—		50,000
Principal payments of Term Loan		(15,084)		(5,625)
Payments of Revolver		—		(25,000)
Proceeds from the issuance of Term Loan		—		450,000
Proceeds from exercise of stock options						Proceeds from exercise of stock options	814		—
Payments for shares withheld and retired for taxes and exercise price for stock-settled stock appreciation rights						Payments for shares withheld and retired for taxes and exercise price for stock-settled stock appreciation rights	(572)		—
Principal payments for 2022 Term Loan Facility, and principal payments and prepayment fees for 2020 Term Loan Facility						Principal payments for 2022 Term Loan Facility, and principal payments and prepayment fees for 2020 Term Loan Facility	(780,382)		(15,084)

Proceeds from the issuance of 2022 Term Loan Facility						Proceeds from the issuance of 2022 Term Loan Facility	675,000		—
Payments of debt issuance costs	Payments of debt issuance costs	—		(10,526)		Payments of debt issuance costs	(11,944)		—
Net cash (used in) provided by financing activities		(14,451)		1,418,716
Net cash used in financing activities						Net cash used in financing activities	(117,084)		(14,451)

Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	110,515		121,585		Net increase in cash and cash equivalents	63,011		110,515
Cash and cash equivalents - beginning of period	Cash and cash equivalents - beginning of period	10,964		—		Cash and cash equivalents - beginning of period	186,388		10,964
Cash and cash equivalents - end of period	Cash and cash equivalents - end of period	$	121,479	$	121,585	Cash and cash equivalents - end of period	$	249,399	$	121,479

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid for income taxes	Cash paid for income taxes	$	16,105	$	976	Cash paid for income taxes	$	54,904	$	16,105
Cash paid during the year for interest	Cash paid during the year for interest	43,968		25,500		Cash paid during the year for interest	21,716		43,968
Cash paid during the year for offering and strategic transition costs	Cash paid during the year for offering and strategic transition costs	3,840		—		Cash paid during the year for offering and strategic transition costs	$	—	$	3,840
Supplemental disclosure of noncash activities:	Supplemental disclosure of noncash activities:					Supplemental disclosure of noncash activities:
Public offering and strategic transition costs included in accounts payable and accrued expenses	Public offering and strategic transition costs included in accounts payable and accrued expenses	$	4,542	$	—	Public offering and strategic transition costs included in accounts payable and accrued expenses	$	—	$	4,542
Increase in Related Party payable pursuant to Tax Receivable Agreement and decrease in Additional paid-in capital		232,893		—
Increase in related party payable related to the tax receivable agreement						Increase in related party payable related to the tax receivable agreement	—		232,893
Cash-settled units liability reclassification to additional paid in capital						Cash-settled units liability reclassification to additional paid in capital	$	1,632	$	—

The accompanying notes are an integral part of these ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements

OLAPLEX HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AS OF SEPTEMBER 30, 2021~~

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

(Unaudited)

NOTE 1- NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Olaplex Holdings, Inc. (“Olaplex Holdings” and, together with its subsidiaries, the “Company” or “we”) is a Delaware corporation that was incorporated on June 8, 2021 for the purpose of facilitating an initial public offering and to enter into the other related Reorganization Transactions, as described below, in order to carry on the business of Penelope Holdings Corp., (“Penelope”), together with its subsidiaries. Olaplex Holdings is organized as a holding company and operates indirectly through its wholly owned subsidiaries, Penelope and Olaplex, Inc., which conducts business under the name “Olaplex”. Olaplex is an innovative, science-enabled, technology-driven beauty company that is focused on delivering its patent-protected premium hair care products to professional hair salons, retailers and everyday consumers. Olaplex develops, manufactures and distributes a suite of ~~haircare~~hair care products strategically developed to address three key uses: treatment, maintenance and protection.

OnIn January 8, 2020, ~~(the “Acquisition Date”),~~ a group of third-party investors, through Penelope, acquired 100% of the Olaplex, LLC business, including the intellectual property operations of another affiliated business, LIQWD, Inc. (the “Olaplex business”), from the owners of the Olaplex business ~~(the “Sellers”)~~ for $1,381,582 (the “Acquisition”). Subsequent to the Acquisition, ~~Date,~~ all of the operations of Olaplex are comprised of the operations of Olaplex, Inc.

In these financial statements, the term “Olaplex” is used to refer to either the operations of the business prior or after the Acquisition and prior to and after the initial public offering and Reorganization Transactions, in each case as discussed below, depending on the respective period discussed.

~~COVID-19~~ — On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The global spread and unprecedented impact of COVID-19 continues to create significant volatility, uncertainty and economic disruption. The Company’s operations and its financial results including net sales, gross profit, and selling, general, and administrative expenses were impacted by COVID-19 in 2020, however the Company is unable to estimate the impact of COVID-19 on its operations.

The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the ultimate duration, spread and intensity of the pandemic (including any resurgences), impact of the new COVID-19 variants and the rollout of COVID-19 vaccines, and the level of social and economic restrictions imposed in the United States and abroad in an effort to curb the spread of the virus, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of the COVID-19 pandemic on the Company’s business, results of operations, financial condition or liquidity. Future events and effects related to COVID-19 cannot be determined with precision and actual results could differ from estimates or forecasts.

Initial Public Offering

On October 4, 2021, Olaplex Holdings completed an initial public offering of ~~73,700,000~~ shares of its common stock (the “IPO”). ~~All shares sold~~See “Item 8. Financial Statements – Note 1. Nature of Operations and Basis of Presentation – Initial Public Offering” in the IPO were sold by certain existing stockholders of Olaplex Holdings at a public offering price of $21 per share. The selling stockholders received net proceeds of approximately $1,466,446, after deducting underwriting discounts and commissions. On October 8, 2021, the selling stockholders sold 11,055,000 additional shares of common stock pursuant to the full exercise by the underwriters of the IPO of their option to purchase additional shares at the initial public offering price of $21 per share. The selling shareholders received net proceeds of approximately $219,967, after deducting underwriting discounts and commissions,Company’s Annual Report on Form 10-K for the ~~sale of these~~year ended December 31, 2021 (the “2021 Form 10-K”) for additional ~~shares. The Company did not receive any proceeds from~~details on the IPO.

Reorganization Transactions

Prior to the IPO, Penelope Group Holdings, L.P. was the direct parent of Penelope, which is the indirect parent of Olaplex, Inc., the Company’s primary operating subsidiary. In connection with the IPO, the Company completed ~~the following~~a series of transactions (collectively, the “Reorganization Transactions”):

•~~The limited partners~~ pursuant to which all outstanding units of Penelope Group Holdings, L.P. including Advent International GPE IX, LP (“Fund IX”), who also held 100% of the equity interest in Penelope Group Holdings GP II, LLC (“Penelope Group Holdings GP II”), the general partner of Penelope Group Holdings, L.P., contributed 100% of their respective economic equity interests in Penelope Group Holdings, L.P. and Fund IX further contributed 100% of the equity interests in Penelope Group Holdings GP II to Olaplex Holdings in exchange for:

◦~~an aggregate of 648,124,642 shares of common stock of Olaplex Holdings; and~~

◦~~certain rights to payments under the Tax Receivable Agreement (as defined below);~~

•~~outstanding options to purchase shares of common stock of Penelope and outstanding cash-settled units of Penelope~~ were ~~converted into options to purchase shares of Olaplex Holdings and cash-settled units of Olaplex Holdings as follows:~~

◦outstanding vested time-based options to purchase shares of common stock of Penelope were converted into vested options to purchase an aggregate of 2,929,500 shares of common stock of Olaplex Holdings, with a corresponding adjustment to the exercise price that preserved the option’s spread value;

◦outstanding unvested time-based options to purchase shares of common stock of Penelope were converted into time-based options to purchase an aggregate of 14,314,725 shares of common stock of Olaplex Holdings, with a corresponding adjustment to the exercise price that preserves the options’ spread value and the same time-based vesting schedule that applied to the options prior to the conversion;

◦outstanding performance-based options to purchase shares of common stock of Penelope were converted into (i) vested options to purchase an aggregate of 4,315,275 shares of common stock of Olaplex Holdings, with a corresponding adjustment to the exercise price that preserved the options’ spread value, and (ii) time-based options to purchase an aggregate of 25,363,800 shares of common stock of Olaplex Holdings, with a corresponding adjustment to the exercise price that preserves the options’ spread value, that will be eligible to vest ~~in equal installments on each of the first three anniversaries of the IPO~~;

◦outstanding time-based cash-settled units of Penelope were converted into an aggregate of 621,000 time-based cash-settled units of Olaplex Holdings, with a corresponding adjustment to the base price per unit that preserves the units’ spread value and the same time-based vesting schedule that applied to the unit prior to the conversion; and

◦outstanding performance-based cash-settled units of Penelope were converted into (i) an aggregate of 318,600 time-based cash-settled units of Olaplex Holdings, with a corresponding adjustment to the base price per unit that preserves the units’ spread value, that will be eligible to vest in equal installments on each of the first three anniversaries of the IPO, subject to (A) the unit holder’s continued service through the applicable vesting date and (B) the weighted average closing price per share of Olaplex Holdings’ common stock over the 30 consecutive trading days ending on the day immediately prior to the applicable vesting date equaling or exceeding ~~$21~~ ~~per share on each applicable vesting date, and (ii) an aggregate of 159,300 vested cash-settled units of Olaplex Holdings with a corresponding adjustment to the base price per unit that preserves the units’ spread value;~~

•The Company entered into an income tax receivable agreement (“the Tax Receivable Agreement”) under which the Company is required to pay to the former limited partners of Penelope Group Holdings, L.P. and holders of options to purchase shares of common stock of Penelope (collectively the “Pre-IPO Stockholders”) that were vested prior to the Reorganization Transactions, 85% of the cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes on its taxable income following the IPO as specified in the Tax Receivable Agreement.

•Olaplex Holdings and Olaplex Intermediate, Inc., which had received a portion of the equity interests of Penelope Group Holdings, L.P. from Olaplex Holdings, contributed 100% of the equity interests of Penelope Group Holdings, L.P. and 100% of the equity interests of Penelope Group Holdings GP II to Olaplex Intermediate II, Inc., a direct subsidiary of Olaplex Intermediate Inc.; and

•~~Penelope Group Holdings, L.P. and Penelope Group Holdings GP II merged with and into Olaplex Intermediate II, Inc. with Olaplex Intermediate II, Inc. surviving each merger.~~

~~Basis of Presentation~~

The accompanying unaudited condensed consolidated financial statements present the results of operations, financial position and cash flows of the Company, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Article 10 of Regulation S-X. Accordingly, these financial statements do

not include all information and footnotes required by US GAAP for complete financial statements, and are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim period or for any other future fiscal year. The balance sheet as of December 31, 2020, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by US GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been omitted pursuant to such rules and regulations. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2020 and in conjunction with the unaudited condensed consolidated financial statements for the June 30, 2021 period ended and notes included in the IPO Prospectus. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. The Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.

~~The financial statements for prior periods give effect to the Reorganization Transactions discussed above, including the exchange of all 960,184 units of Penelope Group Holdings, L.P.~~exchanged for an aggregate of 648,124,642 shares of common stock of Olaplex Holdings, Inc., ~~which is equivalent to an overall exchange ratio of one-for-675,~~ and the ~~conversion of~~ options and cash-settled units of Penelope were converted into options and cash-settled units of Olaplex Holdings, atInc. See “Item 8. Financial Statements – Note 1. Nature of Operations and Basis of Presentation – Reorganization Transactions” in the Company’s 2021 Form 10-K for additional details on the Reorganization Transactions that were completed in connection with the IPO.

Basis of Presentation

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim Condensed Consolidated Financial Statements furnished reflect all adjustments which are, in the opinion of management, necessary for a ~~conversion rate~~fair statement of ~~one-for-675,~~the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with ~~a corresponding adjustment~~the Consolidated Financial Statements and accompanying footnotes included in the Company’s 2021 Form 10-K.

The financial statements for prior periods give effect to the ~~exercise price and base price, respectively,~~Reorganization Transactions as ~~discussed above and~~referred in ~~Note 11.~~the 2021 Form 10-K. All share and earnings per share amounts presented herein have been retroactively adjusted to give effect to the Reorganization Transactions as if they occurred in all prior periods presented.

For the periods prior to the Reorganization Transactions, Penelope and its subsidiaries, including Olaplex, Inc., are consolidated in the unaudited ~~condensed consolidated financial statements~~interim Condensed Consolidated Financial Statements of the Company.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; the fair value of share-based options and ~~cash-settled units;~~stock settled rights; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting unit; the fair value of our interest rate cap; useful lives of our tangible and intangible assets; allowance for promotions; estimated income tax and tax receivable payments; the net realizable value of, and demand for our inventory. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements established a framework for measuring fair value and established a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company’s Level 1 assets consist of its marketable securities.

Level 2—Observable quoted prices for similar assets or liabilities in active markets and observable quoted prices for identical assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are not corroborated by market data.

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at carrying value, which approximates fair value due to the short-term maturity. The Company’s long-term debt is recorded at its carrying value in the ~~consolidated balance sheets,~~Consolidated Balance Sheets, which may differ from fair value. The Company’s interest rate cap is recorded at its Level 3 fair value in the Condensed Consolidated Balance Sheets.

Accounting Policies

The ~~gross carrying amount of~~Company entered into an interest rate cap transaction during the ~~Company’s long-term debt, before reduction of the debt issuance costs, approximates its fair values as the stated rate approximates market rates for loans with similar terms as of~~quarter ended September 30, ~~2021~~2022. See further discussion of this transaction in “Note 8 – Long-Term Debt – Interest Rate Cap Transaction”. As a result, the Company has updated its accounting policies to include a policy on derivative instruments and ~~December 31, 2020.~~hedging, per below:

Accounting Policy for Derivative Instruments and Hedging Activities

The Company records all derivatives on the balance sheet at fair value in accordance with FASB Accounting Standards Codification (“ASC”) ASC 815, “Derivatives and Hedging”. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative as a hedge and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (in a fair value hedge) or the earnings effect of the hedged forecasted transactions (in a cash flow hedge). The Company may enter into derivative contracts that are intended to

~~Accounting Policies~~economically hedge certain of its risks, even though hedge accounting does not apply or the Company otherwise elects not to apply hedge accounting.

There have been no material changes in significant accounting policies as described in the Company’s consolidated financial statements for the year ended December 31, 2020 and as described in the Company’s unaudited condensed consolidated financial statements for the June 30, 2021 period in the IPO Prospectus, except as noted below.Constructive Retirement of Common Stock Repurchases

~~Deferred Offering Costs~~

~~The Company incurred $702 of deferred offering costs as of June 30, 2021 in connection with~~When the ~~anticipated sale of the Company’s~~Company's common stock ~~in an IPO including certain legal, accounting,~~is retired or purchased for constructive retirement for net share settlement of stock options, any excess purchase price over par value is allocated between additional paid-in-capital, to the extent that previous net gains from sales or retirements are included therein, and ~~other IPO related costs. During~~ the third quarter of 2021, the Company completed the IPO. The Company expensed in the third quarter the deferred offering costs plus additional IPO and related transition costs incurred during the third quarter of 2021 for a total of $6,118 in the statement of operations and comprehensive income under selling, general and administrative expenses.

~~Segment Reporting~~

~~Operating segments are components of an enterprise for which separate financial information is available that is evaluated by the chief operating decision maker in deciding how~~remainder to allocate resources and in assessing performance. Utilizing this criteria, the Company manages its business on the basis of 3 operating segments that are aggregated into 1 reportable segment given the operating segments have similar economic characteristics, classes of consumers, products, production, distribution methods, and operate in the same regulatory environments.

~~Investment in Nonconsolidated Entity~~

The Company uses the cost method to account for its equity investment for which these equity securities do not have readily determinable fair values and for which the Company does not have the ability to exercise significant influence. Under the cost method of accounting, the Company’s investment is carried at cost and is adjusted only for other-than-temporary declines in fair value, additional investments, plus or minus changes from observable price changes in orderly transactions or distributions deemed to be a return of capital. Earnings from cost method investments are recorded in the statement of operations and comprehensive income under other income. There are no earnings or fair value adjustments recorded to date.retained earnings.

Tax Receivable Agreement

As part of the IPO, we entered into the Tax Receivable Agreement under which generally we will be required to pay to the ~~Pre-IPO Stockholders~~former limited partners of Penelope Group Holdings, L.P. and the holders of options to purchase shares of common stock of Penelope that were vested prior to the Reorganization Transactions (collectively, the “Pre-IPO Stockholders”), 85% of the cash savings, if any, in U.S. federal, state or local tax that we actually realize on our taxable income following the IPO (or are deemed to realize in certain circumstances) as a result of ~~(i)~~ certain existing tax attributes, including tax basis in intangible assets and capitalized transaction costs relating to taxable years ending on or before the date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the date of ~~this offering)~~the IPO), that are amortizable over a fixed period of time (including in tax periods beginning after ~~this offering)~~the IPO) and which are available to us and our wholly-owned subsidiaries, and ~~(ii) tax benefits attributable to payments made under the Tax Receivable Agreement, together with~~ interest accrued at a rate equal to LIBOR (“London Interbank Offered Rate”) (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3% from the date the applicable tax return is due (without extension) until paid. Under the Tax Receivable Agreement, generally we will retain the benefit of the remaining 15% of the applicable tax savings.

Recently Adopted Accounting Pronouncements

The Company is an “emerging growth company” and as an emerging growth company, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

~~Recent Accounting Guidance Not Yet Adopted~~

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” The guidance in this ASU supersedes the leasing guidance in “Leases (Topic 840).” Under the new

guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for ~~the~~ Company fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company ~~will adopt~~adopted this accounting standard on January 1, ~~2022 and does not believe~~2022. Adoption of this standard ~~will~~did not have a material impact on its ~~consolidated financial statements.~~

~~In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on~~Condensed Consolidated Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. The amendments in the ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early application of the amendments is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.Statements.

In March 2020, the FASB issued ASU 2020-04, ~~Reference~~“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides an optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (“IBORs”) and, particularly, the risk of cessation of the LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU can be adopted no later than December 31, 2022 with early adoption permitted. The Company ~~is currently evaluating the~~adopted this accounting standard on January 1, 2022. Adoption of this standard did not have a material impact ~~this guidance will have~~ on its ~~consolidated~~Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial ~~statements~~assets held at the reporting date based on historical experience, current conditions, and ~~related disclosures.~~reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking

information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. The amendments in the ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted this accounting standard on July 1, 2022. Adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.

NOTE 3 – NET SALES

The Company distributes products ~~through national~~in the U.S. and ~~international~~internationally through professional distributors in the salon channel, directly to retailers for sale in their physical stores and ~~retailers as well as~~e-commerce sites, and direct-to-consumer (“DTC”) through sales to pure-play e-commerce ~~channels. The marketing~~customers and ~~consumer engagement benefits that the Company’s channels provide are integral to the Company’s brand and product development strategy and drive sales across channels.~~through its own Olaplex.com websites. As such, the Company’s three business channels consist of professional, specialty retail and DTC as follows:

For the Three Months Ended For the Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net sales by Channel:
Professional $ 74,978 $ 47,573 $ 201,855 $ 103,768
Specialty retail 46,343 20,313 116,201 36,919
DTC 40,303 21,561 113,811 48,368
Total Net sales $ 161,624 $ 89,447 $ 431,867 $ 189,055


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net sales by Channel:
Professional	$	62,991	$	74,978	$	245,539	$	201,855
Specialty retail	74,191		46,343		202,692		116,201
DTC	39,272		40,303		125,322		113,811
Total Net sales	$	176,454	$	161,624	$	573,553	$	431,867

Revenue by major geographic region is based upon the geographic location of customers who purchase our ~~products.~~products, however the majority of net sales are transacted in U.S. Dollars, the Company’s functional and reporting currency. During the three and nine months ended September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, our net sales to consumers in the United States and International regions were as follows:


		For the Three Months Ended				For the Nine Months Ended					For the Three Months Ended				For the Nine Months Ended
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020			September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net sales by Geography:	Net sales by Geography:									Net sales by Geography:
United States	United States	$	93,611	$	45,969	$	252,224	$	101,978	United States	$	89,543	$	93,611	$	330,973	$	252,224
International	International	68,013		43,478		179,643		87,077		International	86,911		68,013		242,580		179,643
Total Net sales	Total Net sales	$	161,624	$	89,447	$	431,867	$	189,055	Total Net sales	$	176,454	$	161,624	$	573,553	$	431,867

United Kingdom (“~~U.K”~~U.K.”) net sales for the three and nine months ended September 30, ~~2021 and September 30, 2020~~2022 were ~~15% and 15% and~~ 13% and ~~14%~~10% of total net sales, ~~respectively.~~respectively, and net sales for the three and nine months ended September 30, 2021 were 15% of total net sales. No other International country exceeds 10% of total net sales.

NOTE 4 - INVENTORY

Inventory as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Raw materials	Raw materials	$	10,677	$	7,773	Raw materials	$	37,173	$	20,852
Finished goods	Finished goods	58,411		25,823		Finished goods	114,110		77,547
Inventory	Inventory	$	69,088	$	33,596	Inventory	$	151,283	$	98,399

NOTE 5 - INVESTMENT IN NONCONSOLIDATED ENTITY

Our investment in and advances to our nonconsolidated entity as of September 30, 2022 and December 31, 2021 represents our investment in a limited liability company. We do not control or have significant influence over the operating and financial policies of this ~~affiliate.~~entity.

We account for this investment using the cost method and adjust only for other than temporary declines in fair value, additional investments, plus or minus changes from observable price changes in orderly transactions or distributions deemed to be a return of capital. Our investment is classified as a long-term asset and included in Other assets in our ~~consolidated balance sheet~~Condensed Consolidated Balance Sheet and consists of the following:


	~~September 30, 2021~~		~~December 31, 2020~~
~~Capital contributions, net of distributions and impairments~~	$	~~4,500~~	$	—
~~Total investments in and advances to nonconsolidated affiliate~~	$	~~4,500~~	$	—


	September 30, 2022		December 31, 2021
Capital contributions, net of distributions and impairments	$	4,500	$	4,500
Total investments in and advances to nonconsolidated entity	$	4,500	$	4,500

~~NOTE 6 - BUSINESS COMBINATIONS~~

~~On January 8, 2020, the Company completed the Acquisition to acquire the net assets of the Olaplex business and 100% of voting equity interests. The purchase price was $1,381,582 in net cash paid.~~

~~Information regarding the net cash consideration paid and fair value of the assets and liabilities assumed at the Acquisition Date is as follows:~~


~~Fair value of assets acquired~~	$	~~1,216,259~~
~~Goodwill~~	~~168,300~~
~~Fair value of liabilities assumed~~	~~(2,977)~~
~~Net cash paid for acquisition~~	$	~~1,381,582~~

~~Purchase price is comprised of:~~
~~Cash, net of acquired cash~~	$	~~1,381,582~~
~~Net cash paid for acquisition~~	$	~~1,381,582~~


~~Allocation of purchase price:~~
~~Net tangible assets (liabilities):~~
~~Inventory~~	$	~~61,262~~
~~Accounts receivable and other current assets~~	~~7,595~~
~~Deferred tax assets~~	~~6,402~~
~~Liabilities~~	~~(2,977)~~
~~Net tangible assets~~	~~72,282~~
~~Identifiable intangible assets:~~
~~Brand name~~	~~952,000~~
~~Product formulations~~	~~136,000~~
~~Customer relationships~~	~~53,000~~
~~Total identifiable intangible assets~~	~~1,141,000~~
~~Goodwill~~	~~168,300~~
~~Net assets acquired~~	$	~~1,381,582~~

For this Acquisition, brand name, product formulations, and customer relationships were assigned estimated useful lives of 25 years, 15 years, and 20 years, respectively, the weighted average of which is approximately 23.6 years.

Costs related to the Acquisition are expensed as incurred. In connection with the Acquisition, the Company recorded transaction expenses totaling $488 and $16,499 for the three and nine months ended September 30, 2020, respectively, within the unaudited condensed consolidated statements of operations and comprehensive income.

NOTE 76 – GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets are comprised of the following:


		September 30, 2021								September 30, 2022
		Estimated Useful Life	Gross Carrying Amount		Accumulated amortization		Net carrying amount			Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Brand name	Brand name	25 years	$	952,000	$	(65,794)	$	886,206	Brand name	25 years	$	952,000	$	(103,874)	$	848,126
Product formulations	Product formulations	15 years	136,000		(15,665)		120,335		Product formulations	15 years	136,000		(24,732)		111,268
Customer relationships	Customer relationships	20 years	53,000		(4,579)		48,421		Customer relationships	20 years	53,000		(7,228)		45,772
Software									Software	3 years	2,503		(402)		2,101
Total finite-lived intangibles	Total finite-lived intangibles		1,141,000		(86,038)		1,054,962		Total finite-lived intangibles		1,143,503		(136,236)		1,007,267
Goodwill	Goodwill	Indefinite	168,300		—		168,300		Goodwill	Indefinite	168,300		—		168,300
Total goodwill and other intangibles	Total goodwill and other intangibles		$	1,309,300	$	(86,038)	$	1,223,262	Total goodwill and other intangibles		$	1,311,803	$	(136,236)	$	1,175,567

Amortization expense on the finite-lived intangible assets were $11,862 and $36,946 for the three and nine months ended September 30, 2021, respectively, and $12,284 and $34,210 for the three and nine months ended September 30, 2020.


	December 31, 2021
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Brand name	25 years	$	952,000	$	(75,314)	$	876,686
Product formulations	15 years	136,000		(17,932)		118,068
Customer relationships	20 years	53,000		(5,241)		47,759
Software	3 years	890		(59)		831
Total finite-lived intangibles		1,141,890		(98,546)		1,043,344
Goodwill	Indefinite	168,300		—		168,300
Total goodwill and other intangibles		$	1,310,190	$	(98,546)	$	1,211,644

The amortization of the Company’s brand name, ~~and~~ customer relationships and software is recorded to Amortization of ~~$10,182~~other intangible assets in the Condensed Consolidated Statements of Operations and ~~$10,182~~Comprehensive Income. A portion of Amortization of patented formulations is capitalized to Inventory in the Condensed Consolidated Balance Sheets, and ~~$30,547 and $29,643 for~~ the ~~three and~~remainder is recorded to Amortization of patented formulations in the Condensed Consolidated Statements of Operations

1614

~~nine months ended September 30, 2021~~ and ~~2020, respectively, is recorded in~~Comprehensive Income. Amortization of the ~~consolidated statements of operations and comprehensive income.~~

~~The amortization for patented formulations~~Company’s definite-lived intangible assets for the three and nine ~~months~~month periods ended September 30, 2022 and 2021 ~~respectively,~~ is $2,267 and $6,800. The Company expensed $1,680 of patent amortization in cost of sales for the three months ended September 30, 2021 and capitalized $587 to inventory and expensed $6,399 in cost of sales for the nine months ended September 30, 2021 with $401 capitalized to inventory.as follows:

The amortization for patented formulations for the three and nine months ended September 30, 2020, respectively, is $2,267 and $6,598. The Company expensed $2,102 of patent amortization in cost of sales for the three months ended September 30, 2020 and capitalized $164 to inventory and expensed $4,567 in cost of sales for the nine months ended September 30, 2020 with $2,031 capitalized to inventory.

December 31, 2020
Estimated
Useful
Life Gross
Carrying
Amount Accumulated
amortization
Net carrying
amount
Brand name 25 years $ 952,000 $ (37,234) $ 914,766
Product formulations 15 years 136,000 (8,865) 127,135
Customer relationships 20 years 53,000 (2,591) 50,409
Total finite-lived intangibles 1,141,000 (48,690) 1,092,310
Goodwill Indefinite 168,300 — 168,300
Total goodwill and other intangibles $ 1,309,300 $ (48,690) $ 1,260,610


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Amortization of patented formulations	$	1,142	$	1,680	$	5,091	$	6,399

Amortization expense, brand name and customer relationships	10,182		10,182		30,547		30,547
Amortization expense, software	147		—		343		—
Amortization of other intangible assets	10,329		10,182		30,890		30,547

Amortization of patented formulations capitalized to inventory	$	1,125	$	587	$	1,709	$	401

NOTE 87 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:


		September 30, 2021		December 31, 2020			September 30, 2022		December 31, 2021
Accrued interest						Accrued interest	$	8,344	$	—
Deferred revenue	Deferred revenue	$	5,652	$	2,314	Deferred revenue	4,890		5,022
Accrued sales and income taxes		9,342		3,100
Accrued freight						Accrued freight	4,823		636
Payroll liabilities						Payroll liabilities	4,418		6,302
Accrued other	Accrued other	8,439		2,931		Accrued other	3,556		5,372
Payroll liabilities		7,461		1,517
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	$	30,894	$	9,862	Accrued expenses and other current liabilities	$	26,031	$	17,332

NOTE 98 - LONG-TERM DEBT

The Company’s Long-Term Debt as of September 30, 2022 and December 31, 2021 consisted of the ~~following on~~following:


	September 30, 2022		December 31, 2021
Long-term debt
Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”)(1)
$675 Million 7-Year Senior Secured Term Loan Facility (the “2022 Term Loan Facility”)	$	671,626	$	—
$150 Million 5-Year Senior Secured Revolving Credit Facility (the “2022 Revolver”)(2)	—		—
Credit Agreement, dated as of January 8, 2020, as amended (the “2020 Credit Agreement”)(1)
$800 Million 6-Year Senior Secured Term Loan Facility, as amended (the “2020 Term Loan Facility”)	—		769,235
$51 Million 5-Year Senior Secured Revolving Credit Facility, as amended (the “2020 Revolver”)(2)	—		—
Debt issuance costs	(9,214)		(11,033)
Total term loan debt	662,412		758,202
Less: Current portion	(6,750)		(20,112)
Long-term debt, net of debt issuance costs and current portion	$	655,662	$	738,090

(1) The 2022 Credit Agreement refinanced and replaced the 2020 Credit Agreement.

(2) As of September 30, ~~2021:~~

January 2020 Credit
Agreement
December 2020
Amendment
Total
Long-term debt
Original term loan borrowing $ 433,125 $ 341,138 $ 774,263
Debt issuance costs (7,434) (4,346) (11,780)
Total term loan debt 425,691 336,792 762,483
Less: Current portion (11,250) (8,862) (20,112)
Long-term debt, net of current portion $ 414,441 $ 327,930 $ 742,371
2022 and December 31, 2021, the Company did not have outstanding draws on the 2022 Revolver or 2020 Revolver, respectively, including letters of credit and swingline loan sub-facilities. As of September 30, 2022, the Company had $150 million of available borrowing capacity under the 2022 Revolver.

1715

~~Debt consisted of the following on December 31, 2020:~~

January 2020
Credit
Agreement
December 2020
Amendment
Total
Long-term debt
Original term loan borrowing $ 441,562 $ 347,785 $ 789,347
Debt issuance costs (8,810) (5,054) (13,864)
Total term loan debt 432,752 342,731 775,483
Less: Current portion (11,250) (8,862) (20,112)
Long-term debt, net of current portion $ 421,502 $ 333,869 $ 755,371

On January 8, 2020, the Company entered into a secured credit agreement (the “Original Credit Agreement”), consisting of a $450,000 term loan facility (the “Term Loan Facility”) and a $50,000 revolving facility (the “Revolver” and together with the Term Loan Facility, the “Credit Facilities”), which includes a $10,000 letter of credit sub-facility and a $5,000 swingline loan facility. In addition, on December 18, 2020, the Company entered into a First Incremental Amendment to the Credit Agreement (the “Amendment,” and together with the Original Credit Agreement, the “Credit Agreement”) to increase the Term Loan Facility by $350,000 and increase the Revolver capacity by $1,000 to a revised $800,000 Term Loan Facility and $51,000 Revolver. The unused balance of the Revolver as of December 31, 2020 was $51,000.

Under the Original Credit Agreement, the Company incurred original issue discount (“OID”) costs of $10,000, and $527 of third-party issue costs. In connection with the incremental borrowing pursuant to the Amendment, the Company incurred OID costs of $3,500 and $1,590 of third-party issue costs.

The interest rate on outstanding debt under the 2022 Term Loan Facility iswas 6.1% as of September 30, 2022, and the interest rate on outstanding debt under the 2020 Term Loan Facility was 7.5%. as of December 31, 2021. The interest rates for all facilities ~~are~~under the 2022 and 2020 Credit Agreements were calculated based upon the Company’s election between the applicable published ~~LIBOR~~reference rate at time of election plus an additional interest rate spread, or an “Alternate Base Rate” (as defined in the ~~Alternate Base Rate~~2022 Credit Agreement or the 2020 Credit Agreement, as applicable) plus an additional interest rate spread. ~~As of September 30, 2021 and December 31, 2020, there was no balance outstanding under the Revolver, including letters of credit and swingline loans.~~

Interest expense, inclusive of debt amortization, was ~~$14,987~~$10,499 and ~~$9,794~~$30,653 for the three and nine months ended September 30, ~~2021 and 2020,~~2022, respectively, and ~~$46,052~~$14,987 and ~~$28,577~~$46,052 for the three and nine months ended September 30, 2021, ~~and September 30, 2020, respectively, and was recorded in interest (expense) income, net in the consolidated statements of operations and comprehensive income.~~respectively.

The 2022 Credit Agreement includes, and the 2020 Credit Agreement included, reporting, financial, and maintenance covenants that require, among other things, for the Company to comply with certain maximum secured leverage ratios, which the Company was in compliance with on September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. Substantially all the assets of the Company constitute collateral under the ~~Term Loan and Revolver facilities.~~

~~NOTE 10 - INCOME TAXES~~

~~The Company computes its provision for income taxes by applying the estimated annual effective tax rate to pretax income and adjusts the provision for discrete tax items recorded in the period.~~

For the three months ended September 30, 2021 and 2020, the Company recorded income tax expense of $15,252 and $5,753, respectively, resulting in effective tax rates of 21.2% and 16.9%, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded income tax expense of $37,797 and $1,197, respectively, resulting in effective tax rates for the nine months ended September 30, 2021 and 2020 of 20.0% and 16.9%, respectively.

Compared to the U.S. federal statutory tax rate of 21%, the effective tax rates for the three and nine months ended September 30, 2021 and 2020 were reduced by the benefit associated with the foreign derived intangible income deduction (FDII), which results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate. For the three and nine months ended September 30, 2021, the benefit of the FDII deduction was offset by the unfavorable impact of non-recurring IPO costs that were not deductible for tax purposes.

~~Tax Receivable Agreement~~

Based on current tax laws and assuming that the Company earns sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement, (i) we expect that future payments under the Tax Receivable Agreement relating to certain tax benefits related to certain existing tax attributes, including tax basis in intangible assets and capitalized transaction costs relating to taxable years ending on or before the date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the date of the IPO), that are amortizable over a fixed period of time (including in tax periods beginning after this offering) and which are available to the Company and its wholly-owned subsidiaries could aggregate to $232,893 over the 14-year period under the Tax Receivable Agreement and (ii) we expect material payments to occur beginning in 2023. Payments under the Tax Receivable Agreement are not conditioned upon the parties’ continued ownership of the company. The Tax Receivable payment obligation was recorded as a non-current liability on the unaudited condensed consolidated balance sheet with a corresponding decrease in Additional paid-in capital.

~~NOTE 11 – SHARE-BASED COMPENSATION~~

On September 17, 2021, the Company adopted the Olaplex Holdings 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, including restricted stock units, performance awards, and other stock-based awards to employees, directors and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2021 Plan (subject to adjustment as described below) is 45,368,725 shares of common stock, plus the number of shares of common stock underlying awards granted under the Penelope Holdings Corp. 2020 Omnibus Equity Incentive Plan (the “2020 Plan”) that on or after September 17, 2021 expire or become unexercisable, are forfeited to, or repurchased for cash by, the Company are settled in cash, or otherwise become available again for grant under the 2020 Plan discussed below.

The total number of shares of common stock of the Company available for issuance under the 2021 Plan will increase automatically on January 1 of each year beginning in 2023 and continuing through and including 2031 by the lesser of (i) three percent (3%) of the number of shares of common stock outstanding as of such date and (ii) the number of shares of common stock determined by the Company’s Board of Directors on or prior to such date for such year. The number of shares available for issuance under the 2021 Plan will not be increased by any shares of common stock delivered under the 2021 Plan that are subsequently repurchased using proceeds directly attributable to stock option exercises.

Prior to the IPO and the Reorganization Transactions, Penelope previously granted share-based options to purchase common stock of Penelope under the 2020 Plan with vesting based on either service or market (performance) conditions. Immediately prior to the Reorganization Transactions, each option to purchase shares of common stock of Penelope was converted into an option to purchase 675 shares of common stock of Olaplex Holdings, with a corresponding adjustment to the option’s exercise price to preserve its spread value, and each cash-settled unit of Penelope was converted to 675 cash-settled units of Olaplex Holdings, with a corresponding adjustment to the unit’s base price to preserve its spread value, as further described in this Note 11. No further awards will be made under the 2020 Plan.

~~Conversion of Shared-Based Options in Reorganization Transactions~~

As a result of the Reorganization Transactions, the options to purchase shares of common stock of Penelope were converted into options to purchase an aggregate of 46,923,300 shares of common stock of Olaplex Holdings, in each case with a corresponding adjustment to the exercise price that preserved the option’s spread value, as follows:

•outstanding vested time-based options to purchase shares of common stock of Penelope were converted into vested options to purchase an aggregate of 2,929,500 shares of common stock of Olaplex Holdings;

•outstanding unvested time-based options to purchase shares of common stock of Penelope were converted into time-based options to purchase an aggregate of 14,314,725 shares of common stock of Olaplex Holdings that will be eligible to vest as described under “Converted Time-Based Options” below;

•outstanding performance-based options to purchase shares of common stock of Penelope were converted into (i) time-based options to purchase an aggregate of 25,363,800 shares of common stock of Olaplex Holdings that will be eligible to vest as described under “Converted Performance-Based Options” below, and (ii) vested options to purchase an aggregate of 4,315,275 shares of common stock of Olaplex Holdings;

~~Converted Time-Based Options~~

All converted outstanding time-based options are in the form of options to purchase common stock of Olaplex Holdings with vesting based on the option holder’s continued service. The original time-based options that were converted are eligible to vest in five equal installments on the first five anniversaries from the vesting start date, subject to the option

~~holder’s continued service through the applicable vesting date and are ratably expensed over a five-year service period from the original grant date.~~

~~Converted Performance-Based Options~~

The performance-based options that were converted to time-based options to purchase common stock of Olaplex Holdings are eligible to vest in three equal installments on the first three anniversaries of the consummation of the IPO, subject to the option holder’s continued service through the applicable vesting date and are ratably expensed over a three-year service period from the consummation of the IPO.

~~IPO Option Grants~~

In connection with the IPO, the Company granted, under the 2021 Plan, time-based options to purchase an aggregate of 351,058 shares of common stock of the Company to certain employees. The options are eligible to vest in four equal installments on the first four anniversaries of the grant date, subject to the option holder’s continued service through the applicable vesting date and are ratably expensed over a four-year service period from the grant date.

As of September 30, 2021, a total of 92,292,025 shares have been authorized for issuance under the 2020 Plan and 2021 Plan, with 45,017,667 remaining available to grant under the 2021 Plan and no shares available for issuance under the 2020 Plan. As of September 30, 2021, there were outstanding options to purchase an aggregate of 47,274,358 shares with 46,923,300 shares outstanding under the 2020 Plan and 351,058 shares outstanding under the 2021 Plan. As of September 30, 2021, there were options to purchase an aggregate of 2,362,500 shares forfeited under the 2020 Plan.

Share-based compensation expense for the three and nine months ended September 30, 2021 of $1,945 and $3,119, respectively, was recognized in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income. As of September 30, 2021, the Company had not recognized compensation costs on unvested share-based options of $11,908 with a weighted average remaining recognition period of 3.58 years.

Share-based compensation expense for the three and nine months ended September 30, 2020 of $516 and $937, respectively, was recognized in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. As of September 30, 2020, the Company had not recognized compensation costs on unvested share-based options of $10,018 with a weighted average remaining recognition period of 4.6 years for time-based and 3.75 years for performance-based options.

~~Time-based service options~~

The following table summarizes the activity for options that vest solely based upon the satisfaction of a time-based service condition shown on a converted basis to reflect the Reorganization Transactions for all periods as follows:

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Options
Outstanding Weighted Average
Exercise Price Per Share Options
Outstanding Weighted Average
Exercise Price Per Share
Outstanding at Beginning of Period 15,997,500 $ 0.88 — $ —
Granted 2,947,783 5.30 15,803,775 0.87
Cancelled/Forfeited (1,350,000) (0.97) — —
Converted Performance to Time-Based 25,363,800 0.92 — —
Outstanding at End of Period 42,959,083 $ 1.20 15,803,775 $ 0.87
Vested and Exercisable 2,929,500 $ 0.87 — $ —

~~Additional information relating to time-based service options is as follows:~~

Three Months Ended Nine Months Ended
September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Share-based compensation expense $ 571 $ 370 $ 1,414 $ 667
Weighted-average grant date fair value of options granted (per share) $ 6.03 $ 0.63 $ 1.65 $ 0.53
2022 Credit Agreement.

The fair value of ~~time-based options granted were calculated using~~ the ~~following assumptions:~~Company’s long-term debt is based on the market value of our long-term debt instrument. Based on the inputs used to value the long-term debt, the Company’s long-term debt is categorized within Level 2 in the fair value hierarchy. As of September 30, 2022, the carrying amount of the Company’s long-term debt under the 2022 Credit Agreement was $662.4 million, and the fair value of the Company’s long-term debt was $646.4 million. As of December 31, 2021, the carrying amount of the Company’s long-term debt under the 2020 Credit Agreement approximated its fair value, as the stated rate approximated market rates for loans with similar terms.

Interest Rate Cap Transaction

The Company’s results are subject to risk from interest rate fluctuations on borrowings under the 2022 Credit Agreement, including the 2022 Term Loan Facility. The Company may, from time to time, utilize interest rate derivatives in an effort to add stability to interest expense and to manage its exposure to interest rate movements. On August 11, 2022, the Company entered into an interest rate cap transaction (the “interest rate cap”) in connection with the 2022 Term Loan Facility, with a notional amount of $400 million. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate applicable to the transaction, in exchange for an up-front premium paid by the Company. The Company has designated the interest rate cap as a cash-flow hedge for accounting purposes.

For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

~~Nine Months Ended~~Asset Derivatives

September 30,
~~2021~~ 2022

September 30,
2020December 31, 2021

~~Expected term (years)~~Interest rate cap

~~6.50 - 7.00~~

~~6.50~~

~~Expected volatility (%)~~

~~25 - 30~~

~~Risk-free interest rate (%)~~Balance Sheet Caption

~~1.07 - 1.62~~

~~0.365 - 1.87~~

~~Expected dividend yield (%)~~Other Assets

—$

4,357

—

~~Performance-based options~~

~~The following table summarizes the activity for options that vest based upon the satisfaction of a performance condition as follows:~~

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Options
Outstanding Weighted Average
Exercise Price Per Share Options
Outstanding Weighted Average
Exercise Price Per Share
Outstanding at Beginning of Period 28,732,050 $ 0.81 — $ —
Granted 1,959,525 3.19 28,588,275 0.80
Cancelled/Forfeited (1,012,500) (0.97) — —
Converted Performance to Time-Based (25,363,800) (0.92) — —
Outstanding at End of Period 4,315,275 $ 1.23 28,588,275 $ 0.80
Vested and Exercisable 4,315,275 $ 1.23 — $ —

~~Additional information relating to performance-based options is as follows:~~

Three Months Ended Nine Months Ended
September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Share-based compensation expense $ 1,374 $ 146 $ 1,705 $ 270
Weighted-average grant date fair value of options granted (per share) $ — $ 0.15 $ 0.74 $ 0.09

~~The fair value of performance-based options granted were calculated using the following assumptions:~~

Nine Months Ended
September 30,
2021 September 30,
2020
Expected term (years) 0.40 4.00
Expected volatility (%) 30 30
Risk-free interest rate (%) 1.48 - 1.62 1.87
Expected dividend yield (%) 49 —

~~Treatment of Cash-Settled Units in Reorganization Transactions~~

In addition, as a result of the Reorganization Transactions, the cash-settled units of Penelope were converted into an aggregate of 1,098,900 cash-settled units of Olaplex Holdings, in each case with a corresponding adjustment to the base price per unit that preserves the units’ spread value, as follows:

•outstanding time-based cash-settled units of Penelope were converted into an aggregate of 621,000 time-based cash-settled units of Olaplex Holdings that will be eligible to vest as described under “Converted Time-Based Cash-Settled Units” below; and

•~~outstanding performance-based cash-settled units of Penelope were converted into (i) an aggregate of 318,600 time-based cash-settled units of Olaplex Holdingsthat will be eligible to vest as described under “Converted Performance-Based Cash-Settled Units” below, and (ii) an aggregate of 159,300 vested cash-settled units of Olaplex Holdings.~~

~~Converted Time-Based Cash-Settled Units~~

The converted time-based cash-settled units are eligible to vest in five equal installments on the first five anniversaries of the vesting start date, subject to the option holder’s continued service through the applicable vesting date. The time-based cash-settled units are liability awards and are fair valued at each reporting period and recognized as compensation expense over a five-year service period.

~~Converted Performance-Based Cash-Settled Units~~

Following the IPO, the converted performance cash-settled units are eligible to vest in three equal installments on the first three anniversaries of the consummation of the IPO, subject to (i) the unit holder’s continued service through the applicable vesting date and (ii) the weighted average closing price per share over the thirty (30) consecutive trading days ending on the day immediately prior to the applicable vesting date equaling or exceeding the IPO price of $21 on each applicable vesting date. The performance-based cash-settled awards are liability awards and are fair valued at each reporting period and contingent upon achieving a market condition and not expensed until the market condition is achieved.

~~For~~During the three and nine months ended September 30, ~~2021, $4,279 and $4,427~~2022, the Company’s interest rate cap generated an unrecognized pre-tax gain of ~~compensation~~$2.4 million, recorded in Accumulated Other Comprehensive Income on the Company’s Condensed Consolidated Balance Sheets. The Company also recognized Interest expense ~~(and liability) was recognized for~~of $0.1 million related to amortization of the ~~time-based and vested cash-settled units, respectively,~~interest rate cap premium paid by the Company in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income. The Company subsequently paid an aggregate of $2,872 to the holders of the 159,300 performance-based cash-settled units that vested in connection with the ~~Reorganization Transactions~~interest rate cap. The Company did not have an interest rate cap agreement in place during the three and ~~IPO. As of~~nine months ended September 30, ~~2021, the unrecognized compensation for time-based units is $11,848.~~2021.

The Company performed an initial effectiveness assessment on the interest rate cap, and determined it to be an effective hedge of the cash flows related to the interest rate payments on the 2022 Term Loan Facility. The hedge is being evaluated qualitatively on a quarterly basis for effectiveness. Changes in fair value are recorded in Accumulated Other Comprehensive Income and periodic settlements of the interest rate cap will be recorded in interest expense along with the

Ininterest on amounts outstanding under the ~~event the contingent market condition and continued service requirement for performance-based cash-settled units is achieved, 33.33%~~2022 Term Loan Facility. Payment of the ~~cash-settled units shall vest on each~~up-front premium of the ~~first three anniversaries of October 4, 2021, with the Company paying an aggregate of $6,859 to holders of these units based~~interest rate cap is included within Other assets/liabilities within cash flows from operating activities on the ~~September 30, 2021 assumptions noted below. The performance-based cash-settled units are liability awards and are fair valued at each reporting period.~~Company’s Condensed Consolidated Statements of Cash Flows.

The ~~following table summarizes~~Company does not hold or issue derivative financial instruments for trading purposes, nor does it hold or issue leveraged derivative instruments. By using derivative financial instruments to hedge exposures to interest rate fluctuations, the ~~activity for units~~Company exposes itself to counterparty credit risk. The Company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that ~~vest based upon~~can be expected to fully perform under the ~~satisfaction~~terms of ~~time and performance-based conditions as follows:~~the applicable contracts.

Nine Months Ended September 30, 2021
Time-based Performance-based
Outstanding at Beginning of Period — —
Granted 684,450 526,500
Cancelled/Forfeited (63,450) (48,600)
Outstanding at End of Period 621,000 477,900
Vested at September 30, 2021 — 159,300

~~The fair value of time-based cash-settled units granted were calculated using the following assumptions:~~NOTE 9 - EQUITY


			~~Nine Months Ended September 30, 2021~~
~~Expected term (years)~~			~~0.40 – 4.40~~
~~Expected volatility (%)~~			25
~~Risk-free interest rate (%)~~			~~0.80~~
~~Expected dividend yield (%)~~			—

~~The unrecognized compensation expense for~~During the nine months ended September 30, 2022, the Company converted 886,950 of cash-settled units ~~was calculated using the following assumptions:~~


	~~Nine Months Ended September 30, 2021~~
~~Stock Price at September 30, 2021~~	$	~~24.50~~
~~Exercise Price per Unit~~	$	~~2.97~~
~~Intrinsic Value per Unit~~	$	~~21.53~~
~~Converted Units~~	~~318,600~~

~~NOTE 12 - EQUITY~~

~~In connection~~into net stock-settled stock appreciation rights (“SARs”), with ~~the Reorganization Transactions, on September 29, 2021, Fund IX and the other former limited partners~~a fair value liability of ~~Penelope Group Holdings, L.P. contributed 100% of their respective economic equity interests in Penelope Group Holdings, L.P. and Fund IX contributed 100%~~$1,632 reclassified to additional paid-in capital. The Company issued 117,180 shares of its ~~equity interests in Penelope Group Holdings GP II, to Olaplex Holdings in exchange for an aggregate~~common stock upon vesting and settlement of ~~648,124,642~~the converted SARs. The Company repurchased 55,244 of outstanding shares of its common stock for the net settlement of ~~Olaplex Holdings plus Tax Receivable Agreement~~SARs for payment ~~rights. Penelope Group Holdings, L.P. directly held~~of taxes related to such SARs, that were accounted for as a share retirement. Additionally, the Company issued 256,846 shares of ~~Penelope prior to~~its common stock as a result of stock options exercised during the ~~reorganization and following the mergers, Olaplex Intermediate II, Inc. currently holds the shares of Penelope.~~

With regard to the Reorganization Transactions, including the issuance of 648,124,642 shares of Olaplex Holdings with a par value of $0.001 per share, the Company made a par value reclassification adjustment from Additional Paid in Capital in the consolidated statement of changes in equity to reflect the par value of the Company.

~~As part of the Reorganization Transactions, the Company entered into the Tax Receivable Agreement with the Pre-IPO Stockholders. See further discussion in Notes 2 and 10.~~

nine months ended September 30, 2022.

NOTE 1310 - RELATED PARTY TRANSACTIONS

The Company received $300 in the 2020 fiscal period from certain investment funds affiliated with Advent International Corporation (the “Advent Funds”), which are shareholders of the Company, to be expended as charitable donations of which $20 remains unpaid as of September 30, 2021 and December 31, 2020.

In July 2020, the Company entered into an agreement with CI&T, an information technology and software company, ~~pursuant to~~in which certain investment funds affiliated with Advent International Corporation (the “Advent Funds”) hold a greater than 10% equity interest. During the three and nine months ended September 30, 2022, the Company paid CI&T ~~developed~~$153 and $179, respectively. During the ~~Olaplex professional application. During the~~three and nine months ended September 30, 2021, ~~and fiscal year ended December 31, 2020,~~ the Company paid CI&T ~~$189~~$30 and ~~$25~~$189 respectively, for services related to the development, maintenance and enhancement of the Olaplex professional application, all of which were negotiated on ~~an arm’s length basis and on~~ market terms. ~~The Advent Funds hold a greater than 10% equity interest in CI&T. CI&T continues to provide services to us for the maintenance and enhancement of the professional application.~~

Tax Receivable Agreement

In connection with the Reorganization, the Company entered into the Tax Receivable Agreement with the Pre-IPO Stockholders. See further discussion in ~~Notes~~“Note 2 – Summary of Significant Accounting Policies – Tax Receivable Agreement”. During the three and ~~10.~~nine months ended September 30, 2022, the Company made a payment to the Pre-IPO Stockholders of $4.2 million as required pursuant to the terms of the Tax Receivable Agreement.

NOTE 1411 - CONTINGENCIES

From time to time, the Company is subject to various legal actions arising in the ordinary course of business. The Company cannot predict with reasonable assurance the outcome of these legal actions brought against us as they are subject to uncertainties. Accordingly, any settlement or resolution in these legal actions may occur and affect our net income in such period as the settlement or resolution.

Pursuant to the purchase agreement between the Sellers, the Advent Funds and the other purchasers of the Olaplex business, the Company was required to pay the Sellers certain amounts in connection with the final settlement of certain litigation and contingency matters involving LIQWD, Inc., a predecessor entity to the Company substantially all of whose assets and liabilities were purchased as part of the Acquisition (the “LIQWD Matters”).

During April 2021, the Company and the Sellers commenced negotiations concerning the amount to be paid to the Sellers by the Company in connection with a potential settlement of the LIQWD Matters and, in May 2021, the Company reached agreement with the Sellers on the amount to be paid by the Company to the Sellers in full satisfaction of the contingency provisions in the purchase agreement related to the LIQWD Matters.

Accordingly, the Company has expensed approximately $14,250 included in selling, general and administrative costs in the accompanying consolidated financial statements during the nine months ended September 30, 2021, associated with the amounts to be paid by the Company in connection with the final resolution of the LIQWD Matters. The amounts accrued, all of which were paid in May 2021, in connection with the final settlement of the LIQWD Matters, represent the total cost to the Company in resolving the LIQWD Matters.

As a result of the foregoing agreement with the Sellers and the resulting approval by the Sellers of the settlement of the LIQWD Matters, all outstanding claims of the Sellers and the Company associated with the LIQWD Matters have been resolved.

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company iswas not subject to any ~~other currently~~ pending legal matters or claims that could have a material adverse effect on its financial position, results of operations, or cash flows should such litigation be resolved unfavorably.

2417

NOTE 1512 – NET INCOME PER SHARE

The following is a reconciliation of the numerator and denominator in the basic and diluted net income per common share computations:

Three Months Ended Nine Months Ended
September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Numerator:
Net Income $ 56,591 $ 28,315 $ 151,473 $ 5,890
Denominator:
Weighted average common shares outstanding – basic 648,124,642 647,888,387 648,082,081 631,143,589
Dilutive common equivalent shares from equity options 42,587,140 5,148,506 41,026,191 1,734,251
Weighted average common shares outstanding – diluted 690,711,782 653,036,893 689,108,272 632,877,840
Net income per share:
Basic $ 0.09 $ 0.04 $ 0.23 $ 0.01
Diluted $ 0.08 $ 0.04 $ 0.22 $ 0.01

~~NOTE 16 - SUBSEQUENT EVENTS~~

~~The Company has evaluated subsequent events through November 10, 2021, the date these unaudited condensed consolidated financial statements were available to be issued.~~

~~Exercise of Underwriters’ Option~~

On October 8, 2021, the selling stockholders sold 11,055,000 additional shares of common stock of the Company pursuant to the full exercise by the underwriters of the IPO of their option to purchase additional shares at the initial public offering price of $21 per share. The selling shareholders received net proceeds of approximately $219,967, after deducting underwriting discounts and commissions, for the sale of these additional shares. The Company did not receive any proceeds from the IPO.


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Numerator:
Net Income	$	60,763	$	56,591	$	210,439	$	151,473

Denominator:
Weighted average common shares outstanding – basic	649,099,780		648,124,642		648,963,625		648,082,081
Dilutive common equivalent shares from equity options	42,157,874		42,587,140		42,622,162		41,026,191
Weighted average common shares outstanding – diluted	691,257,654		690,711,782		691,585,787		689,108,272

Net income per share:
Basic	$	0.09	$	0.09	$	0.32	$	0.23
Diluted	$	0.09	$	0.08	$	0.30	$	0.22

2518

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited ~~consolidated financial statements~~Consolidated Financial Statements included in the ~~IPO Prospectus.~~Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from management’s expectations as a result of various factors. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and in ~~the “Risk~~“Item 1A. – Risk Factors” ~~section~~ in the ~~IPO Prospectus.~~2021 Form 10-K.

Company Overview

OLAPLEX is an innovative, science-enabled, technology-driven beauty company. We are founded on the principle of delivering effective, ~~patented~~patent-protected and proven performance in the categories where we compete. We strive to empower our consumers to look as beautiful on the outside as they feel on the inside.

We believe every person deserves to have healthy, beautiful hair, whether they are visiting a salon or caring for their hair at home. Our commitment to deliver results that are visible on first use, coupled with our strong sense of community across both professional hairstylists and consumers, has driven ~~tremendous~~strong brand loyalty. We offer our award-winning products through a global ~~omni-channel~~omnichannel platform serving the professional, specialty retail, and ~~DTC~~Direct to Consumer (“DTC”) channels.

OLAPLEX disrupted and revolutionized the professional ~~haircare~~hair care industry by creating the bond building category in 2014. We have grown from an initial offering of three products sold exclusively through the professional channel to a broader suite of products offered through the professional, specialty retail and DTC channels that have been strategically developed to address three key uses: treatment, maintenance and protection. Our ~~unique~~patent-protected bond building technology ~~can repair~~repairs disulfide bonds in human hair that are destroyed via chemical, thermal, mechanical, environmental and aging processes. Our current product portfolio comprises ~~eleven~~fourteen unique, complementary products specifically developed to provide a holistic regimen for hair health. ~~We have strategically expanded our product line over time to create a weekly self-care routine that our consumers look forward to and rely upon on a daily basis.~~

We have developed a distribution strategy that leverages the strength of each of our channels, including the specific attributes of each channel as described below, and our strong digital capabilities that we apply across our omni-channel sales platform. Our professional channel grew 95% from the nine months ended September 30, 2020 to the nine months ended September, 30, 2021, representing 47% of our total net sales for the period. Our specialty retail channel grew 215% from the nine months ended September 30, 2020 to the nine months ended September 30, 2021, representing 27% of our total net sales for the period. Our DTC channel, comprised of OLAPLEX.com and sales through third-party e-commerce platforms, grew 135% from the nine months ended September 30, 2020 to the nine months ended September 30, 2021, and represented 26% of our total net sales for the period. This channel also provides us with the opportunity to engage directly with our consumers to help power feedback that drives decisions we make around new product development.

The strength of our business model and ability to scale have created a compelling financial profile characterized by revenue growth and very strong profitability. We have developed a mutually reinforcing, synergistic, omnichannel model that leverages the strength of each of our channels and our strong digital capabilities that we apply across our sales platforms. Our ~~net~~professional channel serves as the foundation for our brand, validating the quality of our products and influencing our consumers’ purchasing decisions. The DTC channel and specialty retail channel have both contributed to the success of our omnichannel model. Our DTC channel, comprised of OLAPLEX.com and sales through third-party e-commerce platforms, also provides us with the opportunity to engage directly with our consumers to provide powerful feedback that drives decisions we make around new product development.

Third quarter 2022 financial highlights

•Net sales increased 9.2% from ~~$189.1~~$161.6 million in the ~~nine~~three months ended September 30, ~~2020~~2021 to $176.5 million in the three months ended September 30, 2022. For the three months ended September 30, 2022, net sales in our professional channel decreased 16.0%, our specialty retail channel grew 60.1% and our DTC channel decreased 2.6%, in each case as compared to the three months ended September 30, 2021. We believe the decreases in our professional and DTC channels were driven by macroeconomic concerns that impacted the stylist community, key customers reducing inventory levels in response to lower sell through trends, and increased competitive activity including discounting.

•Gross profit margin, gross profit as a percentage of sales, decreased from 78.9% in the three months ended September 30, 2021 to 73.6% in the three months ended September 30, 2022, primarily as a result of product mix, higher input costs for warehousing, transportation, raw materials, and one-time labeling stock write-off and disposal costs.

•Operating expenses for the three months ended September 30, 2022 increased by 1.7%, as compared to the three months ended September 30, 2021, primarily as a result of increased sales and marketing expense, public company compliance and other related expenses, higher payroll due to workforce expansion, and higher professional fees, partially offset by one-time initial public offering costs and cash settled unit costs incurred in the three months ended September 30, 2021.

•Operating income increased from $87.0 million for the three months ended September 30, 2021 to $88.7 million for the three months ended September 30, 2022.

•Net income increased from $56.6 million for the three months ended September 30, 2021 to $60.8 million for the three months ended September 30, 2022.

Year-to-date 2022 financial highlights

•Net sales increased 32.8% from $431.9 million in the nine months ended September 30, ~~2021, representing a 128% increase. Our net income increased from $5.9~~2022 to $573.6 million in the nine months ended September 30, ~~2020~~2022. For the nine months ended September 30, 2022, net sales in our professional channel grew 21.6%, our specialty retail channel grew 74.4%, and our DTC channel grew 10.1%, in each case as compared to ~~$151.5 million~~the nine months ended September 30, 2021.

•Gross profit margin decreased from 79.1% in the nine months ended September 30, 2021 ~~representing a 2,472% increase, and our adjusted net income (see “Non-GAAP Financial Measures”) increased from $85.1 million~~to 74.5% in the nine months ended September 30, ~~2020,~~2022, primarily as a result of product mix, higher input costs for raw materials, warehousing, and transportation, as well as one-time inventory and labeling stock write-off and disposal costs.

•Operating expenses for the nine months ended September 30, 2022 increased by 4.0%, as compared to ~~$204.3 million~~the nine months ended September 30, 2021, primarily as a result of increased sales and marketing expense, higher payroll due to workforce expansion, higher professional fees, share-based compensation expense and distribution and fulfillment expenses, partially offset by one-time initial public offering costs, legal costs, and cash settled unit costs incurred in the nine months ended September 30, ~~2021, representing a 140% increase. We have also experienced robust adjusted EBITDA (see “Non-GAAP Financial Measures”) growth over the past year, increasing our adjusted EBITDA~~2021.

•Operating income increased from ~~$133.5~~$235.7 million ~~in the nine months ended September 30, 2020, to $298.1 million in~~for the nine months ended September 30, 2021 ~~representing a 123% increase, and a decrease in our adjusted EBITDA margins (see “Non-GAAP Financial Measures”) from 71% in~~to $317.3 million for the nine months ended September 30, ~~2020, to 69% in~~2022.

•Net income increased from $151.5 million for the nine months ended September 30, ~~2021.~~

~~Key Factors Affecting Our Performance~~

~~We believe that our continued success and growth are dependent on a number of factors. These factors provide both significant areas of opportunity as well as potential challenges that we will need~~2021 to ~~address in order to sustain~~$210.4 million for the growth of our business. We have outlined some of these factors below, as well as in the section “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and in the “Risk Factors” section of the IPO Prospectus.

~~Ability to Grow Our Brand Awareness and Penetration~~

Our brand is integral to the growth of our business and is essential to our ability to engage with our community. Our performance will depend on our ability to attract new customers and encourage consumer spending across our product portfolio. Despite rapid growth in our brand awareness, we believe Olaplex still only has aided brand awareness of approximately 45% among prestige haircare consumers, which is lower than most haircare peers. We believe awareness among the broader market is lower still. We believe the core elements of continuing to grow our awareness, and thus increase our penetration, are highlighting our products’ quality, our continued ability to drive innovative new haircare solutions and our digital first marketing tactics. As we seek to enter new markets, it will be important for us to be able to expand our brand awareness and engage with new consumers across all of our channels.

~~Continued Execution of Omni-channel Strategy~~

Since our founding, the professional channel has provided our brand with credibility in the hairstylist community and with consumers, which translated into meaningful brand equity and success in the specialty retail and DTC channel, allowing us to gain deeper consumer insights. These channels broaden the scope of our brand’s awareness and customer penetration, which also serves to grow our professional channel. This synergistic omni-channel strategy has been key to our growth thus far, and we expect it will continue to serve as a valuable tool for growing our business. We intend to continue to find ways to deepen our channel integration through our digital platform, engaged social community, and vendor relationships with salons and key retailers. Our ability to execute this strategy will depend on a number of factors, such as retailers’ and salons’ satisfaction with the sales and profitability of our products.

~~Continued Geographic Expansion Across All Channels~~

We believe our ability to enter new markets across all of our channels will continue to be part of our future growth. Since our founding, we have expanded into Europe, Asia, Latin America and other markets, with plans to continue to increase our presence in all of these markets. As we scale in new markets, we anticipate that we will leverage our existing relationships with partners who operate in these markets, as well as engage with new professional and retail customers. We believe our ability to continue expanding in new markets will be powered by our integrated omni-channel efforts to enable a synergistic relationship between the professional, specialty retail and DTC channels. Our ability to grow our business geographically will depend on a number of factors, including our marketing efforts and continued customer satisfaction with the quality of our products.

~~Continued Product Innovation~~

We anticipate a meaningful portion of our future growth will come from new product development and innovation. We believe our robust in-house research and development team, dedicated Olaplex laboratory, independent lab testing and real-world salon testing enables us to continue to develop meaningful new products and positions us to maintain a full new product pipeline for several years into the future. Though we have a well-built pipeline for our future products, we are relentlessly focused on staying at the forefront of cutting edge and technologically-enhancing innovation. Our attention in this area is a critical component of our growth plan, and thus our performance will depend, in part, on our ability to continue to deliver new high-performance products.

~~Impact of COVID-19~~

The COVID-19 pandemic has impacted our business beginning in March 2020. The degree to which the COVID-19 pandemic will directly or indirectly impact our cash flow, business, financial condition, results of operations and prospects will depend on future developments that are highly uncertain and cannot be predicted, many of which are outside of our control.

We believe the COVID-19 pandemic shifted demand from our professional channel to our specialty retail and DTC channels, as consumers were unable to treat their hair in salons as a result of restrictions, such as mandatory lockdowns, that caused the closure of many of our professional salon partners and consumers turned to purchasing our products online for home treatment. This shift enabled us to scale our DTC capability faster than expected. Even as salons in our professional channel locations have reopened, we have not seen a decline in the demand for our products in our DTC channel, nor do we expect to, as COVID-19 restrictions continue to ease globally.

One impact on our business due to COVID-19 was the implementation of our Affiliate Program. We created this program during April and May of 2020 to support hairstylists during salon closures imposed by COVID-19 safety measures, allowing hairstylists to connect with their consumers and generate income by selling Olaplex products for at-home use. As we continue to monitor developments related to the COVID-19 pandemic, including the impacts on our customers, suppliers and consumers, we have taken and will continue to take further measures.

~~Components of Our Results of Operations and Trends Affecting Our Business~~

~~Net Sales~~

We develop, market and sell premium haircare products under our Olaplex brand through our wholly owned subsidiary, Olaplex, Inc., which is our primary operating subsidiary and conducts business under the name “Olaplex”. We operate through three customer channels: professional, specialty retail, and DTC.

Net sales are comprised of the transaction price to customers for product sales less expected allowances, discounts, and allowance for returns. Our growth in net sales is driven by a number of trends, including the levels of consumer spending, increasing awareness of and demand for our products, and the broader economic environment. Our largest channel, professional, includes sales through external distributors who sell to professional hairstylists throughout the world who use our products to treat their customers’ hair. Net sales in our professional channel also includes products sold to consumers for use at home. Net sales within this channel have continued to grow with increased awareness and distribution. Our specialty retail channel includes sales through national retail accounts, such as Sephora. Net sales in this channel have continued to grow through increased distribution across new stores within our existing customers, new customer relationships, and increasing sales within existing stores. We expect to continue to grow through increased penetration in additional stores within existing accounts as well as the addition of new retail customers and stores, both domestically and internationally. The DTC channel includes direct sales to the consumer through our website, olaplex.com, and sales through third-party e-commerce customers who resell our products solely through online platforms.

~~Cost of Sales~~

Cost of sales reflects the aggregate costs to procure our products, including the amounts invoiced by our third- party contract manufacturers and suppliers for finished goods, as well as costs related to transportation to our distribution center, and amortization of our patented formulations. For the 2020 fiscal year, we amortized a one-time non-recurring fair value step-up adjustment to inventory as part of purchase accounting related to the Acquisition that is recorded in cost of sales.

~~Gross Profit and Gross Margin~~

~~Gross profit is our net sales less cost of sales. Gross margin measures our gross profit as a percentage of net sales.~~

We have a network of domestic and international third-party manufacturers from whom we purchase finished goods. Over the past several years, we have worked to evolve our supply chain to increase capacity and technical capabilities while maintaining and reducing overall costs as a percentage of sales. We intend to continue to leverage our innovation and sourcing capabilities to lower costs and improve margin in future periods.

~~Operating Expenses~~

~~Our operating expenses consist of selling, general and administrative expenses, amortization of brand name and customer relationship intangible assets and purchase accounting acquisition costs.~~

Selling, general and administrative expenses include personnel-related expenses, including salaries, success payments, fringe benefits and share-based compensation. Other significant operating expenses include sales and marketing, research and development, outbound shipping, fulfillment, information technology costs, merchant fees, professional fees for accounting, auditing, consulting and legal services, and travel and overhead expenses.

In relation to the Acquisition, and included in the operating expenses, are amortization of brand name and customer relationship intangible assets and non-recurring purchase accounting acquisition costs that consist of legal, accounting, and banking fees.

In the near term, we expect selling, general and administrative expense to increase as we invest to support our growth initiatives, including investments in the Olaplex brand and infrastructure. Additionally, we expect our operating expenses will increase compared to prior periods due to the reporting and compliance costs associated with being a public company.

~~Interest (Expense)~~

Interest expense primarily consists of interest incurred on our outstanding indebtedness and amortization of debt issuance costs. See “Financial condition, liquidity and capital resources” below and a description of our indebtedness in Note 9 of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

~~Other (Expense) Income, Net~~

Other (expense) income, net primarily reflects gains (losses) caused by fluctuations of foreign currency exchange rates, as well as reduction of diversion income that results from penalty payments received from distributors for sales in violation of their distribution agreements.

~~Income Tax Provision~~

We operate as a C-Corporation. The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain permanent tax adjustments. The U.S. federal statutory tax rate was primarily lower due to the FDII deduction. This deduction results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, the impact of permanent tax adjustments, and the interaction of various tax strategies.

~~Net Income~~

~~Our net income for future periods will be affected by the various factors described above.~~

~~Segments~~

Operating segments are components of an enterprise for which separate financial information is available that is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Utilizing this criteria, the Company manages its business on the basis of three operating segments that are aggregated into one reportable segment given the operating segments have similar economic characteristics, classes of consumers, products, production, distribution methods, and operate in the same regulatory environments.

nine months ended September 30, 2022.

Results of operations

~~The following table sets forth our consolidated statements of operations data for each of the periods presented:~~

Three Months Ended September 30,
2021 2020
(in thousands) % of Net
sales (in thousands) % of Net
sales
Net sales $ 161,624 100.0 % $ 89,447 100.0 %
Cost of sales:
Cost of product (excluding amortization) 32,462 20.1 24,569 27.5
Amortization of patented formulations 1,680 1.0 2,102 2.3
Total cost of sales 34,142 21.1 26,671 29.8
Gross profit 127,482 78.9 62,776 70.2
Operating expenses:
Selling, general, and administrative 30,257 18.7 8,215 9.2
Amortization of other intangible assets 10,182 6.3 10,182 11.4
Acquisition costs — — 488 0.5
Total operating expenses 40,439 25.0 18,885 21.1
Operating income 87,043 53.9 43,891 49.1
Interest (expense) (14,987) (9.3) (9,794) (10.9)
Other (expense) income, net (213) (0.1) (29) —
Income before provision for income taxes 71,843 44.5 34,068 38.1
Income tax provision 15,252 9.4 5,753 6.4
Net income $ 56,591 35.0 $ 28,315 31.7
Comprehensive income $ 56,591 35.0 % $ 28,315 31.7 %

Comparison of the Three Months Ended September 30, ~~2021~~2022 to the Three Months Ended September 30, ~~2020~~2021

The following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income data for each of the periods presented:


	Three Months Ended September 30,
	2022				2021
	(in thousands)		% of Net sales		(in thousands)		% of Net sales
Net sales	$	176,454	100.0	%	$	161,624	100.0	%
Cost of sales:
Cost of product (excluding amortization)	45,484		25.8		32,462		20.1
Amortization of patented formulations	1,142		0.6		1,680		1.0
Total cost of sales	46,626		26.4		34,142		21.1
Gross profit	129,828		73.6		127,482		78.9
Operating expenses:
Selling, general, and administrative	30,807		17.5		30,257		18.7
Amortization of other intangible assets	10,329		5.9		10,182		6.3

Total operating expenses	41,136		23.3		40,439		25.0
Operating income	88,692		50.3		87,043		53.9
Interest expense	(10,499)		(5.9)		(14,987)		(9.3)



Other expense, net	(2,251)		(1.3)		(213)		(0.1)
Income before provision for income taxes	75,942		43.0		71,843		44.5
Income tax provision	15,179		8.6		15,252		9.4
Net income	$	60,763	34.4		$	56,591	35.0

Net Sales

~~We distribute~~The Company distributes products in the U.S. and internationally through professional distributors in the salon ~~channels, national~~channel, directly to retailers for sale in their physical stores and ~~international retailers, as well as direct~~e-commerce sites, and DTC through sales to ~~consumers~~pure-play e-commerce customers and through ~~e-commerce.~~the Company’s own Olaplex.com websites. As such, our three business channels consist of professional, specialty retail and DTC as ~~follows.~~follows:

(in thousands) For the Three Months Ended September 30,
2021 2020 $ Change % Change
Net sales by Channel:
Professional $ 74,978 $ 47,573 $ 27,405 57.6 %
Specialty retail 46,343 20,313 26,030 128.1
DTC 40,303 21,561 18,742 86.9
Total Net sales $ 161,624 $ 89,447 $ 72,177 80.7 %

~~Net sales increased $72.2 million, or 80.7%, to $161.6 million in the three months ended September 30, 2021, from $89.4 million in the three months ended September 30, 2020.~~


(in thousands)	For the Three Months Ended September 30,
	2022		2021		$ Change		% Change
Net sales by Channel:
Professional	$	62,991	$	74,978	$	(11,987)	(16.0)	%
Specialty retail	74,191		46,343		27,848		60.1	%
DTC	39,272		40,303		(1,031)		(2.6)	%
Total Net sales	$	176,454	$	161,624	$	14,830	9.2	%

~~Professional net sales increased $27.4 million, or 57.6%, to $75.0 million~~The decline in ~~the three months ended September 30, 2021, from $47.6 million in the three months ended September 30, 2020. Growth for~~ professional was driven by volume ~~growth~~decline from ~~increased~~decreased velocity (sales per point of distribution) of existing products, which the Company believes is due to macroeconomic concerns impacting the stylist community, and certain key distributors opting to reduce inventory levels in response to the ~~launch of new products (including~~

~~No.8 - Bond Intense Moisture Mask, No.4P – Blonde Enhancer Toning Shampoo,~~lower sell through trends. Net sales decline in the ~~Professional only 4-in-1 Moisture Mask).~~

~~Specialty retail~~U.S. was partly offset by net sales ~~increased $26.0 million, or 128.1%,~~growth in Italy, the U.K. and Germany. Sales growth in these countries is primarily attributable to ~~$46.3 million in~~product price increases effected by the Company during the three months ended September 30, ~~2021, from $20.3 million in~~2022, and the ~~three months ended~~net impact of new products launched since September 30, ~~2020. Growth for~~2021, including 1-liter sizes in No. 4 Bond Maintenance Shampoo, No.4C Bond Maintenance Clarifying Shampoo, and No. 5 Bond Maintenance Conditioner.

The growth in specialty retail was driven by ~~volume growth from increased velocity of existing products, the launch of new products (including No.8 - Bond Intense Moisture Mask and No.4P -Blonde Enhancer Toning Shampoo) and~~ the addition of new ~~customers.~~

~~DTC~~customers and the net ~~sales~~impact of new products launched since September 2021, which include No. 9 Bond Protector Nourishing Hair Serum and No. 4C Bond Maintenance Clarifying Shampoo. A deceleration in sell-through trends amongst certain of the Company’s U.S. specialty retail customers, which the Company believes was related to increased ~~$18.7 million, or 86.9%, to $40.3 million~~competitive activity including discounting, was more than offset by the Company’s successful launch into Ulta Beauty, a higher sell-in of holiday kits and pricing changes in the ~~three months ended September 30, 2021, from $21.6 million~~U.S and international markets.

The decline in ~~the three months ended September 30, 2020. Growth for~~ DTC was driven by the volume ~~growth~~decline from decreased velocity at Olaplex.com, particularly in the U.S. The Company believes this decline was driven by deceleration in sell-through trends amongst certain of the Company’s third party DTC customers related to increased ~~velocity~~competitive activity including discounting, offset by a higher sell-in of ~~existing products~~holiday kits and the launch of new products (including No.8 - Bond Intense Moisture Mask and No.4P -Blonde Enhancer Toning Shampoo). Olaplex.com also saw strong growth as a result of increased traffic and higher average order value.pricing changes.

Cost of Sales and Gross Profit


(in thousands)	(in thousands)	For the Three Months Ended September 30,				$ Change					% Change		(in thousands)	For the Three Months Ended September 30,								$ Change			% Change
		2021		2020						2022					2021
Cost of sales	Cost of sales	$	34,142	$	26,671			$	7,471					28.0		%	Cost of sales	$	46,626		$	34,142		$	12,484		36.6	%
Gross profit	Gross profit	$	127,482	$	62,776	$	64,706				103.1	%	Gross profit	$	129,828				$	127,482		$	2,346		1.8	%

Our cost of sales increased ~~$7.5~~primarily due to inflationary pressures and growth in sales volume, as well as increases related to write-off and disposal costs of $1.6 million ~~or 28.0%~~related to ~~$34.1 million~~unused labeling stock that became obsolete as a result of regulation changes in the ~~three months ended September 30, 2021 from $26.7~~E.U., and distribution start-up costs of $0.4 million, ~~in the three months ended September 30, 2020 due to a $15.6 million increase driven by increased sales volume,~~ partially offset by a ~~$7.7 million decrease as a result of the absence of the one-time fair value inventory adjustment due to the Acquisition in January 2020 and a $0.4~~$0.5 million decrease in the amortization of our acquired patented formulations.

Our gross profit ~~increased $64.7 million, or 103.1%, to $127.5 million in the three months ended September 30, 2021 from $62.8 million in the three months ended September 30, 2020. Our~~margin, gross profit ~~margin,~~ as a percentage of sales, ~~increased~~decreased from ~~70.2% in the three months ended September 30, 2020 to~~ 78.9% in the three months ended September 30, 2021 ~~as a result of the absence of the one-time fair value inventory adjustment due~~ to ~~the Acquisition in January 2020. Our adjusted gross profit margin (see “Non-GAAP Financial Measures”) decreased from 81.2%~~73.6% in the three months ended September 30, ~~2020~~2022, as a result of increased input costs for warehousing, transportation and raw materials, which accounted for approximately four percentage points of the decline, inflation on product costs, and labeling stock write off and disposal costs, with the remainder relating to ~~79.9%~~product and customer mix. Gross profit margin was also adversely impacted due to increased sales of holiday kits at a lower margin versus the individual products in the Company’s product portfolio, which was offset by the benefit of the product price increase effected by the Company during the three months ended September 30, ~~2021 due primarily to higher input costs, particularly for inbound distribution and increased sales of lower margin products.~~2022.

Operating Expenses


(in thousands)	(in thousands)	For the Three Months Ended September 30,								(in thousands)	For the Three Months Ended September 30,
		2021		2020		$ Change		% Change			2022		2021		$ Change		% Change
Selling, general, and administrative expenses	Selling, general, and administrative expenses	$	30,257	$	8,215	$	22,042	268.3	%	Selling, general, and administrative expenses	$	30,807	$	30,257	$	550	1.8	%
Amortization of other intangible assets	Amortization of other intangible assets	10,182		10,182		—		—		Amortization of other intangible assets	10,329		10,182		147		1.4	%
Acquisition costs		—		488		(488)		—

Total operating expenses	Total operating expenses	$	40,439	$	18,885	$	21,554	114.1	%	Total operating expenses	$	41,136	$	40,439	$	697	1.7	%

~~Our operating~~The increase in selling, general and administrative expenses ~~increased $21.6 million, or 114.1%, from $18.9~~was primarily driven by increases of $4.3 million in ~~the three months ended September 30, 2020 to $40.4~~sales and marketing expense, $2.5 million in public company compliance and other related expenses, $2.2 million in payroll expenses driven by workforce expansion, and $2.1 million of professional fees, partially offset by $6.1 million in non-capitalizable IPO and strategic transition costs and $4.4 million in cash-settled units compensation expense recorded in the three months ended September 30, 2021.

~~Selling, general~~Interest Expense, Net


(in thousands)	For the Three Months Ended September 30,
	2022		2021		$ Change		% Change
Interest expense, net	$	(10,499)	$	(14,987)	$	4,488	(29.9)	%

Interest expense decreased due to the Company refinancing its previously-existing 2020 Credit Agreement (as defined below) with a new 2022 Credit Agreement (as defined below) during the three months ended March 31, 2022, which reduced the Company’s outstanding debt and ~~administrative expenses increased by $22.0 million, or 268.3%, from $8.2 million~~lowered the interest rate in respect thereof, in the three months ended September 30, ~~2020 to $30.3 million in the three months ended September 30, 2021. In the three months ended September 2021, there were increases of $6.1 million in non-capitalizable IPO~~2022. See “Liquidity and strategic transition costs, $4.3 million in cash-settled units compensation expense (see Note 11 to the unaudited condensed consolidated interim financial statements), $3.4 million in sales and marketing expense, $2.6 million in payroll driven by expansion of the workforce, $1.6 million in distribution and fulfillment costs related to the increase in product sales volume, $1.4 million in share-based compensation expense, and $2.6 million in other selling, general and administrative expenses pertaining to general business growth. We expect sales and marketing, research and development, payroll, and other selling, general and administrativeCapital Resources Requirements – Credit Facility” for additional information.

Other Expense, Net


(in thousands)	For the Three Months Ended September 30,
	2022		2021		$ Change		% Change


Other expense, net	$	(2,251)	$	(213)	$	(2,038)	956.8	%

3122

~~expenses to increase in the future as we continue to expand brand awareness, develop and introduce new products, build out infrastructure and implement new marketing strategies.~~

~~Amortization of intangible assets stayed flat. Acquisition costs decreased $0.5 million.~~

~~Interest (Expense)~~

(in thousands) For the Three Months Ended September 30,

2021 2020

$ Change % Change
Interest (expense) $ (14,987) $ (9,794) $ (5,193)

53.0 %

~~Interest~~Other expense, increased $5.2 million in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase is due to the Company entering into the Amendment to the Original Credit Agreement for additional borrowings on December 18, 2020. See “⸺Liquidity and Capital Resources Requirements⸺ Credit Facility”.

~~Other (Expense) Income, Net~~

(in thousands) For the Three Months Ended September 30,

2021 2020

$ Change % Change
Other (expense) income, net $ (213) $ (29)

$ (184) 634.5 %

~~In the three months ended September 30, 2021,~~ net ~~other expense~~ increased ~~$0.2 million compared to the three months ended September 30, 2020,~~ primarily due to ~~a $0.21 million~~an increase in foreign currency ~~translation~~transaction losses ~~offset~~driven by ~~a $0.03 million decrease in charitable contributions.~~strengthening of the U.S. dollar.

Income Tax Provision


(in thousands)	(in thousands)	For the Three Months Ended September 30,								(in thousands)	For the Three Months Ended September 30,
		2021		2020		$ Change		% Change			2022		2021		$ Change		% Change
Income tax provision	Income tax provision	$	15,252	$	5,753	$	9,499	165.1	%	Income tax provision	$	15,179	$	15,252	$	(73)	(0.5)	%

The ~~provision for income taxes increased to $15.3 million, or an~~Company’s effective tax rate ~~of 21.2%,~~was 20.0% for the three months ended September 30, ~~2021 from $5.8 million, or an effective tax rate of 16.9%,~~2022, as compared to 21.2% for the three months ended September 30, ~~2020. The increase in the provision for income taxes from the comparative prior three months period is primarily due to the increase in the Company’s income before taxes over this period.The~~2021.The Company’s effective tax rate infor the three months ended September 30, ~~2020~~2022 is lower than the statutory tax rate of 21% primarily due to the benefit associated with the foreign derived intangible income deduction (“FDII”), which results in income from the Company’s sales to foreign customers being taxed at a lower effective tax ~~rate.~~ rate, partially offset by the net impact of state income taxes. The ~~increase~~decrease in the effective tax rate from the comparative prior three months period is primarily due to the unfavorable impact of non-recurring IPO costs that were not deductible for tax purposes ~~which offsets the benefit from the FDII deduction for~~in the three months ended September 30, 2021.

3223

Comparison of the Nine Months Ended September 30, ~~2021~~2022 to the Nine Months Ended September 30, ~~2020~~2021

Nine Months Ended September 30,
2021 2020
(in thousands) % of Net
sales (in thousands) % of Net
sales
Net sales $ 431,867 100.0 % $ 189,055 100.0 %
Cost of sales:

Cost of product (excluding amortization) 83,859 19.4 79,236 41.9
Amortization of patented formulations 6,399 1.5 4,567 2.4
Total cost of sales 90,258 20.9 83,803 44.3
Gross profit 341,609 79.1 105,252 55.7
Operating expenses:
Selling, general, and administrative 75,323 17.4 23,291 12.3
Amortization of other intangible assets 30,547 7.1 29,643 15.7
Acquisition costs — — 16,499 8.7
Total operating expenses 105,870 24.5 69,433 36.7
Operating income 235,739 54.6 35,819 18.9
Interest (expense) (46,052) (10.7) (28,577) (15.1)
Other (expense) income, net (417) (0.1) (155) (0.1)
Income before provision for income taxes 189,270 43.8 7,087 3.7
Income tax provision 37,797 8.8 1,197 0.6
Net income $ 151,473 35.1 $ 5,890 3.1
Comprehensive income $ 151,473 35.1 % $ 5,890 3.1 %
The following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income data for each of the periods presented:


	Nine Months Ended September 30,
	2022				2021
	(in thousands)		% of Net sales		(in thousands)		% of Net sales
Net sales	$	573,553	100.0	%	$	431,867	100.0	%
Cost of sales:
Cost of product (excluding amortization)	140,999		24.6		83,859		19.4
Amortization of patented formulations	5,091		0.9		6,399		1.5
Total cost of sales	146,090		25.5		90,258		20.9
Gross profit	427,463		74.5		341,609		79.1
Operating expenses:
Selling, general, and administrative	79,232		13.8		75,323		17.4
Amortization of other intangible assets	30,890		5.4		30,547		7.1

Total operating expenses	110,122		19.2		105,870		24.5
Operating income	317,341		55.3		235,739		54.6
Interest expense	(30,653)		(5.3)		(46,052)		(10.7)
Other expense, net
Loss on extinguishment of debt	(18,803)		(3.3)		—		—
Other expense, net	(3,852)		(0.7)		(417)		(0.1)
Total other expense, net	(22,655)		(3.9)		(417)		(0.1)
Income before provision for income taxes	264,033		46.0		189,270		43.8
Income tax provision	53,594		9.3		37,797		8.8
Net income	$	210,439	36.7		$	151,473	35.1

Net Sales

We distribute products through professional salon channels, national and international retailers, as well as direct to consumers through e-commerce. As such, our three business channels consist of professional, specialty retail and DTC as follows.


(in thousands)	(in thousands)	For the Nine Months Ended September 30,								(in thousands)	For the Nine Months Ended September 30,
		2021		2020		$ Change		% Change			2022		2021		$ Change		% Change
Net sales by Channel:	Net sales by Channel:									Net sales by Channel:
Professional	Professional	$	201,855	$	103,768	$	98,087	94.5	%	Professional	$	245,539	$	201,855	$	43,684	21.6	%
Specialty retail	Specialty retail	116,201		36,919		79,282		214.7		Specialty retail	$	202,692	$	116,201	86,491		74.4	%
DTC	DTC	113,811		48,368		65,443		135.3		DTC	$	125,322	$	113,811	11,511		10.1	%
Total Net sales	Total Net sales	$	431,867	$	189,055	$	242,812	128.4	%	Total Net sales	$	573,553	$	431,867	$	141,686	32.8	%

~~Net sales increased $242.8 million, or 128.4%, to $431.9 million~~The growth in ~~the nine months ended September 30, 2021, from $189.1 million in the nine months ended September 30, 2020.~~

~~Professional net sales increased $98.1 million, or 94.5%, to $201.9 million in the nine months ended September, 30, 2021, from $103.8 million in the nine months ended September 30, 2020. Growth for~~ professional was driven by volume growth from ~~the~~ increased velocity (sales per point of distribution) of existing products and the ~~launch~~net impact of new products ~~(including No.0 - Intensive Bond Building Hair Treatment, No.8 - Bond Intense Moisture Mask, Professional only 4-in-1 Moisture Mask, No.4P-~~launched since September 30, 2021, which include No.4P Blonde Enhancer Toning ~~Shampoo)~~Shampoo, No. 9 Bond Protector Nourishing Hair Serum, and No. 4C Bond Maintenance Clarifying Shampoo, and 1-liter sizes in No. 4 Bond Maintenance Shampoo, No. 5 Bond Maintenance Conditioner, and No. 4C Bond Maintenance Clarifying Shampoo. The Company also experienced significant net sales growth in the U.S., Germany and Italy.

The growth in specialty retail was driven by the addition of new customers ~~(primarily~~and the net impact of new products launched since September 30, 2021, which include No. 9 Bond Protector Nourishing Hair Serum, No. 4P Blonde Enhancer Toning Shampoo, and No. 4C Bond Maintenance Clarifying Shampoo. The Company experienced significant net sales growth in the ~~international professional market).~~U.S., Canada, and France.

~~Specialty retail~~The growth in DTC was driven by the net ~~sales increased $79.3 million, or 214.7%, to $116.2 million in the nine months ended~~impact of volume growth from new products launched since September 30, 2021, ~~from $36.9 million~~which include No. 4P Blonde Enhancer Toning Shampoo, No. 9 Bond Protector Nourishing Hair Serum, and No. 4C Bond Maintenance Clarifying Shampoo. The Company experienced net sales growth in the nine months ended September 30, 2020. Growth for specialty retail was driven by volume growth from the increased velocity of existing products, the launch of new products (including No.0 - Intensive BondU.S. and China.

3324

~~Building Hair Treatment, No.8 - Bond Intense Moisture Mask, and No.4P- Blonde Enhancer Toning Shampoo) and the addition of new retail customers.~~

DTC net sales increased $65.4 million, or 135.3%, to $113.8 million in the nine months ended September 30, 2021 from $48.4 million in the nine months ended September 30, 2020. Growth for DTC was driven by volume growth from the addition of new pure-play e-commerce customers, increased velocity from existing products and the launch of new products (including No.0 - Intensive Bond Building Hair Treatment, No.8 - Bond Intense Moisture Mask, and No.4P- Blonde Enhancer Toning Shampoo) Olaplex.com also saw strong growth as a result of increased traffic and higher average order value.

Cost of Sales and Gross Profit


(in thousands)	(in thousands)	For the Nine Months Ended September 30,								(in thousands)	For the Nine Months Ended September 30,				$ Change				% Change
		2021		2020		$ Change		% Change			2022		2021
Cost of sales	Cost of sales	$	90,258	$	83,803	$	6,455	7.7	%	Cost of sales	$	146,090	$	90,258			$	55,832			61.9	%
Gross profit	Gross profit	$	341,609	$	105,252	$	236,357	224.6	%	Gross profit	$	427,463	$	341,609	$	85,854			25.1	%

Our cost of sales increased ~~$6.5~~primarily due to inflationary pressures and growth in sales volume, a $4.3 million ~~or 7.7%~~increase due to ~~$90.3 million~~inventory write-off and disposal costs related to unused stock of a product that the Company reformulated in June 2021 as a result of regulation changes in the ~~nine months ended September 30, 2021 from $83.8~~E.U, and a $1.6 million increase due to write-off and disposal costs related to unused labeling stock that became obsolete as a result of regulation changes in the ~~nine months ended September 30, 2020 due to~~E.U. The increase in cost of sales was partially offset by a ~~$49.1~~$1.3 million ~~increase driven by increased sales volume and a $1.9 million increase~~decrease in the amortization of our acquired patented ~~formulations, partially offset by the absence of a $44.5 million expense as a result of the one-time fair value inventory adjustment due to the Acquisition in January 2020.~~formulations.

Our gross profit ~~increased $236.4 million, or 224.6%, to $341.6 million in the nine months ended September 30, 2021~~margin decreased from ~~$105.3 million in the nine months ended September 30, 2020. Our gross profit margin, as a percentage of sales, increased from 55.7% in the nine months ended September 30, 2020 to~~ 79.1% in the nine months ended September 30, 2021 ~~as a result of the absence of the one-time fair value inventory adjustment due~~ to ~~the Acquisition in January 2020. Our adjusted gross profit margin (see “Non-GAAP Financial Measures”) decreased from 81.6%~~74.5% in the nine months ended September 30, ~~2020~~2022 due to ~~80.6% in the nine months ended September 30, 2021 due primarily to higher~~increased input costs ~~particularly~~ for ~~inbound~~warehousing, transportation, and raw materials, which accounted for approximately three percentage points of the decline, with the remainder relating to product and channel mix, and the inventory write-off and disposal costs, labeling stock write-off and disposal costs, and distribution ~~and increased sales of lower margin products.~~start up costs discussed above.

Operating Expenses

(in thousands) For the Nine Months Ended September 30,

2021 2020

$ Change % Change
Selling, general, and administrative expenses $ 75,323 $ 23,291

$ 52,032

223.4 %
Amortization of other intangible assets 30,547 29,643

904

3.0
Acquisition costs — 16,499

(16,499)

—
Total operating expenses $ 105,870

$ 69,433

$ 36,437 52.5 %

~~Our operating expenses increased $36.4 million, or 52.5%, from $69.4 million in the nine months ended September 30, 2020 to $105.9 million in the nine months ended September 30, 2021.~~


(in thousands)	For the Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Selling, general, and administrative expenses	79,232		75,323		$	3,909	5.2	%
Amortization of other intangible assets	30,890		30,547		343		1.1	%

Total operating expenses	$	110,122	$	105,870	$	4,252	4.0	%

Selling, general and administrative expenses increased ~~by $52.0 million, or 223.4%, from $23.3 million in the nine months ended September 30, 2020~~primarily due to ~~$75.3 million in the nine months ended September 30, 2021. In 2021, there were~~ increases of ~~$8.4 million in non-capitalizable IPO and strategic transition costs, $7.0~~$8.8 million in sales and marketing expense, ~~$6.0~~$7.7 million in payroll driven by workforce expansion, ~~of our workforce, $5.2~~$7.2 million in public company compliance and other related expenses, $3.9 million in professional fees, $2.3 million in share-based compensation expense, and $2.1 million in distribution and fulfillment costs related to the increase in product sales volume, ~~$4.4~~partially offset by a decrease of $14.3 million in general and administrative expenses primarily related to non-recurring litigation costs, $8.4 million in non-capitalizable IPO and strategic transition costs and $5.4 million in cash-settled units compensation expense ~~(see Note 11~~recorded in the nine months ended September 30, 2021.

Interest Expense, Net


(in thousands)	For the Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Interest expense	$	(30,653)	$	(46,052)	$	15,399	(33.4)	%

Interest expense decreased due to the ~~unaudited condensed consolidated interim financial statements), $2.2~~Company refinancing its 2020 Credit Agreement with a new 2022 Credit Agreement in February 2022, which reduced the Company’s outstanding debt and lowered the interest rate in respect thereof, in the nine months ended September 30, 2022. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information.

Other Expense, Net


(in thousands)	For the Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Loss on extinguishment of debt	$	(18,803)	$	—	$	(18,803)	—	%
Other expense, net	(3,852)		$	(417)	$	(3,435)	823.7	%
Total other expense, net	$	(22,655)	$	(417)	$	(22,238)	5332.9	%

As a result of the debt refinancing that occurred during the nine months ended September 30, 2022, as described above, the Company recorded $18.8 million of loss on extinguishment of debt. Other expense, net also increased primarily due to an increase in share-based compensation expense and $4.5 million in other selling, general and administrative expenses pertaining to general business growth. Also included in selling, general and administrative costsforeign currency transaction losses driven by the strengthening of the U.S. dollar.

Income Tax Provision


(in thousands)	For the Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Income tax provision	$	53,594	$	37,797	$	15,797	41.8	%

Our effective tax rate was 20.3% for the nine months ended September 30, ~~2021, were costs incurred related~~2022, as compared to 20.0% for the LIQWD Matters of $14.3 million (see Note 14 to the unaudited condensed consolidated interim financial statements included elsewhere in this Quarterly Report on Form 10-Q). We expect sales and marketing, research and development, payroll, and other selling, general and administrative expenses to increase in the future as we continue to expand brand awareness, develop and introduce new products, build out infrastructure and implement new marketing strategies.

Amortization of intangible assets increased $0.9 million or 3.0%. Acquisition costs decreased $16.5 million due to the Acquisition (see Note 1 to the unaudited condensed consolidated interim financial statements) occurring in 2020.

~~Interest (Expense)~~

(in thousands) For the Nine Months Ended September 30,

2021 2020 $ Change % Change
Interest (expense) $ (46,052) $ (28,577) $ (17,475) 61.2 %

~~Interest expense increased $17.5 million~~nine months ended September 30, 2021. The Company’s effective tax rate in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase is due to the Company entering into the Amendment to the Original Credit Agreement for additional borrowings on December 18, 2020. See “⸺Liquidity and Capital Resources Requirements⸺ Credit Facility”.

~~Other (Expense) Income, Net~~

(in thousands) For the Nine Months Ended September 30,

2021 2020 $ Change % Change
Other (expense) income, net $ (417) $ (155) $ (262)

169.0 %

In the nine months ended September 30, 2021, net other expense increased $0.26 million compared to the nine months ended September 30, 2020, primarily due to a $0.32 million increase in foreign currency translation losses offset by a $0.06 million decrease in charitable contributions.

~~Income Tax Provision~~

(in thousands) For the Nine Months Ended September 30,

2021 2020 $ Change % Change
Income tax provision $ 37,797 $ 1,197 $ 36,600

3,057.6 %

The provision for income taxes increased to $37.8 million, or an effective tax rate of 20.0%, for the nine months ended September 30, 2021 from $1.2 million, or an effective tax rate of 16.9%, for the nine months ended September 30, 2020. The increase in the provision for income taxes is primarily due to the increase in the Company’s income before taxes over this period. The Company’s effective tax rate in both periods2022 is lower than the statutory tax rate of 21% primarily due to the benefit associated with the ~~FDII,~~foreign derived intangible income deduction (“FDII”), which results in income from the Company’s sales to foreign customers being taxed at a lower effective tax ~~rate. The increase~~rate, partially offset by the net impact of state income taxes.

Tax Receivable Agreement

Based on current tax laws and assuming that the Company earns sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement, we expect that future payments under the Tax Receivable Agreement relating to certain tax benefits of tax attributes existing prior to the Company’s IPO, including tax basis in intangible assets and capitalized transaction costs relating to taxable years ending on or before the ~~effective~~date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the date of the IPO), that are amortizable over a fixed period of time (including in tax ~~rate from~~periods beginning after the ~~comparative prior~~IPO) and which are available to the Company and its wholly-owned subsidiaries, could aggregate to $225.1 million over the 14-year period under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned upon the parties’ continued ownership of the Company. During the nine months ~~period is primarily due~~ended September 30, 2022, the ~~unfavorable impact of non-recurring IPO costs that were not deductible for tax purposes.~~

~~Non-GAAP Financial Measures~~

We prepare and present our consolidated financial statements in accordance with GAAP. However, management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income and adjusted net income per share, which are non-GAAP financial measures, provide investors with additional useful information in evaluating our performance.

Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income and adjusted net income per share are financial measures that are not required by or presented in accordance with U.S. GAAP. We believe that adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income and adjusted net income per share, when taken together with our financial results presented in accordance with U.S. GAAP, provide meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance onCompany made a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of these non-GAAP measures is helpful to our investors as they are measures used by management in assessing the health of our business,

~~determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.~~

We calculate adjusted EBITDA as net income, adjusted to exclude: (1) interest expense (income), net; (2) income tax provision; (3) depreciation and amortization; (4) share-based compensation expense; (5) fair value inventory step-up adjustment amortization;(6) Acquisition costs and financing fees; (7) costs incurred for LIQWD Matters; (8) non-capitalizable IPO and strategic transition costs; and (9) as applicable tax receivable agreement liability adjustments. We calculate adjusted EBITDA margin by dividing adjusted EBITDA by net sales.

~~We calculate adjusted gross profit as gross profit, adjusted to exclude: (1) fair value inventory step-up adjustment amortization and (2) amortization of patented formulations pertaining~~payment to the ~~Acquisition. We calculate adjusted gross profit margin by dividing adjusted gross profit by net sales.~~

~~We calculate adjusted net income~~Pre-IPO Stockholders of $4.2 million as ~~net income, adjusted~~required pursuant to exclude: (1) amortization of intangible assets; (2) share-based compensation expense; (3) fair value inventory step-up adjustment amortization; (4) Acquisition costs and financing fees;(5) costs incurred for LIQWD Matters; (6) non-capitalizable IPO and strategic transition costs; (7) as applicable, tax receivable agreement liability adjustments and (8) the ~~tax effect of non-GAAP adjustments. Adjusted net income per share is defined as adjusted net income per share using the weighted average basic and diluted shares outstanding.~~

Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income and adjusted net income per share are presented for supplemental informational purposes only, which have limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. Someterms of the ~~limitations~~Tax Receivable Agreement. The remaining Tax Receivable Agreement payment obligation as of ~~these non-GAAP measures include that they (1) do not reflect capital commitments to be paid~~September 30, 2022 is $225.1 million, of which $208.6 million was recorded in ~~the future, (2) do not reflect that, although amortization is a non-cash charge, the underlying assets may need to be replaced~~long term liabilities and ~~non-GAAP measures do not reflect these capital expenditures and intangible asset amortization that contributes to revenue recognition will recur~~$16.5 million was recorded in future periods until fully amortized, (3) do not consider the impact of share-based compensation expense, (4) do not reflect other non-operating expenses, including, in the case of adjusted EBITDA and adjusted EBITDA margin, interest expense, (5) in the case of adjusted EBITDA and adjusted EBITDA margin, do not reflect tax payments that may represent a reduction in cash available to us and (6) do not include certain non-ordinary cash expenses that we do not believe are representative of our business on a steady-state basis. In addition, our use of non-GAAP measures may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income, and adjusted net income per share in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider these non-GAAP measures alongside other financial measures, including our gross profit, gross profit margin, net income, net income per share and other results stated in accordance with U.S. GAAP.

The following tables present a reconciliation of net income and gross profit, as the most directly comparable financial measure stated in accordance with U.S. GAAP, to adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted net income and adjusted net income per share for each of the periods presented.

For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Reconciliation of Net Income to Adjusted EBITDA
Net income $ 56,591 $ 28,315 $ 151,473 $ 5,890
Interest expense 14,987 9,794 46,052 28,577
Income tax provision 15,252 5,753 37,797 1,197
Depreciation and amortization of intangible assets 11,949 12,284 37,033 34,210
Acquisition transaction costs and financing fees (1)
— 1,015 — 18,122
Costs incurred for LIQWD Matters (2)
— — 14,250 —
Inventory fair value adjustment (3)
— 7,744 — 44,519
Share-based compensation 1,945 516 3,119 937
Non-capitalizable IPO and strategic transition costs (4)
6,118 — 8,382 —
Adjusted EBITDA $ 106,842 $ 65,421 $ 298,106 $ 133,452
Adjusted EBITDA margin 66.1 % 73.1 % 69.0 % 70.6 %

For the Three Months Ended September 30,
For the Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Reconciliation of Gross Profit to Adjusted Gross Profit
Gross profit $ 127,482 $ 62,776 $ 341,609 $ 105,252
Inventory fair value adjustment (3)
— 7,744 — 44,519
Amortization of patented formulations 1,680 2,102 6,399 4,567
Adjusted gross profit $ 129,162 $ 72,622 $ 348,008 $ 154,338
Adjusted gross profit margin 79.9 % 81.2 % 80.6 % 81.6 %

For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(in thousands) 2021 2020 2021 2020
Reconciliation of Net Income to Adjusted Net Income
Net income $ 56,591 $ 28,315 $ 151,473 $ 5,890
Amortization of intangible assets 11,862 12,284�� 36,946 34,210
Acquisition transaction costs and financing fees (1)
— 1,015 — 18,122
Costs incurred for LIQWD Matters (2)
— — 14,250 —
Inventory fair value adjustment (3)
— 7,744 — 44,519
Share-based compensation 1,945 516 3,119 937
Non-capitalizable IPO and strategic transition costs (4)
6,118 — 8,382 —
Tax effect of adjustments (5)
(2,082) (4,094) (9,913) (18,570)
Adjusted net income $ 74,434 $ 45,780 $ 204,257 $ 85,108
Adjusted net income per share:
Basic $ 0.11 $ 0.07 $ 0.32 $ 0.13
Diluted $ 0.11 $ 0.07 $ 0.30 $ 0.13

~~(1)~~current liabilities~~Includes acquisition costs related to the Acquisition of the Olaplex business and dividend financing costs.~~

~~(2)~~Includes costs incurred related to the resolution of the LIQWD Matters of $14.3 million as discussed in Note 14 to the unaudited condensed consolidated interim financial statements included elsewhere in this Quarterly Report on Form 10-Q.

~~(3)~~Includes the non-cash, non-recurring fair value inventory step-up adjustment amortization as part of the purchase accounting on the Acquisition Date, utilizing the comparative sales method in accordance with ASC 820-10-55-21.

~~(4)Represents non-capitalizable professional fees and executive severance incurred in connection with the IPO and the Company’s public company transition.~~

~~(5)~~The tax effect of non-GAAP adjustments is calculated by applying the applicable statutory tax rate by jurisdiction to the non-GAAP adjustments listed above, taking into consideration the estimated total tax impact of the adjustments..

Financial Condition, Liquidity and Capital Resources

Overview

Our primary recurring source of cash is the collection of proceeds from the sale of our products to our customers, including cash periodically collected in advance of delivery or performance.

Our primary use of cash is for working capital and payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, fulfillment costs of customer orders, overhead costs, capital expenditures, and debt servicing. We also utilize cash for strategic investments. Fluctuations in working capital are primarily caused by customer demand of our product, timing of when a retailer rearranges or restocks our products, expansion of space within our existing retailer base, expansion into new retail stores and fluctuation in warehouse and distribution costs. Capital expenditures typically vary and are currently limited, and future capital expenditure requirements depend on strategic initiatives selected for the fiscal year, including investments in infrastructure, expansion into new national and international retailers and expansion of our customer base.

A considerable portion of our operating income is earned outside the United States; however, ~~we do not have~~the majority of our bank ~~time~~ deposits are held ~~outside of~~within the United ~~States~~States.

As of September 30, ~~2021,~~2022, we had ~~$121.5 million~~$249.4 million of cash and cash equivalents. In addition, as of September 30,~~2021,~~ 2022, we had borrowing capacity ~~of $51.0 million~~of $150.0 million under ~~our~~the 2022 Revolver (as defined below), providing us with a liquidity position of $~~172.5~~558.7 million, ~~plus $71.2~~including $159.3 million of working capital excluding cash and cash ~~equivalents for a combined $243.7 million liquidity position.~~equivalents.

~~Although there is no current need, we primarily examine our options with respect to terms and sources of~~existing and future short-term and long-term capital resources to maintain financial flexibility and may from time to time elect to raise capital through the issuance of additional equity or the incurrence of additional debt.

Cash Flows

The following table summarizes our cash flows for the periods presented:


		For the Nine Months Ended September 30,					For the Nine Months Ended September 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Net cash provided by (used in):	Net cash provided by (used in):					Net cash provided by (used in):
Operating activities	Operating activities	$	130,325	$	84,509	Operating activities	$	181,807	$	130,325
Investing activities	Investing activities	(5,359)		(1,381,640)		Investing activities	(1,712)		(5,359)
Financing activities	Financing activities	(14,451)		1,418,716		Financing activities	(117,084)		(14,451)
Net increase in cash		$	110,515	$	121,585
Net increase in cash and cash equivalents:						Net increase in cash and cash equivalents:	$	63,011	$	110,515

Operating Activities

The increase in net cash provided by operating activities was primarily a result of an increase in net income of $59.0 million and adjusting items, partially offset by the loss on extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit Agreement, inventory and unused labeling write-offs and disposal adjustments of $6.0 million recorded in the nine months ended September 30, 2022, and other changes in working capital.

Investing Activities

The Company’s investing activities include purchases of software, property and equipment.

Financing Activities

The Company’s financing activities for the nine months ended September 30, 2022 primarily consisted of cash outflows for payments on our long-term debt and debt issuance costs, offset by proceeds from the issuance of the 2022 Credit Agreement. For the nine months ended September 30, 2021, net cash provided by operating activities was $130.3 million. This included net income of $151.5 million, plus $37.0 million in amortization of patents and other intangibles, $2.1 million in amortization of debt issuance costs, $3.9 million in deferred taxes, and $3.1 million in share-based compensation. Additionally, there was a $67.3 million increase in working capital excluding cash during the period. The increase in net working capital was largely driven by a $85.8 million increase in accounts receivable, inventory, and other current assets for customer deposits and prepaids, offset partly by an increase of $18.5 million in accounts payable, accrued expenses and other current liabilities caused by increased inventory and other purchases.

For the nine months ended September 30, 2020, net cash provided by operating activities was $84.5 million. This included net income of $5.9 million, plus $34.2 million in amortization of patents and other intangibles, $44.5 million for fair value

of acquired inventory, $1.3 million in amortization of debt issuance costs, $0.9 million in share-based compensation expense offset partly by a $3.3 million increase in deferred tax assets. Additionally, there was a $1.0 million decrease in working capital excluding cash during the period. The decrease in net working capital was largely driven by a $18.5 million increase in accounts receivable, inventory, and other current assets for customer deposits and prepaids, offset partly by an increase of $19.5 million in accounts payable, accrued expenses and other current liabilities caused by increased sales.

~~Investing Activities~~

For the nine months ended September 30, 2021, net cash used in investing activity was $5.4 million. This was due to $4.5 million in purchase of investments and $0.9 million in purchase of property and equipment.

~~For the nine months ended September 30, 2020 net cash used in investing activity was $1,381.6 million. This was due to the net cash outflow related to the Acquisition in January 2020.~~

~~Financing Activities~~

~~For the nine months ended September 30, 2021, net cash used in~~Company’s financing activities ~~was $14.5 million. This was~~ primarily ~~driven by $15.1 million~~consisted of ~~principal~~cash outflows for payments on ~~term debt, offset by $0.6 million of cash proceeds received from the issuance of common shares.~~

~~For the nine months ended September 30, 2020, net cash provided by financing activities was $1,418.7 million.~~ our long-term debt.~~This was primarily driven by $959.9 million from the issuance of common shares in connection with the Acquisition in January 2020 and additional issuance of shares in May 2020.~~

In connection with the Acquisition, on the Acquisition Date, we received cash proceeds of $450.0 million from the issuance by Olaplex, Inc. of the Term Loan pursuant to the Original Credit Agreement and an additional $25.0 million from the Revolver. This was offset by $10.5 million of debt issuance costs and $5.6 million in principal payments related to the Original Credit Agreement.

Liquidity and Capital Resources Requirements

Based on past performance and current expectations, we believe that our cash, cash equivalents and cash generated from operations ~~and draws on our Revolver~~ will be sufficient to meet anticipated operating costs, required payments of principal and interest, working capital, ~~needs,~~ ordinary course capital expenditures, and other commitments for at least the next 12 months.

If necessary, we may borrow funds under our Revolver to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends, to a significant extent, on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in “Risk Factors” in the IPO Prospectus. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be our ability to continue providing innovative products to our customers and consumers and manage production and our supply chain.

Credit Facility

On ~~January 8, 2020,~~February 23, 2022, Olaplex, Inc. entered into a seven-year $675 million senior-secured term loan facility (the “2022 Term Loan Facility”) and a five-year $150 million senior-secured revolving credit facility (the “2022 Revolver”), which includes a $25 million letter of credit sub-facility and a $25 million swingline loan sub-facility (collectively, the ~~Original~~“2022 Credit Agreement”). The 2022 Credit Agreement ~~consisting~~refinanced and replaced the previously existing secured credit agreement entered into by Olaplex, Inc. in January 2020 (such agreement, as amended, the “2020 Credit Agreement”). The 2020 Credit Agreement consisted of ~~a $450~~an $800 million term loan facility and a ~~$50~~$51 million revolving credit facility, which ~~includes~~included a $10 million letter of credit sub-facility and a $5 million swingline loan facility. In addition, on December 18, 2020 Olaplex, Inc. entered into the Amendment to the Original Credit Agreement to increase the Term Loan Facility by $350 million and increase the Revolver capacity by $1 million to a revised $800 million Term Loan and $51 million Revolver facility. The unused balance of the Revolver as of September 30, 2021 and December 31, 2020 was $51 million, respectively.

~~The Term Loan maturity date is January 8, 2026 and the loans made under the Term Loan Facility are secured by substantially all of our assets.~~ Installment payments on the 2022 Term Loan Facility are required to be made in quarterly installments of ~~$5,028,000,~~$1.7 million, with the remaining balance due upon maturity. The Term Loan can be prepaid at any time subject to a 2% or 1% penalty provision (with certain exceptions) if paid prior to July 8, 2021 and July 8, 2022, respectively, and is subject to mandatory prepayments with respect to (i) excess cash flow, which is defined as adjusted EBITDA less certain customary deductions, subject to certain threshold amounts of excess cash flow during the relevant period and percentage reductions of the prepayment amount upon the attainment of certain consolidated first lien net leverage ratio levels, (ii) certain non-ordinary course asset dispositions that result in net proceeds in excess of $2.5 million during the relevant measurement period, unless reinvested in accordance with the terms of the Credit Agreement within twelve months (with an additional 180 days to reinvest, if committed within 12 months) of receipt of such proceeds, or (iii) issuance of additional non permitted debt or certain refinancing debt.

Both the Revolver and the Term Loan bear interest, at Olaplex, Inc.’s option, at either a rate per annum equal to (i) an adjusted LIBOR determined by reference to the cost of funds for U.S. dollar deposits (or any other applicable currency available under the Credit Agreement), as adjusted for statutory reserve requirements for the applicable interest period (with a 1.00% floor), plus an applicable margin ranging from 6.25% to 6.50% based on our consolidated first lien net leverage ratio or (ii) a base rate determined by reference to the highest of (x) the federal funds effective rate plus 0.5%, (y) the one-month LIBO rate plus 1.0% and (z) the prime rate, plus an applicable margin ranging from 5.25% to 5.50% based on our consolidated first lien net leverage ratio. The interest rate on ~~both~~ outstanding ~~amounts~~debt under the ~~Revolver and the outstanding~~2022 Term Loan Facility was ~~7.5% per annum~~6.1% as of September 30, ~~2021~~2022. The interest rates for all facilities under the 2022 and ~~December 31,~~ 2020 ~~respectively. The Revolver matures on January 8, 2025.~~Credit Agreements were calculated based upon the Company’s election between the applicable published reference rate at time of election plus an additional interest rate spread, or an “Alternate

Base Rate” (as defined in the 2022 Credit Agreement or the 2020 Credit Agreement, as applicable) plus an additional interest rate spread.

We incurred costs directly related to the 2022 Credit ~~Facilities~~Agreement of ~~$15.6~~$11.9 million, consisting primarily of lender fees of ~~$13.5~~$1.7 million and third-party fees of ~~$2.1~~$10.2 million during ~~2020.~~the nine months ended September 30, 2022. These fees ~~which~~ were allocated between the 2022 Revolver and the 2022 Term Loan Facility. 2022 Term Loan Facility fees are capitalized and ~~are~~ recorded as a reduction of the carrying amount of non-current ~~debt.~~debt, 2022 Revolver Facility fees are capitalized and recorded as Other Assets on the balance sheet.

The 2022 Credit ~~Facilities contain a number of covenants that, among other things, restrict our ability to (subject to certain exceptions) pay dividends~~Agreement includes, and ~~distributions or repurchase our capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The~~the 2020 Credit ~~Facilities also include~~Agreement included, reporting, financial, and maintenance covenants that require, ~~us to,~~ among other things, for the Company to comply with certain ~~consolidated~~maximum secured ~~net~~ leverage ~~ratios. As of~~ratios, which the Company was in compliance with on September 30, ~~2021~~2022 and December 31, ~~2020, we were~~2021. Substantially all the assets of the Company constitute collateral under the 2022 Credit Agreement.

As of September 30, 2022, the Company had outstanding indebtedness under the 2022 Credit Agreement of $671.6 million, of which $6.8 million was classified as current. As of September 30, 2022, the Company had $150.0 million of available borrowing capacity under the 2022 Revolver.

On August 11, 2022, the Company entered into an interest rate cap transaction in ~~compliance~~connection with the 2022 Term Loan Facility, with a notional amount of $400 million, in order to limit its exposure to potential increases in future interest rates related to the 2022 Term Loan Facility. The Company has designated the interest rate cap as a cash-flow hedge for accounting purposes. See “Note 8. Long-Term-Debt – Interest Rate Cap Transaction” to our ~~financial maintenance covenant.~~unaudited interim Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Tax Receivable Agreement Obligations

Although the actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of the Company’s and its subsidiaries’ taxable income in the future and the tax rates then applicable to us and our subsidiaries, we expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital. See ~~Note 10~~“Comparison of the Nine Months ended September 30, 2022 to the ~~unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.~~Nine Months ended September 30, 2021 – Tax Receivable Agreement” above for additional information.

Contractual Obligations and Commitments

~~The following table summarizes~~There were no material changes outside the ordinary course of business to our ~~material cash requirements from known~~ contractual ~~and other~~ obligations ~~as of September 30, 2021 (in thousands):~~

Total
Less Than
One Year
1-3 Years 3-5 Years More Than
Five Years
Term Loan Facility debt (1)
$ 774,263 $ 20,112 $ 40,224 $ 713,927 $ —
Interest on Term Loan Facility debt (2)
241,615 58,300 112,288 71,027 —
Related party payable pursuant to the tax receivable agreement (3)
232,893 — 21,971 35,154 175,768
Total contractual obligations (4)
$ 1,248,771 $ 78,412 $ 174,483 $ 820,108 $ 175,768

~~(1)Long-term debt payments include scheduled principal payments only.~~

~~(2)The Term Loan Facility is subject to variable interest rates. The weighted average interest rate of borrowings under~~since the ~~Term Loan Facility was 7.5% during the nine months ended September 30, 2021. Assumes annual interest rate of 7.5% on Term Loan Facility over the term of the loan.~~

~~(3)~~Represents 85% of the estimated cash savings in U.S. federal, state or local that the Company realizes in its taxable income as a result of certain existing tax attributes as per the tax receivable agreement. The Company has not considered financing costs that may be incurred with respect to when tax receivable payments are due from the Company’s tax filing dates (with no extensions) to the actual filing of ~~tax returns under extension. See Note 10 to the unaudited condensed consolidated interim financial statements included elsewhere in this~~Company's Quarterly Report on Form ~~10-Q.~~10-Q for the fiscal quarter ended June 30, 2022.

~~(4)~~Does not reflect any borrowings under the Revolver. As of September 30, 2021, we had no outstanding borrowings under the Revolver. We are required to pay a commitment fee of 0.50% per annum on unused commitments under the Revolver.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Our unaudited interim ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that we believe to be reasonable. Actual results may differ from those estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts may differ from such estimated amounts, we believe such differences are not likely to be material. For additional detail regarding our critical accounting policies including revenue recognition, inventory, business combinations, valuation of goodwill, ~~and long-lived assets and definite-lived intangible assets,~~ share based compensation, ~~and~~ income taxes and the Tax Receivable Agreement, see our discussion for the year ended December 31, ~~2020~~ 2021~~and in conjunction with the unaudited condensed consolidated financial statements for the June 30, 2021 period ended and notes included~~ in the ~~IPO Prospectus.~~2021 Form 10-K. There have been no material changes to these policies ~~as of~~in the three and nine months ended September 30, ~~2021.~~2022.

New Accounting Pronouncements

See ~~Note~~ “Note 2. Summary of Significant Accounting Policies” to our unaudited ~~condensed consolidated financial statements~~interim Condensed Consolidated Financial Statements included ~~elsewhere~~ in Item 1 of this Quarterly Report on Form 10-Q for information regarding new accounting pronouncements.

JOBS Act Accounting Election

Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult.

4129

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks arising from transactions in the normal course of our business. This includes risk associated with interest rates, inflation and foreign exchange.

Interest Rate Risk

Our results are subject to risk from interest rate fluctuations on borrowings under the 2022 Credit ~~Facilities.~~Agreement. Our borrowings bear interest at a variable rate; therefore, we are exposed to market risks relating to changes in interest rates. ~~Interest rate changes generally do not affect~~When the ~~market value of~~reference rates under our 2022 Term ~~Loan; however, they do affect~~Loan Facility increase, the ~~amount of our~~ interest payments ~~and, therefore,~~we must make thereon also increase which can impact our future earnings and cash flows. As of September 30, ~~2021,~~2022, we had ~~$774.3~~$672 million of outstanding variable rate loans under the 2022 Term Loan Facility. Based on our September 30, ~~2021~~2022 variable rate loan balances, an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest cost of approximately ~~$7.7~~$6.7 million over the next 12 months.

On August 11, 2022, we entered into an interest rate cap transaction in connection with the 2022 Term Loan Facility, with a notional amount of $400 million, in order to limit our exposure to potential increases in future interest rates related to the 2022 Term Loan Facility. The Company has designated the interest rate cap as a cash-flow hedge for accounting purposes.

See “Note 8. Long-Term-Debt – Interest Rate Cap Transaction” to our unaudited interim Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Inflation

Inflationary factors such as increases in the cost of sales for our products and overhead costs may adversely affect our operating results. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling general & administrative expenses as a percentage of net revenue if the selling prices of our products do not increase with these increased costs.

Foreign Exchange Risk

Our reporting currency ~~including our U.K. foreign subsidiary, Olaplex UK Limited,~~ is the U.S. dollar. Gains or losses due to transactions in foreign currencies are reflected in the ~~consolidated statements~~Consolidated Statements of ~~comprehensive income~~Comprehensive Income under the line-item other ~~(expense) income,~~expense, net. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our ~~consolidated financial statements.~~Condensed Consolidated Financial Statements.

4230

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

~~Disclosure~~Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed ~~by us~~ in the reports ~~filed~~that we file or ~~submitted~~submit under the Securities Exchange Act of 1934, as amended ~~(“Exchange~~(the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and ~~forms. Disclosure controls~~forms and ~~procedures include, without limitation, controls and procedures designed~~ to ensure that information required to be disclosed ~~under the Exchange Act~~ is accumulated and communicated to our management, including ~~the principal executive~~our Chief Executive Officer and ~~financial officers,~~Chief Financial Officer, as appropriate, to allow for timely decisions regarding required ~~disclosure. There are inherent limitations to~~disclosures. Our management has evaluated, under the ~~effectiveness of any system of disclosure controls~~supervision and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

~~In connection~~ with the ~~preparation~~participation of ~~this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021,~~ our ~~management, including our Principal~~Chief Executive Officer and ~~Principal~~Chief Financial Officer, ~~carried out an evaluation of~~ the effectiveness of our disclosure controls and procedures ~~which are~~(as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange ~~Act is accumulated and communicated to~~Act), as of the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

end of the period covered by this Report. Based on ~~this~~that evaluation, ~~management~~our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ~~not~~ effective as of September 30, ~~2021, as a result of the material weaknesses~~2022.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting ~~discussed below.~~

~~Material Weaknesses~~

~~Prior to~~(as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2021, we have been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Although we are required to disclose changes2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting on a quarterly basis, we are~~reporting.

Inherent Limitations in Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not ~~required to make~~expect that our ~~first annual assessment of~~disclosure controls and procedures or our internal control over financial reporting ~~pursuant to Section 404~~will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the ~~Sarbanes-Oxley Act until our second annual report required~~control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be ~~filed~~faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with ~~the SEC.~~

~~Although we are not yet subject~~policies or procedures may deteriorate. Due to the ~~attestation requirements of the Sarbanes-Oxley Act~~inherent limitations in ~~connection with the preparation of our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we identified three material weaknesses in our internal~~a cost-effective control ~~over financial reporting as of December 31, 2020. A material weakness is a deficiency,~~system, misstatements due to error or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements willfraud may occur and not be ~~prevented or detected on a timely basis.~~

As described in the IPO Prospectus, in connection with the audit of our financial statements as of and for the year ended December 31, 2020, we identified three material weaknesses: (i) limited technical accounting resources and a lack of sufficient segregation of duties related to the control over review and approval of journal entries, reconciliations and accruals; (ii) lack of formal risk assessment process to identify, evaluate and address business risks relevant to financial reporting objectives; and (iii) lack of entity-level controls typical for a public company, including corporate policies, accounting policies, formal board and audit committee charters and calendar, formal organizational chart depicting reporting lines and key areas of authority and responsibility, and information technology.

Nonetheless, management believes that our consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles. Our Principal Executive Officer and Principal Financial Officer have certified that, based on such officer’s knowledge, the financial statements and other financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report on Form 10-Q. In addition, we developed and are implementing a remediation plan for the material weaknesses, which plan is described below.

detected.

~~Material Weakness Remediation Activities~~

We are currently in the process of remediating the material weakness and have taken and will continue to take steps that we believe will address the underlying causes of the material weakness. We are committed to continuing to improve our financial organization. We hired a Principal Financial Officer, VP of Finance, VP of Accounting, Controller, Assistant Controller, Accounting Manager and Staff Accountant while we continue to utilize additional support from external accounting consultants to assist with technical accounting questions and financial reporting, as well as the implementation of additional control processes.

~~The remediation efforts include:~~

•Implement additional internal reporting procedures including those designed to add depth to our review processes and improve our segregation of duties. We have been actively recruiting for open positions and have hired additional qualified accounting and financial reporting personnel in 2021 and will continue to recruit through early 2022.

•Develop and perform a formal scoping and risk assessment process to identify, evaluate and address business risks relevant to financial reporting objectives, including identification of significant accounts, relevant assertions, significant business locations, and significant processes and systems to determine scope of testing and sufficiency of evidence required.

•~~Design and document the Company’s internal control framework, and implement entity level, business process and IT controls.~~

While progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing, documenting and testing these processes, procedures and controls. We will continue to devote significant time and attention to these remediation efforts. However, the material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

~~Changes in Internal Control Over Financial Reporting~~

The changes in the aforementioned internal controls over financial reporting and the remediation efforts expected to be undertaken have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No other changes in the Company’s internal control over financial reporting occurred during the first nine months of its 2021 fiscal year.

4431

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in litigation or other legal proceedings incidental to our business, including, litigation related to intellectual property, regulatory matters, contract, advertising and other consumer claims. We are not currently a party to any litigation or legal proceeding that, in the opinion of our management, is likely to have a material adverse effect on our business, results of operations, financial condition or cash flows.

Reasonably possible losses in addition to the amounts accrued for such litigation and legal proceedings are not material to our ~~consolidated financial statements.~~Consolidated Financial Statements. In addition, we believe that protecting our intellectual property is essential to our business and we have in the past, and may in the future, become involved in proceedings to enforce our rights. Regardless of outcome, litigation can have an adverse impact on our reputation, financial condition and business, including by utilizing our resources and potentially diverting the attention of our management from the operation of our business.

ITEM 1A. RISK FACTORS

An investment in our common stock involves risks. For a detailed discussion of the risks that affect our business please refer to ~~the section titled “Risk Factors”~~“Item 1A. – Risk Factors" in the ~~IPO Prospectus.~~2021 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 29, 2021, in connection with the Reorganization Transactions, Olaplex Holdings, Inc. issued an aggregate of 648,124,642 shares of its common stock in exchange for all outstanding Class A common units of Penelope Group Holdings, L.P. The issuance of the common stock described in this paragraph was made in reliance on Section 4(a)(2) of the Securities Act.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

4532

ITEM 6. EXHIBITS

Description of Exhibit Incorporated Herein by Reference
Exhibit
Number Description Form File No. Exhibit Filing Date Provided Herewith
3.1
Restated Certificate of Incorporation of Olaplex Holdings, Inc.
X
3.2
Amended and Restated Bylaws of Olaplex Holdings, Inc.
X
10.1
Registration Rights Agreement.
X
10.2
Income Tax Receivable Agreement.
X
10.3
Olaplex Holdings, Inc. 2021 Equity Incentive Plan
S-1 333-259116 10.15 9/20/2021
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1†
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2†
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)


Exhibit Number						Description
3.1						Restated Certificate of Incorporation of Olaplex Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, filed on November 10, 2021 (File No. 001- 40860)).
3.2						Amended and Restated Bylaws of Olaplex Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, filed on November 10, 2021 (File No. 001-40860)).
10.1#						Letter Agreement, dated October 16, 2022, by and between Olaplex Inc. and Tiffany Walden.
10.2#						Amended and Restated Nonqualified Stock Option Award Agreement, effective as of December 31, 2022, by and between Olaplex Holdings, Inc. and Tiffany Walden.
31.1						Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†						Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†						Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

# Indicates a management contract or compensation plan, contract or arrangement.

† This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

4633

SIGNATURES

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


	OLAPLEX HOLDINGS, INC.

	By:	/s/ JuE Wong
November ~~10, 2021~~9, 2022		Name:	JuE Wong
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)

	By:	/s/ Eric Tiziani
November ~~10, 2021~~9, 2022		Name:	Eric Tiziani
		Title:	Chief Financial Officer
			(Principal Financial ~~and Accounting~~ Officer)

4734


	December 31, 2020
	Estimated Useful Life	Gross Carrying Amount		Accumulated amortization		Net carrying amount
Brand name	25 years	$	952,000	$	(37,234)	$	914,766
Product formulations	15 years	136,000		(8,865)		127,135
Customer relationships	20 years	53,000		(2,591)		50,409
Total finite-lived intangibles		1,141,000		(48,690)		1,092,310
Goodwill	Indefinite	168,300		—		168,300
Total goodwill and other intangibles		$	1,309,300	$	(48,690)	$	1,260,610


	January 2020 Credit Agreement		December 2020 Amendment		Total
Long-term debt
Original term loan borrowing	$	433,125	$	341,138	$	774,263
Debt issuance costs	(7,434)		(4,346)		(11,780)
Total term loan debt	425,691		336,792		762,483
Less: Current portion	(11,250)		(8,862)		(20,112)
Long-term debt, net of current portion	$	414,441	$	327,930	$	742,371


	January 2020 Credit Agreement		December 2020 Amendment		Total
Long-term debt
Original term loan borrowing	$	441,562	$	347,785	$	789,347
Debt issuance costs	(8,810)		(5,054)		(13,864)
Total term loan debt	432,752		342,731		775,483
Less: Current portion	(11,250)		(8,862)		(20,112)
Long-term debt, net of current portion	$	421,502	$	333,869	$	755,371


	Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
	Options Outstanding	Weighted Average Exercise Price Per Share		Options Outstanding	Weighted Average Exercise Price Per Share
Outstanding at Beginning of Period	15,997,500	$	0.88	—	$	—
Granted	2,947,783	5.30		15,803,775	0.87
Cancelled/Forfeited	(1,350,000)	(0.97)		—	—
Converted Performance to Time-Based	25,363,800	0.92		—	—
Outstanding at End of Period	42,959,083	$	1.20	15,803,775	$	0.87
Vested and Exercisable	2,929,500	$	0.87	—	$	—


	Nine Months Ended
	September 30, 2021	September 30, 2020
Expected term (years)	0.40	4.00
Expected volatility (%)	30	30
Risk-free interest rate (%)	1.48 - 1.62	1.87
Expected dividend yield (%)	49	—


	Nine Months Ended September 30, 2021
	Time-based	Performance-based
Outstanding at Beginning of Period	—	—
Granted	684,450	526,500
Cancelled/Forfeited	(63,450)	(48,600)
Outstanding at End of Period	621,000	477,900
Vested at September 30, 2021	—	159,300


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2021			2020			2021			2020
Reconciliation of Net Income to Adjusted EBITDA
Net income	$	56,591		$	28,315		$	151,473		$	5,890
Interest expense	14,987			9,794			46,052			28,577
Income tax provision	15,252			5,753			37,797			1,197
Depreciation and amortization of intangible assets	11,949			12,284			37,033			34,210
Acquisition transaction costs and financing fees (1)	—			1,015			—			18,122
Costs incurred for LIQWD Matters (2)	—			—			14,250			—
Inventory fair value adjustment (3)	—			7,744			—			44,519
Share-based compensation	1,945			516			3,119			937
Non-capitalizable IPO and strategic transition costs (4)	6,118			—			8,382			—
Adjusted EBITDA	$	106,842		$	65,421		$	298,106		$	133,452
Adjusted EBITDA margin	66.1		%	73.1		%	69.0		%	70.6		%


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Reconciliation of Net Income to Adjusted Net Income
Net income	$	56,591	$	28,315	$	151,473	$	5,890
Amortization of intangible assets	11,862		12,284��		36,946		34,210
Acquisition transaction costs and financing fees (1)	—		1,015		—		18,122
Costs incurred for LIQWD Matters (2)	—		—		14,250		—
Inventory fair value adjustment (3)	—		7,744		—		44,519
Share-based compensation	1,945		516		3,119		937
Non-capitalizable IPO and strategic transition costs (4)	6,118		—		8,382		—
Tax effect of adjustments (5)	(2,082)		(4,094)		(9,913)		(18,570)
Adjusted net income	$	74,434	$	45,780	$	204,257	$	85,108
Adjusted net income per share:
Basic	$	0.11	$	0.07	$	0.32	$	0.13
Diluted	$	0.11	$	0.07	$	0.30	$	0.13


	Total		Less Than One Year		1-3 Years		3-5 Years		More Than Five Years
Term Loan Facility debt (1)	$	774,263	$	20,112	$	40,224	$	713,927	$	—
Interest on Term Loan Facility debt (2)	241,615		58,300		112,288		71,027		—
Related party payable pursuant to the tax receivable agreement (3)	232,893		—		21,971		35,154		175,768
Total contractual obligations (4)	$	1,248,771	$	78,412	$	174,483	$	820,108	$	175,768