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 ~~June~~September 30, 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 ~~July 29,~~October 31, 2022, registrant had ~~649,087,823~~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.

Table of Contents

OLAPLEX HOLDINGS, INC.

TABLE OF CONTENTS


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Operations and Comprehensive Income	7
	Condensed Consolidated Statements of Changes in Equity	8
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2930
Item 4.	Controls and Procedures	3031
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	3132
Item 1A.	Risk Factors	3132
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3132
Item 3.	Defaults Upon Senior Securities	3132
Item 4.	Mine Safety Disclosures	3132
Item 5.	Other Information	3132
Item 6.	Exhibits	3233
Signatures		3334

Table of Contents

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, including geographic expansion and omnichannel strategy; general economic and industry trends; business prospects; future product development; growth and expansion opportunities; 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 Annual Report on Form 10-K for the year ended December 31, 2021 (the “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 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;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 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 accurately forecast consumer demand for our products;~~

•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 hair care professionals and other customers;

•~~impacts on our business due to the sensitivity of our business to unfavorable economic and business conditions;~~

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

~~Table of Contents~~

•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 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 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 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 included in the 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 ~~U.S,~~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.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Assets	Assets					Assets
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	198,028	$	186,388	Cash and cash equivalents	$	249,399	$	186,388
Accounts receivable, net of allowances of $17,443 and $8,231		81,345		40,779
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	140,316		98,399		Inventory	151,283		98,399
Other current assets	Other current assets	5,765		9,621		Other current assets	3,277		9,621
Total current assets	Total current assets	425,454		335,187		Total current assets	497,245		335,187
Property and equipment, net	Property and equipment, net	670		747		Property and equipment, net	614		747
Intangible assets, net	Intangible assets, net	1,019,120		1,043,344		Intangible assets, net	1,007,267		1,043,344
Goodwill	Goodwill	168,300		168,300		Goodwill	168,300		168,300
Deferred taxes		11,881		8,344
Deferred taxes, net						Deferred taxes, net	12,876		8,344
Other assets	Other assets	6,234		4,500		Other assets	10,498		4,500
Total assets	Total assets	$	1,631,659	$	1,560,422	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	$	20,699	$	19,167	Accounts payable	$	23,126	$	19,167
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	20,546		17,332		Accrued expenses and other current liabilities	26,031		17,332
Accrued sales and income taxes	Accrued sales and income taxes	18,199		12,144		Accrued sales and income taxes	16,096		12,144
Current portion of long-term debt	Current portion of long-term debt	6,750		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	20,786		4,157		Current portion of Related Party payable pursuant to Tax Receivable Agreement	16,557		4,157
Total current liabilities	Total current liabilities	86,980		72,912		Total current liabilities	88,560		72,912
Related Party payable pursuant to Tax Receivable Agreement	Related Party payable pursuant to Tax Receivable Agreement	208,493		225,122		Related Party payable pursuant to Tax Receivable Agreement	208,582		225,122
Long-term debt	Long-term debt	656,989		738,090		Long-term debt	655,662		738,090
Total liabilities	Total liabilities	952,462		1,036,124		Total liabilities	952,804		1,036,124

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

Stockholders’ equity (Notes 1 and 9):	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, 649,087,823 and 648,794,041 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		649		648
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	308,088		302,866		Additional paid-in capital	310,193		302,866
Accumulated other comprehensive income						Accumulated other comprehensive income	1,931		—
Retained earnings	Retained earnings	370,460		220,784		Retained earnings	431,223		220,784
Total stockholders’ equity	Total stockholders’ equity	679,197		524,298		Total stockholders’ equity	743,996		524,298
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,631,659	$	1,560,422	Total liabilities and stockholders’ equity	$	1,696,800	$	1,560,422

The accompanying notes are an integral part of these 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 June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Net sales	Net sales	$	210,903	$	152,124	$	397,099	$	270,243	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)	52,293		29,324		95,515		51,397		Cost of product (excluding amortization)	45,484		32,462		140,999		83,859
Amortization of patented formulations	Amortization of patented formulations	2,180		2,268		3,949		4,719		Amortization of patented formulations	1,142		1,680		5,091		6,399
Total cost of sales	Total cost of sales	54,473		31,592		99,464		56,116		Total cost of sales	46,626		34,142		146,090		90,258
Gross profit	Gross profit	156,430		120,532		297,635		214,127		Gross profit	129,828		127,482		427,463		341,609
Operating expenses:	Operating expenses:									Operating expenses:
Selling, general, and administrative	Selling, general, and administrative	26,111		33,786		48,425		45,066		Selling, general, and administrative	30,807		30,257		79,232		75,323
Amortization of other intangible assets	Amortization of other intangible assets	10,295		10,183		20,561		20,365		Amortization of other intangible assets	10,329		10,182		30,890		30,547

Total operating expenses	Total operating expenses	36,406		43,969		68,986		65,431		Total operating expenses	41,136		40,439		110,122		105,870
Operating income	Operating income	120,024		76,563		228,649		148,696		Operating income	88,692		87,043		317,341		235,739
Interest expense	Interest expense	(8,694)		(15,563)		(20,154)		(31,065)		Interest expense	(10,499)		(14,987)		(30,653)		(46,052)
Other expense, net	Other expense, net									Other expense, net
Loss on extinguishment of debt	Loss on extinguishment of debt	—		—		(18,803)		—		Loss on extinguishment of debt	—		—		(18,803)		—
Other expense, net	Other expense, net	(1,224)		(157)		(1,601)		(204)		Other expense, net	(2,251)		(213)		(3,852)		(417)
Total other expense, net	Total other expense, net	(1,224)		(157)		(20,404)		(204)		Total other expense, net	(2,251)		(213)		(22,655)		(417)
Income before provision for income taxes	Income before provision for income taxes	110,106		60,843		188,091		117,427		Income before provision for income taxes	75,942		71,843		264,033		189,270
Income tax provision	Income tax provision	22,391		11,492		38,415		22,545		Income tax provision	15,179		15,252		53,594		37,797
Net income	Net income	$	87,715	$	49,351	$	149,676	$	94,882	Net income	$	60,763	$	56,591	$	210,439	$	151,473
Comprehensive income		$	87,715	$	49,351	$	149,676	$	94,882

Net income per share:	Net income per share:									Net income per share:
Basic	Basic	$	0.14	$	0.08	$	0.23	$	0.15	Basic	$	0.09	$	0.09	$	0.32	$	0.23
Diluted	Diluted	$	0.13	$	0.08	$	0.22	$	0.14	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	648,973,952		648,124,642		648,894,417		648,066,435		Basic	649,099,780		648,124,642		648,963,625		648,082,081
Diluted	Diluted	691,365,072		656,745,557		692,985,088		683,430,562		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

Table of Contents

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			Shares (Note 1)	Amount		Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Equity
Balance - December 31, 2021	Balance - December 31, 2021	648,794,041	$	648	$	302,866	$	220,784	$	524,298	Balance - December 31, 2021	648,794,041	$	648	$	302,866	$	—	$	220,784	$	524,298
Net income	Net income	—	—		—		61,961		61,961		Net income	—	—		—				61,961		61,961
Conversion of cash-settled units to stock-settled stock appreciation rights	Conversion of cash-settled units to stock-settled stock appreciation rights	—	—		1,632		—		1,632		Conversion of cash-settled units to stock-settled stock appreciation rights	—	—		1,632				—		1,632
Exercise of stock-settled stock appreciation rights	Exercise of stock-settled stock appreciation rights	117,180	—		348		—		348		Exercise of stock-settled stock appreciation rights	117,180	—		348				—		348
Shares withheld and retired on exercise of stock-settled stock appreciation rights	Shares withheld and retired on exercise of stock-settled stock appreciation rights	(55,244)	—		(920)		—		(920)		Shares withheld and retired on exercise of stock-settled stock appreciation rights	(55,244)	—		(920)				—		(920)
Share-based compensation expense	Share-based compensation expense	—	—		1,696		—		1,696		Share-based compensation expense	—	—		1,696				—		1,696
Balance – March 31, 2022	Balance – March 31, 2022	648,855,977	$	648	$	305,622	$	282,745	$	589,015	Balance – March 31, 2022	648,855,977	648		305,622		—		282,745		589,015
Net income	Net income	—	—		—		87,715		87,715		Net income	—	—		—				87,715		87,715
Exercise of stock options	Exercise of stock options	231,846	1		739		—		740		Exercise of stock options	231,846	1		739				—		740
Share-based compensation expense	Share-based compensation expense	—	—		1,727		—		1,727		Share-based compensation expense	—	—		1,727				—		1,727
Balance – June 30, 2022	Balance – June 30, 2022	649,087,823	$	649	$	308,088	$	370,460	$	679,197	Balance – June 30, 2022	649,087,823	649		308,088		—		370,460		679,197
Net income											Net income	—	$	—	$	—	—		$	60,763	$	60,763
Exercise of stock options											Exercise of stock options	25,000	$	—	$	74	—		$	—	$	74
Share-based compensation expense											Share-based compensation expense	—	$	—	$	2,031	—		$	—	$	2,031
Unrealized gain on derivatives											Unrealized gain on derivatives	—	$	—	$	—	1,931		$	—	$	1,931
Balance – September 30, 2022											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 - December 31, 2020	Balance - December 31, 2020	647,888,387	$	648	$	530,025	$	—	$	530,673	Balance - December 31, 2020	647,888,387		$	648		$	530,025	$	—	$	—	$	530,673
Issuance of common stock	Issuance of common stock	236,255	—		633		—		633		Issuance of common stock	236,255		—			633		—		—		633
Net income	Net income	—	—		—		45,531		45,531		Net income	—		—			—		—		45,531		45,531
Share-based compensation expense	Share-based compensation expense	—	—		627		—		627		Share-based compensation expense	—		—			627		—		—		627
Balance – March 31, 2021	Balance – March 31, 2021	648,124,642	$	648	$	531,285	$	45,531	$	577,464	Balance – March 31, 2021	648,124,642		648			531,285		—		45,531		577,464
Net income	Net income	—	—		—		49,351		49,351		Net income	—		—			—		—		49,351		49,351
Share-based compensation expense	Share-based compensation expense	—	—		547		—		547		Share-based compensation expense	—		—			547		—		—		547
Balance – June 30, 2021	Balance – June 30, 2021	648,124,642	$	648	$	531,832	$	94,882	$	627,362	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

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OLAPLEX HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)


		Six Months Ended June 30,					Nine Months Ended September 30,
		2022		2021			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	149,676	$	94,882	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	3,949		4,719		Amortization of patent formulations	5,091		6,399
Amortization of other intangibles	Amortization of other intangibles	20,561		20,365		Amortization of other intangibles	30,890		30,547
Inventory write-off and disposal	Inventory write-off and disposal	4,324		—		Inventory write-off and disposal	5,958		—

Depreciation of fixed assets	Depreciation of fixed assets	152		—		Depreciation of fixed assets	233		87

Amortization of debt issuance costs	Amortization of debt issuance costs	636		1,380		Amortization of debt issuance costs	2,955		2,084
Deferred taxes	Deferred taxes	(3,537)		1,331		Deferred taxes	(4,532)		3,852
Share-based compensation expense	Share-based compensation expense	3,423		1,174		Share-based compensation expense	5,454		3,119
Loss on extinguishment of debt	Loss on extinguishment of debt	18,803		—		Loss on extinguishment of debt	18,803		—
Changes in operating assets and liabilities, net of effects of acquisition:
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	(40,566)		(28,715)		Accounts receivable, net	(52,507)		(44,906)
Inventory	Inventory	(45,657)		(23,777)		Inventory	(57,132)		(35,090)
Other current assets	Other current assets	3,856		(3,421)		Other current assets	6,344		(5,760)
Accounts payable	Accounts payable	1,532		723		Accounts payable	3,959		9,165
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	10,901		6,292		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	128,053		74,953		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	(75)		(64)		Purchase of property and equipment	(100)		(859)
Purchase of software	Purchase of software	(870)		—		Purchase of software	(1,612)		—

Purchase of investment in nonconsolidated entity						Purchase of investment in nonconsolidated entity	—		(4,500)

Net cash used in investing activities	Net cash used in investing activities	(945)		(64)		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		Proceeds from the issuance of stock	—		633
Proceeds from exercise of stock options	Proceeds from exercise of stock options	740		—		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)		—		Payments for shares withheld and retired for taxes and exercise price for stock-settled stock appreciation rights	(572)		—
Principal payments and prepayment fees for 2020 Term Loan Facility, and principal payments for 2022 Term Loan Facility		(778,692)		(10,056)
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		—		Proceeds from the issuance of 2022 Term Loan Facility	675,000		—
Payments of debt issuance costs	Payments of debt issuance costs	(11,944)		—		Payments of debt issuance costs	(11,944)		—
Net cash used in financing activities	Net cash used in financing activities	(115,468)		(9,423)		Net cash used in financing activities	(117,084)		(14,451)

Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	11,640		65,466		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	186,388		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	$	198,028	$	76,430	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	$	35,176	$	22,731	Cash paid for income taxes	$	54,904	$	16,105
Cash paid during the year for interest	Cash paid during the year for interest	$	13,491	$	32,006	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
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	$	—	$	626	Public offering and strategic transition costs included in accounts payable and accrued expenses	$	—	$	4,542

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	$	—	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

OLAPLEX HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 hair care products strategically developed to address three key uses: treatment, maintenance and protection.

In January 2020, 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 for $1,381,582 (the “Acquisition”). Subsequent to the Acquisition, 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.

Initial Public Offering

On October 4, 2021, Olaplex Holdings completed an initial public offering of shares of its common stock (the “IPO”). See “Item 8. Financial Statements – Note 1. Nature of Operations and Basis of Presentation – Initial Public Offering” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) for additional 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 a series of transactions (collectively, the “Reorganization Transactions”) pursuant to which all outstanding units of Penelope Group Holdings, L.P. were exchanged for an aggregate of 648,124,642 shares of common stock of Olaplex Holdings, Inc., and the options and cash-settled units of Penelope were converted into options and cash-settled units of Olaplex Holdings, Inc. 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 fair statement of 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 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 Reorganization Transactions as referred in 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 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 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, 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

~~There have been no material~~The Company entered into an interest rate cap transaction during the quarter ended September 30, 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 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 ~~significant~~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 ~~policies~~and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as ~~described~~a hedge of the exposure to changes in the ~~Company’s Consolidated Financial Statements~~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 ~~year ended December 31, 2021.~~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

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

Constructive Retirement of Common Stock Repurchases

When the Company's common stock 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 the remainder to 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 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 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 the IPO) and which are available to us and our wholly-owned subsidiaries, and 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.

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 Company fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted this accounting standard on January 1, 2022. Adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, “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 adopted this accounting standard on January 1, 2022. Adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.

~~Recent Accounting Pronouncement not yet adopted~~

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 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~~adopted this accounting standard on July 1, 2022. Adoption of this standard did not have a material impact ~~this guidance will have~~ on its Condensed Consolidated Financial ~~Statements and related disclosures.~~Statements.

NOTE 3 – NET SALES

The Company distributes products in the U.S. and internationally through professional distributors in the salon channel, directly to retailers for sale in their physical stores and e-commerce sites, and direct-to-consumer (“DTC”) through sales to pure-play e-commerce customers and 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 Six Months Ended					For the Three Months Ended				For the Nine Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net sales by Channel:	Net sales by Channel:									Net sales by Channel:
Professional	Professional	$	105,489	$	79,488	$	182,548	$	126,877	Professional	$	62,991	$	74,978	$	245,539	$	201,855
Specialty retail	Specialty retail	64,229		38,118		128,501		69,858		Specialty retail	74,191		46,343		202,692		116,201
DTC	DTC	41,185		34,518		86,050		73,508		DTC	39,272		40,303		125,322		113,811
Total Net sales	Total Net sales	$	210,903	$	152,124	$	397,099	$	270,243	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, however the majority of net sales are transacted in U.S. Dollars, the Company’s functional and reporting currency. During the three and ~~six~~nine months ended ~~June~~September 30, 2022 and ~~June~~September 30, 2021, our net sales to consumers in the United States and International regions were as follows:


		For the Three Months Ended				For the Six Months Ended					For the Three Months Ended				For the Nine Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			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	$	121,320	$	85,855	$	241,430	$	158,613	United States	$	89,543	$	93,611	$	330,973	$	252,224
International	International	89,583		66,269		155,669		111,630		International	86,911		68,013		242,580		179,643
Total Net sales	Total Net sales	$	210,903	$	152,124	$	397,099	$	270,243	Total Net sales	$	176,454	$	161,624	$	573,553	$	431,867

United Kingdom (“U.K.”) net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2022 were 8%13% and 10% of total net sales, respectively, and net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2021 were ~~11% and 12%~~15% of total net ~~sales, respectively.~~sales. No other International country exceeds 10% of total net sales.

NOTE 4 - INVENTORY

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Raw materials	Raw materials	$	31,407	$	20,852	Raw materials	$	37,173	$	20,852
Finished goods	Finished goods	108,909		77,547		Finished goods	114,110		77,547
Inventory	Inventory	$	140,316	$	98,399	Inventory	$	151,283	$	98,399

NOTE 5 - INVESTMENT IN NONCONSOLIDATED ENTITY

Our investment in and advances to our nonconsolidated entity as of ~~June~~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 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 Condensed Consolidated Balance Sheet and consists of the following:


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

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets are comprised of the following:


		June 30, 2022								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	$	(94,354)	$	857,646	Brand name	25 years	$	952,000	$	(103,874)	$	848,126
Product formulations	Product formulations	15 years	136,000		(22,465)		113,535		Product formulations	15 years	136,000		(24,732)		111,268
Customer relationships	Customer relationships	20 years	53,000		(6,566)		46,434		Customer relationships	20 years	53,000		(7,228)		45,772
Software	Software	3 years	1,760		(255)		1,505		Software	3 years	2,503		(402)		2,101
Total finite-lived intangibles	Total finite-lived intangibles		1,142,760		(123,640)		1,019,120		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		$	1,311,060	$	(123,640)	$	1,187,420	Total goodwill and other intangibles		$	1,311,803	$	(136,236)	$	1,175,567

Total amortization on finite-lived intangible assets was $12,562 and $25,094 for the three and six months ended June 30, 2022, respectively, and $12,634 and $25,084 for the three and six months ended June 30, 2021, respectively.


	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 ~~was $10,182~~ and ~~$20,365 for the three and six months ended June 30, 2022, and June 30, 2021, respectively, and~~software is recorded into Amortization of other intangible assets in the Condensed Consolidated Statements of Operations and Comprehensive Income.

~~The amortization~~ A portion of ~~software~~Amortization of ~~$113~~patented formulations is capitalized to Inventory in the Condensed Consolidated Balance Sheets, and ~~$196 for~~ the ~~three and six months ended June 30, 2022~~remainder is recorded into Amortization of ~~other intangible assets~~patented formulations in the Condensed Consolidated Statements of Operations ~~and Comprehensive Income. There was no amortization of software recorded for the three and six months ended June 30, 2021, respectively.~~

The amortization for patented formulations was $2,266 and $4,533 for the three and six months ended June 30, 2022, respectively. The Company expensed $2,180 and $3,948 of patent amortization in the Condensed Consolidated Statements of Operations and Comprehensive Income, and capitalized $86 and $585 to inventory for the three and six months ended June 30, 2022, respectively.

The amortization for patented formulations was $2,266 and $4,533 for the three and six months ended June 30, 2021, respectively. The Company expensed $2,267 and $4,719 of patent amortization in the Condensed Consolidated Statements

~~of Operations~~ and Comprehensive ~~Income,~~Income. Amortization of ~~which $1 and $186 was previously capitalized to inventory,~~the Company’s definite-lived intangible assets for the three and ~~six months~~nine month periods ended ~~June~~September 30, 2022 and 2021 ~~respectively.~~is as follows:

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


	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 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Accrued interest						Accrued interest	$	8,344	$	—
Deferred revenue	Deferred revenue	$	6,558	$	5,022	Deferred revenue	4,890		5,022
Accrued interest		6,027		—
Accrued freight						Accrued freight	4,823		636
Payroll liabilities						Payroll liabilities	4,418		6,302
Accrued other	Accrued other	4,677		6,008		Accrued other	3,556		5,372
Payroll liabilities		3,284		6,302
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	$	20,546	$	17,332	Accrued expenses and other current liabilities	$	26,031	$	17,332

NOTE 8 - LONG-TERM DEBT

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Long-term debt	Long-term debt					Long-term debt
Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”)(1)	Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”)(1)					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”)	$675 Million 7-Year Senior Secured Term Loan Facility (the “2022 Term Loan Facility”)	$	673,313	$	—	$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)	$150 Million 5-Year Senior Secured Revolving Credit Facility (the “2022 Revolver”)(2)	—		—		$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)	Credit Agreement, dated as of January 8, 2020, as amended (the “2020 Credit Agreement”)(1)					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”)	$800 Million 6-Year Senior Secured Term Loan Facility, as amended (the “2020 Term Loan Facility”)	—		769,235		$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)	$51 Million 5-Year Senior Secured Revolving Credit Facility, as amended (the “2020 Revolver”)(2)	—		—		$51 Million 5-Year Senior Secured Revolving Credit Facility, as amended (the “2020 Revolver”)(2)	—		—
Debt issuance costs	Debt issuance costs	(9,574)		(11,033)		Debt issuance costs	(9,214)		(11,033)
Total term loan debt	Total term loan debt	663,739		758,202		Total term loan debt	662,412		758,202
Less: Current portion	Less: Current portion	(6,750)		(20,112)		Less: Current portion	(6,750)		(20,112)
Long-term debt, net of debt issuance costs and current portion	Long-term debt, net of debt issuance costs and current portion	$	656,989	$	738,090	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 ~~June~~September 30, 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.

The interest rate on outstanding debt under the 2022 Term Loan Facility was ~~4.8%~~6.1% as of ~~June~~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 under the 2022 and 2020 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.

Interest expense, inclusive of debt amortization, was ~~$8,694~~$10,499 and ~~$20,154~~$30,653 for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, and ~~$15,563~~$14,987 and ~~$31,065~~$46,052 for the three and ~~six~~nine months ended ~~June~~September 30, 2021, 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 ~~June~~September 30, 2022 and December 31, 2021. Substantially all the assets of the Company constitute collateral under the 2022 Credit Agreement.

The fair value of the 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 ~~June~~September 30, 2022, the carrying amount of the Company’s long-term debt under the 2022 Credit Agreement was ~~$663.7~~$662.4 million, and the fair value of the Company’s long-term debt was ~~$634.6~~$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 ~~values,~~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.


	Asset Derivatives
	September 30, 2022		December 31, 2021
Interest rate cap
Balance Sheet Caption
Other Assets	$	4,357	$	—

During the three and nine months ended September 30, 2022, the Company’s interest rate cap generated an unrecognized pre-tax gain of $2.4 million, recorded in Accumulated Other Comprehensive Income on the Company’s Condensed Consolidated Balance Sheets. The Company also recognized Interest expense of $0.1 million related to amortization of the interest rate cap premium paid by the Company in connection with the interest rate cap. The Company did not have an interest rate cap agreement in place during the three and nine months ended September 30, 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

interest on amounts outstanding under the 2022 Term Loan Facility. Payment of the up-front premium of the interest rate cap is included within Other assets/liabilities within cash flows from operating activities on the Company’s Condensed Consolidated Statements of Cash Flows.

The 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 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 can be expected to fully perform under the terms of the applicable contracts.

NOTE 9 - EQUITY

During the ~~six~~nine months ended ~~June~~September 30, 2022, the Company converted 886,950 of cash-settled units into net stock-settled stock appreciation rights (“SARs”), with a fair value liability of $1,632 reclassified to ~~APIC.~~additional paid-in capital. The Company issued 117,180 shares of its common stock upon vesting and settlement of the converted SARs. The Company repurchased 55,244 of outstanding shares of its common stock for the net settlement of SARs for payment of taxes related to such SARs, that were accounted for as a share retirement. Additionally, the Company issued ~~231,846~~256,846 shares of its common stock as a result of stock options exercised during the ~~six~~nine months ended ~~June~~September 30, 2022.

NOTE 10 - RELATED PARTY TRANSACTIONS

In July 2020, the Company entered into an agreement with CI&T, an information technology and software company, in which certain investment funds affiliated with Advent International Corporation (the “Advent Funds”) hold a greater than 10% equity interest. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Company paid CI&T ~~$22~~$153 and ~~$27,~~$179, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company paid CI&T ~~$40~~$30 and ~~$159~~$189 respectively, for services related to the development, maintenance and enhancement of the Olaplex professional application, all of which were negotiated on market terms.

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 “Note 2 – Summary of Significant Accounting Policies – Tax Receivable Agreement”. During the three and 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 11 - 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.

As of ~~June~~September 30, 2022 and December 31, 2021, the Company was not subject to any 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.

1617

NOTE 12 – 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				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021			September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Numerator:	Numerator:									Numerator:
Net Income	Net Income	$	87,715	$	49,351	$	149,676	$	94,882	Net Income	$	60,763	$	56,591	$	210,439	$	151,473

Denominator:	Denominator:									Denominator:
Weighted average common shares outstanding – basic	Weighted average common shares outstanding – basic	648,973,952		648,124,642		648,894,417		648,066,435		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	Dilutive common equivalent shares from equity options	42,391,120		8,620,915		44,090,671		35,364,127		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	Weighted average common shares outstanding – diluted	691,365,072		656,745,557		692,985,088		683,430,562		Weighted average common shares outstanding – diluted	691,257,654		690,711,782		691,585,787		689,108,272

Net income per share:	Net income per share:									Net income per share:
Basic	Basic	$	0.14	$	0.08	$	0.23	$	0.15	Basic	$	0.09	$	0.09	$	0.32	$	0.23
Diluted	Diluted	$	0.13	$	0.08	$	0.22	$	0.14	Diluted	$	0.09	$	0.08	$	0.30	$	0.22

1718

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 and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited Consolidated Financial Statements included in the 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 “Item 1A. – Risk Factors” in the 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, 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 strong brand loyalty. We offer our award-winning products through a global omnichannel platform serving the professional, specialty retail, and Direct to Consumer (“DTC”) channels.

OLAPLEX disrupted and revolutionized the professional 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 repairs disulfide bonds in human hair that are destroyed via chemical, thermal, mechanical, environmental and aging processes. Our current product portfolio comprises ~~thirteen~~fourteen unique, complementary products specifically developed to provide a holistic regimen for hair health.

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 professional channel serves as the foundation for our brand, validating the quality of our products and influencing our consumers’ purchasing decisions. ~~As we continued to grow, we expanded into the~~The DTC channel and specialty retail channel ~~both of which~~ have ~~continued to grow and 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.

~~Second~~Third quarter 2022 financial highlights

•Net sales increased ~~38.6%~~9.2% from ~~$152.1~~$161.6 million in the three months ended ~~June~~September 30, 2021 to ~~$210.9~~$176.5 million in the three months ended ~~June~~September 30, 2022. For the three months ended ~~June~~September 30, 2022, net sales in our professional channel ~~grew 32.7%~~decreased 16.0%, our specialty retail channel grew ~~68.5%~~60.1% and our DTC channel ~~grew 19.3%~~decreased 2.6%, in each case as compared to the three months ended ~~June~~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 ~~79.2%~~78.9% in the three months ended ~~June~~September 30, 2021 to ~~74.2%~~73.6% in the three months ended ~~June~~September 30, 2022, primarily as a result of product mix, ~~and~~ higher input costs for warehousing, transportation, raw materials, ~~warehousing,~~ and ~~inbound distribution.~~one-time labeling stock write-off and disposal costs.

•Operating expenses for the three months ended ~~June~~September 30, 2022 ~~decreased~~increased by ~~17.2%~~1.7%, as compared to the three months ended ~~June~~September 30, 2021, primarily as a result of increased sales and marketing expense, public company compliance and other related expenses, higher payroll due to ~~one time legal~~workforce expansion, and higher professional fees, partially offset by one-time initial public offering costs ~~of $14.3 million~~and cash settled unit costs incurred in the three months ended ~~June~~September 30, 2021.

•Operating income increased from ~~$76.6~~$87.0 million for the three months ended ~~June~~September 30, 2021 to ~~$120.0~~$88.7 million for the three months ended ~~June~~September 30, 2022.

•Net income increased from ~~$49.4~~$56.6 million for the three months ended ~~June~~September 30, 2021 to ~~$87.7~~$60.8 million for the three months ended ~~June~~September 30, 2022.

Year-to-date 2022 financial highlights

•Net sales increased ~~46.9%~~32.8% from ~~$270.2~~$431.9 million in the ~~six~~nine months ended ~~June~~September 30, ~~2021~~2022 to ~~$397.1~~$573.6 million in the ~~six~~nine months ended ~~June~~September 30, 2022. For the ~~six~~nine months ended ~~June~~September 30, 2022, net sales in our professional channel grew ~~43.9%~~21.6%, our specialty retail channel grew ~~83.9%~~74.4%, and our DTC channel grew ~~17.1%~~10.1%, in each case as compared to the ~~six~~nine months ended ~~June~~September 30, 2021.

•Gross profit margin decreased from ~~79.2%~~79.1% in the ~~six~~nine months ended ~~June~~September 30, 2021 to ~~75.0%~~74.5% in the ~~six~~nine months ended ~~June~~September 30, 2022, primarily as a result of product mix, higher input costs for raw materials, warehousing, and ~~inbound distribution,~~transportation, as well as one-time inventory and labeling stock write-off and disposal costs.

•Operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2022 increased by ~~5.4%~~4.0%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021, primarily as a result of increased sales and marketing expense, higher payroll due to workforce expansion, ~~increased sales and marketing expense,~~higher professional fees, share-based compensation expense and distribution and fulfillment expenses, partially offset by one-time initial public offering costs, legal costs, ~~of $14.3 million~~and cash settled unit costs incurred in the ~~three~~nine months ended ~~June~~September 30, ~~2021;~~2021.

•Operating income increased from ~~$148.7~~$235.7 million for the ~~six~~nine months ended ~~June~~September 30, 2021 to ~~$228.6~~$317.3 million for the ~~six~~nine months ended ~~June~~September 30, 2022.

•Net income increased from ~~$94.9~~$151.5 million for the ~~six~~nine months ended ~~June~~September 30, 2021 to ~~$149.7~~$210.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022.

~~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 to address in order to sustain the growth of our business. We have outlined some of these factors below, as well as in “Item 1A. – Risk Factors” in the 2021 Form 10-K.

~~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 is in the high single digits of unaided brand awareness within the U.S. among prestige hair care consumers. We believe awareness among the broader market is lower still. 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 Omnichannel 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 awareness and customer penetration, which also serves to grow our professional channel. This synergistic omnichannel 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 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.

~~Supply Chain~~

The COVID-19 pandemic has contributed to global supply chain disruptions, including closures, employee absences, port congestion, labor and container shortages, and shipment delays. As a result, we have incurred and expect to continue to incur higher costs which have and will continue to negatively impact our cost of sales and operating expenses in the near future. We have mitigated, and expect to continue to mitigate some of the impact to our business through cost savings initiatives, product mix optimization, strategic pricing, timing of shipments, and minimizing the use of air freight and congested ports. Our inventory levels of finished goods have increased in response to longer international transit times, and

we have increased the supply of raw materials and components on hand to ensure availability to meet demand even with the industry supply chain delays. By the end of 2022 we expect to begin manufacturing with a new contract manufacturer in Europe to directly supply certain of our core products to that market. We believe this will help to reduce transportation costs, shipping time and environmental impact, as we continue our efforts to build further resilience in our supply chain.

~~Continued Geographic Expansion Across All Channels~~

We believe our ability to enter new markets, and scale existing 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 and existing markets, we anticipate that we will leverage our existing relationships with partners who operate in these markets, as well as engage with new professional, specialty retail and DTC customers. We believe our ability to continue expanding in new markets will be powered by our omnichannel 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. During 2022 we expanded our product portfolio with the launch of No. 9 Bond Protector Nourishing Hair Serum and No. 4C Bond Maintenance Clarifying Shampoo and a new 1-liter size for each of No. 4 Bond Maintenance Shampoo, No. 4C Bond Maintenance Clarifying Shampoo and No. 5 Bond Maintenance Conditioner. As we develop future products, we are relentlessly focused on staying at the forefront of technical developments and product 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.

Results of operations

Comparison of the Three Months Ended ~~June~~September 30, 2022 to the Three Months Ended ~~June~~September 30, 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 June 30,
2022 2021
(in thousands) % of Net sales (in thousands) % of Net sales
Net sales $ 210,903 100.0 % $ 152,124 100.0 %
Cost of sales:
Cost of product (excluding amortization) 52,293 24.8 29,324 19.3
Amortization of patented formulations 2,180 1.0 2,268 1.5
Total cost of sales 54,473 25.8 31,592 20.8
Gross profit 156,430 74.2 120,532 79.2
Operating expenses:
Selling, general, and administrative 26,111 12.4 33,786 22.2
Amortization of other intangible assets 10,295 4.9 10,183 6.7
Total operating expenses 36,406 17.3 43,969 28.9
Operating income 120,024 56.9 76,563 50.3
Interest expense (8,694) (4.1) (15,563) (10.2)
Other expense, net (1,224) (0.6) (157) (0.1)
Income before provision for income taxes 110,106 52.2 60,843 40.0
Income tax provision 22,391 10.6 11,492 7.6
Net income $ 87,715 41.6 $ 49,351 32.4
Comprehensive income $ 87,715 41.6 % $ 49,351 32.4 %


	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

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


(in thousands)	(in thousands)	For the Three Months Ended June 30,								(in thousands)	For the Three Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Net sales by Channel:	Net sales by Channel:									Net sales by Channel:
Professional	Professional	$	105,489	$	79,488	$	26,001	32.7	%	Professional	$	62,991	$	74,978	$	(11,987)	(16.0)	%
Specialty retail	Specialty retail	64,229		38,118		26,111		68.5	%	Specialty retail	74,191		46,343		27,848		60.1	%
DTC	DTC	41,185		34,518		6,667		19.3	%	DTC	39,272		40,303		(1,031)		(2.6)	%
Total Net sales	Total Net sales	$	210,903	$	152,124	$	58,779	38.6	%	Total Net sales	$	176,454	$	161,624	$	14,830	9.2	%

~~Growth~~

The decline in 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 lower sell through trends. Net sales decline in the U.S. was partly offset by net sales growth in Italy, the U.K. and Germany. Sales growth in these countries is primarily attributable to product price increases effected by the Company during the three months ended September 30, 2022, and the net impact of new products launched since ~~June~~September 30, 2021, ~~which include the Professional only 4-in-1 Moisture Mask, No. 4P Blonde Enhancer Toning Shampoo, No. 9 Bond Protector Nourishing Hair Serum, No. 4C Bond Maintenance Clarifying Shampoo, and~~including 1-liter sizes in No. 4 Bond Maintenance Shampoo, No.4C Bond Maintenance Clarifying Shampoo, and No. 5 Bond Maintenance Conditioner. ~~The Company also experienced significant net sales growth in the U.S., Germany, and Italy.~~

~~Growth~~The growth in specialty retail was driven by the addition of new customers and the net impact of new products launched since ~~June 30,~~September 2021, which include ~~No. 4P Blonde Enhancer Toning Shampoo,~~ No. 9 Bond Protector Nourishing Hair Serum and No. 4C Bond Maintenance Clarifying Shampoo. ~~The~~A deceleration in sell-through trends amongst certain of the Company’s U.S. specialty retail customers, which the Company ~~experienced significant net sales growth~~believes was related to increased 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 ~~U.S., Canada,~~U.S and ~~France.~~international markets.

~~Growth~~The decline in DTC was driven by the ~~net impact of~~ volume ~~growth~~decline from new products launched since June 30, 2021, 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 significant net sales growthdecreased 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 competitive activity including discounting, offset by a higher sell-in of holiday kits and ~~China.~~pricing changes.

Cost of Sales and Gross Profit


(in thousands)	(in thousands)	For the Three Months Ended June 30,				$ Change					% Change		(in thousands)	For the Three Months Ended September 30,								$ Change			% Change
		2022		2021						2022					2021
Cost of sales	Cost of sales	$	54,473	$	31,592			$	22,881					72.4		%	Cost of sales	$	46,626		$	34,142		$	12,484		36.6	%
Gross profit	Gross profit	$	156,430	$	120,532	$	35,898				29.8	%	Gross profit	$	129,828				$	127,482		$	2,346		1.8	%

Our cost of sales increased 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 related to unused labeling stock that became obsolete as a result of regulation changes in the E.U., and distribution start-up costs of $0.4 million, partially offset by a ~~$0.1~~$0.5 million decrease in the amortization of our acquired patented formulations.

Our gross profit margin, gross profit as a percentage of sales, decreased from ~~79.2%~~78.9% in the three months ended ~~June~~September 30, 2021 to ~~74.2%~~73.6% in the three months ended ~~June~~September 30, 2022, as a result of increased input costs for warehousing, ~~inbound distribution~~transportation and raw materials, which accounted for approximately ~~three~~four percentage points of the decline, inflation on product costs, and labeling stock write off and disposal costs, with the remainder relating to product and ~~channel~~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 ~~mix in our professional channel as a result of our efforts to build a pipeline~~portfolio, which was offset by the benefit of the ~~1-liter sizes in each of No. 4 Bond Maintenance Shampoo, No. 4C Bond Maintenance Clarifying Shampoo and No. 5 Bond Maintenance Conditioner.~~

product price increase effected by the Company during the three months ended September 30, 2022.

Operating Expenses


(in thousands)	(in thousands)	For the Three Months Ended June 30,								(in thousands)	For the Three Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Selling, general, and administrative expenses	Selling, general, and administrative expenses	$	26,111	$	33,786	$	(7,675)	(22.7)	%	Selling, general, and administrative expenses	$	30,807	$	30,257	$	550	1.8	%
Amortization of other intangible assets	Amortization of other intangible assets	10,295		10,183		112		1.1	%	Amortization of other intangible assets	10,329		10,182		147		1.4	%

Total operating expenses	Total operating expenses	$	36,406	$	43,969	$	(7,563)	(17.2)	%	Total operating expenses	$	41,136	$	40,439	$	697	1.7	%

The ~~decline~~increase in selling, general and administrative expenses was primarily driven by ~~a decrease~~increases of ~~$14.3~~$4.3 million in sales and marketing expense, $2.5 million in public company compliance and other ~~selling, general~~related expenses, $2.2 million in payroll expenses driven by workforce expansion, and ~~administrative expenses related to non-recurring litigation~~$2.1 million of professional fees, partially offset by $6.1 million in non-capitalizable IPO and strategic transition costs ~~that were~~and $4.4 million in cash-settled units compensation expense recorded in the three months ended ~~June~~September 30, 2021, partially offset by increases of $2.4 million in sales and marketing expense, $2.4 million in payroll driven by workforce expansion, and $1.2 million in share-based compensation expense in the three months ended June 30, 2022.2021.

Interest Expense, Net


(in thousands)	(in thousands)	For the Three Months Ended June 30,								(in thousands)	For the Three Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Interest expense		$	(8,694)	$	(15,563)	$	6,869	(44.1)	%
Interest expense, net										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 lowered the interest rate in respect thereof, in the three months ended ~~June~~September 30, 2022. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information.

Other Expense, Net


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

Other expense, net	Other expense, net	(1,224)		$	(157)	$	(1,067)	679.6	%	Other expense, net	$	(2,251)	$	(213)	$	(2,038)	956.8	%
Total other expense, net		$	(1,224)	$	(157)	$	(1,067)	679.6	%

Other expense, net increased primarily due to an increase in foreign currency ~~translation~~transaction losses driven by strengthening of the U.S. dollar.

Income Tax Provision


(in thousands)	(in thousands)	For the Three Months Ended June 30,								(in thousands)	For the Three Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Income tax provision	Income tax provision	$	22,391	$	11,492	$	10,899	94.8	%	Income tax provision	$	15,179	$	15,252	$	(73)	(0.5)	%

~~Our~~The Company’s effective tax rate was ~~20.3%~~20.0% for the three months ended ~~June~~September 30, 2022, as compared to ~~18.9%~~21.2% for the three months ended ~~June~~September 30, ~~2021. 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 ~~June~~September 30, 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, partially offset by the ~~effect~~net impact of state income taxes. The ~~increase~~decrease in the effective tax rate from the comparative prior three months period is primarily duedue to ~~an increase~~the unfavorable impact of non-recurring IPO costs that were not deductible for tax purposes in the ~~effect of state income taxes.~~three months ended September 30, 2021.

2223

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

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


		Six Months Ended June 30,									Nine Months Ended September 30,
		2022				2021					2022				2021
		(in thousands)		% of Net sales		(in thousands)		% of Net sales			(in thousands)		% of Net sales		(in thousands)		% of Net sales
Net sales	Net sales	$	397,099	100.0	%	$	270,243	100.0	%	Net sales	$	573,553	100.0	%	$	431,867	100.0	%
Cost of sales:	Cost of sales:									Cost of sales:
Cost of product (excluding amortization)	Cost of product (excluding amortization)	95,515		24.1		51,397		19.0		Cost of product (excluding amortization)	140,999		24.6		83,859		19.4
Amortization of patented formulations	Amortization of patented formulations	3,949		1.0		4,719		1.7		Amortization of patented formulations	5,091		0.9		6,399		1.5
Total cost of sales	Total cost of sales	99,464		25.0		56,116		20.8		Total cost of sales	146,090		25.5		90,258		20.9
Gross profit	Gross profit	297,635		75.0		214,127		79.2		Gross profit	427,463		74.5		341,609		79.1
Operating expenses:	Operating expenses:									Operating expenses:
Selling, general, and administrative	Selling, general, and administrative	48,425		12.2		45,066		16.7		Selling, general, and administrative	79,232		13.8		75,323		17.4
Amortization of other intangible assets	Amortization of other intangible assets	20,561		5.2		20,365		7.5		Amortization of other intangible assets	30,890		5.4		30,547		7.1

Total operating expenses	Total operating expenses	68,986		17.4		65,431		24.2		Total operating expenses	110,122		19.2		105,870		24.5
Operating income	Operating income	228,649		57.6		148,696		55.0		Operating income	317,341		55.3		235,739		54.6
Interest expense	Interest expense	(20,154)		(5.1)		(31,065)		(11.5)		Interest expense	(30,653)		(5.3)		(46,052)		(10.7)
Other expense, net	Other expense, net			—				—		Other expense, net
Loss on extinguishment of debt	Loss on extinguishment of debt	(18,803)		(4.7)		—		—		Loss on extinguishment of debt	(18,803)		(3.3)		—		—
Other expense, net	Other expense, net	(1,601)		(0.4)		(204)		(0.1)		Other expense, net	(3,852)		(0.7)		(417)		(0.1)
Total other expense, net	Total other expense, net	(20,404)		(5.1)		(204)		(0.1)		Total other expense, net	(22,655)		(3.9)		(417)		(0.1)
Income before provision for income taxes	Income before provision for income taxes	188,091		47.4		117,427		43.5		Income before provision for income taxes	264,033		46.0		189,270		43.8
Income tax provision	Income tax provision	38,415		9.7		22,545		8.3		Income tax provision	53,594		9.3		37,797		8.8
Net income	Net income	$	149,676	37.7		$	94,882	35.1		Net income	$	210,439	36.7		$	151,473	35.1
Comprehensive income		$	149,676	37.7	%	$	94,882	35.1	%

Net Sales


(in thousands)	(in thousands)	For the Six Months Ended June 30,								(in thousands)	For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Net sales by Channel:	Net sales by Channel:									Net sales by Channel:
Professional	Professional	$	182,548	$	126,877	$	55,671	43.9	%	Professional	$	245,539	$	201,855	$	43,684	21.6	%
Specialty retail	Specialty retail	$	128,501	$	69,858	58,643		83.9	%	Specialty retail	$	202,692	$	116,201	86,491		74.4	%
DTC	DTC	$	86,050	$	73,508	12,542		17.1	%	DTC	$	125,322	$	113,811	11,511		10.1	%
Total Net sales	Total Net sales	$	397,099	$	270,243	$	126,856	46.9	%	Total Net sales	$	573,553	$	431,867	$	141,686	32.8	%

~~Growth~~The growth in professional was driven by volume growth from increased velocity (sales per point of distribution) of existing products and the net impact of new products launched since ~~June~~September 30, 2021, which include ~~No. 8 - Bond Intense Moisture Mask, the Professional only 4-in-1 Moisture Mask,~~ No.4P Blonde Enhancer Toning 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 and No. 5 Bond Maintenance Conditioner.~~Shampoo. The Company also experienced significant net sales growth in the U.S., Germany and Italy.

~~Growth~~The growth in specialty retail was driven by the addition of new customers and the net impact of new products launched since ~~June~~September 30, 2021, which include ~~No. 8 - Bond Intense Moisture Mask,~~ 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 U.S., Canada, and France.

~~Growth~~The growth in DTC was driven by the net impact of volume growth from new products launched since ~~June~~September 30, 2021, which include ~~No. 8 - Bond Intense Moisture Mask,~~ No. 4P Blonde Enhancer Toning Shampoo, No. 9 Bond Protector Nourishing

Hair Serum, and No. 4C Bond Maintenance Clarifying Shampoo. The Company experienced ~~significant~~ net sales growth in the U.S. and China.

Cost of Sales and Gross Profit


(in thousands)	(in thousands)	For the Six Months Ended June 30,				$ Change					% Change		(in thousands)	For the Nine Months Ended September 30,								$ Change			% Change
		2022		2021						2022					2021
Cost of sales	Cost of sales	$	99,464	$	56,116			$	43,348					77.2		%	Cost of sales	$	146,090		$	90,258		$	55,832		61.9	%
Gross profit	Gross profit	$	297,635	$	214,127	$	83,508				39.0	%	Gross profit	$	427,463				$	341,609		$	85,854		25.1	%

Our cost of sales increased primarily due to inflationary pressures and growth in sales volume, ~~as well as~~ a $4.3 million increase due to ~~the~~ 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 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 E.U. ~~In addition,~~The increase in cost of sales was partially offset by a ~~$0.8~~$1.3 million decrease in the amortization of our acquired patented formulations.

Our gross profit margin decreased from ~~79.2%~~79.1% in the ~~six~~nine months ended ~~June~~September 30, 2021 to ~~75.0%~~74.5% in the ~~six~~nine months ended ~~June~~September 30, 2022 due to increased input costs for warehousing, ~~inbound distribution,~~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 start up costs discussed above.

Operating Expenses


(in thousands)	(in thousands)	For the Six Months Ended June 30,								(in thousands)	For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Selling, general, and administrative expenses	Selling, general, and administrative expenses	48,425		45,066		$	3,359	7.5	%	Selling, general, and administrative expenses	79,232		75,323		$	3,909	5.2	%
Amortization of other intangible assets	Amortization of other intangible assets	20,561		20,365		196		1.0	%	Amortization of other intangible assets	30,890		30,547		343		1.1	%

Total operating expenses	Total operating expenses	$	68,986	$	65,431	$	3,555	5.4	%	Total operating expenses	$	110,122	$	105,870	$	4,252	4.0	%

Selling, general and administrative expenses increased primarily due to increases of ~~$4.5~~$8.8 million in sales and marketing expense, $7.7 million in payroll driven by workforce expansion, ~~$4.4~~$7.2 million in ~~sales~~public company compliance and ~~marketing expense, $2.2~~other related expenses, $3.9 million in professional fees, $2.3 million in share-based compensation expense, ~~$2.0~~and $2.1 million in distribution and fulfillment costs related to the increase in product sales volume, 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 recorded in the ~~three~~nine months ended ~~June~~September 30, 2021.

Interest Expense, Net


(in thousands)	(in thousands)	For the Six Months Ended June 30,								(in thousands)	For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Interest expense	Interest expense	$	(20,154)	$	(31,065)	$	10,911	(35.1)	%	Interest expense	$	(30,653)	$	(46,052)	$	15,399	(33.4)	%

Interest expense decreased due to the Company refinancing its ~~previously-existing~~ 2020 Credit Agreement with a new 2022 Credit Agreement ~~during the three months ended March 31,~~in February 2022, which reduced the Company’s outstanding debt and lowered the interest rate in respect thereof, in the ~~six~~nine months ended ~~June~~September 30, 2022. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information.

2425

Other Expense, Net


(in thousands)	(in thousands)	For the Six Months Ended June 30,								(in thousands)	For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Loss on extinguishment of debt	Loss on extinguishment of debt	$	(18,803)	$	—	$	(18,803)	—	%	Loss on extinguishment of debt	$	(18,803)	$	—	$	(18,803)	—	%
Other expense, net	Other expense, net	(1,601)		$	(204)	$	(1,397)	684.8	%	Other expense, net	(3,852)		$	(417)	$	(3,435)	823.7	%
Total other expense, net	Total other expense, net	$	(20,404)	$	(204)	$	(20,200)	9902.0	%	Total other expense, net	$	(22,655)	$	(417)	$	(22,238)	5332.9	%

As a result of the debt refinancing that occurred during the ~~six~~nine months ended ~~June~~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 foreign currency ~~translation~~transaction losses driven by the strengthening of the U.S. dollar.

Income Tax Provision


(in thousands)	(in thousands)	For the Six Months Ended June 30,								(in thousands)	For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change
Income tax provision	Income tax provision	$	38,415	$	22,545	$	15,870	70.4	%	Income tax provision	$	53,594	$	37,797	$	15,797	41.8	%

Our effective tax rate was ~~20.4%~~20.3% for the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to ~~19.2%~~20.0% for the ~~six~~nine months ended ~~June~~September 30, 2021. ~~The increase in the provision for income taxes from the comparative prior period is primarily due to the increase in the Company’s income before taxes over this period.~~ The Company’s effective tax rate in the ~~six~~nine months ended ~~June~~September 30, 2022 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, partially offset by the ~~effect~~net impact of state income taxes. ~~The increase in the effective tax rate from the comparative prior period is primarily due to an increase in the effect 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 ~~initial public offering of shares of its common stock (the “IPO”),~~IPO, 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 the IPO) and which are available to the Company and its wholly-owned subsidiaries, could aggregate to $~~229.3~~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 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. The remaining Tax Receivable Agreement payment obligation as of ~~June~~September 30, 2022 is ~~$229.3~~$225.1 million, of which ~~$208.5~~$208.6 million was recorded in long term liabilities and ~~$20.8~~$16.5 million was recorded in current liabilities.

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.

2526

A considerable portion of our operating income is earned outside the United States; however, the majority of our bank deposits are held within the United States.

As of ~~June~~September 30, 2022, we had $~~198.0~~249.4 million of cash and cash equivalents. In addition, as of ~~June~~September 30, 2022, we had borrowing capacity of $150.0 million under the 2022 Revolver (as defined below), providing us with a liquidity position of $~~348.0~~558.7 million, ~~plus $140.4~~including $159.3 million of working capital excluding cash and cash ~~equivalents for a combined $488.4 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 Six Months Ended June 30,					For the Nine Months Ended September 30,
(in thousands)	(in thousands)	2022		2021		(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	$	128,053	$	74,953	Operating activities	$	181,807	$	130,325
Investing activities	Investing activities	(945)		(64)		Investing activities	(1,712)		(5,359)
Financing activities	Financing activities	(115,468)		(9,423)		Financing activities	(117,084)		(14,451)
Net increase in cash and cash equivalents:	Net increase in cash and cash equivalents:	$	11,640	$	65,466	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 ~~$54.8~~$59.0 million and adjusting items, ~~including~~partially offset by the loss on extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit Agreement, ~~partially offset by the~~ inventory ~~write-off~~and unused labeling write-offs and disposal ~~adjustment~~adjustments of ~~$4.3~~$6.0 million recorded in the ~~three~~nine months ended ~~March 31,~~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 ~~six~~nine months ended ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2021, the Company’s financing activities primarily consisted of cash outflows for payments on our long-term debt.

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 2022 Revolver~~ will be sufficient to meet anticipated operating costs, required payments of principal and interest, working capital, ordinary course capital expenditures, and other commitments for at least the next 12 months.

Credit Facility

On 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 “2022 Credit Agreement”). The 2022 Credit Agreement 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 an $800 million term loan facility and a $51 million revolving credit facility, which included a $10 million letter of credit sub-facility and a $5 million swingline loan facility.

Installment payments on the 2022 Term Loan Facility are required to be made in quarterly installments of ~~$1,687,500,~~$1.7 million, with the remaining balance due upon maturity. The 2022 Term Loan Facility can be prepaid at any time subject to a 1% penalty provision (with certain exceptions) if paid prior to August 23, 2022, and is subject to certain mandatory prepayments, as described in the agreement governing the 2022 Credit Agreement.

The interest rate on outstanding debt under the 2022 Term Loan Facility was ~~4.8%~~6.1% as of ~~June~~September 30, 2022. The interest rates for all facilities under the 2022 and 2020 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 Agreement of $11.9 million, consisting primarily of lender fees of $1.7 million and third-party fees of $10.2 million during the ~~six~~nine months ended ~~June~~September 30, 2022. These fees were allocated between the 2022 Revolver and the 2022 Term Loan Facility. 2022 Term Loan Facility fees are capitalized and recorded as a reduction of the carrying amount of non-current debt, 2022 Revolver Facility fees are capitalized and recorded as Other Assets on the balance sheet.

As of ~~June~~September 30, 2022, the Company had outstanding indebtedness under the 2022 Credit Agreement of ~~$673.3~~$671.6 million, of which $6.8 million was classified as current. As of ~~June~~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 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 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 “Comparison of the ~~Six~~Nine Months ended ~~June~~September 30, 2022 to the ~~Six~~Nine Months ended ~~June~~September 30, 2021 – Tax Receivable Agreement” above for additional information.

Contractual Obligations and Commitments

There were no material changes outside the ordinary course of business to our contractual obligations since the filing of Company's Quarterly Report on Form 10-Q for the fiscal quarter ended ~~March 31,~~June 30, 2022.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Our unaudited interim 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, share based compensation, income taxes and the Tax Receivable Agreement, see our discussion for the year ended December 31, 2021 in the 2021 Form 10-K. There have been no material changes to these policies in the three and ~~six~~nine months ended ~~June~~September 30, 2022.

New Accounting Pronouncements

See “Note 2. Summary of Significant Accounting Policies” to our unaudited interim Condensed Consolidated Financial Statements included 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.

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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 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 the~~reference rates under our 2022 Term Loan ~~Facility; however, they do affect~~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 ~~June~~September 30, 2022, we had ~~$673~~$672 million of outstanding variable rate loans under the 2022 Term Loan Facility. Based on our ~~June~~September 30, 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 $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 ~~SG&A~~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 is the U.S. dollar. Gains or losses due to transactions in foreign currencies are reflected in the Consolidated Statements of Comprehensive Income under the line-item other 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 Condensed Consolidated Financial Statements.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the quarter ended ~~June~~September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations in Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting 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 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 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 policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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. 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 “Item 1A. – Risk Factors" in the 2021 Form 10-K.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


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†~~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†~~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.

3233

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
~~August 09,~~November 9, 2022		Name:	JuE Wong
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)

	By:	/s/ Eric Tiziani
~~August 09,~~November 9, 2022		Name:	Eric Tiziani
		Title:	Chief Financial Officer
			(Principal Financial Officer)

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	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


	Three Months Ended June 30,
	2022				2021
	(in thousands)		% of Net sales		(in thousands)		% of Net sales
Net sales	$	210,903	100.0	%	$	152,124	100.0	%
Cost of sales:
Cost of product (excluding amortization)	52,293		24.8		29,324		19.3
Amortization of patented formulations	2,180		1.0		2,268		1.5
Total cost of sales	54,473		25.8		31,592		20.8
Gross profit	156,430		74.2		120,532		79.2
Operating expenses:
Selling, general, and administrative	26,111		12.4		33,786		22.2
Amortization of other intangible assets	10,295		4.9		10,183		6.7

Total operating expenses	36,406		17.3		43,969		28.9
Operating income	120,024		56.9		76,563		50.3
Interest expense	(8,694)		(4.1)		(15,563)		(10.2)



Other expense, net	(1,224)		(0.6)		(157)		(0.1)
Income before provision for income taxes	110,106		52.2		60,843		40.0
Income tax provision	22,391		10.6		11,492		7.6
Net income	$	87,715	41.6		$	49,351	32.4
Comprehensive income	$	87,715	41.6	%	$	49,351	32.4	%