Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 10, 2021

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number  001-40860                         
________________________
Olaplex Holdings, Inc.
(Exact name of registrant as specified in its charter)
________________________
Delaware 87-1242679
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Address not applicable1
(Address of principal executive offices and zip code)

(310) 691-0776
(Registrant’s telephone number, including area code)
________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share OLPX Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  
As of October 31, 2021, registrant had 648,124,642 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.

OLAPLEX HOLDINGS, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2021
TABLE OF CONTENTS
Page
 
Item 1A.
Risk Factors    
Item 3.
Item 4.
Exhibits    
Signatures    
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; general economic and industry trends; business prospects; future product development; growth and expansion opportunities; cybersecurity profile; 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” in the Company’s final prospectus, dated September 29, 2021, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on October 1, 2021 (the “IPO
3

Prospectus”), 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;

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

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

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

changes in consumer preferences or changes in demand for haircare products or other products we may develop;

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 haircare professionals and other customers;

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

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

failure of markets to accept new product introductions;

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

regulatory changes and developments affecting our current and future products;

our ability to service our existing indebtedness and obtain additional capital to finance operations and our growth opportunities;

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

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

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

the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits or impact trade agreements and tariffs;

the outcome of litigation and governmental proceedings;

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

the other factors identified in the “Risk Factors” section of the IPO Prospectus.

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
4

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 of the IPO Prospectus. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Unless required by United States 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.



5

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLAPLEX HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
(Unaudited)
September 30,
2021
December 31,
2020
Assets
Current Assets:
Cash and cash equivalents $ 121,479  $ 10,964 
Accounts receivable, net of allowances of $6,867 and $1,362
59,283  14,377 
Inventory 69,088  33,596 
Other current assets 8,182  2,422 
Total current assets 258,032  61,359 
Property and equipment, net 806  34 
Intangible assets, net 1,054,962  1,092,310 
Goodwill 168,300  168,300 
Deferred taxes 6,978  10,830 
Investment in nonconsolidated entity 4,500   
Total assets $ 1,493,578  $ 1,332,833 
Liabilities and stockholders’ equity
Current Liabilities:
Accounts payable $ 14,303  $ 16,815 
Accrued expenses and other current liabilities 30,894  9,862 
Current portion of long-term debt 20,112  20,112 
Total current liabilities 65,309  46,789 
Related Party payable pursuant to Tax Receivable Agreement 232,893   
Long-term debt 742,371  755,371 
Total liabilities 1,040,573  802,160 
Contingencies (Note 14)
Stockholders’ equity (Notes 1 and 12):
Common stock, $0.001 par value per share; 2,000,000,000 shares authorized, 648,124,642 and 647,888,387 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
648  648 
Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding
   
Additional paid-in capital
300,884  530,025 
Retained earnings
151,473   
Total stockholders’ equity 453,005  530,673 
Total liabilities and stockholders’equity $ 1,493,578  $ 1,332,833 

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
September 30,
Nine Months Ended
September 30,
2021 2020 2021 2020
Net sales $ 161,624  $ 89,447  $ 431,867  $ 189,055 
Cost of sales:
Cost of product (excluding amortization) 32,462  24,569  83,859  79,236 
Amortization of patented formulations 1,680  2,102  6,399  4,567 
Total cost of sales 34,142  26,671  90,258  83,803 
Gross profit 127,482  62,776  341,609  105,252 
Operating expenses:
Selling, general, and administrative 30,257  8,215  75,323  23,291 
Amortization of other intangible assets 10,182  10,182  30,547  29,643 
Acquisition costs   488    16,499 
Total operating expenses 40,439  18,885  105,870  69,433 
Operating income 87,043  43,891  235,739  35,819 
Interest (expense) (14,987) (9,794) (46,052) (28,577)
Other (expense) income, net (213) (29) (417) (155)
Income before provision for income taxes
71,843  34,068  189,270  7,087 
Income tax provision 15,252  5,753  37,797  1,197 
Net income $ 56,591  $ 28,315  $ 151,473  $ 5,890 
Comprehensive income $ 56,591  $ 28,315  $ 151,473  $ 5,890 
Net income per share:
Basic $ 0.09  $ 0.04  $ 0.23  $ 0.01 
Diluted $ 0.08  $ 0.04  $ 0.22  $ 0.01 
Weighted average common shares outstanding:
Basic 648,124,642  647,888,387  648,082,081  631,143,589 
Diluted 690,711,782  653,036,893  689,108,272  632,877,840 
The accompanying notes are an integral part of these condensed consolidated financial statements
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OLAPLEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(amounts in thousands, except number of shares)
(Unaudited)
Shares
(Note 1)
Amount Additional Paid
 in Capital
Retained
Earnings
Total Equity
Balance - December 31, 2020 647,888,387  $ 648  $ 530,025  $   $ 530,673 
Issuance of common stock 236,255  —  633  —  633 
Net income —  —  —  94,882  94,882 
Share-based compensation expense —  —  1,174  —  1,174 
Balance – June 30, 2021 648,124,642  $ 648  $ 531,832  $ 94,882  $ 627,362 
Net income —  —  —  56,591  56,591 
Tax receivable agreement —  —  (232,893) —  (232,893)
Share-based compensation expense —  —  1,945  —  1,945 
Balance – September 30, 2021 648,124,642  $ 648  $ 300,884  $ 151,473  $ 453,005 
Shares
(Note 1)
Amount Additional Paid
in Capital
Retained
Earnings
Total Equity
Balance - January 1, 2020
Issuance of common stock 647,888,387  $ 648  $ 959,220  $ —  $ 959,868 
Net loss —  —  —  (22,425) (22,425)
Share-based compensation expense —  —  421  —  421 
Balance – June 30, 2020 647,888,387  $ 648  $ 959,641  $ (22,425) $ 937,864 
Net income —  —  —  28,315  28,315 
Share-based compensation expense —  —  516  —  516 
Balance – September 30, 2020
647,888,387  $ 648  $ 960,157  $ 5,890  $ 966,695 


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)
Nine Months Ended
September 30,
2021 2020
Cash flows from operating activities:
Net income $ 151,473  $ 5,890 
Adjustments to reconcile net income to net cash from operations provided by operating activities:
Amortization of patent formulations 6,399  4,567 
Amortization of other intangibles
30,547  29,643 
Depreciation of fixed assets 87   
Amortization of fair value of acquired inventory
  44,519 
Amortization of debt issuance costs
2,084  1,277 
Deferred taxes
3,852  (3,321)
Share-based compensation expense
3,119  937 
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable, net
(44,906) (13,198)
Inventory
(35,090) (2,488)
Other current assets
(5,760) (2,825)
Accounts payable
9,165  3,882 
Accrued expenses and other current liabilities
9,355  15,626 
Net cash provided by operating activities 130,325  84,509 
Cash flows from investing activities:
Purchase of property and equipment
(859) (58)
Purchase of investment in nonconsolidated entity
(4,500)  
Business acquisition, net of acquired cash
  (1,381,582)
Net cash used in investing activities (5,359) (1,381,640)
Cash flows from financing activities:
Proceeds from the issuance of stock
633  959,867 
Proceeds from Revolver
  50,000 
Principal payments of Term Loan
(15,084) (5,625)
Payments of Revolver
  (25,000)
Proceeds from the issuance of Term Loan
  450,000 
Payments of debt issuance costs
  (10,526)
Net cash (used in) provided by financing activities (14,451) 1,418,716 
Net increase in cash and cash equivalents 110,515  121,585 
Cash and cash equivalents - beginning of period 10,964   
Cash and cash equivalents - end of period $ 121,479  $ 121,585 
Supplemental disclosure of cash flow information:
Cash paid for income taxes
$ 16,105  $ 976 
Cash paid during the year for interest
43,968  25,500 
Cash paid during the year for offering and strategic transition costs
3,840   
Supplemental disclosure of noncash activities:
Public offering and strategic transition costs included in accounts payable and accrued expenses
$ 4,542  $  
Increase in Related Party payable pursuant to Tax Receivable Agreement and decrease in Additional paid-in capital 232,893   
The accompanying notes are an integral part of these condensed consolidated financial statements
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OLAPLEX HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2021
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
(Unaudited)
NOTE 1- NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Olaplex Holdings, Inc. (“Olaplex Holdings” 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 other related Reorganization Transactions, as described below, in order to carry on the business of Penelope Holdings Corp., (“Penelope”) together with its subsidiaries. Olaplex Holdings is organized as a holding company and operates indirectly through its wholly owned subsidiaries, Penelope and Olaplex, Inc., which conducts business under the name “Olaplex”. Olaplex is an innovative, science-enabled, technology-driven beauty company that is focused on delivering its patent-protected premium hair care products to professional hair salons, retailers and everyday consumers. Olaplex develops, manufactures and distributes a suite of haircare products strategically developed to address three key uses: treatment, maintenance and protection.
On January 8, 2020 (the “Acquisition Date”), a group of third-party investors, through Penelope, acquired 100% of the Olaplex LLC business, including the intellectual property operations of another affiliated business, LIQWD, Inc. (the “Olaplex business”) from the owners of the Olaplex business (the “Sellers”) for $1,381,582 (the “Acquisition”). Subsequent to the Acquisition Date, all of the operations of Olaplex are comprised of the operations of Olaplex, Inc.
In these financial statements, the term “Olaplex” is used to refer to either the operations of the business prior or after the Acquisition and prior to and after the initial public offering and Reorganization Transactions as discussed below, depending on the respective period discussed.
COVID-19 — On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The global spread and unprecedented impact of COVID-19 continues to create significant volatility, uncertainty and economic disruption. The Company’s operations and its financial results including net sales, gross profit, and selling, general, and administrative expenses were impacted by COVID-19 in 2020, however the Company is unable to estimate the impact of COVID-19 on its operations.
The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the ultimate duration, spread and intensity of the pandemic (including any resurgences), impact of the new COVID-19 variants and the rollout of COVID-19 vaccines, and the level of social and economic restrictions imposed in the United States and abroad in an effort to curb the spread of the virus, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of the COVID-19 pandemic on the Company’s business, results of operations, financial condition or liquidity. Future events and effects related to COVID-19 cannot be determined with precision and actual results could differ from estimates or forecasts.

Initial Public Offering

On October 4, 2021, Olaplex Holdings completed an initial public offering of 73,700,000 shares of its common stock (the “IPO”). All shares sold in the IPO were sold by certain existing stockholders of Olaplex Holdings at a public offering price of $21 per share. The selling stockholders received net proceeds of approximately $1,466,446, after deducting underwriting discounts and commissions. On October 8, 2021, the selling stockholders sold 11,055,000 additional shares of common stock pursuant to the full exercise by the underwriters of the IPO of their option to purchase additional shares at the initial public offering price of $21 per share. The selling shareholders received net proceeds of approximately $219,967, after deducting underwriting discounts and commissions, for the sale of these additional shares. The Company did not receive any proceeds from the IPO.

Reorganization Transactions

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

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

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

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

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

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

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

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

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

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

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

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

Penelope Group Holdings, L.P. and Penelope Group Holdings GP II merged with and into Olaplex Intermediate II, Inc. with Olaplex Intermediate II, Inc. surviving each merger.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the results of operations, financial position and cash flows of the Company, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Article 10 of Regulation S-X. Accordingly, these financial statements do
11


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

The financial statements for prior periods give effect to the Reorganization Transactions discussed above, including the exchange of all 960,184 units of Penelope Group Holdings, L.P. for an aggregate of 648,124,642 shares of common stock of Olaplex Holdings, Inc., which is equivalent to an overall exchange ratio of one-for-675, and the conversion of options and cash-settled units of Penelope into options and cash-settled units of Olaplex Holdings at a conversion rate of one-for-675, with a corresponding adjustment to the exercise price and base price, respectively, as discussed above and in Note 11. All share and earnings per share amounts presented herein have been retroactively adjusted to give effect to the Reorganization Transactions as if they occurred in all prior periods presented.

For the periods prior to the Reorganization Transactions, Penelope and its subsidiaries, including Olaplex, Inc., are consolidated in the unaudited condensed consolidated financial statements of the Company.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; the fair value of share-based options and cash-settled units; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting unit; 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 gross carrying amount of the Company’s long-term debt, before reduction of the debt issuance costs, approximates its fair values as the stated rate approximates market rates for loans with similar terms as of September 30, 2021 and December 31, 2020.

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Accounting Policies

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

Deferred Offering Costs

The Company incurred $702 of deferred offering costs as of June 30, 2021 in connection with the anticipated sale of the Company’s common stock in an IPO including certain legal, accounting, and other IPO related costs. During the third quarter of 2021, the Company completed the IPO. The Company expensed in the third quarter the deferred offering costs plus additional IPO and related transition costs incurred during the third quarter of 2021 for a total of $6,118 in the statement of operations and comprehensive income under selling, general and administrative expenses.

Segment Reporting

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

Investment in Nonconsolidated Entity

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

Tax Receivable Agreement

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

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

In February 2016, the Financial 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
13


guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for the Company fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company will adopt this accounting standard on January 1, 2022 and does not believe this standard will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. The amendments in the ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early application of the amendments is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
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 is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
NOTE 3 – NET SALES
The Company distributes products through national and international professional distributors and retailers as well as direct-to-consumer (“DTC”) through e-commerce channels. The marketing and consumer engagement benefits that the Company’s channels provide are integral to the Company’s brand and product development strategy and drive sales across channels. As such, the Company’s three business channels consist of professional, specialty retail and DTC as follows:
For the Three Months Ended
For the Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net sales by Channel:
Professional $ 74,978  $ 47,573  $ 201,855  $ 103,768 
Specialty retail 46,343  20,313  116,201  36,919 
DTC 40,303  21,561  113,811  48,368 
Total Net sales $ 161,624  $ 89,447  $ 431,867  $ 189,055 
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Revenue by major geographic region is based upon the geographic location of customers who purchase our products. During the three and nine months ended September 30, 2021 and September 30, 2020, our net sales to consumers in the United States and International regions were as follows:
For the Three Months Ended
For the Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Net sales by Geography:
United States $ 93,611  $ 45,969  $ 252,224  $ 101,978 
International 68,013  43,478  179,643  87,077 
Total Net sales $ 161,624  $ 89,447  $ 431,867  $ 189,055 
United Kingdom (“U.K”) net sales for the three and nine months ended September 30, 2021 and September 30, 2020 were 15% and 15% and 13% and 14% of total net sales, respectively. No other International country exceeds 10% of total net sales.
NOTE 4 - INVENTORY
Inventory as of September 30, 2021 and December 31, 2020 consisted of the following:
September 30, 2021 December 31, 2020
Raw materials $ 10,677  $ 7,773 
Finished goods 58,411  25,823 
Inventory $ 69,088  $ 33,596 

NOTE 5 - INVESTMENT IN NONCONSOLIDATED ENTITY

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

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 in our consolidated balance sheet and consists of the following:

September 30, 2021 December 31, 2020
Capital contributions, net of distributions and impairments $ 4,500  $  
Total investments in and advances to nonconsolidated affiliate $ 4,500  $  
NOTE 6 - BUSINESS COMBINATIONS
On January 8, 2020, the Company completed the Acquisition to acquire the net assets of the Olaplex business and 100% of voting equity interests. The purchase price was $1,381,582 in net cash paid.
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Information regarding the net cash consideration paid and fair value of the assets and liabilities assumed at the Acquisition Date is as follows:
Fair value of assets acquired $ 1,216,259 
Goodwill 168,300 
Fair value of liabilities assumed (2,977)
Net cash paid for acquisition $ 1,381,582 
Purchase price is comprised of:
Cash, net of acquired cash $ 1,381,582 
Net cash paid for acquisition $ 1,381,582 
Allocation of purchase price:
Net tangible assets (liabilities):
Inventory $ 61,262 
Accounts receivable and other current assets 7,595 
Deferred tax assets 6,402 
Liabilities (2,977)
Net tangible assets
72,282 
Identifiable intangible assets:
Brand name 952,000 
Product formulations 136,000 
Customer relationships 53,000 
Total identifiable intangible assets
1,141,000 
Goodwill 168,300 
Net assets acquired $ 1,381,582 
For this Acquisition, brand name, product formulations, and customer relationships were assigned estimated useful lives of 25 years, 15 years, and 20 years, respectively, the weighted average of which is approximately 23.6 years.
Costs related to the Acquisition are expensed as incurred. In connection with the Acquisition, the Company recorded transaction expenses totaling $488 and $16,499 for the three and nine months ended September 30, 2020, respectively, within the unaudited condensed consolidated statements of operations and comprehensive income.
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are comprised of the following:
September 30, 2021
Estimated
Useful Life
Gross Carrying
Amount
Accumulated
amortization
Net
carrying
amount
Brand name 25 years $ 952,000  $ (65,794) $ 886,206 
Product formulations 15 years 136,000  (15,665) 120,335 
Customer relationships 20 years 53,000  (4,579) 48,421 
Total finite-lived intangibles
1,141,000  (86,038) 1,054,962 
Goodwill Indefinite 168,300  —  168,300 
Total goodwill and other intangibles
$ 1,309,300  $ (86,038) $ 1,223,262 
Amortization expense on the finite-lived intangible assets were $11,862 and $36,946 for the three and nine months ended September 30, 2021, respectively, and $12,284 and $34,210 for the three and nine months ended September 30, 2020. The amortization of brand name and customer relationships of $10,182 and $10,182 and $30,547 and $29,643 for the three and
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nine months ended September 30, 2021 and 2020, respectively, is recorded in the consolidated statements of operations and comprehensive income.

The amortization for patented formulations for the three and nine months ended September 30, 2021, respectively, is $2,267 and $6,800. The Company expensed $1,680 of patent amortization in cost of sales for the three months ended September 30, 2021 and capitalized $587 to inventory and expensed $6,399 in cost of sales for the nine months ended September 30, 2021 with $401 capitalized to inventory.

The amortization for patented formulations for the three and nine months ended September 30, 2020, respectively, is $2,267 and $6,598. The Company expensed $2,102 of patent amortization in cost of sales for the three months ended September 30, 2020 and capitalized $164 to inventory and expensed $4,567 in cost of sales for the nine months ended September 30, 2020 with $2,031 capitalized to inventory.
December 31, 2020
Estimated
Useful
Life
Gross
Carrying
Amount
Accumulated
amortization
Net carrying
amount
Brand name 25 years $ 952,000  $ (37,234) $ 914,766 
Product formulations 15 years 136,000  (8,865) 127,135 
Customer relationships 20 years 53,000  (2,591) 50,409 
Total finite-lived intangibles
1,141,000  (48,690) 1,092,310 
Goodwill Indefinite 168,300  —  168,300 
Total goodwill and other intangibles
$ 1,309,300  $ (48,690) $ 1,260,610 
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses as of September 30, 2021 and December 31, 2020 consisted of the following:
September 30, 2021 December 31, 2020
Deferred revenue $ 5,652  $ 2,314 
Accrued sales and income taxes 9,342  3,100 
Accrued other 8,439  2,931 
Payroll liabilities 7,461  1,517 
Accrued expenses and other current liabilities $ 30,894  $ 9,862 
NOTE 9 - LONG-TERM DEBT
Debt consisted of the following on September 30, 2021:
January 2020 Credit
Agreement
December 2020
Amendment
Total
Long-term debt
Original term loan borrowing $ 433,125  $ 341,138  $ 774,263 
Debt issuance costs (7,434) (4,346) (11,780)
Total term loan debt
425,691  336,792  762,483 
Less: Current portion (11,250) (8,862) (20,112)
Long-term debt, net of current portion
$ 414,441  $ 327,930  $ 742,371 
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Debt consisted of the following on December 31, 2020:
January 2020
Credit
Agreement
December 2020
Amendment
Total
Long-term debt
Original term loan borrowing $ 441,562  $ 347,785  $ 789,347 
Debt issuance costs (8,810) (5,054) (13,864)
Total term loan debt
432,752  342,731  775,483 
Less: Current portion (11,250) (8,862) (20,112)
Long-term debt, net of current portion
$ 421,502  $ 333,869  $ 755,371 
On January 8, 2020, the Company entered into a secured credit agreement (the “Original Credit Agreement”), consisting of a $450,000 term loan facility (the “Term Loan Facility”) and a $50,000 revolving facility (the “Revolver” and together with the Term Loan Facility, the “Credit Facilities”), which includes a $10,000 letter of credit sub-facility and a $5,000 swingline loan facility. In addition, on December 18, 2020, the Company entered into a First Incremental Amendment to the Credit Agreement (the “Amendment,” and together with the Original Credit Agreement, the “Credit Agreement”) to increase the Term Loan Facility by $350,000 and increase the Revolver capacity by $1,000 to a revised $800,000 Term Loan Facility and $51,000 Revolver. The unused balance of the Revolver as of December 31, 2020 was $51,000.

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

The interest rate on outstanding debt under the Term Loan Facility is 7.5%. The interest rates for all facilities are calculated based upon the Company’s election between the published LIBOR rate at time of election plus an additional interest rate spread, or the Alternate Base Rate plus an additional interest rate spread. As of September 30, 2021 and December 31, 2020, there was no balance outstanding under the Revolver, including letters of credit and swingline loans. Interest expense, inclusive of debt amortization, was $14,987 and $9,794 for the three months ended September 30, 2021 and 2020, respectively, and $46,052 and $28,577 for the nine months ended September 30, 2021 and September 30, 2020, respectively, and was recorded in interest (expense) income, net in the consolidated statements of operations and comprehensive income.
The Credit Agreement includes reporting, financial, and maintenance covenants that require, among other things, for the Company to comply with certain maximum secured leverage ratios, which the Company was in compliance with on September 30, 2021 and December 31, 2020. Substantially all the assets of the Company constitute collateral under the Term Loan and Revolver facilities.
NOTE 10 - INCOME TAXES

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

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

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

Tax Receivable Agreement

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Based on current tax laws and assuming that the Company earns sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement, (i) we expect that future payments under the Tax Receivable Agreement relating to certain tax benefits related to certain existing tax attributes, including tax basis in intangible assets and capitalized transaction costs relating to taxable years ending on or before the date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the date of the IPO), that are amortizable over a fixed period of time (including in tax periods beginning after this offering) and which are available to the Company and its wholly-owned subsidiaries could aggregate to $232,893 over the 14-year period under the Tax Receivable Agreement and (ii) we expect material payments to occur beginning in 2023. Payments under the Tax Receivable Agreement are not conditioned upon the parties’ continued ownership of the company. The Tax Receivable payment obligation was recorded as a non-current liability on the unaudited condensed consolidated balance sheet with a corresponding decrease in Additional paid-in capital.
NOTE 11 – SHARE-BASED COMPENSATION
On September 17, 2021, the Company adopted the Olaplex Holdings 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, including restricted stock units, performance awards, and other stock-based awards to employees, directors and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2021 Plan (subject to adjustment as described below) is 45,368,725 shares of common stock, plus the number of shares of common stock underlying awards granted under the Penelope Holdings Corp. 2020 Omnibus Equity Incentive Plan (the “2020 Plan”) that on or after September 17, 2021 expire or become unexercisable, are forfeited to, or repurchased for cash by, the Company are settled in cash, or otherwise become available again for grant under the 2020 Plan discussed below.

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

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

Conversion of Shared-Based Options in Reorganization Transactions

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

outstanding vested time-based options to purchase shares of common stock of Penelope were converted into vested options to purchase an aggregate of 2,929,500 shares of common stock of Olaplex Holdings;
outstanding unvested time-based options to purchase shares of common stock of Penelope were converted into time-based options to purchase an aggregate of 14,314,725 shares of common stock of Olaplex Holdings that will be eligible to vest as described under “Converted Time-Based Options” below;
outstanding performance-based options to purchase shares of common stock of Penelope were converted into (i) time-based options to purchase an aggregate of 25,363,800 shares of common stock of Olaplex Holdings that will be eligible to vest as described under “Converted Performance-Based Options” below, and (ii) vested options to purchase an aggregate of 4,315,275 shares of common stock of Olaplex Holdings;

Converted Time-Based Options

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

Converted Performance-Based Options

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


IPO Option Grants

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

As of September 30, 2021, a total of 92,292,025 shares have been authorized for issuance under the 2020 Plan and 2021 Plan, with 45,017,667 remaining available to grant under the 2021 Plan and no shares available for issuance under the 2020 Plan. As of September 30, 2021, there were outstanding options to purchase an aggregate of 47,274,358 shares with 46,923,300 shares outstanding under the 2020 Plan and 351,058 shares outstanding under the 2021 Plan. As of September 30, 2021, there were options to purchase an aggregate of 2,362,500 shares forfeited under the 2020 Plan.
Share-based compensation expense for the three and nine months ended September 30, 2021 of $1,945 and $3,119, respectively, was recognized in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income. As of September 30, 2021, the Company had not recognized compensation costs on unvested share-based options of $11,908 with a weighted average remaining recognition period of 3.58 years.

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

Time-based service options

The following table summarizes the activity for options that vest solely based upon the satisfaction of a time-based service condition shown on a converted basis to reflect the Reorganization Transactions for all periods as follows:
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Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Options
Outstanding
Weighted Average
Exercise Price Per Share
Options
Outstanding
Weighted Average
Exercise Price Per Share
Outstanding at Beginning of Period 15,997,500  $ 0.88    $  
Granted 2,947,783  5.30  15,803,775  0.87 
Cancelled/Forfeited (1,350,000) (0.97)    
Converted Performance to Time-Based 25,363,800  0.92     
Outstanding at End of Period 42,959,083  $ 1.20  15,803,775  $ 0.87 
Vested and Exercisable 2,929,500  $ 0.87    $  
Additional information relating to time-based service options is as follows:
Three Months Ended
Nine Months Ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Share-based compensation expense $ 571  $ 370  $ 1,414  $ 667 
Weighted-average grant date fair value of options granted (per share) $ 6.03  $ 0.63  $ 1.65  $ 0.53 

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

Nine Months Ended
September 30,
2021
September 30,
2020
Expected term (years)
6.50 - 7.00
6.50
Expected volatility (%)
25 - 30
30 
Risk-free interest rate (%)
1.07 - 1.62
0.365 - 1.87
Expected dividend yield (%)    

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

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Options
Outstanding
Weighted Average
Exercise Price Per Share
Options
Outstanding
Weighted Average
Exercise Price Per Share
Outstanding at Beginning of Period 28,732,050  $ 0.81    $  
Granted 1,959,525  3.19  28,588,275  0.80 
Cancelled/Forfeited (1,012,500) (0.97)    
Converted Performance to Time-Based (25,363,800) (0.92)    
Outstanding at End of Period 4,315,275  $ 1.23  28,588,275  $ 0.80 
Vested and Exercisable 4,315,275  $ 1.23    $  
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Additional information relating to performance-based options is as follows:
Three Months Ended
Nine Months Ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Share-based compensation expense $ 1,374  $ 146  $ 1,705  $ 270 
Weighted-average grant date fair value of options granted (per share) $   $ 0.15  $ 0.74  $ 0.09 
The fair value of performance-based options granted were calculated using the following assumptions:

Nine Months Ended
September 30,
2021
September 30,
2020
Expected term (years) 0.40 4.00
Expected volatility (%) 30  30 
Risk-free interest rate (%)
1.48 - 1.62
1.87 
Expected dividend yield (%) 49   
Treatment of Cash-Settled Units in Reorganization Transactions

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

outstanding time-based cash-settled units of Penelope were converted into an aggregate of 621,000 time-based cash-settled units of Olaplex Holdings that will be eligible to vest as described under “Converted Time-Based Cash-Settled Units” below; and
outstanding performance-based cash-settled units of Penelope were converted into (i) an aggregate of 318,600 time-based cash-settled units of Olaplex Holdings that will be eligible to vest as described under “Converted Performance-Based Cash-Settled Units” below, and (ii) an aggregate of 159,300 vested cash-settled units of Olaplex Holdings.

Converted Time-Based Cash-Settled Units

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

Converted Performance-Based Cash-Settled Units

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

For the three and nine months ended September 30, 2021, $4,279 and $4,427 of compensation expense (and liability) was recognized for the time-based and vested cash-settled units, respectively, by the Company in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income. The Company subsequently paid an aggregate of $2,872 to the holders of the 159,300 performance-based cash-settled units that vested in connection with the Reorganization Transactions and IPO. As of September 30, 2021, the unrecognized compensation for time-based units is $11,848.

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In the event the contingent market condition and continued service requirement for performance-based cash-settled units is achieved, 33.33% of the cash-settled units shall vest on each of the first three anniversaries of October 4, 2021, with the Company paying an aggregate of $6,859 to holders of these units based on the September 30, 2021 assumptions noted below. The performance-based cash-settled units are liability awards and are fair valued at each reporting period.

The following table summarizes the activity for units that vest based upon the satisfaction of time and performance-based conditions as follows:
Nine Months Ended September 30, 2021
Time-based Performance-based
Outstanding at Beginning of Period    
Granted 684,450  526,500 
Cancelled/Forfeited (63,450) (48,600)
Outstanding at End of Period 621,000  477,900 
Vested at September 30, 2021   159,300 
The fair value of time-based cash-settled units granted were calculated using the following assumptions:

Nine Months Ended September 30, 2021
Expected term (years)
0.404.40
Expected volatility (%) 25 
Risk-free interest rate (%) 0.80 
Expected dividend yield (%)  
The unrecognized compensation expense for converted cash-settled units was calculated using the following assumptions:

Nine Months Ended September 30, 2021
Stock Price at September 30, 2021 $ 24.50 
Exercise Price per Unit $ 2.97 
Intrinsic Value per Unit $ 21.53 
Converted Units 318,600 
NOTE 12 - EQUITY
In connection with the Reorganization Transactions, on September 29, 2021, Fund IX and the other former limited partners of Penelope Group Holdings, L.P. contributed 100% of their respective economic equity interests in Penelope Group Holdings, L.P. and Fund IX contributed 100% of its equity interests in Penelope Group Holdings GP II, to Olaplex Holdings in exchange for an aggregate of 648,124,642 shares of common stock of Olaplex Holdings plus Tax Receivable Agreement payment rights. Penelope Group Holdings, L.P. directly held the shares of Penelope prior to the reorganization and following the mergers, Olaplex Intermediate II, Inc. currently holds the shares of Penelope.

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

As part of the Reorganization Transactions, the Company entered into the Tax Receivable Agreement with the Pre-IPO Stockholders. See further discussion in Notes 2 and 10.
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NOTE 13 - RELATED PARTY TRANSACTIONS
The Company received $300 in the 2020 fiscal period from certain investment funds affiliated with Advent International Corporation (the “Advent Funds”), which are shareholders of the Company, to be expended as charitable donations of which $20 remains unpaid as of September 30, 2021 and December 31, 2020.
In July 2020, the Company entered into an agreement with CI&T, an information technology and software company, pursuant to which CI&T developed the Olaplex professional application. During the nine months ended September 30, 2021 and fiscal year ended December 31, 2020, the Company paid CI&T $189 and $25 respectively, for services related to the development, maintenance and enhancement of the application, all of which were negotiated on an arm’s length basis and on market terms. The Advent Funds hold a greater than 10% equity interest in CI&T. CI&T continues to provide services to us for the maintenance and enhancement of the professional application.

Tax Receivable Agreement

In connection with the Reorganization, the Company entered into the Tax Receivable Agreement with the Pre-IPO Stockholders. See further discussion in Notes 2 and 10.
NOTE 14 - CONTINGENCIES
From time to time, the Company is subject to various legal actions arising in the ordinary course of business. The Company cannot predict with reasonable assurance the outcome of these legal actions brought against us as they are subject to uncertainties. Accordingly, any settlement or resolution in these legal actions may occur and affect our net income in such period as the settlement or resolution.
Pursuant to the purchase agreement between the Sellers, the Advent Funds and the other purchasers of the Olaplex business, the Company was required to pay the Sellers certain amounts in connection with the final settlement of certain litigation and contingency matters involving LIQWD, Inc., a predecessor entity to the Company substantially all of whose assets and liabilities were purchased as part of the Acquisition (the “LIQWD Matters”).
During April 2021, the Company and the Sellers commenced negotiations concerning the amount to be paid to the Sellers by the Company in connection with a potential settlement of the LIQWD Matters and, in May 2021, the Company reached agreement with the Sellers on the amount to be paid by the Company to the Sellers in full satisfaction of the contingency provisions in the purchase agreement related to the LIQWD Matters.
Accordingly, the Company has expensed approximately $14,250 included in selling, general and administrative costs in the accompanying consolidated financial statements during the nine months ended September 30, 2021, associated with the amounts to be paid by the Company in connection with the final resolution of the LIQWD Matters. The amounts accrued, all of which were paid in May 2021, in connection with the final settlement of the LIQWD Matters, represent the total cost to the Company in resolving the LIQWD Matters.
As a result of the foregoing agreement with the Sellers and the resulting approval by the Sellers of the settlement of the LIQWD Matters, all outstanding claims of the Sellers and the Company associated with the LIQWD Matters have been resolved.
As of September 30, 2021 and December 31, 2020, the Company is not subject to any other currently pending legal matters or claims that could have a material adverse effect on its financial position, results of operations, or cash flows should such litigation be resolved unfavorably.
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NOTE 15 – NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator in the basic and diluted net income per common share computations:
Three Months Ended
Nine Months Ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Numerator:
Net Income $ 56,591  $ 28,315  $ 151,473  $ 5,890 
Denominator:
Weighted average common shares outstanding – basic
648,124,642  647,888,387  648,082,081  631,143,589 
Dilutive common equivalent shares from equity options 42,587,140  5,148,506