Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 9, 2022

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on November 9, 2022

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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, 2022
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, 2022, registrant had 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.

OLAPLEX HOLDINGS, INC.
TABLE OF CONTENTS
Page
 
Item 1.
Item 1A.
Risk Factors    
Item 3.
Item 4.
Exhibits    
Signatures    


3

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 business due to the sensitivity of our business to unfavorable economic and 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 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;

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

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

4

our ability to 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. 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
(amounts in thousands, except per share and share data)
(Unaudited)
September 30,
2022
December 31,
2021
Assets
Current Assets:
Cash and cash equivalents $ 249,399  $ 186,388 
Accounts receivable, net of allowances of $14,976 and $8,231
93,286  40,779 
Inventory 151,283  98,399 
Other current assets 3,277  9,621 
Total current assets 497,245  335,187 
Property and equipment, net 614  747 
Intangible assets, net 1,007,267  1,043,344 
Goodwill 168,300  168,300 
Deferred taxes, net 12,876  8,344 
Other assets 10,498  4,500 
Total assets $ 1,696,800  $ 1,560,422 
Liabilities and stockholders’ equity
Current Liabilities:
Accounts payable $ 23,126  $ 19,167 
Accrued expenses and other current liabilities 26,031  17,332 
Accrued sales and income taxes 16,096  12,144 
Current portion of long-term debt 6,750  20,112 
 Current portion of Related Party payable pursuant to Tax Receivable Agreement 16,557  4,157 
Total current liabilities 88,560  72,912 
Related Party payable pursuant to Tax Receivable Agreement 208,582  225,122 
Long-term debt 655,662  738,090 
Total liabilities 952,804  1,036,124 
Contingencies (Note 11)
Stockholders’ equity (Notes 1 and 9):
Common stock, $0.001 par value per share; 2,000,000,000 shares authorized, 649,112,823 and 648,794,041 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
649  648 
Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding
   
Additional paid-in capital
310,193  302,866 
Accumulated other comprehensive income 1,931   
Retained earnings
431,223  220,784 
Total stockholders’ equity 743,996  524,298 
Total liabilities and stockholders’ equity $ 1,696,800  $ 1,560,422 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
6

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,
2022 2021 2022 2021
Net sales $ 176,454  $ 161,624  $ 573,553  $ 431,867 
Cost of sales:
Cost of product (excluding amortization) 45,484  32,462  140,999  83,859 
Amortization of patented formulations 1,142  1,680  5,091  6,399 
Total cost of sales 46,626  34,142  146,090  90,258 
Gross profit 129,828  127,482  427,463  341,609 
Operating expenses:
Selling, general, and administrative 30,807  30,257  79,232  75,323 
Amortization of other intangible assets 10,329  10,182  30,890  30,547 
Total operating expenses 41,136  40,439  110,122  105,870 
Operating income 88,692  87,043  317,341  235,739 
Interest expense (10,499) (14,987) (30,653) (46,052)
Other expense, net
Loss on extinguishment of debt     (18,803)  
Other expense, net (2,251) (213) (3,852) (417)
Total other expense, net (2,251) (213) (22,655) (417)
Income before provision for income taxes
75,942  71,843  264,033  189,270 
Income tax provision 15,179  15,252  53,594  37,797 
Net income $ 60,763  $ 56,591  $ 210,439  $ 151,473 
Net income per share:
Basic $ 0.09  $ 0.09  $ 0.32  $ 0.23 
Diluted $ 0.09  $ 0.08  $ 0.30  $ 0.22 
Weighted average common shares outstanding:
Basic 649,099,780  648,124,642  648,963,625  648,082,081 
Diluted 691,257,654  690,711,782  691,585,787  689,108,272 
Other comprehensive income:
Unrealized gain on derivatives, net of income tax effect $ 1,931  $   $ 1,931  $  
Total other comprehensive income: 1,931    1,931   
Total comprehensive income: $ 62,694  $ 56,591  $ 212,370  $ 151,473 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
7

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
Accumulated Other Comprehensive Income Retained
Earnings
Total Equity
Balance - December 31, 2021 648,794,041  $ 648  $ 302,866  $   $ 220,784  $ 524,298 
Net income —  —  —  61,961  61,961 
Conversion of cash-settled units to stock-settled stock appreciation rights —  —  1,632  —  1,632 
Exercise of stock-settled stock appreciation rights 117,180  —  348  —  348 
Shares withheld and retired on exercise of stock-settled stock appreciation rights (55,244) —  (920) —  (920)
Share-based compensation expense —  —  1,696  —  1,696 
Balance – March 31, 2022 648,855,977  648  305,622    282,745  589,015 
Net income —  —  —  87,715  87,715 
Exercise of stock options 231,846  1  739  —  740 
Share-based compensation expense —  —  1,727  —  1,727 
Balance – June 30, 2022 649,087,823  649  308,088    370,460  679,197 
Net income —  $ —  $ —  —  $ 60,763  $ 60,763 
Exercise of stock options 25,000  $   $ 74  —  $ —  $ 74 
Share-based compensation expense —  $ —  $ 2,031  —  $ —  $ 2,031 
Unrealized gain on derivatives —  $ —  $ —  1,931  $ —  $ 1,931 
Balance – September 30, 2022
649,112,823  $ 649  $ 310,193  $ 1,931  $ 431,223  $ 743,996 
Shares
(Note 1)
Amount Additional Paid
in Capital
Accumulated Other Comprehensive Income 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 —  —  —  —  45,531  45,531 
Share-based compensation expense —  —  627  —  —  627 
Balance – March 31, 2021 648,124,642  648  531,285    45,531  577,464 
Net income —  —  —  —  49,351  49,351 
Share-based compensation expense —  —  547  —  —  547 
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   PY $ 648   PY $ 300,884  $   $ 151,473  $ 453,005 


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


8

OLAPLEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
2022 2021
Cash flows from operating activities:
Net income $ 210,439  $ 151,473 
Adjustments to reconcile net income to net cash from operations provided by operating activities:
Amortization of patent formulations
5,091  6,399 
Amortization of other intangibles
30,890  30,547 
Inventory write-off and disposal
5,958   
Depreciation of fixed assets
233  87 
Amortization of debt issuance costs
2,955  2,084 
Deferred taxes
(4,532) 3,852 
Share-based compensation expense
5,454  3,119 
Loss on extinguishment of debt
18,803   
Other operating 147   
Changes in operating assets and liabilities, net of effects of acquisition (as applicable):
Accounts receivable, net
(52,507) (44,906)
Inventory
(57,132) (35,090)
Other current assets
6,344  (5,760)
Accounts payable
3,959  9,165 
Accrued expenses and other current liabilities
14,283  9,355 
Other assets/liabilities (8,578)  
Net cash provided by operating activities 181,807  130,325 
Cash flows from investing activities:
Purchase of property and equipment
(100) (859)
Purchase of software
(1,612)  
Purchase of investment in nonconsolidated entity
  (4,500)
Net cash used in investing activities (1,712) (5,359)
Cash flows from financing activities:
Proceeds from the issuance of stock
  633 
Proceeds from exercise of stock options
814   
Payments for shares withheld and retired for taxes and exercise price for stock-settled stock appreciation rights
(572)  
Principal payments for 2022 Term Loan Facility, and principal payments and prepayment fees for 2020 Term Loan Facility
(780,382) (15,084)
Proceeds from the issuance of 2022 Term Loan Facility
675,000   
Payments of debt issuance costs
(11,944)  
Net cash used in financing activities (117,084) (14,451)
Net increase in cash and cash equivalents 63,011  110,515 
Cash and cash equivalents - beginning of period 186,388  10,964 
Cash and cash equivalents - end of period $ 249,399  $ 121,479 
Supplemental disclosure of cash flow information:
Cash paid for income taxes
$ 54,904  $ 16,105 
Cash paid during the year for interest
21,716  43,968 
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 related to the tax receivable agreement
  232,893 
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
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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.

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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

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 the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative as a hedge and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (in a fair value hedge) or the earnings effect of the hedged forecasted transactions (in a cash flow hedge). The Company may enter into derivative contracts that are intended to
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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.
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
12


information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. The amendments in the ASU are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted this accounting standard on July 1, 2022. Adoption of this standard did not have a material impact on its Condensed Consolidated Financial Statements.
NOTE 3 – NET SALES
The Company distributes products 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 Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net sales by Channel:
Professional $ 62,991  $ 74,978  $ 245,539  $ 201,855 
Specialty retail 74,191  46,343  202,692  116,201 
DTC 39,272  40,303  125,322  113,811 
Total Net sales $ 176,454  $ 161,624  $ 573,553  $ 431,867 
Revenue by major geographic region is based upon the geographic location of customers who purchase our products, however the majority of net sales are transacted in U.S. Dollars, the Company’s functional and reporting currency. During the three and nine months ended September 30, 2022 and 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 Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Net sales by Geography:
United States $ 89,543  $ 93,611  $ 330,973  $ 252,224 
International 86,911  68,013  242,580  179,643 
Total Net sales $ 176,454  $ 161,624  $ 573,553  $ 431,867 
United Kingdom (“U.K.”) net sales for the three and nine months ended September 30, 2022 were 13% and 10% of total net sales, respectively, and net sales for the three and nine months ended September 30, 2021 were 15% of total net sales. No other International country exceeds 10% of total net sales.
NOTE 4 - INVENTORY
Inventory as of September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022 December 31, 2021
Raw materials $ 37,173  $ 20,852 
Finished goods 114,110  77,547 
Inventory $ 151,283  $ 98,399 

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NOTE 5 - INVESTMENT IN NONCONSOLIDATED ENTITY

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

September 30, 2022 December 31, 2021
Capital contributions, net of distributions and impairments $ 4,500  $ 4,500 
Total investments in and advances to nonconsolidated entity $ 4,500  $ 4,500 
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are comprised of the following:
September 30, 2022
Estimated
Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Brand name 25 years $ 952,000  $ (103,874) $ 848,126 
Product formulations 15 years 136,000  (24,732) 111,268 
Customer relationships 20 years 53,000  (7,228) 45,772 
Software 3 years 2,503  (402) 2,101 
Total finite-lived intangibles
1,143,503  (136,236) 1,007,267 
Goodwill Indefinite 168,300  —  168,300 
Total goodwill and other intangibles
$ 1,311,803  $ (136,236) $ 1,175,567 
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, customer relationships and software is recorded to Amortization of other intangible assets in the Condensed Consolidated Statements of Operations and Comprehensive Income. A portion of Amortization of patented formulations is capitalized to Inventory in the Condensed Consolidated Balance Sheets, and the remainder is recorded to Amortization of patented formulations in the Condensed Consolidated Statements of Operations
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and Comprehensive Income. Amortization of the Company’s definite-lived intangible assets for the three and nine month periods ended September 30, 2022 and 2021 is as follows:
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 September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022 December 31, 2021
Accrued interest $ 8,344  $  
Deferred revenue 4,890  5,022 
Accrued freight 4,823  636 
Payroll liabilities 4,418  6,302 
Accrued other 3,556  5,372 
Accrued expenses and other current liabilities $ 26,031  $ 17,332 
NOTE 8 - LONG-TERM DEBT
The Company’s Long-Term Debt as of September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022 December 31, 2021
Long-term debt
Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”)(1)
$675 Million 7-Year Senior Secured Term Loan Facility (the “2022 Term Loan Facility”)
$ 671,626  $  
$150 Million 5-Year Senior Secured Revolving Credit Facility (the “2022 Revolver”)(2)
   
Credit Agreement, dated as of January 8, 2020, as amended (the “2020 Credit Agreement”)(1)
$800 Million 6-Year Senior Secured Term Loan Facility, as amended (the “2020 Term Loan Facility”)
  769,235 
$51 Million 5-Year Senior Secured Revolving Credit Facility, as amended (the “2020 Revolver”)(2)
   
Debt issuance costs (9,214) (11,033)
Total term loan debt
662,412  758,202 
Less: Current portion (6,750) (20,112)
Long-term debt, net of debt issuance costs and current portion
$ 655,662  $ 738,090 
(1) The 2022 Credit Agreement refinanced and replaced the 2020 Credit Agreement.
(2) As of September 30, 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.
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The interest rate on outstanding debt under the 2022 Term Loan Facility was 6.1% as of September 30, 2022, and the interest rate on outstanding debt under the 2020 Term Loan Facility was 7.5% as of December 31, 2021. The interest rates for all facilities 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 $10,499 and $30,653 for the three and nine months ended September 30, 2022, respectively, and $14,987 and $46,052 for the three and nine months ended 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 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 September 30, 2022, the carrying amount of the Company’s long-term debt under the 2022 Credit Agreement was $662.4 million, and the fair value of the Company’s long-term debt was $646.4 million. As of December 31, 2021, the carrying amount of the Company’s long-term debt under the 2020 Credit Agreement approximated its fair value, as the stated rate approximated market rates for loans with similar terms.

Interest Rate Cap Transaction

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

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

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

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
16


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 nine months ended 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 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 256,846 shares of its common stock as a result of stock options exercised during the nine months ended 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 nine months ended September 30, 2022, the Company paid CI&T $153 and $179, respectively. During the three and nine months ended September 30, 2021, the Company paid CI&T $30 and $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 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.
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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
Nine Months Ended
September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
Numerator:
Net Income $ 60,763  $ 56,591  $ 210,439  $ 151,473 
Denominator:
Weighted average common shares outstanding – basic
649,099,780  648,124,642  648,963,625  648,082,081 
Dilutive common equivalent shares from equity options 42,157,874  42,587,140  42,622,162  41,026,191 
Weighted average common shares outstanding – diluted
691,257,654  690,711,782  691,585,787  689,108,272 
Net income per share:
Basic $ 0.09  $ 0.09  $ 0.32  $ 0.23 
Diluted $ 0.09  $ 0.08  $ 0.30  $ 0.22 
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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 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 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. The DTC channel and specialty retail channel have both contributed to the success of our omnichannel model. Our DTC channel, comprised of OLAPLEX.com and sales through third-party e-commerce platforms, also provides us with the opportunity to engage directly with our consumers to provide powerful feedback that drives decisions we make around new product development.
Third quarter 2022 financial highlights
Net sales increased 9.2% from $161.6 million in the three months ended September 30, 2021 to $176.5 million in the three months ended September 30, 2022. For the three months ended September 30, 2022, net sales in our professional channel decreased 16.0%, our specialty retail channel grew 60.1% and our DTC channel decreased 2.6%, in each case as compared to the three months ended September 30, 2021. We believe the decreases in our professional and DTC channels were driven by macroeconomic concerns that impacted the stylist community, key customers reducing inventory levels in response to lower sell through trends, and increased competitive activity including discounting.
Gross profit margin, gross profit as a percentage of sales, decreased from 78.9% in the three months ended September 30, 2021 to 73.6% in the three months ended September 30, 2022, primarily as a result of product mix, higher input costs for warehousing, transportation, raw materials, and one-time labeling stock write-off and disposal costs.
19


Operating expenses for the three months ended September 30, 2022 increased by 1.7%, as compared to the three months ended September 30, 2021, primarily as a result of increased sales and marketing expense, public company compliance and other related expenses, higher payroll due to workforce expansion, and higher professional fees, partially offset by one-time initial public offering costs and cash settled unit costs incurred in the three months ended September 30, 2021.
Operating income increased from $87.0 million for the three months ended September 30, 2021 to $88.7 million for the three months ended September 30, 2022.
Net income increased from $56.6 million for the three months ended September 30, 2021 to $60.8 million for the three months ended September 30, 2022.
Year-to-date 2022 financial highlights
Net sales increased 32.8% from $431.9 million in the nine months ended September 30, 2022 to $573.6 million in the nine months ended September 30, 2022. For the nine months ended September 30, 2022, net sales in our professional channel grew 21.6%, our specialty retail channel grew 74.4%, and our DTC channel grew 10.1%, in each case as compared to the nine months ended September 30, 2021.
Gross profit margin decreased from 79.1% in the nine months ended September 30, 2021 to 74.5% in the nine months ended September 30, 2022, primarily as a result of product mix, higher input costs for raw materials, warehousing, and transportation, as well as one-time inventory and labeling stock write-off and disposal costs.
Operating expenses for the nine months ended September 30, 2022 increased by 4.0%, as compared to the nine months ended September 30, 2021, primarily as a result of increased sales and marketing expense, higher payroll due to workforce expansion, higher professional fees, share-based compensation expense and distribution and fulfillment expenses, partially offset by one-time initial public offering costs, legal costs, and cash settled unit costs incurred in the nine months ended September 30, 2021.
Operating income increased from $235.7 million for the nine months ended September 30, 2021 to $317.3 million for the nine months ended September 30, 2022.
Net income increased from $151.5 million for the nine months ended September 30, 2021 to $210.4 million for the nine months ended September 30, 2022.
Results of operations
Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021
The following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income data for each of the periods presented:
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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 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)
For the Three Months Ended September 30,
2022 2021
$ Change
% Change
Net sales by Channel:
Professional $ 62,991  $ 74,978  $ (11,987) (16.0) %
Specialty retail 74,191  46,343  27,848  60.1  %
DTC 39,272  40,303  (1,031) (2.6) %
Total Net sales $ 176,454  $ 161,624  $ 14,830  9.2  %

The decline in professional was driven by volume decline from 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 September 30, 2021, including 1-liter sizes in No. 4 Bond Maintenance Shampoo, No.4C Bond Maintenance Clarifying Shampoo, and No. 5 Bond Maintenance Conditioner.

The growth in specialty retail was driven by the addition of new customers and the net impact of new products launched since September 2021, which include No. 9 Bond Protector Nourishing Hair Serum and No. 4C Bond Maintenance Clarifying Shampoo. A deceleration in sell-through trends amongst certain of the Company’s U.S. specialty retail customers, which the Company believes was related to increased 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 and international markets.
The decline in DTC was driven by the volume decline from decreased velocity at Olaplex.com, particularly in the U.S. The Company believes this decline was driven by deceleration in sell-through trends amongst certain of the Company’s third party DTC customers related to increased competitive activity including discounting, offset by a higher sell-in of holiday kits and pricing changes.
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Cost of Sales and Gross Profit
(in thousands)
For the Three Months Ended September 30,

$ Change % Change
2022 2021
Cost of sales $ 46,626  $ 34,142 

$ 12,484 

36.6  %
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 $0.5 million decrease in the amortization of our acquired patented formulations.

Our gross profit margin, gross profit as a percentage of sales, decreased from 78.9% in the three months ended September 30, 2021 to 73.6% in the three months ended September 30, 2022, as a result of increased input costs for warehousing, transportation and raw materials, which accounted for approximately four percentage points of the decline, inflation on product costs, and labeling stock write off and disposal costs, with the remainder relating to product and customer mix. Gross profit margin was also adversely impacted due to increased sales of holiday kits at a lower margin versus the individual products in the Company’s product portfolio, which was offset by the benefit of the product price increase effected by the Company during the three months ended September 30, 2022.
Operating Expenses
(in thousands)
For the Three Months Ended September 30,

2022 2021

$ Change
% Change
Selling, general, and administrative expenses $ 30,807  $ 30,257 

$ 550 

1.8  %
Amortization of other intangible assets 10,329  10,182 

147 

1.4  %
Total operating expenses $ 41,136 

$ 40,439 

$ 697  1.7  %
The increase in selling, general and administrative expenses was primarily driven by increases of $4.3 million in sales and marketing expense, $2.5 million in public company compliance and other related expenses, $2.2 million in payroll expenses driven by workforce expansion, and $2.1 million of professional fees, partially offset by $6.1 million in non-capitalizable IPO and strategic transition costs and $4.4 million in cash-settled units compensation expense recorded in the three months ended September 30, 2021.

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



2022 2021

$ Change
% Change
Interest expense, net $ (10,499) $ (14,987) $ 4,488 

(29.9) %

Interest expense decreased due to the Company refinancing its previously-existing 2020 Credit Agreement (as defined below) with a new 2022 Credit Agreement (as defined below) during the three months ended March 31, 2022, which reduced the Company’s outstanding debt and lowered the interest rate in respect thereof, in the three months ended September 30, 2022. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information.
Other Expense, Net
(in thousands)
For the Three Months Ended September 30,



2022 2021

$ Change
% Change
Other expense, net $ (2,251) $ (213)

$ (2,038) 956.8  %
22


Other expense, net increased primarily due to an increase in foreign currency transaction losses driven by strengthening of the U.S. dollar.
Income Tax Provision
(in thousands)
For the Three Months Ended September 30,



2022 2021

$ Change
% Change
Income tax provision $ 15,179  $ 15,252  $ (73) (0.5) %

The Company’s effective tax rate was 20.0% for the three months ended September 30, 2022, as compared to 21.2% for the three months ended September 30, 2021.The Company’s effective tax rate for the three months ended 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 net impact of state income taxes. The decrease in the effective tax rate from the comparative prior three months period is primarily due to the unfavorable impact of non-recurring IPO costs that were not deductible for tax purposes in the three months ended September 30, 2021.

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Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
The following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income data for each of the periods presented:
Nine Months Ended September 30,
2022 2021
(in thousands) % of Net sales (in thousands) % of Net sales
Net sales $ 573,553  100.0  % $ 431,867  100.0  %
Cost of sales:
Cost of product (excluding amortization) 140,999  24.6  83,859  19.4 
Amortization of patented formulations 5,091  0.9  6,399  1.5 
Total cost of sales 146,090  25.5  90,258  20.9 
Gross profit 427,463  74.5  341,609  79.1 
Operating expenses:
Selling, general, and administrative 79,232  13.8  75,323  17.4 
Amortization of other intangible assets 30,890  5.4  30,547  7.1 
Total operating expenses 110,122  19.2  105,870  24.5 
Operating income 317,341  55.3  235,739  54.6 
Interest expense (30,653) (5.3) (46,052) (10.7)
Other expense, net
Loss on extinguishment of debt (18,803) (3.3) —  — 
Other expense, net (3,852) (0.7) (417) (0.1)
Total other expense, net (22,655) (3.9) (417) (0.1)
Income before provision for income taxes
264,033  46.0  189,270  43.8 
Income tax provision 53,594  9.3  37,797  8.8 
Net income $ 210,439  36.7  $ 151,473  35.1 
Net Sales
(in thousands)
For the Nine Months Ended September 30,
2022 2021
$ Change
% Change
Net sales by Channel:
Professional $ 245,539  $ 201,855  $ 43,684  21.6  %
Specialty retail $ 202,692  $ 116,201  86,491  74.4  %
DTC $ 125,322  $ 113,811  11,511  10.1  %
Total Net sales $ 573,553  $ 431,867  $ 141,686