10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 9, 2023
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
FORM
10-Q
________________________
(Mark
One)
For
the quarterly period ended
March 31, 2023
or
For
the transition period from __________ to __________
Commission
File Number
001-40860
________________________
(Exact
name of registrant as specified in its charter)
________________________
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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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:
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Title
of Each Class
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Trading
Symbol(s)
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Name
of each exchange on which registered
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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.
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☒ | Accelerated Filer | ☐ | ||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company |
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| Emerging growth company |
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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 May 5, 2023, registrant had
654,276,766 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. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
1
GLOSSARY
As
used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the terms identified below have the
meanings specified below unless otherwise noted or the context indicates otherwise. Except where the
context otherwise requires or where otherwise indicated, the terms “OLAPLEX”
“we,” “us,” “our,” “the Company,” and “our business” refer to Olaplex
Holdings, Inc.
and its consolidated subsidiaries.
•“2020
Credit Agreement”
refers to the Credit Agreement, dated as of January 8, 2020, by and among Olaplex, Inc., Penelope
Intermediate Corp., MidCap Financial Trust, as administrative agent, collateral agent and swingline
lender, and each lender and issuing bank from time to time party thereto, as amended by the First
Incremental Amendment to the 2020 Credit Agreement, dated as of December 18, 2020. The 2020 Credit
Agreement was refinanced and replaced by the 2022 Credit Agreement.
•“2022
Credit Agreement”
refers to the Credit Agreement, dated as of February 23, 2022, by and among Olaplex, Inc., Penelope
Intermediate Corp, Goldman Sachs Bank USA, as administrative agent, collateral agent and swingline
lender, and each lender and issuing bank from time to time party thereto. The 2022 Credit Agreement
refinanced and replaced the 2020 Credit Agreement, and includes, among other things, a $675 million
seven-year senior-secured term loan facility (the “2022 Term Loan Facility”) and a $150 million
five-year senior-secured revolving credit facility (the “2022 Revolver”).
•“IPO”
refers to the initial public offering of shares of common stock of Olaplex Holdings, Inc., completed
on October 4, 2021.
•“Penelope”
refers to Penelope Holdings Corp., which is an indirect parent of Olaplex, Inc., the Company’s
primary operating subsidiary.
•“Penelope
Group Holdings”
refers to Penelope Group Holdings L.P., which prior to the IPO was the direct parent of Penelope.
•“Pre-IPO
Stockholders”
refers to, collectively, (i) the former limited partners of Penelope Group Holdings prior to the
Reorganization Transactions and (ii) holders of options to purchase shares of common stock of
Penelope that were vested as of the consummation of the Reorganization Transactions.
•“Pre-IPO
Tax Assets”
refers to, collectively, certain tax attributes existing prior to the IPO, including tax basis in
intangible assets and capitalized transaction costs relating to taxable years ending on or before
the date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the
date of the IPO), that are amortizable over a fixed period of time (including in tax periods
beginning after the IPO) and which are available to us and our wholly-owned subsidiaries.
•“Reorganization
Transactions”
refers to the internal reorganization completed in connection with our IPO, pursuant to which
Olaplex Holdings, Inc. became an indirect parent of Olaplex, Inc. For further information, see
“Reorganization Transactions” in “Note 1 - Nature of Operations and Basis of Presentation” to our
Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2022.
•“Tax
Receivable Agreement”
refers to the income tax receivable agreement entered into by the Company in connection with the
Reorganization Transactions under which the Company is required to pay the Pre-IPO Stockholders 85%
of the cash savings, if any, in United States (“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.
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q (the “Quarterly Report”) 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 that
are not historical or current 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.
The
forward-looking statements in this Quarterly Report reflect our current expectations and projections
about future events and financial trends that we believe may affect our business, financial condition
and results of operation. Examples of forward-looking statements include, among others, statements we
make regarding: our financial position and operating results; our business plans, strategies and
objectives, including sales and marketing investments; general economic and industry trends; our
business prospects; our reputation and brand; our product technology; future product development and
introduction, including entry into adjacent and other categories; growth and expansion opportunities,
including expansion in existing markets and into new markets; our sales channels and omnichannel
strategy; legal proceedings; future payments under our Tax Receivable Agreement; our customer base; our
supply chain and global distribution network; our information technology; our employees and culture; our
operational capabilities; and our expenses, working capital and liquidity. Forward-looking statements
are predictions based upon assumptions that may not prove to be accurate, and they are not guarantees of
future performance. As such, you should not place significant reliance on our forward-looking
statements. Neither we nor any other person assumes responsibility for the accuracy and completeness of
the forward-looking statements, including any such statements taken from third party industry and market
reports.
Forward-looking
statements involve known and unknown risks, inherent uncertainties and other factors that are difficult
to predict 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, including, without limitation, the following:
•our
ability to anticipate and respond to market trends and changes in consumer preferences and execute
on our growth strategies and expansion opportunities, including with respect to new product
introductions;
•our
ability to develop, manufacture and effectively and profitably market and sell future
products;
•our
ability to accurately forecast customer and consumer demand for our products;
•competition
in the beauty industry;
•our
ability to effectively maintain and promote a positive brand image and expand our brand
awareness;
•our
dependence on a limited number of customers for a large portion of our net sales;
•our
ability to attract new customers and consumers and encourage consumer spending across our product
portfolio;
•our
ability to successfully implement new or additional marketing efforts;
•our
relationships with and the performance of our suppliers, manufacturers, distributors and retailers
and our ability to manage our supply chain;
•impacts
on our business from political, regulatory, economic, trade and other risks associated with
operating internationally;
•our
ability to attract and retain senior management and other qualified personnel;
•our
reliance on our and our third-party service providers’ information technology;
•our
ability to maintain the security of confidential information;
•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
outcome of litigation and regulatory proceedings;
•the
impact of changes in federal, state and international laws, regulations and administrative
policy;
•our
existing and any future indebtedness, including our ability to comply with affirmative and negative
covenants under the 2022 Credit Agreement;
3
•our
ability to service our existing indebtedness and obtain additional capital to finance operations and
our growth opportunities;
•volatility
of our stock price;
•our
“controlled company” status and the influence of investment funds affiliated with Advent
International Corporation over us;
•the
impact of an economic downturn and inflationary pressures on our business;
•fluctuations
in our quarterly results of operations;
•changes
in our tax rates and our exposure to tax liability; and
•the
other factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the
year ended December 31, 2022 (the “2022 Form 10-K”) and in other documents that we file with the
U.S. Securities and Exchange Commission from time to time.
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 as anticipated, believed, estimated, expected, intended, planned or projected. We discuss many of
these risks in greater detail in the “Risk Factors” section of our 2022 Form 10-K. The forward-looking
statements included in this Quarterly Report are made only as of the date hereof. Unless required by
law, we neither intend nor assume any obligation to update these forward-looking statements for any
reason after the date of this Quarterly Report to conform these statements to actual results or to
changes in our expectations or otherwise.
4
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)
| March
31, 2023 |
December
31, 2022 |
||||||||||
| Assets | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
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|
Accounts
receivable, net of allowances of $
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| Inventory |
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| Other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Intangible assets, net |
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| Goodwill |
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| Other assets |
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| Total assets | $ |
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$ |
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| Liabilities and stockholders’ equity | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ |
|
$ |
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| Sales and income taxes payable |
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| Accrued expenses and other current liabilities |
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| Current portion of long-term debt |
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| Current portion of Related Party payable pursuant to Tax Receivable Agreement |
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| Total current liabilities |
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| Long-term debt |
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| Deferred tax liabilities |
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| Related Party payable pursuant to Tax Receivable Agreement |
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| Total liabilities |
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Contingencies
(Note 10)
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Stockholders’
equity (Notes 1 and 8):
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Common
stock, $
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Preferred
stock, $
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Additional
paid-in capital
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| Accumulated other comprehensive income |
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Retained
earnings
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|||||||||
| Total stockholders’ equity |
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|||||||||
| Total liabilities and stockholders’ equity | $ |
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$ |
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|||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
5
OLAPLEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(amounts
in thousands, except per share and share data)
(Unaudited)
| Three
Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
| Net sales | $ |
|
$ |
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|||||||
| Cost of sales: | |||||||||||
| Cost of product (excluding amortization) |
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| Amortization of patented formulations |
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| Total cost of sales |
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| Gross profit |
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| Operating expenses: | |||||||||||
| Selling, general, and administrative |
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| Amortization of other intangible assets |
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| Total operating expenses |
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| Operating income |
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| Interest expense, net |
(
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(
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| Other income (expense), net | |||||||||||
| Loss on extinguishment of debt |
|
(
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|||||||||
| Other income (expense), net |
|
(
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|||||||||
| Total other income (expense), net |
|
(
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|||||||||
|
Income
before provision for income taxes
|
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| Income tax provision |
|
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|||||||||
| Net income | $ |
|
$ |
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|||||||
| Net income per share: | |||||||||||
| Basic | $ |
|
$ |
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|||||||
| Diluted | $ |
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$ |
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|||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic |
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|||||||||
| Diluted |
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|||||||||
| Other comprehensive loss: | |||||||||||
| Unrealized loss on derivatives, net of income tax effect | $ | (
|
$ |
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|||||||
| Total other comprehensive loss: |
(
|
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|||||||||
| Comprehensive income: | $ |
|
$ |
|
|||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
6
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, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
| Net income | — | — | — | — |
|
|
|||||||||||||||||||||||||||||
| Exercise of stock-settled stock appreciation rights |
|
— |
|
— | — |
|
|||||||||||||||||||||||||||||
| Shares withheld and retired for taxes on exercise of stock-settled stock appreciation rights |
(
|
— |
(
|
— | — |
(
|
|||||||||||||||||||||||||||||
| Exercise of stock options |
|
|
|
— | — |
|
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — |
|
— | — |
|
|||||||||||||||||||||||||||||
| Unrealized loss on derivatives (net of taxes) | — | — | — |
(
|
— |
(
|
|||||||||||||||||||||||||||||
| Balance – March 31, 2023 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
| Shares (Note 1) |
Amount | Additional
Paid in Capital |
Accumulated Other Comprehensive Income |
Retained Earnings |
Total Equity | ||||||||||||||||||||||||||||||
| Balance - December 31, 2021 |
|
$ |
|
$ |
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$ |
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$ |
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$ |
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||||||||||||||||||||||||
| Net income | — | — | — | — |
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|||||||||||||||||||||||||||||
| Conversion of cash settled units to stock appreciation rights | — | — |
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— | — |
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|||||||||||||||||||||||||||||
| Exercise of stock-settled stock appreciation rights |
|
— |
|
— | — |
|
|||||||||||||||||||||||||||||
| Shares withheld and retired for taxes on exercise of stock-settled stock appreciation rights |
(
|
— |
(
|
— | — |
(
|
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — |
|
— | — |
|
|||||||||||||||||||||||||||||
| Balance – March 31, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
7
OLAPLEX HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(Unaudited)
| Three
Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
|
Cash
flows from operating activities:
|
|||||||||||
| Net income | $ |
|
$ |
|
|||||||
| Adjustments to reconcile net income to net cash from operations provided by operating activities: | |||||||||||
|
Amortization
of patent formulations
|
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Amortization
of other intangibles
|
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Inventory
write-off and disposal
|
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Depreciation
of fixed assets
|
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Amortization
of debt issuance costs
|
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Deferred
taxes
|
|
(
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|||||||||
|
Share-based
compensation expense
|
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|
|||||||||
|
Loss
on extinguishment of debt
|
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| Other operating |
|
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| Changes in operating assets and liabilities, net of effects of acquisition (as applicable): | |||||||||||
|
Accounts
receivable, net
|
|
(
|
|||||||||
|
Inventory
|
|
(
|
|||||||||
|
Other
current assets
|
(
|
|
|||||||||
|
Accounts
payable
|
(
|
|
|||||||||
|
Accrued
expenses and other current liabilities
|
|
|
|||||||||
| Other assets and liabilities |
(
|
|
|||||||||
| Net cash provided by operating activities |
|
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|||||||||
| Cash flows from investing activities: | |||||||||||
|
Purchase
of property and equipment
|
(
|
(
|
|||||||||
|
Purchase
of software
|
(
|
(
|
|||||||||
| Net cash used in investing activities |
(
|
(
|
|||||||||
| Cash flows from financing activities: | |||||||||||
|
Proceeds
from exercise of stock options
|
|
|
|||||||||
|
Payments
for shares withheld and retired for taxes and exercise price for stock-settled share
appreciation rights
|
(
|
(
|
|||||||||
|
Principal
payments for 2022 Term Loan Facility, and principal payments and prepayment fees for
2020 Term Loan Facility
|
(
|
(
|
|||||||||
|
Proceeds
from the issuance of 2022 Term Loan Facility
|
|
|
|||||||||
|
Payments
of debt issuance costs
|
|
(
|
|||||||||
| Net cash used in financing activities |
(
|
(
|
|||||||||
| Net increase (decrease) in cash and cash equivalents |
|
(
|
|||||||||
| Cash and cash equivalents - beginning of period |
|
|
|||||||||
| Cash and cash equivalents - end of period | $ |
|
$ |
|
|||||||
| Supplemental disclosure of cash flow information: | |||||||||||
|
Cash
paid for income taxes
|
$ |
|
$ |
|
|||||||
|
Cash
paid during the year for interest
|
$ |
|
$ |
|
|||||||
| Supplemental disclosure of noncash activities: | |||||||||||
|
Public
offering and strategic transition costs included in accounts payable and accrued
expenses
|
$ |
|
$ |
|
|||||||
|
Cash-settled
units liability reclassification to additional paid in capital
|
$ |
|
$ |
|
|||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
8
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”) is a Delaware
corporation that was incorporated on June 8, 2021. 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 prestige hair
care products to professional hair salons, retailers and everyday consumers. Olaplex develops,
manufactures and distributes a line of hair care products developed to address three key uses:
treatment, maintenance and protection.
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
2022 Annual Report on Form 10-K as filed on February 28, 2023.
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
stock appreciation rights (“SARs”); the fair value of and/or potential impairment of goodwill
and intangible assets for the Company’s reporting unit; the fair value of the Company’s interest
rate cap; useful lives of the Company’s tangible and intangible assets; allowance for
promotions; estimated income tax and tax receivable payments; the net realizable value of, and
demand for the Company’s 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 Condensed 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.
9
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, 2022.
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, the Company entered into the Tax Receivable Agreement under which the Company
will be required to pay to the Pre-IPO Stockholders
85 % of the federal, state or local tax cash savings that the Company
actually realizes on its taxable income following the IPO, as a result of the amortization of
intangible assets and capitalized transaction costs that existed as of the date of the IPO.
Under the Tax Receivable Agreement, generally the Company will retain the benefit of the
remaining
15 % of the applicable tax savings.
The
tax liability is based on current tax laws and the assumption that the Company and its
subsidiaries will earn sufficient taxable income to realize the full tax benefits subject to the
Tax Receivable Agreement. Updates to the Company’s blended state tax rate and allocation of U.S.
versus foreign sourced income may impact the established liability and changes to that
established liability would be recorded to other income (expense) in the period the Company made
the determination regarding the applicable change. The Company expects that future payments
under the Tax Receivable Agreement relating to the Pre-IPO Tax Assets could aggregate to $
222.1 million over the
13 -year remaining period under the Tax Receivable Agreement. Payments under
the Tax Receivable Agreement, which began in the year ended December 31, 2022, are not
conditioned upon the parties’ continued ownership of equity in the Company.
Reclassifications
Certain
amounts presented have been reclassified within “Note 6 - Accrued Expenses and Other Current
Liabilities” as of December
31, 2022
to conform with the current period presentation, including a prior year reclassification from
Other accrued expenses and current liabilities to Accrued advertising. The reclassifications had
no effect on the Company’s Total current liabilities.
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 third-party e-commerce customers and through its own
Olaplex.com website. As such, the Company’s
three business channels consist of professional, specialty retail and DTC
as follows:
|
For
the Three Months Ended
|
|||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Net sales by Channel: | |||||||||||
| Professional | $ |
|
$ |
|
|||||||
| Specialty retail |
|
|
|||||||||
| DTC |
|
|
|||||||||
| Total net sales | $ |
|
$ |
|
|||||||
10
Revenue
by major geographic region is based upon the geographic location of customers who purchase the
Company’s products. The majority of net sales are transacted in U.S. Dollars, the Company’s
functional and reporting currency. During the three months ended March 31,
2023 and March 31, 2022, the Company’s net sales to consumers in the United States and
International regions were as follows:
|
For
the Three Months Ended
|
|||||||||||
| March 31, 2023 |
March
31, 2022
|
||||||||||
| Net sales by Geography: | |||||||||||
| United States | $ |
|
$ |
|
|||||||
| International |
|
|
|||||||||
| Total net sales | $ |
|
$ |
|
|||||||
United
Kingdom (“U.K.”) net sales for the three months ended March 31, 2023 and March 31, 2022
were
9
% of total net sales. No international country exceeded 10% of total net sales for
the three months ended March 31, 2023 and March 31, 2022.
NOTE 4 - INVENTORY
Inventory
as of March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Raw materials and packaging components | $ |
|
$ |
|
|||||||
| Finished goods |
|
|
|||||||||
| Inventory | $ |
|
$ |
|
|||||||
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
and intangible assets are comprised of the following:
| March 31, 2023 | |||||||||||||||||||||||
|
Estimated Useful Life |
Gross Carrying Amount |
Accumulated
Amortization |
Net
Carrying
Amount
|
||||||||||||||||||||
| Brand name |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||
| Product formulations |
|
|
(
|
|
|||||||||||||||||||
| Customer relationships |
|
|
(
|
|
|||||||||||||||||||
| Software |
|
|
(
|
|
|||||||||||||||||||
|
Total
finite-lived intangibles
|
|
(
|
|
||||||||||||||||||||
| Goodwill | Indefinite |
|
— |
|
|||||||||||||||||||
|
Total
goodwill and other intangibles
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||
11
| December 31, 2022 | |||||||||||||||||||||||
|
Estimated Useful Life |
Gross Carrying Amount |
Accumulated
Amortization |
Net
Carrying
Amount
|
||||||||||||||||||||
| Brand name |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||
| Product formulations |
|
|
(
|
|
|||||||||||||||||||
| Customer relationships |
|
|
(
|
|
|||||||||||||||||||
| Software |
|
|
(
|
|
|||||||||||||||||||
|
Total
finite-lived intangibles
|
|
(
|
|
||||||||||||||||||||
| Goodwill | Indefinite |
|
— |
|
|||||||||||||||||||
|
Total
goodwill and other intangibles
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||
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 and Comprehensive
Income. Amortization of the Company’s
definite-lived intangible assets for the three months ended March 31, 2023 and 2022 is as
follows:
|
For
the Three Months Ended
|
|||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Amortization of patented formulations | $ |
|
$ |
|
|||||||
| Amortization expense, brand name and customer relationships |
|
|
|||||||||
| Amortization expense, software |
|
|
|||||||||
| Amortization of other intangible assets |
|
|
|||||||||
| Amortization of patented formulations capitalized to inventory | $ |
|
$ |
|
|||||||
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses as of March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued professional fees | $ |
|
$ |
|
|||||||
| Accrued legal settlement |
|
|
|||||||||
| Payroll liabilities |
|
|
|||||||||
| Deferred revenue |
|
|
|||||||||
| Accrued freight |
|
|
|||||||||
| Accrued advertising |
|
|
|||||||||
| Accrued interest |
|
|
|||||||||
| Other accrued expenses and current liabilities |
|
|
|||||||||
| Accrued expenses and other current liabilities | $ |
|
$ |
|
|||||||
During
the three months ended March 31, 2023, the Company accrued approximately $
3.9 million related to a pending settlement of a copyright matter. The
Company expects to recover this settlement amount under its general liability insurance policy. An
offset to the liability related to the insurance receivable is recorded in “Other current assets” on
the Company’s Condensed Consolidated Balance Sheet for the three months ended March 31,
2023.
12
NOTE 7 - LONG-TERM DEBT
The
Company’s Long-Term Debt as of March 31, 2023 and December 31, 2022 consisted of the
following:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Long-term debt | |||||||||||
| Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”) | |||||||||||
|
$
|
$ |
|
$ |
|
|||||||
|
$
|
|
|
|||||||||
| Debt issuance costs |
(
|
(
|
|||||||||
|
Total
term loan debt
|
|
|
|||||||||
| Less: Current portion |
(
|
(
|
|||||||||
|
Long-term
debt, net of debt issuance costs and current portion
|
$ |
|
$ |
|
|||||||
(1)
As
of March 31, 2023 and December 31, 2022, the Company did not have outstanding amounts
drawn on the 2022 Revolver, including letters of credit and swingline loan sub-facilities. As of
March 31, 2023, the Company had $
150 million of available borrowing capacity under the 2022
Revolver.
The
interest rate on outstanding debt under the 2022 Term Loan Facility was
8.4 % per annum as of March 31, 2023. The interest rates for all facilities
under the 2022 Credit Agreement are calculated based upon the Company’s election among (a) adjusted
term SOFR plus an additional interest rate spread, (b) with respect to a borrowing in Euros under
the 2022 Revolver, a euro interbank offered rate plus an additional interest rate spread, or (c) an
“Alternate Base Rate” (as defined in the 2022 Credit Agreement) plus an additional interest rate
spread.
Interest
expense, net, inclusive of debt amortization, for the three months ended March 31, 2023 and
March 31, 2022 was $
10,543 and $
11,460 respectively.
The
fair value of the Company’s long-term debt is based on the market value of its 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 March 31, 2023, the carrying
amount of the Company’s long-term debt under the 2022 Credit Agreement was $
659.8 million, and the fair value of the Company’s long-term debt was $
593.1 million. As of December 31, 2022, the carrying amount of the
Company’s long-term debt under the 2022 Credit Agreement was $
662.8 million, and the fair value of the Company’s long-term debt was $
624.6 million.
The
2022 Credit Agreement includes, among other things, customary negative and affirmative covenants
(including reporting, financial and maintenance covenants) and events of default (including a change
of control) for facilities of this type. In addition, the 2022 Credit Agreement includes a springing
first lien leverage ratio financial covenant, which is applicable only to the lenders under the 2022
Revolver. The Company was in compliance with its financial covenants on March 31, 2023 and
December 31, 2022. The 2022 Term Loan Facility and the 2022 Revolver are secured by
substantially all of the assets of Olaplex, Inc. and the other guarantors, subject to certain
exceptions and thresholds.
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.
13
The
table below presents the fair value of the Company’s derivative financial instruments, which are
classified within Other assets on the Company’s Condensed Consolidated Balance Sheets as of
March 31, 2023 and December 31, 2022.
| March 31, 2023 | December 31, 2022 | ||||||||||
| Fair value, interest rate cap asset | $ |
|
$ |
|
|||||||
During
the three months ended March 31, 2023, the Company’s interest rate cap generated an
unrecognized pre-tax loss of $
0.7 million, recorded in Accumulated Other Comprehensive Income on the
Company’s Condensed Consolidated Balance Sheets. The Company also recognized a $
0.6 million reduction in interest expense related the Company’s receipt of
funds as a result of an interest rate cap settlement with the Company’s counterparty, partially
offset by $
0.3 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 months ended March 31, 2022.
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 evaluated qualitatively on a quarterly basis for effectiveness. Changes in
fair value are recorded in Accumulated Other Comprehensive Income and periodic settlements of the
interest rate cap will be recorded in interest expense along with the interest on amounts
outstanding under the 2022 Term Loan Facility. Payment of the up-front premium of the interest rate
cap is included within Other assets and 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 8 - EQUITY
During
the three months ended March 31, 2023, the Company issued
109,620 shares of its common stock upon vesting and settlement of net
stock-settled SARs. The Company repurchased
83,501 of outstanding shares of its common stock for the net settlement of SARs
for payment of taxes related to such SARs, which were accounted for as a share retirement.
Additionally, the Company issued
3,659,267 shares of its common stock as a result of stock options
exercised.
During
the three months ended March 31, 2022, the Company converted
886,950 cash-settled units into SARs, with a fair value liability of $
1,632 reclassified from Accrued expenses and other current liabilities to
Additional paid-in capital. The Company issued
117,180 shares of its common stock upon vesting and settlement of net
stock-settled 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, which were accounted for as a share retirement.
NOTE 9 - 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 holder of a majority of the Company’s common stock (collectively the “Advent
Funds”), hold a greater than 10% equity interest. During the three months ended March 31, 2023,
the Company paid CI&T $
6 . During the three months ended March 31, 2022, the Company paid CI&T
$
5 . The Company engaged CI&T for services related to the development,
maintenance and enhancement of the Olaplex professional application, as well as other digital
marketing services, all of which were negotiated on an arm’s length basis and on market
terms.
Tax
Receivable Agreement
NOTE 10 - CONTINGENCIES
14
Pending Legal Proceedings:
On
November 17, 2022, a putative securities class action was filed against the Company and certain of
its current and former officers and directors in the United States District Court for the Central
District of California, captioned Lilien v. Olaplex Holdings, Inc. et al., No. 2:22-cv-08395. A
consolidated complaint was filed on April 28, 2023, which names as additional defendants the
underwriters for the Company’s IPO and various stockholders that sold shares of common stock of the
Company in the IPO. The action is brought on behalf of a putative class of purchasers of the
Company’s common stock in or traceable to the Company’s IPO and asserts claims under Sections 11,
12, and 15 of the Securities Act of 1933. The action seeks certification of the putative class,
compensatory damages, attorneys’ fees and costs, and any other relief that the court determines is
appropriate. The Company expects the underwriter defendants to notify the Company of their intent to
seek indemnification from the Company pursuant to the IPO underwriting agreement regarding the
claims asserted in this action. The Company intends to vigorously defend the pending lawsuit.
On
February 9, 2023,
twenty-eight plaintiffs filed Albahae,
et al. v. Olaplex Holdings, Inc., et al.,
No. 2:23-cv-00982, a complaint alleging personal and economic injury and asserting claims for breach
of warranty, negligence/gross negligence, products liability, unjust enrichment, and violations of
California False Advertising Law and Unfair Competition Law, against the Company and Cosway Company,
Inc., the Company’s primary contract manufacturer, in the United States District Court for the
Central District of California. On March 2, 2023, the plaintiffs amended the complaint to include
seventy-three additional plaintiffs. The plaintiffs allege that certain
ingredients used in some Company products have purportedly caused irritation or posed a hazard to
consumers, and that the Company engaged in misrepresentation with respect to those products. The
plaintiffs seek actual and consequential damages, punitive damages, restitution in the form of
disgorgement of profits, attorneys’ fees and costs, and any other relief that the court determines
is appropriate. The Company intends to vigorously defend the pending lawsuit. On April 17, 2023, the
Company moved to dismiss the plaintiffs’ claims.
Any
potential loss associated with these pending legal proceedings is not probable or reasonably
estimable at this time.
As
of March 31, 2023 and December 31, 2022, the Company was 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.
NOTE 11 – 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 | |||||||||||
|
March
31, 2023 |
March
31, 2022 |
||||||||||
| Numerator: | |||||||||||
| Net Income | $ |
|
$ |
|
|||||||
| Denominator: | |||||||||||
|
Weighted
average common shares outstanding – basic
|
|
|
|||||||||
| Dilutive common equivalent shares from equity options |
|
|
|||||||||
|
Weighted
average common shares outstanding – diluted
|
|
|
|||||||||
| Net income per share: | |||||||||||
| Basic | $ |
|
$ |
|
|||||||
| Diluted | $ |
|
$ |
|
|||||||
15
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 and with our audited Consolidated Financial Statements included in the 2022 Form 10-K.
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 and with our audited Consolidated Financial Statements included in the 2022 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 and in “Item 1A. – Risk Factors” in the 2022 Form
10-K.
Company Overview
OLAPLEX
is an innovative, science-enabled, technology-driven beauty company. Since our inception in 2014, we
have focused on delivering effective, patent-protected and proven product performance in the prestige
hair care category. Our mission is to blaze new paths to well-being that ignite confidence from the
inside out.
OLAPLEX
disrupted and revolutionized the prestige hair care category by creating the bond-building space in
2014. We have grown from an initial assortment 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 developed to address three key uses: treatment, maintenance and
protection. Our patent-protected bond-building technology relinks disulfide bonds in human hair that are
destroyed via chemical, thermal, mechanical, environmental and aging processes. Our current product
portfolio comprises sixteen 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
historically 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. Through this channel, professional hairstylists introduce consumers to our
products and, we believe, influence consumer purchasing decisions. Our specialty retail channel works to
increase awareness of, and education for, our products and expand consumer penetration. 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.
Four Strategic Pillars
We
are focused on executing against four key strategic pillars that we believe will support our long-term
growth. These include igniting our global brand, disrupting with innovation, amplifying channel coverage
and charting new geographies. These key strategic pillars are supported by our efforts to build
capabilities and infrastructure that we believe will enable our aspirations.
Igniting our Global Brand
We
believe we have built one of the most powerful brands in the prestige hair care category. We plan to
continue growing awareness of our global brand, in an effort to deepen connections with existing
customers as well as reach new audiences. We will also continue to invest in enhancing our brand equity.
Our marketing model remains focused on implementing high return on investment, performance marketing
activities aimed at fueling growth. Key levers of our marketing include organic social media
activations, strategic paid media, education and training regarding our brand, community engagement with
our professional hairstylists, influencer partnerships, and retailer activations such as sampling and
in-store events.
Disrupting with Innovation
We
believe we have a strong pipeline of disruptive innovation that leverages our science-based technology
and patented Bis-amino ingredient. We plan to launch two-to-four products annually over the next five
years. To support this pipeline, we intend to continue to invest in research and development to
strengthen our internal innovation capabilities. In March 2023, we entered our first hair care adjacency
with the launch of LASHBOND, an eyelash-enhancing serum. We remain excited about the opportunity to
enter additional hair care adjacent categories and also other categories where our patents can serve as
a foundation for entry that we believe is supported by consumer trust in our brand.
16
Amplifying Channel Coverage
In
our professional channel, we have undertaken efforts to support strong relationships with the
hairstylist community and maintain brand awareness by increasing our field support efforts, deepening
partnerships with distributors and customers, and refreshing educational content. We also intend to
pursue opportunities to further penetrate premium and prestige salons. In specialty retail, we are
enhancing visual merchandising in stores and deploying targeted communications intended to enable new
customer acquisition. For our DTC business, we are evolving the digital experiences on Olaplex.com and
third party e-commerce websites. On Olaplex.com, we expect to continue to invest in site enhancements
and more advanced personalization efforts.
Charting New Geographies
We
believe there is substantial opportunity to grow globally. Our priority international regions are
currently key markets in Europe and Asia. Across Europe and other regions, we aim to implement our
business model by first establishing a strong professional channel and then complementing that channel
through entry into specialty retail and DTC. In Asia, we intend to partner with distributors in the
region that will support the omni-channel distribution and sales for our brand.
Supporting our Four Strategic Pillars
To
enable these four key growth pillars, we intend to continue to build our capabilities and
infrastructure. These efforts extend across our organization, including focusing on cultivating top
talent and building a strong corporate culture, evolving our operational capabilities as we scale, and
ensuring that we have financial structure, technology and data to support our growth.
Business Environment & Trends
We
continue to monitor the effects of the global macro-economic environment, including lower customer
demand, the risk of recession, increasing inflationary pressures, competitive product discounting,
currency volatility, rising interest rates, social and political issues, geopolitical tensions and
regulatory matters. We also are mindful of inflationary pressures on our consumers, and are monitoring
the impact that increasing inflationary pressures may have on consumer spending and preferences and
inventory rebalancing at our customers in an increasingly competitive industry.
Competition
in the beauty industry is based on a variety of factors, including innovation, product efficacy,
accessible pricing, brand recognition and loyalty, service to the consumer, promotional activities,
advertising, special events, new product introductions, e-commerce initiatives and other activities. In
recent years, we have seen increased competitive activity including discounting in the prestige hair
care category, which may continue in a heightened inflationary environment. We believe we have a
well-recognized and strong reputation in our core markets and that the quality and performance of our
products, our emphasis on innovation, and our engagement with our professional and consumer communities
position us to compete effectively.
Overview of first quarter 2023 financial results
•Net
sales decreased 38.9% from $186.2 million in the three months ended March 31, 2022 to $113.8
million in the three months ended March 31, 2023. For the three months ended March 31,
2023, net sales in our professional channel decreased 37.2%, our specialty retail channel decreased
45.8%, and our DTC channel decreased 31.9%, in each case as compared to the three months ended
March 31, 2022.
•Gross
profit margin decreased from 75.8% in the three months ended March 31, 2022 to 71.0% in the
three months ended March 31, 2023, primarily as a result of higher input costs for raw
materials and warehousing, a reserve for product obsolescence, and product and channel mix,
partially offset by inventory write-off and disposal costs recorded during the three months ended
March 31, 2022.
•Operating
expenses for the three months ended March 31, 2023 increased by 38.9%, as compared to the three
months ended March 31, 2022, primarily as a result of increased sales and marketing expense,
higher payroll due to workforce expansion, and higher professional fees and other benefit costs,
partially offset by decreased distribution and fulfillment expenses.
•Operating
income decreased from $108.6 million for the three months ended March 31, 2022 to $35.6 million
for the three months ended March 31, 2023.
•Net
income decreased from $62.0 million for the three months ended March 31, 2022 to $21.0 million
for the three months ended March 31, 2023.
17
Results of operations
Comparison of the Three Months Ended March 31, 2023 to the Three
Months Ended March 31, 2022
The
following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income
data for each of the periods presented:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | % of Net sales | (in thousands) | % of Net sales | ||||||||||||||||||||
| Net sales | $ | 113,787 | 100.0 | % | $ | 186,196 | 100.0 | % | |||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of product (excluding amortization) | 31,235 | 27.5 | 43,222 | 23.2 | |||||||||||||||||||
| Amortization of patented formulations | 1,742 | 1.5 | 1,769 | 1.0 | |||||||||||||||||||
| Total cost of sales | 32,977 | 29.0 | 44,991 | 24.2 | |||||||||||||||||||
| Gross profit | 80,810 | 71.0 | 141,205 | 75.8 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general, and administrative | 34,924 | 30.7 | 22,314 | 12.0 | |||||||||||||||||||
| Amortization of other intangible assets | 10,323 | 9.1 | 10,266 | 5.5 | |||||||||||||||||||
| Total operating expenses | 45,247 | 39.8 | 32,580 | 17.5 | |||||||||||||||||||
| Operating income | 35,563 | 31.3 | 108,625 | 58.3 | |||||||||||||||||||
| Interest expense | (10,543) | (9.3) | (11,460) | (6.2) | |||||||||||||||||||
| Other income (expense), net | |||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | (18,803) | (10.1) | |||||||||||||||||||
| Other income (expense), net | 242 | 0.2 | (377) | (0.2) | |||||||||||||||||||
| Total other income (expense), net | 242 | 0.2 | (19,180) | (10.3) | |||||||||||||||||||
|
Income
before provision for income taxes
|
25,262 | 22.2 | 77,985 | 41.9 | |||||||||||||||||||
| Income tax provision | 4,298 | 3.8 | 16,024 | 8.6 | |||||||||||||||||||
| Net income | $ | 20,964 | 18.4 | % | $ | 61,961 | 33.3 | % | |||||||||||||||
Net
Sales
| (in thousands) |
For
the Three Months Ended March 31,
|
||||||||||||||||||||||
| 2023 | 2022 |
$
Change
|
%
Change
|
||||||||||||||||||||
| Net sales by Channel: | |||||||||||||||||||||||
| Professional | $ | 48,397 | $ | 77,059 | $ | (28,662) | (37.2) | % | |||||||||||||||
| Specialty retail | 34,859 | 64,272 | (29,413) | (45.8) | % | ||||||||||||||||||
| DTC | 30,531 | 44,865 | (14,334) | (31.9) | % | ||||||||||||||||||
| Total net sales | $ | 113,787 | $ | 186,196 | $ | (72,409) | (38.9) | % | |||||||||||||||
Total
net sales declined 38.9% in the three months ended March 31, 2023 compared to the same period in 2022
which the Company attributes primarily to a lower baseline level of demand, a negative year over year
impact of approximately $21 million from inventory rebalancing at certain professional and
specialty retail customers, and lapping $10 million of inventory pipeline sold to a key specialty
retailer in the first quarter of 2022. The lower baseline demand across each of our three channels was
partially offset by our launches of LASHBOND™ Serum, which is our first hair care adjacent product, No.
4D Clean Volume Detox Dry Shampoo, and prior year launches of 1-Liter sizes of our No. 4 Bond
Maintenance Shampoo, No. 5 Bond Maintenance Conditioner, and No. 4C Bond Maintenance Clarifying Shampoo,
as well as the impact of new customers within each channel. Net sales declined primarily in the United
States and the United Kingdom, partially offset by increases in Italy.
18
Cost
of Sales and Gross Profit
| (in thousands) |
For
the Three Months Ended March 31,
|
|
$ Change | % Change | |||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cost of sales | $ | 32,977 | $ | 44,991 |
|
$ | (12,014) |
|
(26.7) | % | |||||||||||||
| Gross profit | $ | 80,810 | $ | 141,205 |
|
$ | (60,395) |
|
(42.8) | % | |||||||||||||
Our
cost of sales decreased primarily due to declining product sales in the three months ended
March 31, 2023, and a $4.3 million expense recorded in the three months ended March 31, 2022 for
inventory write-off and disposal costs related to unused stock of a product that the Company
reformulated in June 2021 as a result of regulation changes in the European Union. These decreases were
partially offset by increases in cost of sales resulting from inflationary pressures and a
$2.6 million reserve for product obsolescence recorded during the three months ended March 31,
2023.
As
a result of the activity described above regarding Net sales and Cost of sales, our gross profit margin
decreased from 75.8% in the three months ended March 31, 2022 to 71.0% in the three months ended
March 31, 2023.
Operating
Expenses
| (in thousands) | For the Three Months Ended March 31, |
|
|||||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Selling, general, and administrative expenses | $ | 34,924 | $ | 22,314 |
|
$ | 12,610 |
|
56.5 | % | |||||||||||||
| Amortization of other intangible assets | 10,323 | 10,266 |
|
57 |
|
0.6 | % | ||||||||||||||||
| Total operating expenses | $ | 45,247 |
|
$ | 32,580 |
|
$ | 12,667 | 38.9 | % | |||||||||||||
Selling,
general and administrative expenses increased primarily due to increased investments in sales and
marketing of $8.6 million and higher payroll of $3.6 million driven by workforce expansion,
both of which are expected to support our four strategic pillars. The Company also had increases of
$1.9 million in professional fees and other benefit costs. These increases were partially offset by
a $1.9 million decrease in distribution and fulfillment costs related to the decrease in product
sales volume.
Interest
Expense, Net
| (in thousands) |
For
the Three Months Ended March 31,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Interest expense, net | $ | (10,543) | $ | (11,460) | $ | 917 |
|
(8.0) | % | ||||||||||||||
Interest
expense, net decreased due to the Company refinancing its 2020 Credit Agreement with a new 2022 Credit
Agreement in February 2022, which reduced the Company’s outstanding debt and lowered the interest rate
in respect thereof in the three months ended March 31, 2023. See “Liquidity and Capital Resources
Requirements – Credit Facility” for additional information on the Company’s outstanding debt. The
Company also benefited in the first quarter of 2023 from $3.4 million of interest income from
highly liquid investments with a maturity of three months or less.
Other
Income (Expense), Net
| (in thousands) |
For
the Three Months Ended March 31,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Loss on extinguishment of debt | $ | — | $ | (18,803) | $ | 18,803 | — | % | |||||||||||||||
| Other income (expense), net | 242 | $ | (377) | $ | 619 | (164.2) | % | ||||||||||||||||
| Total other expense, net | $ | 242 | $ | (19,180) |
|
$ | 19,422 | (101.3) | % | ||||||||||||||
As
a result of the debt refinancing that occurred during the three months ended March 31, 2022, as
described above, the Company recorded an $18.8 million loss on extinguishment of debt in that period.
Other Income (expense), net increased in the three months ended March 31, 2023 primarily due to an
increase in foreign currency transaction gains driven by the performance of the U.S. dollar.
19
Income
Tax Provision
| (in thousands) |
For
the Three Months Ended March 31,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Income tax provision | $ | 4,298 | $ | 16,024 | $ | (11,726) | (73.2) | % | |||||||||||||||
Our
effective tax rate was 17.0% for the three months ended March 31, 2023, as compared to 20.5% for
the three months ended March 31, 2022. The decrease in the effective tax rate for the three months
ended March 31, 2023 is primarily due to a discrete tax benefit from stock option exercises during
that period. Additionally, the Company’s effective tax rate in the three months ended March 31,
2023 and 2022 was 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.
Tax
Receivable Agreement
The
tax liability is based on current tax laws and the assumption that the Company and its subsidiaries will
earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement.
Updates to the blended state tax rate and allocation of U.S. versus foreign sourced income may impact
the established liability and changes would be recorded to other income (expense) in the period we made
the determination. The Company expects that future payments under the Tax Receivable Agreement relating
to the Pre-IPO Tax Assets could aggregate to $222.1 million over the 13-year remaining period under the
Tax Receivable Agreement. Payments under the Tax Receivable Agreement, which began in the year ended
December 31, 2022, are not conditioned upon the parties’ continued ownership of the Company. The
remaining Tax Receivable Agreement payment obligation as
of March 31,
2023
is $222.1 million, of which $205.7 million was recorded in long term liabilities and $16.4 million was
recorded in current liabilities.
Financial Condition, Liquidity and Capital Resources
Overview
Our
primary recurring source of cash is the collection of proceeds from the sale of our products to our
customers, including cash periodically collected in advance of delivery or performance.
Our
primary use of cash is for working capital and payment of our operating costs, which consist primarily
of employee-related expenses as well as general operating expenses for marketing, fulfillment costs of
customer orders, overhead costs, capital expenditures and debt servicing. We also utilize cash for
strategic investments. Fluctuations in working capital are primarily caused by customer demand of our
product, timing of when a retailer rearranges or restocks our products, timing of inventory purchases,
and timing of our payables and expenses. Capital expenditures typically vary and are currently limited,
and future capital expenditure requirements depend on strategic initiatives selected for the fiscal
year, including investments in infrastructure, expansion into new national and international
distributors and expansion of our customer base.
A
considerable portion of our operating income is earned outside the U.S.; however, the majority of our
bank deposits are held within the U.S.
As
of March 31, 2023, we had $369.3 million of cash and cash equivalents. In addition, as of
March 31, 2023, we had borrowing capacity of $150.0 million under the 2022 Revolver, plus $136.0
million of working capital excluding cash and cash equivalents for a combined liquidity position
of
$655.3
million.
20
Cash Flows
The
following table summarizes our cash flows for the periods presented:
|
For
the Three Months Ended March 31,
|
|||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 48,089 | $ | 71,969 | |||||||
| Investing activities | (631) | (489) | |||||||||
| Financing activities | (926) | (114,521) | |||||||||
| Net increase (decrease) in cash and cash equivalents: | $ | 46,532 | $ | (43,041) | |||||||
Operating Activities
The
decrease in net cash provided by operating activities during the three months ended March 31,
2023 compared to the same period in 2022
was primarily a result of a decrease in net income of $41.0 million, changes in working capital and
adjusting items to Operating Cash Flows to reconcile to Net income from operations, partially offset by
the loss on extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit
Agreement, as well as inventory write-offs and disposal adjustments of $4.3 million, in each case
recorded in the three months ended March 31, 2022, and other changes in working capital between the
comparative periods.
Investing Activities
The
Company’s investing activities included purchases of software, property and equipment during the three
months ended March 31,
2023 and 2022.
Financing Activities
The
Company’s financing activities for the three months ended March 31,
2023 primarily consisted of cash outflows for payments on our long-term debt and debt issuance costs and
payments for shares withheld and retired for taxes and exercise price for SARs, partially offset by cash
received by the Company from stock option exercises.
For the three months ended March 31, 2022, the Company’s financing activities primarily consisted
of cash outflows for payments on our long-term debt and debt issuance costs, and
payments for shares withheld and retired for taxes and exercise price for SARs, offset by proceeds from
the issuance of the 2022 Credit Agreement
Liquidity and Capital Resources Requirements
Based
on past performance and current expectations, we believe that our cash, cash equivalents and cash
generated from operations will be sufficient to meet anticipated operating costs, required payments of
principal and interest, working capital needs, ordinary course capital expenditures, and other
commitments for at least the next 12 months.
If
necessary, we may borrow funds under our 2022 Revolver to finance our liquidity requirements, subject to
customary borrowing conditions. To the extent additional funds are necessary to meet our long-term
liquidity needs as we continue to execute our business strategy, we anticipate that they will be
obtained through the incurrence of additional indebtedness, equity financings or a combination of these
potential sources of funds; however, such financing may not be available on favorable terms, or at all.
Our ability to meet our operating, investing and financing needs depends, to a significant extent, on
our future financial performance, which will be subject in part to general economic, competitive,
financial, regulatory and other factors that are beyond our control, including those described elsewhere
in “Risk Factors” in our 2022 Form 10-K. In addition to these general economic and industry factors, the
principal factors in determining whether our cash flows will be sufficient to meet our liquidity
requirements will be our ability to continue providing innovative products to our customers and
consumers and manage production and our supply chain.
2022 Credit Facility
As
of March 31, 2023, the Company had outstanding indebtedness under the 2022 Credit Agreement of
$668.3 million, of which $6.8 million was classified as current. As of March 31, 2023, the Company
had $150.0 million of available borrowing capacity under the 2022 Revolver.
The
interest rate on outstanding amounts under the 2022 Term Loan Facility was 8.4% per annum as of
March 31,
2023.
We have not drawn on the 2022 Revolver as of March 31,
2023.
The 2022 Term Loan Facility is repayable in mandatory quarterly installments equal to $1.7 million,
with the balance payable at maturity.
21
The
2022 Credit Agreement includes, among other things, customary negative and affirmative covenants
(including reporting, financial, and maintenance covenants) and events of default (including a change of
control) for facilities of this type. In addition, the 2022 Credit Agreement includes a springing first
lien leverage ratio financial covenant, which is applicable only to the lenders under the 2022 Revolver.
The Company was in compliance with its financial covenants on March 31, 2023 and December 31,
2022. The 2022 Term Loan Facility and the 2022 Revolver are secured by substantially all of the assets
of Olaplex, Inc. and the other guarantors, subject to certain exceptions and thresholds.
On
August 11, 2022, the Company entered into an interest rate cap transaction in connection with the
2022 Term Loan Facility, with a notional amount of $400.0 million, in order to limit its exposure
to potential increases in future interest rates related to the 2022 Term Loan Facility. The Company has
designated the interest rate cap as a cash-flow hedge for accounting purposes.
See
“Note 7.
Long-Term-Debt” in the Notes to the Condensed Consolidated Financial Statements included in Item 1.
Financial Statements of this Quarterly Report for additional information on the Company’s indebtedness
and interest rate cap.
Tax Receivable Agreement Obligations
As
part of the IPO, we entered into the Tax Receivable Agreement under which we will be required to pay to
the Pre-IPO Stockholders 85% of the federal, state or local tax cash savings that we actually realize on
our taxable income following the IPO, as a result of the amortization of intangible assets and
capitalized transaction costs that existed as of the transaction date. Under the Tax Receivable
Agreement, generally we will retain the benefit of the remaining 15% of the applicable tax
savings.
The
tax liability is based on current tax laws and the assumption that the Company and its subsidiaries will
earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement.
Updates to our blended state tax rate and allocation of U.S. versus foreign sourced income may impact
the established liability and changes would be recorded to other income (expense) in the period we made
the determination. We expect that future payments under the Tax Receivable Agreement relating to the
Pre-IPO Tax Assets could aggregate to $222.1 million over the 13-year remaining period under the Tax
Receivable Agreement. Payments under the Tax Receivable Agreement, which began in year ended December
31, 2022, are not conditioned upon the parties’ continued ownership of equity in the Company.
Contractual Obligations and Commitments
There
were no material changes outside the ordinary course of business to our contractual obligations since
the filing of our 2022 Form 10-K.
Critical Accounting Policies and Estimates
Our
unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S.
GAAP, which requires us to make estimates and assumptions that affect reported amounts. The estimates
and assumptions are based on historical experience and on other factors that we believe to be
reasonable. Actual results may differ from those estimates. We review these estimates on a periodic
basis to ensure reasonableness. Although actual amounts may differ from such estimated amounts, we
believe such differences are not likely to be material. For additional detail regarding our critical
accounting policies including revenue recognition, inventory, and the Tax Receivable Agreement, see our
discussion for the year ended December 31, 2022
in the 2022 Form 10-K.
There have been no material changes to these policies in the three months ended March 31, 2023.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are exposed to certain market risks arising from transactions in the normal course of our business. This
includes risk associated with interest rates, inflation and foreign exchange.
Interest Rate Risk
Our
results are subject to risk from interest rate fluctuations on borrowings under the 2022 Credit
Agreement. Our borrowings bear interest at a variable rate; therefore, we are exposed to market risks
relating to changes in interest rates. When the reference rates under our 2022 Term Loan Facility
increase, the interest payments we must make thereon also increase, which can impact our future earnings
and cash flows. As of
March 31, 2023,
we had $668.3 million of outstanding variable rate loans under the 2022 Term Loan Facility. Based on our
March 31, 2023 variable rate loan balances, an increase or decrease of 1% in the effective interest
rate would cause an increase or decrease in interest cost of approximately $6.7 million over the next 12
months.
Interest Rate Cap
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, as more fully described in “Note 7
- Long Term Debt” in the Notes to the Condensed Consolidated Financial Statements included in Item 1.
Financial Statements of this Quarterly Report. The Company uses the interest rate cap to add stability
to interest expense and to manage its exposure to interest rate movements. The fair value of the
interest rate cap is measured at the end of each reporting period using observable inputs other than
quoted prices. The fair value of the interest rate cap recorded in other assets at March 31, 2023
was $4.1 million. A hypothetical 50 basis point increase in interest rates would result in an increase
to the fair value of the interest rate cap of approximately $1.5 million. A hypothetical 50 basis
point decrease in interest rates would result in a decrease to the fair value of the interest rate cap
of approximately $1.2 million.
Inflation
Inflationary
factors such as increases in the cost to produce our products and overhead costs have adversely
affected, and may continue to adversely affect, our operating results. During the three months ended
March 31, 2023, and fiscal year 2022, our gross profit margin was negatively impacted by increased
input costs for warehousing, transportation and raw materials. Sustained increases in warehousing costs,
transportation costs, wages and raw material costs, or other inflationary pressures in the future, may
have an adverse effect on our ability to maintain current levels of gross profit margin if the selling
prices of our products do not increase with these increased costs, or if we cannot identify other cost
efficiencies.
Foreign Exchange Risk
Our
reporting currency including our U.K. foreign subsidiary, Olaplex UK Limited, is the U.S. dollar. Gains
or losses due to transactions in foreign currencies are reflected in the Consolidated Statements of
Operations and Comprehensive Income under the line-item Other (expense) income, net. We have not engaged
in the hedging of foreign currency transactions to date, although we may choose to do so in the future.
We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to
other currencies would have a material effect on our consolidated financial statements.
23
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
are designed to ensure that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure
that information required to be disclosed is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosures. Our management has evaluated, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act),
as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures
were effective as of March 31, 2023.
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2023 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations in Effectiveness of Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people or by management override of the controls. The
design of any system of controls is also based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with policies or procedures may deteriorate. Due to the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We
have, and may in the future, from time to time, become involved in litigation or other legal proceedings
incidental to our business, including litigation related to intellectual property, regulatory matters,
contract, advertising and other consumer claims. In the opinion of our management, reasonably possible
losses in addition to the amounts accrued for any such litigation and legal proceedings are not material
to our consolidated financial statements. In addition, we believe that protecting our intellectual
property is essential to our business and we have in the past, and may in the future, become involved in
proceedings to enforce our rights. Regardless of outcome, litigation (including the litigation noted
below) can have an adverse impact on our reputation, financial condition and business, including by
utilizing our resources and potentially diverting the attention of our management from the operation of
our business.
For
detail on certain legal proceedings, see “Note 10 - Commitments and Contingencies - Pending Legal
Proceedings” included in the Notes to the Condensed Consolidated Financial Statements included in Part
I, Item 1. Financial Statements of this Quarterly Report.
ITEM 1A. RISK FACTORS
An
investment in our common stock involves risks. For a detailed discussion of the risks that affect our
business please refer to “Item 1A. – Risk Factors" in the 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM 5. OTHER INFORMATION
None.
25
ITEM 6. EXHIBITS
| Exhibit Number | Description | |||||||
|
32.1†
|
||||||||
|
32.2†
|
||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
#
Indicates a management contract or compensation plan, contract or arrangement.
†
This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange
Act, except to the extent specifically incorporated by reference into such filing.
26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OLAPLEX HOLDINGS, INC. | |||||||||||
| By: | /s/ JuE Wong | ||||||||||
| May 9, 2023 | Name: | JuE Wong | |||||||||
| Title: | President and Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
| By: | /s/ Eric Tiziani | ||||||||||
| May 9, 2023 | Name: | Eric Tiziani | |||||||||
| Title: | Chief Financial Officer | ||||||||||
|
(Principal
Financial Officer)
|
|||||||||||
27