10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 8, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
(Mark One)
For the quarterly period ended June 30, 2023
or
For the transition period from __________ to __________
Commission File Number
001-40860
________________________
(Exact name of registrant as specified in its charter)
________________________
|
|
|
|||||||
|
(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
|
||||||||||||
|
|
|
|
||||||||||||
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.
|
|
☒ | 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 August 4, 2023, registrant had
654,698,308 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,” “forecast,” “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; interest rate derivatives; and our
expenses, inventory levels, other 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;
3
•our
existing and any future indebtedness, including our ability to comply with affirmative and negative
covenants under the 2022 Credit Agreement;
•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.
|
June
30, 2023 |
December
31, 2022 |
||||||||||
| Assets | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
|
Accounts
receivable, net of allowances of $
|
|
|
|||||||||
| Inventory |
|
|
|||||||||
| Other current assets |
|
|
|||||||||
| Total current assets |
|
|
|||||||||
| Property and equipment, net |
|
|
|||||||||
| Intangible assets, net |
|
|
|||||||||
| Goodwill |
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ |
|
$ |
|
|||||||
| Sales and income taxes payable, net |
|
|
|||||||||
| Accrued expenses and other current liabilities |
|
|
|||||||||
| Current portion of long-term debt |
|
|
|||||||||
| Current portion of Related Party payable pursuant to Tax Receivable Agreement |
|
|
|||||||||
| Total current liabilities |
|
|
|||||||||
| Long-term debt |
|
|
|||||||||
| Deferred tax liabilities |
|
|
|||||||||
| Related Party payable pursuant to Tax Receivable Agreement |
|
|
|||||||||
| Total liabilities |
|
|
|||||||||
|
Contingencies
(Note 10)
|
|
|
|||||||||
|
Stockholders’
equity (Notes 1 and 8):
|
|||||||||||
|
Common
stock, $
|
|
|
|||||||||
|
Preferred
stock, $
|
|
|
|||||||||
|
Additional
paid-in capital
|
|
|
|||||||||
| Accumulated other comprehensive income |
|
|
|||||||||
|
Retained
earnings
|
|
|
|||||||||
| Total stockholders’ equity |
|
|
|||||||||
| Total liabilities and stockholders’ equity | $ |
|
$ |
|
|||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
5
OLAPLEX HOLDINGS, INC.
|
Three
Months Ended June 30, |
Six
Months Ended June 30, |
||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of product (excluding amortization) |
|
|
|
|
|||||||||||||||||||
| Amortization of patented formulations |
|
|
|
|
|||||||||||||||||||
| Total cost of sales |
|
|
|
|
|||||||||||||||||||
| Gross profit |
|
|
|
|
|||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general, and administrative |
|
|
|
|
|||||||||||||||||||
| Amortization of other intangible assets |
|
|
|
|
|||||||||||||||||||
| Total operating expenses |
|
|
|
|
|||||||||||||||||||
| Operating income |
|
|
|
|
|||||||||||||||||||
| Interest expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| Loss on extinguishment of debt |
|
|
|
(
|
|||||||||||||||||||
| Other expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total other expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Income
before provision for income taxes
|
|
|
|
|
|||||||||||||||||||
| Income tax provision |
|
|
|
|
|||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic |
|
|
|
|
|||||||||||||||||||
| Diluted |
|
|
|
|
|||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrealized gain on derivatives, net of income tax effect | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total other comprehensive income: |
|
|
|
|
|||||||||||||||||||
| Comprehensive income: | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
6
OLAPLEX HOLDINGS, INC.
|
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 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
| Net income | — | — | — | — |
|
|
|||||||||||||||||||||||||||||
| Exercise of stock options |
|
|
|
— | — |
|
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — |
|
— | — |
|
|||||||||||||||||||||||||||||
| Unrealized gain on derivatives (net of taxes) | — | — | — |
|
— |
|
|||||||||||||||||||||||||||||
|
Balance
– June 30, 2023
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
Shares (Note 1) |
Amount |
Additional
Paid in Capital |
Accumulated Other Comprehensive Income |
Retained Earnings |
Total Equity | ||||||||||||||||||||||||||||||
| Balance - December 31, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||
| Net income | — | — | — | — |
|
|
|||||||||||||||||||||||||||||
| Conversion of cash settled units to stock appreciation rights | — | — |
|
— | — |
|
|||||||||||||||||||||||||||||
| 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 |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net income | — | — | — |
|
|
||||||||||||||||||||||||||||||
| Exercise of stock options |
|
|
|
— | — |
|
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — |
|
— |
|
||||||||||||||||||||||||||||||
|
Balance
– June 30, 2022
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements
7
OLAPLEX HOLDINGS, INC.
|
Six
Months Ended June 30, |
|||||||||||
| 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
|
|
|
|||||||||
|
Amortization
of other intangibles
|
|
|
|||||||||
|
Inventory
write-off and disposal
|
|
|
|||||||||
|
Depreciation
of fixed assets
|
|
|
|||||||||
|
Amortization
of debt issuance costs
|
|
|
|||||||||
|
Deferred
taxes
|
|
(
|
|||||||||
|
Share-based
compensation expense
|
|
|
|||||||||
|
Loss
on extinguishment of debt
|
|
|
|||||||||
| Other operating |
|
|
|||||||||
| 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 |
|
|
|||||||||
| Cash flows from investing activities: | |||||||||||
|
Purchase
of property and equipment
|
(
|
(
|
|||||||||
| Purchase of intangible assets |
(
|
|
|||||||||
|
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
|
(
|
(
|
|||||||||
| Payment to pre-IPO stockholders pursuant to tax receivable agreement |
(
|
|
|||||||||
|
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 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: | |||||||||||
|
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 Form 10-K.
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 Receivable Agreement liability is calculated 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 $
205.6 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
|
For
the Six Months Ended
|
||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 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 and six months ended
June 30, 2023 and June 30, 2022, the Company’s net sales to consumers in the United States
and International regions were as follows:
|
For
the Three Months Ended
|
For
the Six Months Ended
|
||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Net sales by Geography: | |||||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| International |
|
|
|
|
|||||||||||||||||||
| Total net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
United
Kingdom (“U.K.”) net sales for the three and six months ended June 30, 2023 were
9
% of total net sales, and for the three and six months ended June 30, 2022 were
8
% of total net sales. No international country exceeded 10% of total net sales for the
three and six months ended June 30, 2023 and June 30, 2022.
NOTE 4 - INVENTORY
Inventory
as of June 30, 2023 and December 31, 2022 consisted of the following:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Raw materials and packaging components | $ |
|
$ |
|
|||||||
| Finished goods |
|
|
|||||||||
| Inventory | $ |
|
$ |
|
|||||||
During
the three and six months ended June 30, 2023, the Company recorded write-offs of $3.6 million and $
6.2 million of
inventory due to product obsolescence, respectively. The Company did
not
record write-offs for product obsolescence during the same periods ended June 30,
2022.
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
and intangible assets are comprised of the following:
| June 30, 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 and six months ended June 30, 2023 and 2022 was
as follows:
|
For
the Three Months Ended
|
For
the Six Months Ended
|
||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 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 June 30, 2023 and December 31, 2022 consisted of the following:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Accrued advertising |
|
|
|||||||||
| Accrued legal settlement |
|
|
|||||||||
| Accrued professional fees |
|
|
|||||||||
| Accrued freight |
|
|
|||||||||
| Deferred revenue |
|
|
|||||||||
| Payroll liabilities |
|
|
|||||||||
| Other accrued expenses and current liabilities |
|
|
|||||||||
| Accrued interest |
|
|
|||||||||
| Accrued expenses and other current liabilities | $ |
|
$ |
|
|||||||
During
the six months ended June 30, 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
as of June 30, 2023.
12
NOTE 7 - LONG-TERM DEBT
The
Company’s Long-Term Debt as of June 30, 2023 and December 31, 2022 consisted of the
following:
| June 30, 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 June 30, 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
June 30, 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 8.70 % per annum as of June 30, 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 June 30, 2023 and
June 30, 2022 was $10.2
million and $8.7
million respectively, and for the six months ended June 30, 2023 and
June 30, 2022 was $20.7
million and $20.2
million, 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 June 30, 2023, the carrying amount of
the Company’s long-term debt under the 2022 Credit Agreement was $658.4 million, and the fair value of the Company’s long-term
debt was $
626.6 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 June 30, 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
June 30, 2023 and December 31, 2022.
| June 30, 2023 | December 31, 2022 | ||||||||||
| Fair value, interest rate cap asset | $ |
|
$ |
|
|||||||
During
the three and six months ended June 30, 2023, the Company’s interest rate cap generated an
unrecognized pre-tax gain of $1.7 million and $1.0 million, respectively, recorded in Accumulated Other
Comprehensive Income on the Company’s Condensed Consolidated Balance Sheets. During the same periods,
the Company also recognized a $0.9 million and $1.5 million
reduction, respectively, in interest expense related to 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 and $
0.5 million,
respectively, 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 six months ended
June 30, 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 six months ended June 30, 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,
during the six months ended June 30, 2023, the Company issued 4,413,328 shares of its
common stock as a result of stock options exercised.
During
the six months ended June 30, 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 and six months ended June 30, 2023, the Company paid CI&T $
6
and $12
, respectively. During the three and six months ended June 30, 2022, the Company
paid CI&T $22
and $27
, respectively. 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
In
connection with the Reorganization Transactions, 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 six months ended June 30, 2023, the
Company made a payment to the Pre-IPO Stockholders of $
16.6
million as required pursuant to the terms of the Tax Receivable Agreement. During
the three and six months ended June 30, 2022, the Company did
no
t make a payment to the Pre-IPO Stockholders.
14
NOTE 10 - 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 the Company as they are subject to uncertainties. Accordingly, any settlement or
resolution in these legal actions may occur and affect the Company’s net income in such period as the
settlement or resolution.
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 defendants moved to dismiss the consolidated complaint on July 19, 2023. The
underwriter defendants have notified 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. On April 17, 2023, the Company moved to dismiss and to sever the plaintiffs’ claims. On
July 11, 2023, the Court granted the Company’s motion to sever and dismissed all but the first named
plaintiff. The Court also dismissed the operative complaint with leave to re-file on the grounds that it
now contained allegations that were not relevant to the claims of the one, remaining plaintiff. On July
24, 2023, the remaining plaintiff filed a notice, voluntarily dismissing her claims without prejudice.
Any
potential loss associated with these pending legal proceedings is not probable or reasonably estimable
at this time.
As
of June 30, 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.
15
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
|
Six Months Ended | ||||||||||||||||||||||
| June
30, 2023 |
June
30, 2022 |
June
30, 2023 |
June
30, 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 | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
16
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 seventeen 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 creative campaigns, 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. 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.
17
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 are pursuing 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, 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 these 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. 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 Second Quarter 2023 Financial Results
•Net
sales decreased 48.2% from $210.9 million in the three months ended June 30, 2022 to $109.2 million in
the three months ended June 30, 2023. For the three months ended June 30, 2023, net sales in our
professional channel decreased 61.2%, our specialty retail channel decreased 53.7% and our DTC channel
decreased 6.4%, in each case as compared to the three months ended June 30, 2022.
•Gross
profit margin decreased from 74.2% in the three months ended June 30, 2022 to 70.9% in the three months
ended June 30, 2023, primarily as a result of a reserve for product obsolescence and higher input costs
for raw materials and warehousing, partially offset by channel mix and increased net sales during the second
quarter of 2022 in advance of the Company’s price increases which became effective as of July 1, 2022.
•Operating
expenses for the three months ended June 30, 2023 increased by 61.3%, as compared to the three months
ended June 30, 2022, primarily as a result of increased investments in marketing, professional fees,
legal settlement costs, and a one-time former distributor payment, higher payroll due to workforce
expansion, and higher employee benefit costs, partially offset by lower distribution and fulfillment costs
incurred in the three months ended June 30, 2023.
•Operating
income decreased from $120.0 million for the three months ended June 30, 2022 to $18.8 million for the
three months ended June 30, 2023.
•Net
income decreased from $87.7 million for the three months ended June 30, 2022 to $6.2 million for the
three months ended June 30, 2023.
18
Overview of Year to Date 2023 Financial Results
•Net
sales decreased 43.8% from $397.1 million in the six months ended June 30, 2022 to $223.0 million in
the six months ended June 30, 2023. For the six months ended June 30, 2023, net sales in our
professional channel decreased 51.1%, our specialty retail channel decreased 49.7%, and our DTC channel
decreased 19.7%, in each case as compared to the six months ended June 30, 2022.
•Gross
profit margin decreased from 75.0% in the six months ended June 30, 2022 to 71.0% in the six months
ended June 30, 2023, primarily as a result of higher input costs for raw materials and warehousing, and
increased reserve for product obsolescence, partially offset by product and channel mix and increased net
sales during the second quarter of 2022 in advance of the Company’s price increases which became effective
as of July 1, 2022.
•Operating
expenses for the six months ended June 30, 2023 increased by 50.7%, as compared to the six months ended
June 30, 2022, primarily as a result of increased investments in marketing, professional expenses,
legal settlement costs and a one-time former distributor payment, higher payroll due to workforce expansion,
and higher employee benefit costs, partially offset by decreased distribution and fulfillment
expenses.
•Operating
income decreased from $228.6 million for the six months ended June 30, 2022 to $54.3 million for the
six months ended June 30, 2023.
•Net
income decreased from $149.7 million for the six months ended June 30, 2022 to $27.1 million for the
six months ended June 30, 2023.
Results of operations
Comparison of the Three Months Ended June 30, 2023 to the Three Months
Ended June 30, 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 June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | % of Net sales | (in thousands) | % of Net sales | ||||||||||||||||||||
| Net sales | $ | 109,241 | 100.0 | % | $ | 210,903 | 100.0 | % | |||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of product (excluding amortization) | 29,781 | 27.3 | 52,293 | 24.8 | |||||||||||||||||||
| Amortization of patented formulations | 1,964 | 1.8 | 2,180 | 1.0 | |||||||||||||||||||
| Total cost of sales | 31,745 | 29.1 | 54,473 | 25.8 | |||||||||||||||||||
| Gross profit | 77,496 | 70.9 | 156,430 | 74.2 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general, and administrative | 48,413 | 44.3 | 26,111 | 12.4 | |||||||||||||||||||
| Amortization of other intangible assets | 10,324 | 9.5 | 10,295 | 4.9 | |||||||||||||||||||
| Total operating expenses | 58,737 | 53.8 | 36,406 | 17.3 | |||||||||||||||||||
| Operating income | 18,759 | 17.2 | 120,024 | 56.9 | |||||||||||||||||||
| Interest expense, net | (10,206) | (9.3) | (8,694) | (4.1) | |||||||||||||||||||
| Other expense, net | (600) | (0.5) | (1,224) | (0.6) | |||||||||||||||||||
|
Income
before provision for income taxes
|
7,953 | 7.3 | 110,106 | 52.2 | |||||||||||||||||||
| Income tax provision | 1,797 | 1.6 | 22,391 | 10.6 | |||||||||||||||||||
| Net income | $ | 6,156 | 5.6 | $ | 87,715 | 41.6 | |||||||||||||||||
Net
Sales
We
distribute 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 third
party e-commerce customers and through our Olaplex.com websites. As such, our three business channels
consist of professional, specialty retail and
19
DTC
as follows:
| (in thousands) |
For
the Three Months Ended June 30,
|
||||||||||||||||||||||
| 2023 | 2022 |
$
Change
|
%
Change
|
||||||||||||||||||||
| Net sales by Channel: | |||||||||||||||||||||||
| Professional | $ | 40,940 | $ | 105,489 | $ | (64,549) | (61.2) | % | |||||||||||||||
| Specialty retail | 29,767 | 64,229 | (34,462) | (53.7) | % | ||||||||||||||||||
| DTC | 38,534 | 41,185 | (2,651) | (6.4) | % | ||||||||||||||||||
| Total Net sales | $ | 109,241 | $ | 210,903 | $ | (101,662) | (48.2) | % | |||||||||||||||
Total
net sales declined 48.2% in the three months ended June 30, 2023 compared to the same period in 2022,
primarily attributed to a lower level of demand and inventory rebalancing, particularly within our
Professional and Specialty Retail channels. Lapping our introduction of certain 1-Liter size offerings
during the second quarter of 2022 contributed to $22.0 million of the net sales impact, and approximately
$10.0 million of increased net sales during the second quarter of 2022 were in advance of the Company’s
price increases which became effective as of July 1, 2022. These impacts were partially offset by our
launches of Volumizing Blow Dry Mist, LASHBOND™ Serum, which is our first hair care adjacent product, and
No. 4D Clean Volume Detox Dry Shampoo, as well as the impact of new customers within each channel and the
overall mix shift to DTC. Net sales declined primarily in the United States, Canada and the United Kingdom,
partially offset by increases in Southeast Asia.
Cost
of Sales and Gross Profit
| (in thousands) |
For
the Three Months Ended June 30,
|
|
$ Change | % Change | |||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cost of sales | $ | 31,745 | $ | 54,473 |
|
$ | (22,728) |
|
(41.7) | % | |||||||||||||
| Gross profit | $ | 77,496 | $ | 156,430 |
|
$ | (78,934) |
|
(50.5) | % | |||||||||||||
Our
cost of sales decreased primarily due to declining product sales in the three months ended June 30,
2023. These decreases were partially offset by a $3.6 million inventory obsolescence reserve recorded
during the three months ended June 30, 2023, and increases in cost of sales resulting from inflationary
pressures and sales deleverage.
As
a result of the activity described above regarding Net sales and Cost of sales, our gross profit margin
decreased from 74.2% in the three months ended June 30, 2022 to 70.9% in the three months ended
June 30, 2023.
Operating
Expenses
| (in thousands) |
For
the Three Months Ended June 30,
|
|
|||||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Selling, general, and administrative expenses | $ | 48,413 | $ | 26,111 |
|
$ | 22,302 |
|
85.4 | % | |||||||||||||
| Amortization of other intangible assets | 10,324 | 10,295 |
|
29 |
|
0.3 | % | ||||||||||||||||
| Total operating expenses | $ | 58,737 |
|
$ | 36,406 |
|
$ | 22,331 | 61.3 | % | |||||||||||||
The
increase in selling, general and administrative expenses was primarily driven by an increase of
$14.1 million in investments in sales and marketing, $5.9 million related to a one-time former
distributor payment, legal settlement costs, and professional expenses, $1.4 million in payroll
expenses driven by workforce expansion, and $0.9 million of employee benefit costs, partially offset by
a $0.8 million decrease in distribution and fulfillment costs related to the decrease in product sales
volume during the three months ended June 30, 2023.
20
Interest
Expense, Net
| (in thousands) |
For
the Three Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Interest expense, net | $ | (10,206) | $ | (8,694) | $ | (1,512) |
|
17.4 | % | ||||||||||||||
Interest
expense, net increased due to increased interest rates in response to the inflationary environment during
the three months ended June 30, 2023. See “Liquidity and Capital Resources Requirements – Credit
Facility” for additional information regarding our outstanding debt.
We
also benefited during the three months ended June 30, 2023 from $4.5 million of interest income
from highly liquid investments with a maturity of three months or less.
Other
Expense, Net
| (in thousands) |
For
the Three Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Other expense, net | $ | (600) | $ | (1,224) |
|
$ | 624 | (51.0) | % | ||||||||||||||
Other
expense, net decreased primarily due to lower foreign currency transaction losses driven by the performance
of the U.S. dollar.
Income
Tax Provision
| (in thousands) |
For
the Three Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Income tax provision | $ | 1,797 | $ | 22,391 | $ | (20,594) | (92.0) | % | |||||||||||||||
Our
effective tax rate was 22.6% for the three months ended June 30, 2023, as compared to 20.3% for the
three months ended June 30, 2022. Our effective tax rate for the three months ended June 30, 2023
is higher than the statutory tax rate of 21% due to the effect of state income taxes, partially offset by
the foreign derived intangible income deduction (“FDII”), which results in income from our sales to foreign
customers being taxed at a lower effective tax rate. Our effective tax rate for the three months ended
June 30, 2022 was lower than the statutory tax rate of 21% primarily due to the benefit associated with
the FDII, partially offset by the net impact of state income taxes. The increase in the effective tax rate
from the comparative prior three month period is primarily due to an additional state income tax expense
recorded in the three months ended June 30, 2023, which had a disproportionate impact on the effective
tax rate due to the lower profitability for the period.
21
Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended
June 30, 2022
The
following table sets forth our Condensed Consolidated Statements of Operations and Comprehensive Income data
for each of the periods presented:
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | % of Net sales | (in thousands) | % of Net sales | ||||||||||||||||||||
| Net sales | $ | 223,028 | 100.0 | % | $ | 397,099 | 100.0 | % | |||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Cost of product (excluding amortization) | 61,016 | 27.4 | 95,515 | 24.1 | |||||||||||||||||||
| Amortization of patented formulations | 3,706 | 1.7 | 3,949 | 1.0 | |||||||||||||||||||
| Total cost of sales | 64,722 | 29.0 | 99,464 | 25.0 | |||||||||||||||||||
| Gross profit | 158,306 | 71.0 | 297,635 | 75.0 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general, and administrative | 83,337 | 37.4 | 48,425 | 12.2 | |||||||||||||||||||
| Amortization of other intangible assets | 20,647 | 9.3 | 20,561 | 5.2 | |||||||||||||||||||
| Total operating expenses | 103,984 | 46.6 | 68,986 | 17.4 | |||||||||||||||||||
| Operating income | 54,322 | 24.4 | 228,649 | 57.6 | |||||||||||||||||||
| Interest expense | (20,749) | (9.3) | (20,154) | (5.1) | |||||||||||||||||||
| Other income (expense), net | |||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | (18,803) | (4.7) | |||||||||||||||||||
| Other income (expense), net | (358) | (0.2) | (1,601) | (0.4) | |||||||||||||||||||
| Total other income (expense), net | (358) | (0.2) | (20,404) | (5.1) | |||||||||||||||||||
|
Income
before provision for income taxes
|
33,215 | 14.9 | 188,091 | 47.4 | |||||||||||||||||||
| Income tax provision | 6,095 | 2.7 | 38,415 | 9.7 | |||||||||||||||||||
| Net income | $ | 27,120 | 12.2 | $ | 149,676 | 37.7 | |||||||||||||||||
Net
Sales
Net
sales by channel for the six months ended June 30, 2023 and June 30, 2022 were as follows:
| (in thousands) |
For
the Six Months Ended June 30,
|
||||||||||||||||||||||
| 2023 | 2022 |
$
Change
|
%
Change
|
||||||||||||||||||||
| Net sales by Channel: | |||||||||||||||||||||||
| Professional | $ | 89,337 | $ | 182,548 | $ | (93,211) | (51.1) | % | |||||||||||||||
| Specialty retail | 64,626 | 128,501 | (63,875) | (49.7) | % | ||||||||||||||||||
| DTC | 69,065 | 86,050 | (16,985) | (19.7) | % | ||||||||||||||||||
| Total net sales | $ | 223,028 | $ | 397,099 | $ | (174,071) | (43.8) | % | |||||||||||||||
Total
net sales declined 43.8% in the six months ended June 30, 2023 compared to the same period in 2022,
primarily attributed to a lower level of demand and inventory rebalancing, particularly within the
Professional and Specialty Retail channels. Lapping our introduction of certain 1-Liter size offerings
during the second quarter of 2022 contributed to $22.0 million of the net sales impact, approximately $10.0
million of increased net sales during the second quarter of 2022 were in advance of the Company’s price
increases which became effective as of July 1, 2022, and lapping inventory pipeline sold to a key specialty
retailer in the first quarter of 2022 contributed to approximately $10 million of net sales impact. These
impacts were partially offset by our launches of LASHBOND™ Serum, which is our first hair care adjacent
product, No. 4D Clean Volume Detox Dry Shampoo, and Volumizing Blow Dry Mist, as well as the impact of new
customers within each channel. Net sales declined primarily in the United States, the United Kingdom, and
Canada, partially offset by increases in Southeast Asia and France.
22
Cost
of Sales and Gross Profit
| (in thousands) |
For
the Six Months Ended June 30,
|
|
$ Change | % Change | |||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cost of sales | $ | 64,722 | $ | 99,464 |
|
$ | (34,742) |
|
(34.9) | % | |||||||||||||
| Gross profit | $ | 158,306 | $ | 297,635 |
|
$ | (139,329) |
|
(46.8) | % | |||||||||||||
Our
cost of sales decreased primarily due to declining product sales in the six months ended June 30, 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 $6.2 million reserve for product obsolescence
recorded during the six months ended June 30, 2023.
As
a result of the activity described above regarding Net sales and Cost of sales, our gross profit margin
decreased from 75.0% in the six months ended June 30, 2022 to 71.0% in the six months ended
June 30, 2023.
Operating
Expenses
| (in thousands) | For the Six Months Ended June 30, |
|
|||||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Selling, general, and administrative expenses | $ | 83,337 | $ | 48,425 |
|
$ | 34,912 |
|
72.1 | % | |||||||||||||
| Amortization of other intangible assets | 20,647 | 20,561 |
|
86 |
|
0.4 | % | ||||||||||||||||
| Total operating expenses | $ | 103,984 |
|
$ | 68,986 |
|
$ | 34,998 | 50.7 | % | |||||||||||||
Selling,
general and administrative expenses increased primarily due to an increase of $22.8 million in
investments in sales and marketing, $6.8 million related to a one-time former distributor payment,
professional expenses, and legal settlement costs, payroll expenses of $5.0 million driven by workforce
expansion, and increased employee benefit costs of $2.2 million, partially offset by a
$2.7 million decrease in distribution and fulfillment costs related to the decrease in product sales
volume during the six months ended June 30, 2023.
Interest
Expense, Net
| (in thousands) |
For
the Six Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Interest expense, net | $ | (20,749) | $ | (20,154) | $ | (595) |
|
3.0 | % | ||||||||||||||
Interest
expense, net increased due to increased interest rates in response to the inflationary environment during
the six months ended June 30, 2023. See “Liquidity and Capital Resources Requirements – Credit
Facility” for additional information on our outstanding debt.
We
also benefited during the six months ended June 30, 2023 from $7.8 million of interest income from
highly liquid investments with a maturity of three months or less.
Other
(Expense), Net
| (in thousands) |
For
the Six Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Loss on extinguishment of debt | $ | — | $ | (18,803) | $ | 18,803 | — | % | |||||||||||||||
| Other expense, net | (358) | $ | (1,601) | $ | 1,243 | (77.6) | % | ||||||||||||||||
| Total other expense, net | $ | (358) | $ | (20,404) |
|
$ | 20,046 | (98.2) | % | ||||||||||||||
As
a result of the refinancing of the 2020 Credit Agreement that occurred during the six months ended
June 30, 2022, we recorded an $18.8 million loss on extinguishment of debt in that period. Other
expense, net decreased in the six months ended June 30, 2023 primarily due to a decrease in foreign
currency transaction losses driven by the performance of the U.S. dollar.
23
Income
Tax Provision
| (in thousands) |
For
the Six Months Ended June 30,
|
|
|
|
|||||||||||||||||||
| 2023 | 2022 |
|
$
Change
|
%
Change
|
|||||||||||||||||||
| Income tax provision | $ | 6,095 | $ | 38,415 | $ | (32,320) | (84.1) | % | |||||||||||||||
Our
effective tax rate was 18.4% for the six months ended June 30, 2023, as compared to 20.4% for the six
months ended June 30, 2022. The decrease in the effective tax rate for the six months ended
June 30, 2023 is primarily due to discrete tax benefits from stock option exercises and a one-time
former distributor payment during that period. Additionally, our effective tax rates for the six months
ended June 30, 2023 and 2022 are lower than the statutory tax rate of 21% primarily due to the benefit
associated with the FDII, partially offset by the net impact of state income taxes.
Tax
Receivable Agreement
The
Tax Receivable Agreement liability is calculated 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. We expect that future payments under the Tax Receivable Agreement
relating to the Pre-IPO Tax Assets could aggregate to $205.6 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.
During the three and six months ended June 30, 2023, the Company made a payment to the Pre-IPO
Stockholders of $16.6 million as required pursuant to the terms of the Tax Receivable Agreement. During
the three and six months ended June 30, 2022, the Company did not make a payment to the Pre-IPO
Stockholders. The remaining Tax Receivable Agreement payment obligation as
of June 30,
2023
is $205.6 million, of which $189.4 million was recorded in long term liabilities and $16.2 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, innovation, 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 related to sales to customers outside of the U.S.; however,
the majority of our bank deposits are held within the U.S.
As
of June 30, 2023, we had $378.4 million of cash and cash equivalents. In addition, as of June 30,
2023, we had borrowing capacity of $150.0 million under the 2022 Revolver, plus $131.0 million of working
capital excluding cash and cash equivalents for a combined liquidity position of
$659.4
million.
24
Cash Flows
The
following table summarizes our cash flows for the periods presented:
|
For
the Six Months Ended June 30,
|
|||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 75,087 | $ | 128,053 | |||||||
| Investing activities | (1,996) | (945) | |||||||||
| Financing activities | (17,481) | (115,468) | |||||||||
| Net increase in cash and cash equivalents: | $ | 55,610 | $ | 11,640 | |||||||
Operating Activities
The
decrease in net cash provided by operating activities during the six months ended June 30,
2023 compared to the same period in 2022
was primarily a result of a decrease in net income of $122.6 million, changes in working capital and
adjusting items to Operating Cash Flows to reconcile to Net income from operations, and increases in
inventory write-offs and disposal adjustments of $1.8 million, partially offset by the loss on
extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit Agreement recorded in
the six months ended June 30, 2022, and other changes in working capital between the comparative
periods.
Investing Activities
Our
investing activities included purchases of software, property and equipment during the six months ended
June 30,
2023 and 2022.
Financing Activities
Our
financing activities for the six months ended June 30,
2023 primarily consisted of cash outflows for payments on our long-term debt and debt issuance costs,
payments to our pre-IPO stockholders pursuant to our Tax Receivable Agreement, 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 six months ended June 30, 2022, our 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 June 30, 2023, we had outstanding indebtedness under the 2022 Credit Agreement of $666.6 million, of
which $6.8 million was classified as current. As of June 30, 2023, we 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 8.7% per annum as of June 30,
2023.
We have not drawn on the 2022 Revolver as of June 30,
2023.
The 2022 Term Loan Facility is repayable in mandatory quarterly installments equal to $1.7 million,
with the balance payable at maturity.
25
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. We were in
compliance with our financial covenants on June 30, 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, we 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. We have 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 our 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 Receivable Agreement liability is calculated 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 $205.6 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 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 six months ended June 30, 2023.
26
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
June 30, 2023,
we had $666.6 million of outstanding variable rate loans under the 2022 Term Loan Facility. Based on our
June 30, 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, we 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. We use the interest rate cap to add stability to interest
expense and to manage our 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 June 30, 2023 was $5.5 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 $1.4 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
$1.3 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 and six months ended
June 30, 2023, 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.
27
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 June 30, 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 June 30, 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.
28
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 referenced 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
(a)
On August 4, 2023, Olaplex, Inc. entered into a Manufacturing and Supply Agreement (the “Agreement”) with
Cosway Company Inc. (“Cosway”), which supersedes the Manufacturing Services Agreement, dated January 1,
2020, by and between Olaplex, Inc. and Cosway and all amendments thereto. Pursuant to the Agreement, Cosway
will manufacture, package and label certain products for Olaplex. The Agreement has an initial term of two
years, unless earlier terminated in accordance with the Agreement, and automatically renews for one
additional one year term, unless either party gives 180 days' notice of non-renewal. Either party may
terminate the Agreement (i) with 30 days’ prior written notice in the event of a breach of the Agreement,
unless such breach is cured within the 30 day notice period, (ii) if conditions constituting Force Majeure
(as defined in the Agreement) exist for more than 30 consecutive days, or 60 days in any consecutive six
month period, (iii) immediately in the event of insolvency, (iv) immediately or upon 30 days’ prior written
notice in the event of a change in control, or (v) without cause upon 180 days' prior written notice.
The
foregoing description of the Agreement is a summary and is qualified in its entirety by reference to the
full text of the Agreement, a copy of which is attached as Exhibit 10.1 to this Form 10-Q and is
incorporated by reference herein.
(c)
During the three months ended June 30, 2023, no director or “officer” (as defined in Rule 16a-1(f) under the
Exchange Act) of the Company
adopted
or
terminated
a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term
is defined in Item 408(a) of Regulation S-K.
29
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) | |||||||
†
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.
30
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
| OLAPLEX HOLDINGS, INC. | |||||||||||
| By: | /s/ JuE Wong | ||||||||||
| August 8, 2023 | Name: | JuE Wong | |||||||||
| Title: | President and Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
| By: | /s/ Eric Tiziani | ||||||||||
| August 8, 2023 | Name: | Eric Tiziani | |||||||||
| Title: | Chief Financial Officer | ||||||||||
|
(Principal
Financial Officer)
|
|||||||||||
31