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May 11, 2022, 4:23 p.m. EDT

10-Q: OLAPLEX HOLDINGS, INC.

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(EDGAR Online via COMTEX) -- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, (the "2021 Form 10-K").

Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from management's expectations as a result of various factors. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q and in "Item 1A. - Risk Factors" in the 2021 Form 10-K.

Company Overview

OLAPLEX is an innovative, science-enabled, technology-driven beauty company. We are founded on the principle of delivering effective, patent-protected and proven performance in the categories where we compete. We strive to empower our consumers to look as beautiful on the outside as they feel on the inside.

We believe every person deserves to have healthy, beautiful hair, whether they are visiting a salon or caring for their hair at home. Our commitment to deliver results that are visible on first use, coupled with our strong sense of community across both professional hairstylists and consumers, has driven strong brand loyalty. We offer our award-winning products through a global omni-channel platform serving the professional, specialty retail, and DTC channels. OLAPLEX disrupted and revolutionized the professional hair care industry by creating the bond building category in 2014. We have grown from an initial offering of three products sold exclusively through the professional channel to a broader suite of products offered through the professional, specialty retail and DTC channels that have been strategically developed to address three key uses: treatment, maintenance and protection. Our unique bond building technology repairs disulfide bonds in human hair that are destroyed via chemical, thermal, mechanical, environmental and aging processes. Our current product portfolio comprises twelve unique, complementary products specifically developed to provide a holistic regimen for hair health.

We have developed a cohesive and synergistic distribution strategy that leverages the strength of each of our channels, including the specific attributes of each channel as described below, and our strong digital capabilities that we apply across our omni-channel sales platform. Our professional channel grew 62.6% from the three months ended March 31, 2021 as compared to the three months ended March 31, 2022, representing 41.4% of our total net sales for the three month period ended March 31, 2022. Our specialty retail channel grew 102.5% from the three months ended March 31, 2021 as compared to the three months ended March 31, 2022, representing 34.5% of our total net sales for the three month period ended March 31, 2022. Our DTC channel, comprised of OLAPLEX.com and sales through third-party e-commerce platforms, grew 15.1% from three months ended March 31, 2021 as compared to the three months ended March 31, 2022, and represented 24.1% of our total net sales for the three month period ended March 31, 2022. This channel 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.

The strength of our business model and ability to scale have created a compelling financial profile characterized by revenue growth and very strong profitability. Our net sales increased from $118.1 million in three months ended March 31, 2021 to $186.2 million in three months ended March 31, 2022, representing a 57.6% increase. Our net income increased from $45.5 million in the three months ended March 31, 2021 to $62.0 million in three months ended March 31, 2022, representing a 36.1% increase, and our adjusted net income (see "Non-GAAP Financial Measures") increased from $57.0 million in the three months ended March 31, 2021 to $91.4 million in three months ended March 31, 2022, representing a 60.5% increase. We have also experienced robust adjusted EBITDA (see "Non-GAAP Financial Measures") growth, increasing our adjusted EBITDA from $85.8 million in three months ended March 31, 2021, to $126.4 million in three months ended March 31, 2022, representing a 47.3% increase. Our adjusted EBITDA margins (see "Non-GAAP Financial Measures") decreased from 72.6% in three months ended March 31, 2021 to 67.9% in three months ended March 31, 2022.

Key Factors Affecting Our Performance

Ability to Grow Our Brand Awareness and Penetration

Our brand is integral to the growth of our business and is essential to our ability to engage with our community. Our performance will depend on our ability to attract new customers and encourage consumer spending across our product portfolio. Despite rapid growth in our brand awareness, we believe Olaplex has unaided brand awareness of approximately 7% among prestige hair care consumers. We believe awareness among the broader market is lower still. As we seek to enter new markets, it will be important for us to be able to expand our brand awareness and engage with new consumers across all of our channels.

Continued Execution of Omni-channel Strategy

Since our founding, the professional channel has provided our brand with credibility in the hairstylist community and with consumers, which translated into meaningful brand equity and success in the specialty retail and DTC channel, allowing us to gain deeper consumer insights. These channels broaden the scope of our brand awareness and customer penetration, which also serves to grow our professional channel. This synergistic omni-channel strategy has been key to our growth thus far, and we expect it will continue to serve as a valuable tool for growing our business. We intend to continue to find ways to deepen our channel integration through our digital platform, engaged social community, and relationships with salons and key retailers. Our ability to execute this strategy will depend on a number of factors, such as retailers' and salons' satisfaction with the sales and profitability of our products.

Supply Chain

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

Continued Geographic Expansion Across All Channels

We believe our ability to enter new markets across all of our channels will continue to be part of our future growth. Since our founding, we have expanded into Europe, Asia, Latin America and other markets, with plans to continue to increase our presence in all of these markets. As we scale in new markets, we anticipate that we will leverage our existing relationships with partners who operate in these markets, as well as engage with new professional and retail customers. We believe our ability to continue expanding in new markets will be powered by our integrated omni-channel efforts to enable a synergistic relationship between the professional, specialty retail and DTC channels. Our ability to grow our business geographically will depend on a number of factors, including our marketing efforts and continued customer satisfaction with the quality of our products.

Continued Product Innovation

We anticipate a meaningful portion of our future growth will come from new product development and innovation. We believe our robust in-house research and development team, dedicated Olaplex laboratory, independent lab testing and real-world salon testing enables us to continue to develop meaningful new products and positions us to maintain a full new product pipeline for several years into the future. As we develop future products, we are relentlessly focused on staying at the forefront of technical developments and product innovation. Our attention in this area is a critical component of our growth plan, and thus our performance will depend, in part, on our ability to continue to deliver new high-performance products.

Results of operations

The following table sets forth our consolidated statements of operations data for each of the periods presented:







                                                                                    Three Months Ended March 31,
                                                                       2022                                             2021
                                                     (in thousands)              % of Net              (in thousands)              % of Net
                                                                                  sales                                             sales
        Net sales                                   $      186,196                    100.0  %       $       118,119                    100.0  %
        Cost of sales:
        Cost of product (excluding amortization)            43,222                     23.2                   22,073                     18.7
        Amortization of patented formulations                1,769                      1.0                    2,451                      2.1
        Total cost of sales                                 44,991                     24.2                   24,524                     20.8
        Gross profit                                       141,205                     75.8                   93,595                     79.2
        Operating expenses:
        Selling, general, and administrative                22,314                     12.0                   11,280                      9.5
        Amortization of other intangible assets             10,266                      5.5                   10,182                      8.6
        Acquisition costs                                        -                        -                        -                        -
        Total operating expenses                            32,580                     17.5                   21,462                     18.2
        Operating income                                   108,625                     58.3                   72,133                     61.1
        Interest expense                                   (11,460)                    (6.2)                 (15,502)                   (13.1)
        Other expense, net                                                                -                                                 -
        Loss on extinguishment of debt                     (18,803)                   (10.1)                       -                        -
        Other expense, net                                    (377)                    (0.2)                     (47)                       -
        Total other expense, net                           (19,180)                   (10.3)                     (47)                       -
        Income before provision for income taxes            77,985                     41.9                   56,584                     47.9
        Income tax provision                                16,024                      8.6                   11,053                      9.4
        Net income                                  $       61,961                     33.3          $        45,531                     38.5
        Comprehensive income                        $       61,961                     33.3  %       $        45,531                     38.5  %
        








        Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended
        March 31, 2021
        Net Sales
        We distribute products through professional salon channels, national and
        international retailers, as well as direct to consumers through e-commerce. As
        such, our three business channels consist of professional, specialty retail and
        DTC as follows:
                                                        For the Three Months Ended March
        (in thousands)                                                31,
                                                            2022                2021             $ Change              % Change
        Net sales by Channel:
        Professional                                    $   77,059          $  47,389          $  29,670                     62.6  %
        Specialty retail                                    64,272             31,740             32,532                    102.5  %
        DTC                                                 44,865             38,990              5,875                     15.1  %
        Total Net sales                                 $  186,196          $ 118,119          $  68,077                     57.6  %
        


Net sales increased $68.1 million, or 57.6%, to $186.2 million in the three months ended March 31, 2022, from $118.1 million in the three months ended March 31, 2021.

Professional net sales increased $29.7 million, or 62.6%, to $77.1 million in the three months ended March 31, 2022, from $47.4 million in the three months ended March 31, 2021. Growth in professional was driven by volume growth from increased velocity (sales per point of distribution) of existing products and the net impact of four new products launched

since March 31, 2021 (No. 9 Bond Protector Nourishing Hair Serum, No.4P -Blonde Enhancer Toning Shampoo, the Professional only 4-in-1 Moisture Mask and No.8 - Bond Intense Moisture Mask). The Company experienced significant net sales growth in the U.S., U.K., Germany and Italy.

Specialty retail net sales increased $32.5 million, or 102.5%, to $64.3 million in the three months ended March 31, 2022, from $31.7 million in the three months ended March 31, 2021. Growth in specialty retail was driven by the addition of new customers and the net impact of three new products launched since March 31, 2021 (No. 9 Bond Protector Nourishing Hair Serum, No.4P -Blonde Enhancer Toning Shampoo and No.8 - Bond Intense Moisture Mask).

DTC net sales increased $5.9 million, or 15.1%, to $44.9 million in the three months ended March 31, 2022, from $39.0 million in the three months ended March 31, 2021. Growth in DTC was driven by the net impact of volume growth from three new products launched since March 31, 2021 (No. 9 Bond Protector Nourishing Hair Serum, No.4P -Blonde Enhancer Toning Shampoo and No.8 - Bond Intense Moisture Mask). Olaplex.com continued to see growth due to increased traffic, higher average order value and expansion into new countries, including the U.K., Australia, Italy and Spain.







        Cost of Sales and Gross Profit
        (in thousands)             For the Three Months Ended March 31,
                                            2022                          2021        $ Change      % Change
        Cost of sales     $             44,991                         $ 24,524      $ 20,467         83.5  %
        Gross profit      $            141,205                         $ 93,595      $ 47,610         50.9  %
        


Our cost of sales increased $20.5 million or 83.5% to $45.0 million in the three months ended March 31, 2022 from $24.5 million in the three months ended March 31, 2021, due to a $16.9 million increase driven by a growth in sales volume, a $4.3 million increase due to the inventory write-off and disposal costs related to unused stock of a product that the Company reformulated in June 2021 as a result of regulation changes in the E.U. In the interest of having a single formulation for sale worldwide, the Company reformulated on a global basis and is now disposing of unused stock. In addition, cost of sales was partially offset by a $0.7 million decrease in the amortization of our acquired patented formulations.

Our gross profit increased $47.6 million, or 50.9%, to $141.2 million in the three months ended March 31, 2022 from $93.6 million in the three months ended March 31, 2021. Our gross profit margin, gross profit as a percentage of sales, decreased from 79.2% in the three months ended March 31, 2021 to 75.8% in the three months ended March 31, 2022 primarily as a result of the inventory write-off and disposal costs discussed above as well as higher input costs for raw materials, warehousing, and inbound distribution. Our adjusted gross profit margin (see "Non-GAAP Financial Measures") decreased from 81.3% in the three months ended March 31, 2021 to 79.1% in the three months ended March 31, 2022 primarily due to cost inflation in inbound distribution, warehousing and raw materials.







        Operating Expenses
                                                   For the Three Months Ended March
        (in thousands)                                            31,
                                                        2022                2021             $ Change              % Change
        Selling, general, and administrative
        expenses                                   $    22,314          $  11,280          $  11,034                     97.8  %
        Amortization of other intangible assets         10,266             10,182                 84                      0.8  %
        Total operating expenses                   $    32,580          $  21,462          $  11,118                     51.8  %
        


Our operating expenses increased $11.1 million, or 51.8%, to $32.6 million in the three months ended March 31, 2022 from $21.5 million in the three months ended March 31, 2021.

Selling, general and administrative expenses increased by $11.0 million, or 97.8%, to $22.3 million in the three months ended March 31, 2022 from $11.3 million in the three months ended March 31, 2021. In the three months ended March 31, 2022, there were increases of $2.2 million in payroll driven by workforce expansion, $2.0 million in sales and marketing expense, $1.5 million in distribution and fulfillment costs related to the increase in product sales volume, $1.1 million in share-based compensation expense, and $4.2 million in other selling, general and administrative expenses pertaining to

general business growth. We expect sales and marketing, research and development, payroll, and other selling, general and administrative expenses to increase in the future as we continue to expand brand awareness, develop and introduce new products, build out infrastructure and implement new marketing strategies.







        Interest Expense
        (in thousands)             For the Three Months Ended March 31,
                                            2022                        2021         $ Change      % Change
        


Interest expense decreased $4.0 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease is due to the Company refinancing the existing 2020 Credit Agreement with a new 2022 Credit Agreement, which reduced the Company's outstanding debt and lowered the interest rate in respect thereof, in the three months ended March 31, 2022. See "Liquidity and Capital Resources Requirements - Credit Facility" for additional information.







        Other Expense, Net
                                                        For the Three Months Ended March
        (in thousands)                                                 31,
                                                             2022                2021             $ Change              % Change
        Loss on extinguishment of debt                  $   (18,803)         $       -          $ (18,803)                        -  %
        Other expense, net                                     (377)         $     (47)         $    (330)                    702.1  %
        Total other expense, net                        $   (19,180)         $     (47)         $ (19,133)                  40708.5  %
        


As a result of the debt refinancing that occurred during the three months ended 2022, as described above, the Company recorded $18.8 million of loss on extinguishment of debt. In the three months ended March 31, 2022, other expense, net also increased by $0.3 million as compared to the three months ended March 31, 2021, primarily due to increase in foreign currency translation losses.







        Income Tax Provision
                                                        For the Three Months Ended March
        (in thousands)                                                 31,
                                                             2022                2021             $ Change               % Change
        Income tax provision                            $    16,024          $  11,053          $    4,971                     45.0  %
        


The provision for income taxes increased to $16.0 million, or an effective tax rate of 20.5%, for the three months ended March 31, 2022 from $11.1 million, or an effective tax rate of 19.5%, for the three months ended March 31, 2021. The increase in the provision for income taxes from the comparative prior three months period is primarily due to the increase in the Company's income before taxes over this period. The Company's effective tax rate in the three months ended March 31, 2022 is lower than the statutory tax rate of 21% primarily due to the benefit associated with the foreign derived intangible income deduction ("FDII"), which results in income from the Company's sales to foreign customers being taxed at a lower effective tax rate, partially offset by the effect of state income taxes. The increase in the effective tax rate from the comparative prior three months period is primarily due to an increase in the effect of state income taxes.

Tax Receivable Agreement

Based on current tax laws and assuming that the Company earns sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement, we expect that future payments under the Tax Receivable Agreement relating to certain tax benefits of tax attributes existing prior to the IPO, including tax basis in intangible assets and capitalized transaction costs relating to taxable years ending on or before the date of the IPO (calculated by assuming the taxable year of the relevant entity closes on the date of the IPO), that are amortizable over a fixed period of time (including in tax periods beginning after the IPO) and which are available to the Company and its wholly-owned subsidiaries, could aggregate to $229.3 million over the 14-year period under the Tax Receivable Agreement. Payments under the Tax

Receivable Agreement are not conditioned upon the parties' continued ownership of the Company. The Tax Receivable Agreement payment obligation as of March 31, 2022 is $229.3 million, of which $225.1 was recorded in long term liabilities and $4.2 million was recorded in current liabilities.

Non-GAAP Financial Measures

We prepare and present our consolidated financial statements in accordance with GAAP. Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted SG&A, adjusted net income and adjusted net income per share are financial measures that are not required by or presented in accordance with GAAP. We believe that adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted SG&A, adjusted net income and adjusted net income per share, when taken together with our financial results presented in accordance with GAAP, provide meaningful supplemental information regarding our operating performance and facilitate internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of these non-GAAP measures may be helpful to our investors as they are measures used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.

We calculate adjusted EBITDA as net income, adjusted to exclude: (1) interest expense, net; (2) income tax provision; (3) depreciation and amortization; (4) share-based compensation expense; (5) non-ordinary inventory adjustments; (6) non-ordinary costs and fees; (7) non-ordinary legal costs; (8) non-capitalizable IPO and strategic transition costs; and (9) as applicable Tax Receivable Agreement liability adjustments. We calculate adjusted EBITDA margin by dividing adjusted EBITDA by net sales.

We calculate adjusted gross profit as gross profit, adjusted to exclude: (1) non-ordinary inventory adjustments and (2) amortization of patented formulations pertaining to the Acquisition. We calculate adjusted gross profit margin by dividing adjusted gross profit by net sales.

We calculate adjusted SG&A as SG&A, adjusted to exclude: (1) share-based compensation expense (2) non-ordinary legal costs, (3) non-capitalizable IPO and strategic transition costs, and (4) non-ordinary costs and fees.

We calculate adjusted net income as net income, adjusted to exclude: (1) amortization of intangible assets (excluding software); (2) non-ordinary costs and fees; (3) non-ordinary legal costs; (4) non-ordinary inventory adjustments;

Adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted SG&A, adjusted net income and adjusted net income per share are presented for supplemental informational purposes only, which have limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. Some of the limitations of these non-GAAP measures include that they (1) do not reflect capital commitments to be paid in the future, (2) do not reflect that, although amortization is a non-cash charge, the underlying assets may need to be replaced and non-GAAP measures do not reflect these capital expenditures and intangible asset amortization that contributes to revenue recognition will recur in future periods until fully amortized, (3) do not consider the impact of share-based compensation expense, (4) do not reflect other non-operating . . .

May 11, 2022

COMTEX_407056243/2041/2022-05-11T16:22:44

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