Olaplex (OLPX) - 2023 Q4 - Annual Report

Filing Information This section details Olaplex Holdings, Inc.'s Annual Report on Form 10-K filing information for FY2023, covering registration, exchange listing, and key compliance indicators - Olaplex Holdings, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2023[2] Filing Status and Key Indicators | Indicator | Status | Details | | :--- | :--- | :--- | | Registrant Name | Olaplex Holdings, Inc. | Exact name as specified in charter | | State of Incorporation | Delaware | | | Commission File Number | 001-40860 | | | Trading Symbol | OLPX | Nasdaq Global Select Market | | Well-known seasoned issuer | No | | | Required to file reports | No | | | Filed all required reports (past 12 months) | Yes | | | Subject to filing requirements (past 90 days) | Yes | | | Submitted/posted Interactive Data File | Yes | | | Filer Status | Accelerated filer | | | Filed report on management's assessment of internal control | Yes | | | Financial statements reflect error correction | Yes | | | Error corrections required recovery analysis | No | | | Shell company | No | | | Market value of voting stock held by non-affiliates (June 30, 2023) | ~$0.5 billion | | | Common Stock Outstanding (Feb 23, 2024) | 660,757,501 shares | Par value $0.001 per share | Table of Contents This section presents the detailed table of contents for the Annual Report on Form 10-K, outlining the structure and page numbers for each part and item within the document - The report is structured into four main parts: Part I (Business, Risk Factors, etc.), Part II (Financial Information), Part III (Corporate Governance), and Part IV (Exhibits)[7] Glossary This section provides definitions for key terms and acronyms used throughout the Annual Report on Form 10-K, ensuring clarity and consistent understanding of the company's operations, financial instruments, and historical events - Key terms defined include '2020 Credit Agreement' (refinanced by 2022 Credit Agreement), '2022 Credit Agreement' (including $675 million term loan and $150 million revolver), 'IPO' (October 4, 2021), 'Penelope' (indirect parent of Olaplex, Inc.), 'Pre-IPO Stockholders', 'Pre-IPO Tax Assets', 'Reorganization Transactions', and 'Tax Receivable Agreement'[10][11] Special Note Regarding Forward-Looking Statements This section serves as a cautionary statement, highlighting that the Annual Report contains forward-looking statements based on management's beliefs and assumptions, which involve known and unknown risks and uncertainties that could cause actual results to differ materially from projections - The report contains forward-looking statements about strategies, plans, objectives, expectations, and financial trends, identifiable by words like 'may,' 'will,' 'could,' 'should,' 'intend,' 'potential,' 'anticipate,' 'believe,' 'estimate,' 'expect,' 'plan,' 'target,' 'predict,' 'project,' 'forecast,' and 'seek'[13] - Forward-looking statements are not guarantees of future performance and involve known and unknown risks, inherent uncertainties, and other difficult-to-predict factors, including competition, brand image, market trends, supply chain, legal proceedings, and economic conditions[14][15][18] - The company does not intend or assume any obligation to update these forward-looking statements after the report date, unless required by law[17] Risk Factors Summary This section provides a concise overview of the principal risks associated with an investment in Olaplex Holdings, Inc.'s common stock, urging investors to consider these factors carefully before investing - Key risks include intense competition in the beauty industry, the critical importance of brand image and marketing success, the ability to anticipate and respond to market trends and introduce new products, dependence on product quality and efficacy, and the execution of the long-term strategic plan[20] - Operational risks involve forecasting demand, managing inventory, potential illegal distribution/counterfeiting, reliance on a limited number of manufacturers and customers, and disruptions in operations or supply chain[20] - Financial and legal risks include significant indebtedness, inability to generate sufficient cash flow for debt, potential litigation and regulatory proceedings, and volatility of stock price[20][22] Part I Item 1. Business This section provides a comprehensive overview of Olaplex Holdings, Inc.'s business, covering its profile, product offerings, market strategy, operations, and regulatory environment Company Overview Olaplex is an innovative, science-enabled, technology-driven beauty company established in 2014, specializing in patent-protected, high-performance prestige hair care products - Olaplex was founded in 2014 and focuses on prestige hair care, utilizing science and technology[24] - The company collaborates with professional hairstylists and consumers to identify hair care concerns and addresses them through proprietary technology[25] Our Products Olaplex revolutionized the hair care industry with its bond-building technology, expanding from three professional products to seventeen unique products across professional, specialty retail, and DTC channels, including a recent expansion into eyelash enhancing serum - Olaplex pioneered the bond-building hair care category in 2014[26] - The product portfolio has grown from three professional products to seventeen unique products for treatment, maintenance, and protection, sold across professional, specialty retail, and DTC channels[26] - The proprietary, patent-protected ingredient, Bis-aminopropyl diglycol dimaleate ('Bis-amino'), is a key differentiator, supported by over 160 worldwide patents covering hair care and potential adjacent categories like skin and nail health[26] - Recently expanded into the hair care adjacent market with LASHBOND Building Serum, an eyelash enhancing serum[26] Our Channels Olaplex employs a synergistic omnichannel strategy across Professional, Specialty Retail, and Direct-to-Consumer (DTC) channels to strengthen customer relationships and expand its customer base - The company's omnichannel strategy includes Professional, Specialty Retail, and Direct-to-Consumer (DTC) channels[28] - Professional channel sales are primarily through over 115 wholesale beauty supply distributors to salons and licensed hairstylists[29] - Specialty Retail channel reaches consumers through approximately 60 retailers in over 20 countries[30] - DTC channel leverages Olaplex.com and third-party e-commerce platforms like Amazon[31] Innovation Olaplex's innovation platform is a key differentiator, driven by an in-house R&D team, collaboration with professional hairstylists and consumers, and partnerships with co-manufacturers, universities, and biotech companies to develop new technologies and expand into adjacent categories - Innovation is driven by an in-house R&D team, including scientists and regulatory experts, and incorporates feedback from professional hairstylists and consumers[32] - Products are developed in partnership with national co-manufacturers, universities, and biotech companies[32] - The company plans to focus on developing proprietary new technologies, improving existing products, and exploring adjacent categories in hair care and other areas[32] - Olaplex does not perform or commission animal testing for its products or ingredients[33] Marketing Olaplex's marketing strategy is omnichannel, utilizing educational seminars, dedicated professional portals, mobile apps, trade advertising, social media, and celebrity brand ambassadors to engage with both professional and retail customers, driving brand awareness and sales - Marketing in the professional channel includes educational seminars, a dedicated website portal, and a mobile app for hairstylists[34] - Specialty retail marketing supports authorized retailers with in-store displays, online navigation, cooperative advertising, loyalty programs, and sampling[35] - DTC marketing focuses on a digital-first approach to performance marketing, enhancing Olaplex.com for customer experience, brand awareness, site traffic, and conversion[36] - Top celebrity professional hairstylists and colorists serve as brand ambassadors, marketing through educational events, social media, and publicity[37] Our Customers Olaplex serves over 225 customers globally across more than 100 countries, with a significant portion of net sales concentrated among a few key customers and a majority of international sales transacted in U.S. Dollars - Olaplex has over 225 customers across its omnichannel platform, selling products in more than 100 countries[38] Customers Representing >10% of Net Sales | Year | Customers representing >10% of Net Sales | Aggregate % of Total Net Sales | | :--- | :--- | :--- | | 2023 | Two customers | 21% | | 2022 | One customer | 16% | | 2021 | Two customers | 25% | - In 2023, approximately 45% of net sales were generated in the U.S. and 55% internationally, with the majority of net sales transacted in U.S. Dollars[39] Supply Chain and Global Distribution Network Olaplex maintains a flexible and resilient third-party supply chain, leveraging strong relationships with five manufacturers (primarily in the U.S. and Europe) and logistics partners for global distribution, with disaster recovery programs in place - The supply chain relies on third-party manufacturers and logistics partners for global distribution[40][42] - Finished products are manufactured by five third-party manufacturers in the U.S. and Europe[41] - Cosway Company Inc. manufactured products accounting for over 61% of net sales and 32% of inventory product purchases in 2023[41] - Disaster recovery programs are in place with key suppliers to shift manufacturing capacity during disruptions[42] Seasonality Olaplex's results of operations typically show a slight increase in the second half of the fiscal year due to holiday purchasing, though other macroeconomic and competitive factors can also cause fluctuations - Results are typically slightly higher in the second half of the fiscal year due to increased consumer purchasing for holidays and retailer stocking[43] - Fluctuations can also be attributed to macroeconomic factors, competitive activity, new product introductions, and promotional activities[43][44] Competition The beauty industry is highly competitive, with Olaplex competing on innovation, product efficacy, pricing, brand recognition, and customer service against major players like Estee Lauder, L'Oreal, and Unilever, as well as independent brands - Competition in the beauty industry is based on innovation, product efficacy, accessible pricing, brand recognition, loyalty, and service[45] - Competitors include major companies such as Estee Lauder, Henkel AG & Co. KGaA, Kao Corporation, L'Oreal S.A., and Unilever, along with independent brands[45] - Olaplex believes its strong reputation, product quality, innovation, and community engagement enable effective competition[46] Intellectual Property Olaplex protects its intellectual property through a combination of patents, trademarks, copyrights, trade secrets, and agreements, holding over 400 trademark registrations and 160 issued patents worldwide, primarily protecting its bond-building technology - Intellectual property is protected by patents, trademarks, copyrights, trade secrets, and non-disclosure agreements[47] - As of December 31, 2023, the company owned over 400 trademark registrations and applications globally, with 'OLAPLEX' as its flagship trademark[48] - As of December 31, 2023, it owned over 160 issued patents worldwide, including 16 U.S. patents, with patent families generally expected to expire in 2034 and 2035[48][49][50] Commitment to Social and Environmental Consciousness Olaplex is committed to social and environmental consciousness, evidenced by its cruelty-free, non-toxic formulas, efforts to reduce packaging waste, charitable initiatives, and support for small and minority-owned professional hairstylist businesses - Completed an initial double materiality assessment of Environmental, Social and Governance (ESG) factors in 2023 to develop a multi-year ESG strategy[51] - Environmental sustainability efforts include cruelty-free, non-toxic formulas, limited use of secondary packaging (avoiding ~8.5 million pounds of paper packaging from 2015-2023), and assessing sustainability practices of manufacturing and logistics partners[52] - Social initiatives include the 'Shopping Gives' program (donating $1 per order to chosen causes) and supporting small and minority professional hairstylist businesses[52] Employees and Human Capital Resources As of December 31, 2023, Olaplex employed 233 individuals, operating as a fully remote company, emphasizing a strong culture, diversity, equity, and inclusion (DEI), and comprehensive compensation and benefits to attract and retain talent - As of December 31, 2023, Olaplex had 233 employees and utilized contractors, with no unionized workforce[53] - The company operates as a fully remote entity and uses Professional Employer Organizations (PEOs) for U.S. employee administration[53] - Culture emphasizes passion, product impact, and brand meaning, with a focus on diversity, equity, and inclusion (DEI)[54][55] - As of December 31, 2023, 78% of employees identified as female and 39% as non-white; eight of eleven board members identified as female[55] - Compensation and benefits programs aim to attract, motivate, and reward employees, including professional development reimbursement and educational assistance[57] Government Regulation Olaplex's products are subject to extensive federal, state, and international regulations concerning ingredients, labeling, advertising, manufacturing, and safety, with increasing oversight from authorities like the FDA, FTC, and EU/UK regulators, particularly with the Modernization of Cosmetics Regulation Act (MoCRA) - Products are regulated by the FDA and FTC in the U.S., and various international authorities, covering ingredients, labeling, advertising, packaging, manufacturing, and safety[58] - U.S. products are classified as 'cosmetics' under the FDCA, subject to labeling requirements and restrictions on certain ingredients; claims must be truthful and not misleading[59][60] - The Modernization of Cosmetics Regulation Act (MoCRA), effective December 29, 2022, expands FDA oversight, requiring serious adverse event reporting, facility registration, product listing, safety substantiation, and GMP compliance[61][62] - FTC regulations govern deceptive advertising, claim substantiation (e.g., 'Green Guides'), and endorsements/testimonials (e.g., 'Endorsement Guides')[64][65] - In the EU and UK, cosmetic products are regulated under the E.U. Cosmetics Regulation (EC) No 1223/2009 and U.K. legislation, requiring safety assessments, notification, and GMP compliance[66][67][68] - The company is also subject to evolving federal, state, local, and international laws regarding user privacy and data protection, including GDPR and U.S. state privacy laws[69][70][71][72] Available Information Olaplex provides public access to its SEC filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and other reports, through its investor relations website and the SEC's EDGAR system - Company's Internet address is www.Olaplex.com, where SEC filings are available[73] - Filings can also be accessed through the SEC's Interactive Data Electronic Applications system at http://www.sec.gov[73](index=73&type=chunk) Item 1A. Risk Factors This section details significant risks that could materially affect Olaplex Holdings, Inc.'s business, prospects, operating results, and financial condition, including operational, financial, and regulatory challenges Risks Related to Our Business Olaplex faces risks from intense competition, the critical need to maintain brand value and successful marketing, the ability to innovate and respond to consumer trends, product quality and safety, execution of its strategic plan, accurate demand forecasting, and reliance on a limited number of manufacturers and customers - The beauty industry is highly competitive, with larger competitors having greater resources and potentially offering lower-priced products[75] - Brand image and reputation are critical; negative publicity, ineffective marketing, or product quality issues could adversely affect the business[78][80] - Failure to anticipate and respond to market trends, consumer preferences, or successfully introduce new products could harm financial results[82][85] - Product quality, efficacy, and safety are paramount; any loss of confidence or allegations of adverse effects could damage the brand and lead to legal claims[87][88] - Inability to accurately forecast customer demand and manage inventory can lead to excess inventory, write-downs, or product shortages, impacting gross margins and customer relationships[93][94] - Dependence on a limited number of customers (e.g., two customers represented 21% of net sales in 2023) poses a risk if these relationships deteriorate or sales decrease[97][98] - Reliance on a single or limited number of manufacturers (Cosway accounted for over 61% of net sales in 2023) creates supply chain risks, including shortages, price increases, or quality control issues[102] - Global operations expose the company to risks such as foreign currency fluctuations, political instability, trade restrictions, and macroeconomic factors[109][110] - The business is affected by seasonality, with typically higher sales in the second half of the fiscal year[113] Risks Related to Information Technology and Cybersecurity Olaplex's reliance on information technology systems and third-party service providers exposes it to significant cybersecurity risks, including system failures, data breaches, and the potential for reputational harm, financial losses, and regulatory liabilities - Reliance on IT systems for operations, e-commerce, and data storage makes the company vulnerable to outages, breaches, and cybersecurity threats (e.g., ransomware, phishing)[114][115] - Failure to maintain security of confidential information (customer, employee, IP, financial data) could lead to reputational harm, competitive disadvantage, government investigations, litigation, fines, or damages[115][116] - Processing personal and sensitive data is subject to evolving privacy laws (e.g., GDPR, U.K. GDPR, U.S. state laws), with non-compliance potentially resulting in significant fines and reputational damage[117] Risks Related to Intellectual Property Matters Olaplex's business relies heavily on its intellectual property, and risks include the inability to adequately register, maintain, and protect its patents and trademarks globally, potential infringement claims from third parties, and challenges to the ownership or validity of its proprietary technology - Efforts to register, maintain, and protect intellectual property (patents, trademarks, trade secrets) may not be sufficient, leading to challenges, invalidation, or misappropriation[118] - Enforcing IP rights is expensive and time-consuming, with no guarantee of success or commercially meaningful remedies[119] - Pending patent applications may not be approved, and issued patents may be challenged or circumvented[120] - Third parties may allege infringement, misappropriation, or violation of their IP rights, leading to costly litigation, damages, or the need to redesign products or obtain licenses[125] - Risk of claims that employees or contractors wrongfully used or disclosed trade secrets of former employers, or challenges to the ownership of company-developed IP[128] Risks Related to Legal and Regulatory Matters Olaplex is exposed to various legal and regulatory risks, including litigation, compliance with diverse international laws on product marketing and safety, potential product recalls, and the risk of misconduct by employees or third-party partners - Involvement in litigation or regulatory proceedings (e.g., intellectual property, product-related claims, advertising) can be expensive, time-consuming, and harm reputation and financial results[130] - Business is subject to numerous federal, state, and international laws and regulations that can delay sales, limit imports, restrict marketing claims, or require product reformulations[131][134][135] - Failure to comply with manufacturing standards or product quality issues could lead to reputational harm, remediation costs, or regulatory enforcement, including product recalls[137] - Risk of misconduct by employees, contractors, or partners, including non-compliance with regulatory standards, data privacy laws, or anti-corruption laws (e.g., FCPA, U.K. Bribery Act)[139][140] Risks Related to Our Indebtedness Olaplex's significant indebtedness could adversely affect its financial condition by requiring a large portion of cash flow for debt payments, increasing vulnerability to economic downturns, limiting financial flexibility, and potentially restricting its ability to incur additional debt or raise capital - Significant indebtedness requires a substantial portion of cash flow for payments, reducing funds for working capital, capital expenditures, and growth initiatives[142] - Inability to generate sufficient cash flow from operations to service debt obligations could necessitate refinancing or additional capital, which may not be available on favorable terms[143][144] - Debt agreements contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, make investments, or engage in certain transactions[145][147] - Breach of covenants could lead to acceleration of debt repayment, and the company's subsidiaries' ability to pay dividends to the parent is restricted by debt agreements[148][149] Risks Related to Ownership of Our Common Stock Ownership of Olaplex's common stock carries risks including potential stock price volatility, significant influence by Advent Funds, the impact of the Tax Receivable Agreement, and certain corporate governance provisions that could deter acquisitions or limit stockholder actions - Stock price may be volatile and decline due to market fluctuations, failure to meet analyst projections, or securities class action litigation (e.g., Lilien v. Olaplex Holdings, Inc. et al. filed Nov 2022)[153][154] - Investment funds affiliated with Advent International, L.P. (Advent Funds) beneficially own approximately 75.7% of outstanding common stock as of December 31, 2023, giving them significant influence over the company's affairs[155] - The Tax Receivable Agreement requires substantial cash payments to Pre-IPO Stockholders (expected to aggregate $198.2 million over 12 years), which could exceed actual tax savings or accelerate upon certain events[157][158][159] - Sales of a substantial amount of common stock by Advent Funds or company insiders could cause the stock price to fall[161][162][164] - Delaware law and company bylaws (classified board, preferred stock issuance) could make mergers or proxy contests more difficult[165] - As a 'controlled company' under Nasdaq standards, Olaplex relies on exemptions from certain corporate governance requirements, potentially reducing stockholder protections[166][167] - The company does not intend to pay dividends for the foreseeable future, requiring stockholders to rely on stock price appreciation for gains[170] General Risks General risks include the impact of economic downturns, inflation, and disruptions on consumer spending and customer financial strength, potential fluctuations in quarterly results, changes in tax rates, and risks associated with corporate citizenship, acquisitions, outsourced functions, and catastrophic events - General economic downturns, inflation, and disruptions (e.g., pandemics, geopolitical conflicts) can negatively affect consumer spending on discretionary items and the financial strength of customers[174][177] - Quarterly results of operations may fluctuate due to various factors, and failure to meet guidance or expectations could lead to a decline in stock price[179] - Changes in tax rates, new tax legislation, or exposure to additional tax liabilities (U.S. or international) could materially affect operating results and financial condition[180][181][182] - Failure to meet evolving stakeholder expectations regarding corporate citizenship and sustainability could negatively impact brand, reputation, sales, and financial condition[183][184] - Acquisitions expose the company to additional risks, including management distraction, integration challenges, and failure to achieve anticipated benefits[185] - Dependence on outsourced functions (IT, e-commerce, logistics, finance, HR) means failure of service providers could adversely affect business operations[186] - Natural disasters, public health crises, political crises, or other catastrophic events could disrupt operations, supply chain, and consumer spending[187] - Failure to maintain effective internal control over financial reporting could impair accurate and timely financial statements and reduce investor confidence[188][189] - Liability for PEOs' non-compliance with applicable laws or obligations could significantly affect the business[190][192] Item 1B. Unresolved Staff Comments This section indicates that there are no unresolved comments from the SEC staff regarding the company's previous filings - There are no unresolved staff comments[193] Item 1C. Cybersecurity Olaplex emphasizes its commitment to cybersecurity, detailing its risk management processes, the structure of its cybersecurity team, oversight by the Audit Committee, and the management of third-party vendor risks, while acknowledging the persistent and evolving nature of cyber threats - Information technology supports all business aspects, with an increasing portion of global IT infrastructure being cloud-based and in partnership with industry-leading service providers[193] - The company has adopted processes to identify, assess, and manage cybersecurity risks, including an annual enterprise risk assessment reviewed by management, the Audit Committee, and the Board of Directors[193] - A dedicated cybersecurity team, led by the Senior Vice President of IT (with over 20 years of experience), is responsible for risk management, incident response, and ongoing security assessments, including third-party penetration tests[194] - Third-party vendor cybersecurity risks are managed using risk management software and reviewed during new vendor onboarding[195] - The Audit Committee, through its Information Security Subcommittee, provides oversight of cybersecurity policies and practices[196] - As of the report date, cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial condition, but the risk of future material impact remains due to evolving threats[197] Item 2. Properties Olaplex operates as a fully remote company and does not own real property, leasing a research and development facility and a new office space in New York to support its operations and employee collaboration - The company does not own any real property[198] - Leases an 11,000 square foot facility in New York for R&D activities, with a lease term ending September 30, 2030[198] - As of January 2024, leases a 10,000 square foot office space in New York for meetings and collaboration, with a lease term ending June 14, 2026[198] - Employees work remotely, from home or at shared co-working spaces[198] Item 3. Legal Proceedings Olaplex is involved in various legal proceedings, including a putative securities class action, a purported derivative action, and product liability claims, which could impact its reputation, financial condition, and management's attention - The company is subject to litigation and legal proceedings in the ordinary course of business, including intellectual property, regulatory, contract, advertising, and consumer claims[199] - A putative securities class action (Lilien v. Olaplex Holdings, Inc. et al.) was filed on November 17, 2022, alleging claims under Sections 11, 12, and 15 of the Securities Act of 1933, seeking compensatory damages and other relief[154][432] - A purported derivative action (Ciuffo v. Dagousset, et al.) was filed on November 15, 2023, with similar allegations to the Lilien case, and has been stayed pending a decision in the securities action[433] - Product liability claims (Albahae, et al. v. Olaplex Holdings, Inc., et al.) were filed on February 9, 2023, alleging personal and economic injury due to certain product ingredients; these claims were dismissed without prejudice in July 2023, but plaintiffs may re-file[87][434] - Any potential loss from these pending legal proceedings is not probable or reasonably estimable at this time[435] Item 4. Mine Safety Disclosures This item is not applicable to Olaplex Holdings, Inc. as it is not involved in mining operations - This item is not applicable[201] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides information on the market for Olaplex's common stock, its stockholder base, dividend policy, and a stock performance graph comparing its returns against market indices Common Stock Market Prices Olaplex's common stock has been traded on the Nasdaq Global Select Market under the symbol 'OLPX' since September 30, 2021, with no prior market - Common stock (OLPX) has traded on the Nasdaq Global Select Market since September 30, 2021[204] Holders As of February 23, 2024, Olaplex had 24 registered holders of its common stock, not including shares held in street name - As of February 23, 2024, there were 24 registered holders of common stock[205] Dividends Olaplex does not anticipate paying dividends on its common stock in the foreseeable future, intending to retain earnings for business operations and expansion, with future dividend decisions at the discretion of the Board of Directors and subject to various restrictions - The company does not anticipate paying dividends on common stock for the foreseeable future, intending to retain earnings for business operations and expansion[206] - Future dividend decisions are at the sole discretion of the Board of Directors, considering economic conditions, financial performance, cash needs, capital requirements, and contractual/legal restrictions (e.g., 2022 Credit Agreement, Tax Receivable Agreement)[206] Stock Performance Graph This section presents a graph and table comparing the cumulative total stockholder return of Olaplex's common stock against the Nasdaq Composite and S&P Consumer Staples Index from September 30, 2021, to December 31, 2023 - The stock performance graph compares Olaplex's total stockholder return with the Nasdaq Composite and S&P Consumer Staples Index[208] - The comparison period is from September 30, 2021 (IPO date) to December 31, 2023, assuming a $100 investment and dividend reinvestment[208] Cumulative Total Stockholder Return | Company/Index | 09/30/2021 | 12/31/2021 | 03/31/2022 | 06/30/2022 | 09/30/2022 | 12/31/2022 | 03/31/2023 | 06/30/2023 | 09/30/2023 | 12/31/2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Olaplex Holdings, Inc. | $100.00 | $118.90 | $63.80 | $57.51 | $38.98 | $21.27 | $17.43 | $15.18 | $7.96 | $10.37 | | NASDAQ Composite | $100.00 | $108.45 | $98.42 | $76.33 | $73.19 | $72.44 | $84.59 | $95.43 | $91.49 | $103.89 | | S&P Consumer Staples | $100.00 | $112.86 | $110.76 | $104.96 | $97.37 | $109.03 | $109.21 | $108.99 | $101.79 | $106.68 | Item 6. [Reserved.] This item is reserved and contains no information - This item is reserved[211] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Olaplex's financial condition and results of operations, including strategic pillars, business environment, financial summaries, liquidity, and critical accounting policies Company Overview Olaplex is a science-enabled beauty company that revolutionized the prestige hair care category with its patent-protected bond-building technology, offering a holistic regimen across professional, specialty retail, and DTC channels, and recently expanding into adjacent markets - Olaplex is an innovative, science-enabled, technology-driven beauty company, founded in 2014, focused on prestige hair care[214] - Pioneered the bond-building space in 2014 with patent-protected technology that relinks disulfide bonds in hair[215] - Product portfolio includes seventeen unique products for treatment, maintenance, and protection, distributed through professional, specialty retail, and DTC channels[215] - Expanded into the hair care adjacent market with LASHBOND Building Serum[216] - Operates a synergistic omnichannel model, with the professional channel as the brand foundation, specialty retail for awareness, and DTC for direct consumer engagement and product development feedback[216] Strategic Pillars Olaplex's long-term growth strategy is built on igniting its global brand, disrupting with innovation, amplifying channel coverage, and charting new geographies, all supported by continuous investment in capabilities and infrastructure - Strategic pillars for long-term growth include: igniting global brand, disrupting with innovation, amplifying channel coverage, and charting new geographies[217] - Brand ignition involves investing in performance marketing, organic social media, paid media, education, community engagement, and influencer partnerships[218] - Innovation strategy includes launching 2-4 new products annually over the next three years, leveraging science-based technology and the patented Bis-amino ingredient, and exploring adjacent categories[219] - Channel amplification focuses on strengthening professional relationships, enhancing visual merchandising in specialty retail, and evolving digital experiences on Olaplex.com for DTC[220][221] - New geography expansion prioritizes key markets in Europe and Asia, establishing professional channels first, then complementing with specialty retail and DTC[222] - These pillars are supported by building capabilities and infrastructure, including cultivating talent, evolving operational capabilities, and strengthening financial, technology, and data foundations[223] Business Environment & Trends Olaplex is actively monitoring the global macroeconomic environment, including recession risks, inflationary pressures, competitive discounting, and currency volatility, which are impacting consumer spending and industry competition - The company monitors global macroeconomic factors such as recession risk, inflationary pressures, competitive products and discounting, currency volatility, high interest rates, and geopolitical tensions[224] - Inflationary pressures are impacting consumer spending habits and preferences, leading to inventory rebalancing at customers[224] - Increased competitive activity, including discounting in the prestige hair care category, is observed[225] 2023 Financial Summary Olaplex experienced a significant decline in net sales and profitability in 2023 compared to 2022, primarily due to lower demand, customer inventory rebalancing, increased promotional allowances, and higher operating expenses 2023 Financial Performance Overview | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $458.3 million | $704.3 million | $(246.0) million | (34.9)% | | Gross profit margin | 69.5% | 73.8% | (4.3)% | | | Operating expenses | Increased by 35.6% | | | 35.6% | | Operating income | $108.2 million | $364.4 million | $(256.2) million | (70.3)% | | Net income | $61.6 million | $244.1 million | $(182.5) million | (74.8)% | - Net sales decreased 34.9% due to lower demand and customer inventory rebalancing, particularly in professional and specialty retail channels[227] - Gross profit margin decreased to 69.5% from 73.8% primarily due to increased promotional allowance, higher product obsolescence reserve, and increased raw material costs[227] - Operating expenses increased 35.6% due to higher sales and marketing, payroll from workforce expansion, and professional fees, partially offset by lower distribution costs[227] Results of operations for the years ended December 31, 2023, 2022 and 2021 This section provides a detailed comparative analysis of Olaplex's consolidated statements of operations for fiscal years 2023, 2022, and 2021, highlighting key financial metrics and their year-over-year changes Net Sales Total net sales declined significantly in 2023 compared to 2022 across all channels, primarily driven by lower demand and customer inventory rebalancing, with notable decreases in the U.S., U.K., and Canada Net Sales by Channel | Channel | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Professional | $180,084 | $300,472 | $(120,388) | (40.1)% | | Specialty retail | $135,079 | $235,310 | $(100,231) | (42.6)% | | DTC | $143,137 | $168,492 | $(25,355) | (15.0)% | | Total net sales | $458,300 | $704,274 | $(245,974) | (34.9)% | - Total net sales declined 34.9% in 2023 compared to 2022, mainly due to lower demand and customer inventory rebalancing, particularly in professional and specialty retail channels[230] - The decline was partially offset by new product launches (LASHBOND Building Serum, No. 4D Clean Volume Detox Dry Shampoo, etc.) and new customers[230] - Net sales declined primarily in the United States, the United Kingdom, and Canada, with increases in the Middle East and Latin America[230] Cost of Sales and Gross Profit Cost of sales decreased in 2023 due to lower product sales and prior year write-offs, but gross profit margin declined significantly to 69.5% from 73.8% due to increased inventory obsolescence reserves and inflationary pressures Cost of Sales and Gross Profit Performance | Metric | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of sales | $139,668 | $184,721 | $(45,053) | (24.4)% | | Gross profit | $318,632 | $519,553 | $(200,921) | (38.7)% | | Gross profit margin | 69.5% | 73.8% | | | - Cost of sales decreased primarily due to declining product sales[231] - Gross profit margin decreased from 73.8% in 2022 to 69.5% in 2023, impacted by a $15.2 million inventory obsolescence reserve and inflationary pressures[231][232] Operating Expenses Total operating expenses increased by 35.6% in 2023, mainly driven by significant investments in sales and marketing, higher payroll costs due to workforce expansion, and increased professional and legal fees, partially offset by reduced distribution costs Operating Expenses by Category | Expense Category | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Selling, general, and administrative expenses | $168,942 | $113,877 | $55,065 | 48.4% | | Amortization of other intangible assets | $41,468 | $41,282 | $186 | 0.5% | | Total operating expenses | $210,410 | $155,159 | $55,251 | 35.6% | - Selling, general and administrative expenses increased by $55.1 million (48.4%) due to a $37.1 million increase in sales and marketing investments, $8.7 million in one-time distributor payments, professional expenses, and legal settlement costs, $6.1 million in payroll, and $2.9 million in CEO transition costs[233] - These increases were partially offset by a $3.1 million decrease in distribution and fulfillment costs due to lower product sales volume[234] Interest Expense, Net Net interest expense decreased slightly in 2023, as a significant increase in interest income from higher rates and investments largely offset the rise in interest expense on variable-rate debt Interest Expense, Net Performance | Metric | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $(57,954) | $(43,953) | $(14,001) | 31.9% | | Interest income | $18,828 | $2,775 | $16,053 | 578.4% | | Interest expense, net | $(39,126) | $(41,178) | $2,052 | (5.0)% | - Interest expense increased 31.9% due to higher interest rates, partially offset by benefits from the interest rate cap[235] - Interest income increased 578.4% due to rising interest rates and additional investments in highly liquid instruments[236] Other Income (Expense), Net Total other income (expense), net, significantly improved in 2023, primarily due to the absence of the prior year's loss on debt extinguishment and a larger reduction in the Tax Receivable Agreement liability Other Income (Expense), Net Performance | Metric | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Loss on extinguishment of debt | $0 | $(18,803) | $18,803 | (100.0)% | | Tax receivable agreement liability adjustment | $7,404 | $3,084 | $4,320 | 140.1% | | Other income (expense), net | $220 | $(2,256) | $2,476 | (109.8)% | | Total other income (expense), net | $7,624 | $(17,975) | $25,599 | (142.4)% | - The $25.6 million increase in total other income (expense), net, was primarily driven by the absence of an $18.8 million loss on debt extinguishment from 2022[237] - A $7.4 million reduction in the Tax Receivable Agreement liability was recognized in 2023 (vs. $3.1 million in 2022) due to updates in state and federal tax rates[237] - Other income, net, also increased due to a decrease in foreign currency transaction losses[237] Income Tax Provision The income tax provision decreased significantly in 2023, with the effective tax rate remaining below the U.S. federal statutory rate due to the FDII deduction and non-taxable income from the Tax Receivable Agreement Income Tax Provision Performance | Metric | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Income tax provision | $15,133 | $61,169 | $(46,036) | (75.3)% | | Effective tax rate | 19.7% | 20.0% | | | - The effective tax rate for 2023 was 19.7%, lower than the statutory rate of 21%, primarily due to the Foreign Derived Intangible Income (FDII) deduction and non-taxable income from the Tax Receivable Agreement, partially offset by state and local income taxes[238] Tax Receivable Agreement The Tax Receivable Agreement (TRA) requires Olaplex to make substantial payments to Pre-IPO Stockholders based on tax savings from Pre-IPO Tax Assets, with an expected aggregate of $198.2 million over the remaining 12-year period, and the liability is subject to adjustments based on tax law changes - The Tax Receivable Agreement (TRA) requires payments to Pre-IPO Stockholders equal to 85% of cash savings from utilizing Pre-IPO Tax Assets[239] - Future payments under the TRA are expected to aggregate $198.2 million over the remaining 12-year period[239] - The TRA liability is based on current tax laws and assumptions of sufficient taxable income, with updates to state tax rates and U.S./foreign income allocation potentially impacting the liability[239] - A payment of $16.6 million was made to Pre-IPO Stockholders in 2023[239] - As of December 31, 2023, the remaining TRA payment obligation is $198.2 million ($12.7 million current, $185.5 million long-term)[239] Financial Condition, Liquidity and Capital Resources Olaplex's liquidity is supported by cash, cash equivalents, and operating cash flows, supplemented by its revolving credit facility. The company manages its cash for working capital, operating costs, debt servicing, and strategic investments, while monitoring its 2022 Credit Agreement and Tax Receivable Agreement obligations Overview Olaplex's primary cash sources are product sales, used for working capital, operating costs, capital expenditures, and debt servicing. The company maintains significant cash and cash equivalents, along with available borrowing capacity - Primary cash source is proceeds from product sales[240] - Primary uses of cash include working capital, operating costs (employee, marketing, fulfillment, overhead, innovation), capital expenditures, and debt servicing[241] Liquidity Position | Metric | As of Dec 31, 2023 (in thousands) | As of Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $466,400 | $322,808 | | Available borrowing capacity (2022 Revolver) | $150,000 | $150,000 | | Total liquidity position | $616,400 | $472,808 | | Working capital (excluding cash) | $90,700 | | | Combined total liquidity position | $707,100 | | Cash Flows Olaplex's cash flows from operating activities decreased in 2023, while investing activities remained minimal, and financing activities primarily involved debt payments and tax-related share withholdings Cash Flow Summary | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $177,532 | $255,324 | | Net cash used in investing activities | $(3,614) | $(2,682) | | Net cash used in financing activities | $(30,326) | $(116,222) | | Net increase in cash | $143,592 | $136,420 | Operating Activities Net cash provided by operating activities decreased in 2023, primarily due to a significant drop in net income, partially offset by changes in working capital and non-cash adjustments like inventory obsolescence and deferred taxes - Net cash provided by operating activities decreased in 2023, primarily due to an $182.5 million decrease in net income[245] - Partially offset by increases in inventory obsolescence, write-offs, and disposal adjustments ($7.0 million), and a decrease in deferred taxes benefit ($7.4 million)[245] Investing Activities Investing activities in both 2023 and 2022 primarily involved purchases of property and equipment, patents, and software, with a slight increase in cash used in 2023 - Investing activities included purchases of property and equipment, patents, and software in both 2023 and 2022[246] Financing Activities Financing activities in 2023 primarily consisted of cash outflows for long-term debt payments, Tax Receivable Agreement payments, and tax withholding obligations for stock options, partially offset by proceeds from stock option exercises - 2023 financing activities included payments on long-term debt, Tax Receivable Agreement payments, and payments for shares withheld for tax withholding obligations[247] - These outflows were partially offset by cash received from stock option exercises[247] Liquidity and Capital Resources Requirements Olaplex expects its current cash, cash equivalents, and operating cash flows to be sufficient for at least the next 12 months, with potential additional financing through debt or equity if needed for long-term growth - Current cash, cash equivalents, and operating cash flows are expected to meet operating costs, debt payments, working capital, and capital expenditures for at least the next 12 months[248] - The 2022 Revolver provides additional liquidity, and long-term needs may be met through additional indebtedness or equity financings[249] 2022 Credit Facility The 2022 Credit Agreement, entered into in February 2022, refinanced previous debt with a $675 million term loan and a $150 million revolving credit facility, bearing variable interest rates and subject to covenants, with $663.2 million outstanding as of December 31, 2023 - The 2022 Credit Agreement, dated February 23, 2022, includes a $675 million seven-year senior-secured term loan facility and a $150 million five-year senior-secured revolving credit facility[250] - The refinancing resulted in an $18.8 million loss on extinguishment of debt in 2022[251] - Interest rates are variable, based on adjusted term SOFR or Alternate Base Rate, with the 2022 Term Loan Facility at 9.0% per annum as of December 31, 2023[252][253] - The agreement contains restrictive covenants, including a springing first lien leverage ratio, with the company in compliance as of December 31, 2023[254][255] - As of December 31, 2023, outstanding indebtedness was $663.2 million, with $150.0 million available under the 2022 Revolver[256] - An interest rate cap transaction was entered into on August 11, 2022, with a notional amount of $400.0 million, to limit exposure to interest rate increases[257] Tax Receivable Agreement The Tax Receivable Agreement (TRA) obligates Olaplex to pay Pre-IPO Stockholders 85% of tax savings from Pre-IPO Tax Assets, with an estimated $198.2 million payable over 12 years, subject to various factors including tax law changes and potential acceleration events - The TRA requires payments to Pre-IPO Stockholders equal to 85% of cash savings from utilizing Pre-IPO Tax Assets[258] - Expected future payments under the TRA could aggregate $198.2 million over the remaining 12-year period[259] - The liability is subject to changes based on tax laws, state tax rates, and U.S./foreign income allocation, with adjustments recorded in other income (expense)[259][260] - The TRA liability was initially $232.9 million on September 30, 2021, and adjusted to $198.2 million as of December 31, 2023, due to tax rate updates[260] - Payments under the TRA can accelerate upon certain mergers, sales, or breaches, potentially exceeding actual tax benefits and impacting liquidity[266][268] Contractual Obligations and Commitments Olaplex's material cash requirements as of December 31, 2023, primarily consist of obligations under the 2022 Term Loan Facility (principal and interest), payments due under the Tax Receivable Agreement, purchase obligations, and operating lease liabilities Contractual Obligations as of December 31, 2023 | Obligation Type | Total (in thousands) | Less Than One Year (in thousands) | 1-3 Years (in thousands) | 3-5 Years (in thousands) | More Than Five Years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | 2022 Term Loan Facility debt (principal) | $663,188 | $6,750 | $13,500 | $13,500 | $629,438 | | Interest on 2022 Term Loan Facility debt (assumed 9.0%) | $304,179 | $60,484 | $118,140 | $115,846 | $9,709 | | Related party payable (Tax Receivable Agreement) | $198,171 | $12,675 | $26,765 | $30,343 | $128,388 | | Purchase obligations | $14,080 | $4,121 | $8,242 | $1,717 | $0 | | Operating lease liabilities | $3,157 | $370 | $1,173 | $839 | $775 | | Total contractual obligations | $1,182,775 | $84,400 | $167,820 | $162,245 | $768,310 | - The 2022 Term Loan Facility debt payments include scheduled principal payments and interest calculated at an assumed annual rate of 9.0%[269] - The Tax Receivable Agreement liability represents 85% of estimated cash tax savings, with payments not considering potential financing costs[269] Critical Accounting Policies and Estimates Olaplex's financial statements rely on critical accounting policies and estimates, particularly for revenue recognition (promotional allowances, sales returns), inventory valuation (obsolescence reserves), and the Tax Receivable Agreement liability, where even minor variances can significantly impact reported results Revenue Recognition Revenue recognition involves significant estimates for variable consideration, such as promotional allowances and sales returns, which are based on historical experience and customer-specific expectations, and are subject to revision - Revenue is recognized when control of goods is transferred to the customer, net of estimated and actual allowances[272] - Estimates for promotional allowances and sales returns are based on expected value or most likely amount, historical experience, and customer-specific expectations[274][275] - Significant differences between actual and estimated allowances could impact net sales in subsequent periods[274][275] Inventory Inventory is valued at the lower of cost or net realizable value, with estimates for excess and obsolete inventory based on future demand, sales prices, and competition, which can lead to write-downs if actual conditions are less favorable - Inventory is stated at the lower of cost (average cost method) or estimated net realizable value[276] - Excess and obsolete inventory reductions are determined based on assumptions about future demand, sales prices, impact of competition, and inventory age[277] - Additional inventory write-downs may be required if actual conditions are less favorable than estimated[277] Tax Receivable Agreement The Tax Receivable Agreement liability is a critical estimate, based on current tax laws and assumptions of sufficient taxable income to realize full tax benefits, with potential impacts from changes in tax rates and income allocation - The TRA liability is based on current tax laws and the assumption of sufficient taxable income to realize full tax benefits[278][279] - Updates to blended state tax rates, U.S. vs. foreign sourced income allocation, and changes in tax rules can significantly impact the established liability[279] - Future payments under the TRA are expected to aggregate $198.2 million over the remaining 12-year period[279] New Accounting Pronouncements Olaplex is currently evaluating the potential impact of recently issued accounting pronouncements, including ASU No. 2023-07 on Segment Reporting and ASU No. 2023-09 on Income Tax Disclosures, which will require enhanced disclosures - ASU No. 2023-07 (Segment Reporting) is effective for fiscal years beginning after December 15, 2023, requiring enhanced disclosures about significant segment expenses[361] - ASU No. 2023-09 (Income Taxes) is effective for annual periods beginning after December 15, 2024, modifying income tax disclosures to include specific rate reconciliation categories, domestic/foreign income/loss, and income tax payments by jurisdiction[362] - The company is evaluating the potential impact of these new guidances on its consolidated financial statements[361][362] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This sectio