OLAPLEX HOLDINGS, INC. (OLPX)

ITEM 7 - 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 Consolidated Financial Statements and related notes included elsewhere in this Annual Report. 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 “Special Note Regarding Forward-Looking Statements” section and in the “Risk Factors” section in this Annual Report.

Company Overview

OLAPLEX is a foundational health and beauty company powered by breakthrough innovation that starts with and is inspired by the Pro. Our products are designed to enable Pros and their clients to achieve their best results, and to provide consumers with a holistic hair regimen that starts by establishing a foundation for healthy hair.

In 2014, OLAPLEX revolutionized the haircare category through the introduction of our patent-protected bond-building technology, Bis-aminopropyl diglycol dimaleate (“Bis-amino”), in our No. 1 Bond Multiplier® and No. 2 Bond Perfector® products. This new two-part salon treatment allowed Pros around the world to repair disulfide bonds deep inside the hair that are broken during chemical services (such as coloring, perming and straightening). Later in 2014, OLAPLEX launched an at-home version of this signature bond-building treatment, No. 3 Hair Perfector®, allowing consumers to achieve the benefits of OLAPLEX beyond the salon. By the end of 2015, OLAPLEX products were sold globally, demonstrating the resonance of the product and brand proposition around the world. From our original three bond-building products, we expanded to a range of products suitable across hair types for use in the salon and at home.

Since our inception, we have focused on delivering patent-protected technology and proven performance in the prestige haircare category. From our origins of creating the bond-building space, our product portfolio has expanded to 23 products that support the hair health needs of our Pro and consumer communities.

We have developed a synergistic omnichannel model that leverages the strength of each of our channels and our strong digital capabilities, which we apply across all of our sales platforms. Our professional channel serves as the foundation for our brand. Through this channel, Pros introduce consumers to our products and, we believe, influence consumer purchasing decisions. Our specialty retail channel allows us to build our brand by reinforcing our relationship with current consumers and accessing new consumers. Our DTC channel, comprised of Olaplex.com and sales through third-party e-commerce platforms, further broadens our access to consumers, while allowing us to directly engage with and educate consumers through our owned platforms.

Our Strategy

In 2025, we are focused on the following three strategic priorities.

Generate Brand Demand

Our marketing strategy seeks to celebrate the passion and creativity of our Pros, as well as our breakthrough scientific innovations and technologies. We are focused on elevating our visual brand identity and communicating the unique benefits of Olaplex products to Pros and consumers. We seek to implement a 360-degree full funnel marketing approach to generate consumer demand, leveraging a creator-led point of view and product messaging that focuses on healthy hair from root to tip. We aim to execute on our Pro-first strategy by improving education, enhancing our presence among the Pro community, and elevating our Pro brand ambassadors and influencers.

Harness Innovation

We seek to build a future pipeline of innovation that is grounded in foundational hair health. We are focused on continuing to innovate beyond damage repair to unlock what we believe are key signs of healthy hair: strength and elasticity, shine and sheen, smoothness and frizz control, softness and moisturization, and shape retention and integrity. We seek to continue to introduce breakthrough science while expanding our product portfolio and reinvigorating our signature products to drive overall brand demand.

Execute with Excellence

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We will continue to evolve and refine our operational and strategic processes, realign our international partnerships and seek efficiencies across our organization in support of growth. We have evolved our integrated business planning process and strategic planning procedure. We are currently in the process of realigning our international distribution network, and we are focused on enhancing our ongoing international partnerships and introducing and executing regional specific strategies to service our customers. We will continue to use data, insights and a results-oriented mindset as we look to grow our brand and business in the future.

Business Environment & Trends

We continue to monitor the effects of the global macro-economic environment, including the risk of recession, inflationary pressures, competitive products and discounting, currency volatility, high interest rates, tariffs, social and political issues, geopolitical tensions and regulatory matters. We also are mindful of inflationary pressures on our consumers amidst an increasingly competitive industry, and we are monitoring the impact that consumer confidence may have on consumer spending at our customers.

Competition in the beauty industry is based on a variety of factors, including innovation, product efficacy, pricing, brand recognition and loyalty, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives, sustainability and other activities. We have seen increased competitive activity including discounting in the prestige haircare category. We believe we have a well-recognized and strong reputation within the beauty industry, from our customers to the end-consumer, and that the quality and performance of our products, our emphasis on science-based innovation, our asset-light operating model, and our engagement with our Pro and consumer communities position us to compete effectively.

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Results of operations for the years ended December 31, 2024, 2023 and 2022

Set forth below are our results of operations for our fiscal year ended December 31, 2024 (“fiscal year 2024”) compared to our fiscal year ended December 31, 2023 (“fiscal year 2023”). For discussion of our results of operations for our fiscal year 2023 versus our fiscal year ended December 31, 2022 (“fiscal year 2022”), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our fiscal year 2023, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 29, 2024.

The following table sets forth our Consolidated Statements of Operations data for each of the periods presented:

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Fiscal year 2024 compared to fiscal year 2023:

Net Sales

We distribute products in the U.S. and internationally through professional distributors in salons, 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, net sales by our three sales channels consisting of professional, specialty retail and DTC were as follows:

Total net sales decreased 7.8% for the year ended December 31, 2024 compared to the same period in 2023, primarily attributed to a lower level of demand. This decline was partially offset by sales due to our launches of Browbond® Building Serum, No. 5 Leave-In™ Moisturize & Mend Leave-In Conditioner, No. 10 Bond Shaper™ Curl Defining Gel and Bond Shaper™ Curl Rebuilding Treatment, as well as the impact of new customers within each channel. Net sales declined primarily in certain markets in Western Europe, partially offset by increases in the United States, Canada and Eastern Europe.

Cost of Sales and Gross Profit

Our cost of sales decreased primarily due to a decrease in product sales and a decrease in write-offs for product obsolescence for the year ended December 31, 2024 as compared to the previous year. The Company recorded $7.8 million in inventory write-offs during the year ended December 31, 2024, as compared to $15.2 million during the year ended December 31, 2023.

As a result of the activity described above regarding net sales and cost of sales, as well as due to product mix, our gross profit margin decreased to 69.2% for the year ended December 31, 2024 from 69.5% for the year ended December 31, 2023.

Operating Expenses

The increase in selling, general and administrative expenses was primarily due to an increase of $7.2 million in payroll costs driven by merit increases and organizational realignment costs, $3.9 million in non-payroll related advertising and marketing expenses, $3.3 million in distribution and fulfillment costs and $2.1 million in technology investments, partially offset by a decrease of $5.9 million in legal and professional fees during the year ended December 31, 2024.

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Interest Expense, Net

Interest expense for the year ended December 31, 2024 increased as compared to the previous year due to fluctuations in interest rates. See “Liquidity and Capital Resources Requirements – 2022 Credit Facility” included in Part II, Item 7 of this Annual Report for additional information on our outstanding debt.

Interest income for the year ended December 31, 2024 increased as compared to the previous year due to additional investments driven by an increase in cash and cash equivalents throughout the year.

Other Expense (Income), Net

For the year ended December 31, 2024, total other expense (income), net increased $13.4 million compared to the previous year, primarily due to expense of $3.9 million resulting from an increase to the liability in respect of the Tax Receivable Agreement, compared to a benefit of $7.4 million recognized for the year ended December 31, 2023. The increase in liability in respect of the Tax Receivable Agreement resulted primarily from an update to the blended state income tax rate.

Other expense (income), net increased primarily due to foreign currency transaction losses driven by the performance of the U.S. dollar.

Income Tax Provision

The Company’s effective tax rate was 27.5% for the year ended December 31, 2024, as compared to 19.7% for the year ended December 31, 2023. The Company’s effective tax rate for the year ended December 31, 2024 was higher than the statutory tax rate of 21% primarily due to the unfavorable impact of non-deductible share-based compensation, the effect of state income taxes, the non-deductible expense associated with the Tax Receivable Agreement and the effect of those items on the lower book income for the year ended December 31, 2024, partially offset by the increased foreign derived intangible income (“FDII”) deduction. For the year ended December 31, 2023, the effective tax rate was lower than the U.S. federal statutory tax rate primarily due to the FDII deduction and the non-taxable income associated with the Tax Receivable Agreement, partially offset by the effect of state and local income taxes.

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.

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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 for our products, timing of when a retailer rearranges or restocks our products, timing of inventory purchases, and the amount and timing of our payables and expenses, including to implement our business transformation plan. 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 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 December 31, 2024, we had $586.0 million of cash and cash equivalents. In addition, as of December 31, 2024, we had borrowing capacity of $150.0 million under our 2022 Revolver, providing us with a liquidity position of $736.0 million plus $39.1 million of working capital excluding cash and cash equivalents for a combined $775.1 million total liquidity position.

We continually evaluate our capital structure and may consider opportunities to reduce debt levels in the future to maintain financial flexibility.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

Net cash provided by operating activities was $143.1 million for the year ended December 31, 2024, primarily reflecting our net income of $19.5 million, net of non-cash cost items and changes in operating working capital. Non-cash adjustments were primarily driven by amortization of other intangibles of $43.7 million, share-based compensation expense of $11.1 million, amortization of patent formulations of $9.3 million and inventory write-off and disposals of $7.8 million. Changes in operating assets and liabilities increased cash provided by operating activities by $39.0 million.

Net cash provided by operating activities was $177.5 million for the year ended December 31, 2023, primarily reflecting our net income of $61.6 million, net of non-cash cost items and changes in operating working capital. Non-cash adjustments were primarily driven by amortization of other intangibles of $41.5 million, inventory write-off and disposals of $15.2 million, share-based compensation expense of $9.1 million and amortization of patent formulations of $8.3 million. Changes in operating assets and liabilities increased cash provided by operating activities by $44.1 million.

Investing Activities

Net cash used in investing activities was $4.9 million for the year ended December 31, 2024, reflecting investments of $3.8 million related to the purchase and development of software and purchases of property and equipment of $1.1 million.

Net cash used in investing activities was $3.6 million for the year ended December 31, 2023, reflecting investments of $2.7 million primarily related to the purchase and development of software, purchases of intangible assets of $0.5 million and purchases of property and equipment of $0.4 million.

Financing Activities

Net cash used in financing activities was $18.6 million for the year ended December 31, 2024, primarily consisting of $12.8 million of payments pursuant to our Tax Receivable Agreement and $6.8 million of principal payments for the 2022 Term Loan Facility.

Net cash used in financing activities was $30.3 million for the year ended December 31, 2023, primarily consisting of $16.5 million of payments pursuant to our Tax Receivable Agreement, $10.3 million of payments related to shares withheld to cover the

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tax withholding obligations for options exercised and $8.4 million of principal payments for the 2022 Term Loan Facility, partially offset by proceeds of $5.0 million from stock option exercises.

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 over both the short term (the next twelve months) and long term.

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 this Annual Report. 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 consumer demand for our products and our ability to continue providing innovative products to our customers and manage production and our supply chain.

2022 Credit Facility

On February 23, 2022, Olaplex, Inc., an indirect wholly owned subsidiary of Olaplex Holdings, Inc., together with Penelope Intermediate Corp. acting as the parent guarantor, entered into the 2022 Credit Agreement, by and among Olaplex, Inc., Penelope Intermediate Corp, Goldman Sachs Bank USA (“Goldman Sachs”), as administrative agent (the “Administrative Agent”), collateral agent and swingline lender, and each lender and issuing bank from time to time party thereto (the “Lenders”). The 2022 Credit Agreement refinanced and replaced the 2020 Credit Agreement with a seven-year $675.0 million senior-secured term loan facility (the “2022 Term Loan Facility”) and a five-year $150.0 million senior-secured revolving credit facility (the “2022 Revolver”), which includes a $25.0 million letter of credit sub-facility and a $25.0 million swingline loan sub-facility.

The refinancing of the 2020 Credit Agreement resulted in recognition of loss on extinguishment of debt of $18.8 million which is comprised of $11.0 million in deferred financing fee write off, and $7.8 million of prepayment fees for the 2020 Credit Agreement. We incurred costs directly related to the 2022 Credit Agreement of $11.9 million, consisting primarily of lender fees of $1.7 million and third-party fees of $10.2 million during the year ended December 31, 2022. These fees were allocated between the 2022 Revolver and the 2022 Term Loan Facility. 2022 Term Loan Facility fees are capitalized and recorded as a reduction of the carrying amount of non-current debt, and 2022 Revolver fees are capitalized and recorded as Other Assets on the balance sheet.

The interest rates for all facilities under the 2022 Credit Agreement are calculated based upon the Company’s election among (a) adjusted term secured overnight financing rate (“SOFR”) (subject to a 0.50% floor with respect to the 2022 Term Loan Facility, and a 0% floor with respect to the 2022 Revolver) plus an additional interest rate spread, (b) with respect to a borrowing in Euros under the 2022 Revolver, a euro interbank offered rate (subject to a 0% floor) plus an additional interest rate spread, or (c) an “Alternate Base Rate” (as defined in the 2022 Credit Agreement) (subject to a 1.50% floor with respect to the 2022 Term Loan Facility, and a 1.00% floor with respect to the 2022 Revolver) plus an additional interest rate spread.

The interest rate on outstanding amounts under the 2022 Term Loan Facility was 8.0% per annum as of December 31, 2024. We have not drawn on the 2022 Revolver as of December 31, 2024. The 2022 Term Loan Facility is repayable in mandatory quarterly installments equal to $1.7 million, with the balance payable at maturity. The 2022 Term Loan Facility and 2022 Revolver can each be prepaid at any time without any penalty or premium (subject to any applicable breakage costs). The 2022 Term Loan Facility is subject to customary mandatory prepayments with respect to excess cash flow, net proceeds from non-ordinary course asset dispositions and the issuance of additional non-permitted debt or certain refinancing debt, in each case as set forth in the 2022 Credit Agreement.

The 2022 Credit Agreement contains a number of covenants that, among other things, restrict the Company’s ability to (subject to certain exceptions) pay dividends and distributions or repurchase its capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The 2022 Credit Agreement also includes reporting, financial and maintenance covenants, including a springing first lien leverage ratio financial covenant. The Company was in compliance with these affirmative and negative covenants on December 31, 2024. Substantially all the assets of the Company constitute collateral under the 2022 Credit Agreement. The maturity date of the 2022 Term Loan Facility is February 23, 2029. The maturity date of the 2022 Revolver is February 23, 2027.

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As of December 31, 2024, the Company had outstanding indebtedness under the 2022 Credit Agreement of $656.4 million, of which $6.8 million was classified as current. As of December 31, 2024, the Company had $150.0 million of available borrowing capacity under the 2022 Revolver.

In order to limit its exposure to potential increases in future interest rates related to the 2022 Term Loan Facility, on August 11, 2022, the Company entered into an interest rate cap transaction in connection with the 2022 Term Loan Facility, with a notional amount of $400.0 million, which expired on July 31, 2024. In advance of the expiration of this interest rate cap, on May 7, 2024, the Company entered into a second interest rate cap transaction in connection with the 2022 Term Loan Facility, with a notional amount of $400.0 million, which expires on July 31, 2026 (the “2024 Interest Rate Cap”). The Company has designated the interest rate caps as a cash-flow hedge for accounting purposes. See “Note 6 - Fair Value Measurement” and “Note 9 - Long-Term-Debt – Interest Rate Cap Transactions” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

Tax Receivable Agreement

In connection with the Reorganization Transactions, we entered into the Tax Receivable Agreement that provides the Pre-IPO Stockholders the right to receive future payments from us equal to 85% of the amount of cash savings, if any, in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the “Pre-IPO Tax Assets” and the making of payments under the Tax Receivable Agreement.

Although the actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of our and our subsidiaries’ taxable income in the future and the tax rates then applicable to us and our subsidiaries, we expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital. See “Note 10 - Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information. The tax liability is calculated based on current tax laws and the assumption that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement. Updates to our blended state tax rate, allocation of U.S. versus foreign sourced income and changes in tax rules on the amortization and depreciation of assets may significantly impact the established liability and changes would be recorded to other (expense) income 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 $189.3 million, with payments expected to continue through 2041. The Tax Receivable Agreement provides that interest, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%, accrues from the due date (without extensions) of the tax return to which the applicable tax benefits relate to the date of payment specified by the Tax Receivable Agreement. Payments under the Tax Receivable Agreement, which began in fiscal year 2022, are not conditioned upon the Pre-IPO Stockholders maintaining a continued ownership of equity in the Company.

In connection with the Reorganization Transactions, on September 30, 2021, we recognized a liability of $232.9 million for the payments to be made under the Tax Receivable Agreement, which is accounted for as a reduction of additional paid-in capital on our Consolidated Balance Sheets. Changes in the utilization of the Pre-IPO Tax Assets will impact the amount of the liability that will be paid pursuant to the Tax Receivable Agreement. Changes in the utilization of these Pre-IPO Tax Assets are recorded in income tax expense (benefit) and any changes in the obligation under the Tax Receivable Agreement is recorded in other (income) expense, net. During the fourth quarters of 2024, 2023 and 2022, the Company recognized other expense of $3.9 million and other income of $7.4 million and $3.1 million, respectively, for a change to the liability for the Tax Receivable Agreement resulting primarily from an update to the blended state income tax rate and a change in the effective federal tax rate used to measure the obligation. The change in the effective federal tax rate was due to a change in the portion of the federal taxable income that is eligible for the FDII deduction. The adjusted liability as of December 31, 2024 was recorded as $189.3 million, of which $177.5 million was recorded in long term liabilities and $11.8 million was recorded in current liabilities.

For purposes of the Tax Receivable Agreement, the amount of cash savings in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the Pre-IPO Tax Assets will be computed by comparing our actual U.S. federal, state and local income tax liability with our hypothetical liability had we not been able to utilize the Pre-IPO Tax Assets, taking into account several assumptions and adjustments. Payments under the Tax Receivable Agreement are expected to give rise to certain additional tax benefits. Any such tax benefits that we are deemed to realize under the terms of the Tax Receivable Agreement are covered by the Tax Receivable Agreement and will increase the amounts due thereunder.

The aggregate amount payable pursuant to the Tax Receivable Agreement is dependent in large part on the reduction in taxes that we would have been required to pay absent the existence of the Pre-IPO Tax Assets. As a result, changes in tax law, and in particular the federal and state tax rates applicable to U.S. corporations, the tax rules on the amortization and depreciation of assets, and our split of U.S. to foreign income may materially impact the timing and amounts of payments by us to the Pre-IPO Stockholders pursuant to the Tax Receivable Agreement. Congress is considering a significant number of changes to U.S. tax laws, which may impact our payment obligations to Pre-IPO Stockholders under the Tax Receivable Agreement.

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Different timing rules apply to payments under the Tax Receivable Agreement to be made to holders that, prior to the completion of the IPO, held stock options (collectively, the “Award Holders”). Such payments will generally be deemed invested in a notional account rather than made on the scheduled payment dates, and the account will be distributed on the fifth anniversary of the IPO, together with an amount equal to the net present value of such Award Holder’s future expected payments, if any, under the Tax Receivable Agreement. Moreover, payments to holders of stock options that were unvested prior to the completion of the IPO are subject to vesting on the same schedule as such holder’s unvested stock options.

If we fail to make payment by the date specified by the Tax Receivable Agreement, the Tax Receivable Agreement generally provides for interest to accrue on the unpaid amount from the date so specified until the date of actual payment, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 5%, except under certain circumstances specified in the Tax Receivable Agreement where we are unable to make payment by such date, in which case interest would accrue at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%.

Further, the Tax Receivable Agreement provides that (i) upon certain mergers, stock and asset sales, other forms of business combinations, (ii) upon certain sales or other divestitures, (iii) upon certain proceedings seeking liquidation, reorganization or other relief under bankruptcy, insolvency or similar law, event of default under certain of our indebtedness for borrowed money, or other Credit Event (as defined therein), (iv) upon a breach of any of our material obligations (that is not timely cured) under the Tax Receivable Agreement, or (v) or other Changes of Control (as defined therein) or if, at any time, we elect an early termination of the Tax Receivable Agreement, our payment obligations under the Tax Receivable Agreement will accelerate and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We will be required to make a payment intended to be equal to the present value of future payments (calculated using a discount rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, which may differ from our, or a potential acquirer’s, then-current cost of capital) under the Tax Receivable Agreement, which payment would be based on certain assumptions, including the assumption that we and our subsidiaries have sufficient taxable income and tax liabilities to fully utilize anticipated future tax benefits. In these situations, our, or a potential acquirer’s, obligations under the Tax Receivable Agreement could have a substantial negative impact on our, or a potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying or preventing certain mergers, asset sales, other forms of business combinations or other Changes of Control. These provisions of the Tax Receivable Agreement may result in situations where the Pre-IPO Stockholders have interests that differ from or are in addition to those of our other stockholders.

In addition, certain transactions by us could cause us to recognize taxable income (possibly material amounts of income) without a current receipt of cash. Payments under the Tax Receivable Agreement with respect to such taxable income would cause a net reduction in our available cash. For example, internal restructurings or reorganizations involving the intercompany sale or license of intellectual property rights, transactions giving rise to cancellation of debt income, the accrual of income from original issue discount or deferred payments, a “triggering event” requiring the recapture of dual consolidated losses, or “Subpart F” income would each produce income with no corresponding increase in cash. In these cases, we may use some of the Pre-IPO Tax Assets to offset income from these transactions and, under the Tax Receivable Agreement, would be required to make a payment to our Pre-IPO Stockholders even though we receive no cash corresponding to such income.

Payments under the Tax Receivable Agreement will be based in part on our reporting positions. The Pre-IPO Stockholders (or their transferees or assignees) will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax benefits are subsequently disallowed, although future payments would be adjusted to the extent possible to reflect the result of such disallowance and any excess payments made to any Pre-IPO Stockholder (or such Pre-IPO Stockholder’s transferees or assignees) will be netted against future payments that would otherwise be made under the Tax Receivable Agreement, if any, after our determination of such excess. As a result, in certain circumstances, the payments we are required to make under the Tax Receivable Agreement could exceed the cash tax savings we actually realize.

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Contractual Obligations and Commitments

The following table summarizes our material cash requirements from known contractual and other obligations as of December 31, 2024 (in thousands):

(1)2022 Term Loan Facility debt payments include scheduled principal payments only.

(2)The 2022 Term Loan Facility is subject to variable interest rates. The interest rate on borrowings under the 2022 Term Loan Facility was 8.0% as of December 31, 2024. Assumes annual interest rate of 8.0% on the 2022 Term Loan Facility over the remaining term of the loan.

(3)Represents 85% of the estimated cash savings in U.S. federal, state or local that the Company realizes in its taxable income as a result of certain existing tax attributes as per the Tax Receivable Agreement. The Company has not considered financing costs that may be incurred with respect to when tax receivable payments are due from the Company’s tax filing dates (with no extensions) to the actual filing of tax returns under extension. See “Note 10 - Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

(4)Purchase obligations are commitments for contracted services and include non-cancelable payments.

(5)As of December 31, 2024, we had no outstanding borrowings under the 2022 Revolver. The Company is required to pay a commitment fee of 0.25% to 0.50% per annum on unused commitments under the 2022 Revolver based upon our First Lien Leverage Ratio (as defined in the 2022 Credit Agreement).

Critical Accounting Estimates

Our Consolidated Financial Statements included elsewhere in this Annual Report have been prepared in accordance with GAAP. The preparation of financial statements requires us to make estimates and assumptions about future events that affect amounts reported in our Consolidated Financial Statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

We believe that the following items are critical accounting estimates, as they (1) involve a higher degree of judgment or complexity and (2) are most significant to reporting our results of operations and financial position. The following critical accounting estimates reflect the significant estimates and judgments used in the preparation of our Consolidated Financial Statements. With respect to the critical accounting estimates, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. More information on the Company’s significant accounting policies can be found in the footnotes to our audited Consolidated Financial Statements included in “Note 2 - Summary of Significant Accounting Policies” in Item 8 of this Annual Report.

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Revenue Recognition

In the normal course of business, we offer various incentives to customers such as sales discounts and other incentives and allowances, which give rise to variable consideration. The amount of variable consideration is estimated at the time of sale based on either the expected value method or the most likely amount, depending on the nature of the variability. Actual incentives and allowances upon completion of a promotion are inherently uncertain and thus may differ from our estimates. We regularly review and revise, when deemed necessary, our estimates of variable consideration based on both customer-specific expectations as well as historical rates of realization. If actual or expected promotional allowances were significantly greater or lower than the accrual for the allowance we had established, we would record a reduction or increase to net sales in the period in which we made such determination.

Inventory

Excess and obsolete inventory reductions are determined based on assumptions about future demand and sales prices, estimates of the impact of competition, and the age of inventory. Given uncertainty in general economic and business conditions in the U.S. and international markets, public and consumer preferences, changes in buying patterns of both retailers and consumers, competition in the beauty industry, and inventory management of customers, judgment is required to evaluate future demand for our products. If actual conditions are less favorable than those previously estimated by management, additional inventory write-downs could be required. We do not believe a 10% change in the demand assumptions used in calculating our inventory reserves would have a material effect on our net earnings or the reported carrying value of our inventory.

Tax Receivable Agreement

The Tax Receivable Agreement liability is based on current tax laws and the assumption that the Company and its subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement. Updates to our blended state tax rate, allocation of U.S. versus foreign sourced income and changes in tax rules on the amortization and depreciation of assets may significantly impact the established liability and changes would be recorded to other (expense) income 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 $189.3 million, with payments expected to continue through 2041. Payments under the Tax Receivable Agreement, which began in fiscal year 2022, are not conditioned upon the parties’ continued ownership of equity in the Company. See “Note 10 - Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

Goodwill

Goodwill is evaluated for impairment on an annual basis during the fourth fiscal quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If this qualitative assessment indicates it is more likely than not that the estimated fair value of the reporting unit exceeds its carrying value, no further analysis is required, and goodwill is not impaired. Our qualitative assessment considers factors including changes in the competitive market, budget-to-actual performance, trends in market capitalization for us and our peers, turnover in key management personnel and overall changes in the macroeconomic environment.

We performed the qualitative assessment as of October 1, 2024 and determined that a quantitative test should be performed for our reporting unit given the performance of the business compared to previous periods and the decrease in our stock price. As a result of the quantitative assessment, it was concluded that the fair value of the reporting unit exceeded its carrying value by approximately 19%. No impairment of goodwill was recorded.

We estimated the fair value of our reporting unit using a combination of an income approach and a market approach, which were both weighted equally. The fair value measurements are based on unobservable inputs, with key assumptions including, but not limited to, our forecasted future operating cash flows, terminal growth rates, market multiples, and discount rates. To determine the fair value of our reporting unit, we have used expected growth rates that are in line with expected market growth rates. The terminal value was calculated assuming a projected growth rate of 3.0%. These rates reflect our estimate of long-term growth into perpetuity and approximate the long-term gross domestic product growth expected on a global basis. The estimated weighted-average cost of capital for the reporting unit was determined to be 11.0%. Certain future events and circumstances, including deterioration of market conditions, decline in our stock price, higher cost of capital, and a decline in actual and expected consumer consumption and demands, could result in changes to these assumptions and judgments. A downward revision of these assumptions could cause the fair values of our single reporting unit to fall below its respective carrying value and we may be required to record a goodwill impairment charge.

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We believe the assumptions used in calculating the estimated fair value of the reporting units are reasonable and attainable. However, we may not achieve such results and may need to recognize impairment of goodwill in the future due to other market conditions or changes in our interest rates. Recognition of impairment of a significant portion of our goodwill would negatively affect our reported results of our operations.

New Accounting Pronouncements

See “Note 2 - Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for information regarding new accounting pronouncements.

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ITEM 7 - 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 consolidated financial statements and related notes included elsewhere in this Annual Report. 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 “Special Note Regarding Forward-Looking Statements” section and in the “Risk Factors” section in this Annual Report.

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 performance in the prestige hair care category.

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 Direct to Consumer (“DTC”) channels that have been strategically 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.

Additionally, we recently expanded into our first hair care adjacent market with LASHBOND® Building Serum, our eyelash enhancing serum formulated to promote the appearance of thicker, longer, stronger, full volume lashes.

The strength of our business model and ability to scale have created a compelling financial profile. We have developed a 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.

Strategic Pillars

We are focused on executing against our key strategic pillars that we believe will support our long-term growth. These include igniting our global brand, disrupting with innovation, amplifying channel coverage and charting new geographies. These key strategic pillars are supported by our efforts to build capabilities and infrastructure that we believe will enable our aspirations.

Igniting our Global Brand

We believe we have built one of the most powerful brands in the prestige hair care category. We plan to continue growing awareness of our global brand, in an effort to deepen connections with existing customers as well as reach new audiences. We will also continue to invest in enhancing our brand equity. Our marketing model remains focused on implementing high return on investment, performance marketing activities aimed at fueling growth. Key levers of our marketing include organic social media activations, strategic paid media, education and training regarding our brand, community engagement with our professional hairstylists, influencer partnerships, and retailer activations such as sampling and in-store events.

Disrupting with Innovation

We believe we have a strong pipeline of disruptive innovation that leverages our science-based technology and patented Bis-amino ingredient. We plan to launch two-to-four products annually over the next three years. To support this pipeline, we intend to continue to invest in research and development to strengthen our internal innovation capabilities. We recently entered into our first hair care adjacent category and remain excited about the opportunity to further grow where our technology can serve as a foundation for entry that we believe is supported by consumer trust in our brand.

Amplifying Channel Coverage

In our professional channel, we have undertaken efforts to support and reassert strong relationships with the professional hairstylist community and maintain brand awareness by increasing our field support efforts, deepening partnerships with distributors and customers, and refreshing educational content. We are also pursuing opportunities to further penetrate premium and prestige salons. In specialty retail, we are enhancing visual merchandising in stores, investing in brand store pages online and

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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 omni-channel distribution and sales for our brand.

Supporting our Strategic Pillars

To enable these 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, creating a strong financial foundation for growth, 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 the risk of recession, inflationary pressures, competitive products and discounting, currency volatility, high interest rates, social and political issues, geopolitical tensions and regulatory matters. We also are mindful of inflationary pressures on our consumers, and are monitoring the impact that increasing inflationary pressures may have on consumer spending and preferences and inventory rebalancing at our customers in an increasingly competitive industry.

Competition in the beauty industry is based on a variety of factors, including innovation, product efficacy, accessible pricing, brand recognition and loyalty, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives, sustainability 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.

2023 Financial Summary

•Net sales decreased 34.9% to $458.3 million for the year ended December 31, 2023 from $704.3 million for the year ended December 31, 2022. For the year ended December 31, 2023, net sales in our professional channel decreased 40.1%, our specialty retail channel decreased 42.6%, and our DTC channel decreased 15.0%, in each case as compared to the year ended December 31, 2022.

•Gross profit margin decreased to 69.5% for the year ended December 31, 2023 from 73.8% for the year ended December 31, 2022, primarily as a result of increased promotional allowance, an increased reserve for product obsolescence, and higher input costs for raw materials.

•Operating expenses for the year ended December 31, 2023 increased by 35.6%, as compared to the year ended December 31, 2022, primarily as a result of increased sales and marketing expense, higher payroll due to workforce expansion, and higher professional fees, partially offset by lower distribution and fulfillment costs for the year ended December 31, 2023.

•Operating income decreased to $108.2 million for the year ended December 31, 2023 from $364.4 million for the year ended December 31, 2022.

•Net income decreased to $61.6 million for the year ended December 31, 2023 from $244.1 million for the year ended December 31, 2022.

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Results of operations for the years ended December 31, 2023, 2022 and 2021

Set forth below are our results of operations for our fiscal year ended December 31, 2023 (“fiscal year 2023”) versus our fiscal year ended December 31, 2022 (“fiscal year 2022”). For discussion of our results of operations for our fiscal year 2022 versus our fiscal year ended December 31, 2021, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our fiscal year 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023.

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

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Fiscal year 2023 compared to fiscal year 2022:

Net Sales

We distribute products in the U.S. and internationally through professional distributors in salons, 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 DTC as follows:

Total net sales declined 34.9% for the year ended December 31, 2023 compared to the same period in 2022, primarily attributed to a lower level of demand and customer inventory rebalancing, particularly within the professional and specialty retail channels. During fiscal year 2023, the Company lapped approximately $22 million of net sales impact from the introduction of certain 1-Liter size offerings and approximately $10 million net sales impact of inventory pipeline to a key specialty retail customer, compared to the same period in 2022. These impacts were partially offset by our launches of LASHBOND® Building Serum, No. 4D Clean Volume Detox Dry Shampoo, Olaplex® Volumizing Blow Dry Mist, No. 5P Blonde Enhancer™ Toning Conditioner, Jumbo No. 4P Blonde Enhancer™ Toning Shampoo and Jumbo No. 5P Blonde Enhancer™ Toning Conditioner, 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 the Middle East and in Latin America.

Cost of Sales and Gross Profit

Our cost of sales decreased primarily due to declining product sales for the year ended December 31, 2023. The Company also recorded write-off and disposal expenses of $6.2 million for the same period in 2022 as a result of regulation changes in the European Union. These decreases were partially offset by a $15.2 million inventory obsolescence reserve recorded during the year ended December 31, 2023, and increases in cost of sales resulting from inflationary pressures.

As a result of the activity described above regarding Net sales and Cost of sales, our gross profit margin decreased from 73.8% for the year ended December 31, 2022 to 69.5% for the year ended December 31, 2023.

Operating Expenses

Selling, general and administrative expenses increased primarily due to an increase of $37.1 million in investments in sales and marketing, $8.7 million related to the combination of a one-time former distributor payment, professional expenses, and legal settlement costs, payroll expenses of $6.1 million driven by workforce expansion, $2.9 million of CEO transition and other organizational realignment costs, and increased employee benefit costs of $2.7 million. These increases were partially offset by a

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$3.1 million decrease in distribution and fulfillment costs related to the decrease in product sales volume for the year ended December 31, 2023.

Interest Expense, Net

Interest expense for the year ended December 31, 2023 increased as compared to the previous year due to an increase in interest rates, which were partially offset by benefits from the interest rate cap. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information on our outstanding debt.

Interest income for the year ended December 31, 2023 increased as compared to the previous year due to increasing interest rates and additional investments in highly liquid investments with a maturity of three months or less.

Other Income (Expense), Net

For the year ended December 31, 2023, total other income (expense), net increased $25.6 million compared to the year ended December 31, 2022, primarily due to the $18.8 million loss on extinguishment of debt associated with our 2020 Credit Agreement debt refinancing that occurred in 2022. Additionally, during the fourth quarter of 2023, we recognized other income of $7.4 million for a reduction to the liability in respect of the Tax Receivable Agreement, resulting primarily from an update to the blended state income tax rate and a decrease in the effective federal tax rate used to measure the obligation, compared to $3.1 million recognized in the fourth quarter of 2022. The decrease in the effective federal tax rate was due to an increase in the portion of federal taxable income that is eligible for the foreign derived intangible income (“FDII”) deduction. Other income, net increased primarily due to a decrease in foreign currency transaction losses driven by the performance of the U.S. dollar.

Income Tax Provision

The Company’s effective tax rate was 19.7% for the year ended December 31, 2023, as compared to 20.0% for the year ended December 31, 2022. The Company’s effective tax rate for the year ended December 31, 2023 was lower than the statutory tax rate of 21% primarily due to the FDII deduction and the non-taxable income associated with the Tax Receivable Agreement, partially offset by the effect of state and local income taxes. For the year ended December 31, 2022 the effective tax rate was lower than the U.S. federal statutory tax rate primarily due to the FDII deduction and excess tax benefits associated with share-based compensation, partially offset by the effect of state and local income taxes.

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Tax Receivable Agreement

The liability under the Tax Receivable Agreement is based on current tax laws and the assumption that we and our 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. to foreign income may impact the established liability and changes would be recorded to other (expense) income 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 $198.2 million over the 12-year remaining period under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned upon the Pre-IPO Stockholders’ continued ownership of equity in the Company. During the year ended December 31, 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. The remaining Tax Receivable Agreement payment obligation as of December 31, 2023 is recorded as $198.2 million, of which $185.5 million was recorded in long term liabilities and $12.7 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 December 31, 2023, we had $466.4 million of cash and cash equivalents. In addition, as of December 31, 2023, we had borrowing capacity of $150.0 million under our 2022 Revolver, providing us with a liquidity position of $616.4 million plus $90.7 million of working capital excluding cash and cash equivalents for a combined $707.1 million total liquidity position.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

The decrease in net cash provided by operating activities for the year ended December 31, 2023 was primarily a result of a decrease in net income of $182.5 million, changes in working capital and adjusting items to Operating Cash Flows to reconcile to Net income from operations, and increases in inventory obsolescence, write-offs and disposal adjustments of $7.0 million. This was partially offset by the decrease in deferred taxes benefit of $7.4 million recorded for the year ended December 31, 2023 and the loss on extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit Agreement recorded for the year ended December 31, 2022.

Investing Activities

The Company’s investing activities during the years ended December 31, 2023 and 2022 included purchases of property and equipment, patents and software.

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Financing Activities

Our financing activities for the year ended December 31, 2023 primarily consisted of cash outflows for payments on our long-term debt, payments to our pre-IPO stockholders pursuant to our Tax Receivable Agreement, and payments related to shares withheld and retired to cover the tax withholding obligations for options exercised, partially offset by cash received by the Company from stock option exercises. For the year ended December 31, 2022, our financing activities primarily consisted of cash outflows for payments on our long-term debt and debt issuance costs, partially offset by proceeds from the issuance of debt pursuant to the 2022 Credit Agreement, payments of debt issuance costs, and payments related to shares withheld and retired to cover the tax withholding obligation for SARs, partially offset by cash received by the Company from stock option exercises.

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 this Annual Report. 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

On February 23, 2022, Olaplex, Inc., an indirect wholly owned subsidiary of Olaplex Holdings, Inc., together with Penelope Intermediate Corp. acting as the parent guarantor, entered into the 2022 Credit Agreement, by and among Olaplex, Inc., Penelope Intermediate Corp, Goldman Sachs Bank USA (“Goldman Sachs”), as administrative agent (the “Administrative Agent”), collateral agent and swingline lender, and each lender and issuing bank from time to time party thereto (the “Lenders”). The 2022 Credit Agreement refinanced and replaced the 2020 Credit Agreement with a seven-year $675.0 million senior-secured term loan facility (the “2022 Term Loan Facility”) and a five-year $150.0 million senior-secured revolving credit facility (the “2022 Revolver”), which includes a $25.0 million letter of credit sub-facility and a $25.0 million swingline loan sub-facility.

The refinancing of the 2020 Credit Agreement resulted in recognition of loss on extinguishment of debt of $18.8 million which is comprised of $11.0 million in deferred financing fee write off, and $7.8 million of prepayment fees for the 2020 Credit Agreement. We incurred costs directly related to the 2022 Credit Agreement of $11.9 million, consisting primarily of lender fees of $1.7 million and third-party fees of $10.2 million during the year ended December 31, 2022. These fees were allocated between the 2022 Revolver and the 2022 Term Loan Facility. 2022 Term Loan Facility fees are capitalized and recorded as a reduction of the carrying amount of non-current debt, and 2022 Revolver fees are capitalized and recorded as Other Assets on the balance sheet.

The interest rates for all facilities under the 2022 Credit Agreement are calculated based upon the Company’s election among (a) adjusted term secured overnight financing rate (“SOFR”) (subject to a 0.50% floor with respect to the 2022 Term Loan Facility, and a 0% floor with respect to the 2022 Revolver) plus an additional interest rate spread, (b) with respect to a borrowing in Euros under the 2022 Revolver, a euro interbank offered rate (subject to a 0% floor) plus an additional interest rate spread, or (c) an “Alternate Base Rate” (as defined in the 2022 Credit Agreement) (subject to a 1.50% floor with respect to the 2022 Term Loan Facility, and a 1.00% floor with respect to the 2022 Revolver) plus an additional interest rate spread.

The interest rate on outstanding amounts under the 2022 Term Loan Facility was 9.0% per annum as of December 31, 2023. We have not drawn on the 2022 Revolver as of December 31, 2023. The 2022 Term Loan Facility is repayable in mandatory quarterly installments equal to $1.6 million, with the balance payable at maturity. The 2022 Term Loan Facility and 2022 Revolver can each be prepaid at any time without any penalty or premium (subject to any applicable breakage costs). The 2022 Term Loan Facility is subject to customary mandatory prepayments with respect to excess cash flow, net proceeds from non-ordinary course asset dispositions and the issuance of additional non-permitted debt or certain refinancing debt, in each case as set forth in the 2022 Credit Agreement.

The 2022 Credit Agreement contains a number of covenants that, among other things, restrict the Company’s ability to (subject to certain exceptions) pay dividends and distributions or repurchase its capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The 2022 Credit Agreement also includes

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reporting, financial and maintenance covenants, including a springing first lien leverage ratio financial covenant. The Company was in compliance with these affirmative and negative covenants on December 31, 2023. Substantially all the assets of the Company constitute collateral under the 2022 Credit Agreement. The maturity date of the 2022 Term Loan Facility is February 23, 2029. The maturity date of the 2022 Revolver is February 23, 2027.

As of December 31, 2023, the Company had outstanding indebtedness under the 2022 Credit Agreement of $663.2 million, of which $6.8 million was classified as current. As of December 31, 2023, the Company had $150.0 million of available borrowing capacity under the 2022 Revolver.

On August 11, 2022, the Company entered into an interest rate cap transaction in connection with the 2022 Term Loan Facility, with a notional amount of $400.0 million, in order to limit its exposure to potential increases in future interest rates related to the 2022 Term Loan Facility. The Company has designated the interest rate cap as a cash-flow hedge for accounting purposes. See “Note 9. Long-Term-Debt – Interest Rate Cap Transaction” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

Tax Receivable Agreement

In connection with the Reorganization Transactions, we entered into the Tax Receivable Agreement that provides the Pre-IPO Stockholders the right to receive future payments from us equal to 85% of the amount of cash savings, if any, in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the “Pre-IPO Tax Assets” and the making of payments under the Tax Receivable Agreement.

Although the actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of our and our subsidiaries’ taxable income in the future and the tax rates then applicable to us and our subsidiaries, we expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital. See “Note 10. Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information. The tax liability is calculated based on current tax laws and the assumption that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement. Updates to our blended state tax rate, allocation of U.S. versus foreign sourced income and changes in tax rules on the amortization and depreciation of assets may significantly impact the established liability and changes would be recorded to other (expense) income 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 $198.2 million over the 12-year remaining period under the Tax Receivable Agreement. The Tax Receivable Agreement provides that interest, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%, accrues from the due date (without extensions) of the tax return to which the applicable tax benefits relate to the date of payment specified by the Tax Receivable Agreement. Payments under the Tax Receivable Agreement, which began in fiscal year 2022, are not conditioned upon the Pre-IPO Stockholders maintaining a continued ownership of equity in the Company.

In connection with the Reorganization Transactions, on September 30, 2021, we recognized a liability of $232.9 million for the payments to be made under the Tax Receivable Agreement, which is accounted for as a reduction of additional paid-in capital on our consolidated balance sheet. Changes in the utilization of the Pre-IPO Tax Assets will impact the amount of the liability that will be paid pursuant to the Tax Receivable Agreement. Changes in the utilization of these Pre-IPO Tax Assets are recorded in income tax expense (benefit) and any changes in the obligation under the Tax Receivable Agreement is recorded in other income (expense). During the fourth quarters of 2023, 2022 and 2021, the Company recognized other income of $7.4 million, $3.1 million and $3.6 million, respectively, for a reduction to the liability for the Tax Receivable Agreement resulting primarily from an update to the blended state income tax rate and a decrease in the effective federal tax rate used to measure the obligation. The decrease in the effective federal tax rate was due to an increase in the portion of federal taxable income that is eligible for the FDII deduction. The adjusted liability as of December 31, 2023 is recorded as $198.2 million, of which $185.5 million was recorded in long term liabilities and $12.7 million was recorded in current liabilities.

For purposes of the Tax Receivable Agreement, the amount of cash savings in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the Pre-IPO Tax Assets will be computed by comparing our actual U.S. federal, state and local income tax liability with our hypothetical liability had we not been able to utilize the Pre-IPO Tax Assets, taking into account several assumptions and adjustments. Payments under the Tax Receivable Agreement are expected to give rise to certain additional tax benefits. Any such tax benefits that we are deemed to realize under the terms of the Tax Receivable Agreement are covered by the Tax Receivable Agreement and will increase the amounts due thereunder.

The aggregate amount payable pursuant to the Tax Receivable Agreement is dependent in large part on the reduction in taxes that we would have been required to pay absent the existence of the Pre-IPO Tax Assets. As a result, changes in tax law, and in particular the federal and state tax rates applicable to U.S. corporations, the tax rules on the amortization and depreciation of assets, and our split of U.S. to foreign income may materially impact the timing and amounts of payments by us to the Pre-IPO

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Stockholders pursuant to the Tax Receivable Agreement. Congress is considering a significant number of changes to U.S. tax laws, including an increase in the maximum tax rate applicable to U.S. corporations, which may materially increase our payment obligations to Pre-IPO Stockholders under the Tax Receivable Agreement.

Different timing rules apply to payments under the Tax Receivable Agreement to be made to holders that, prior to the completion of the IPO, held stock options (collectively, the “Award Holders”). Such payments will generally be deemed invested in a notional account rather than made on the scheduled payment dates, and the account will be distributed on the fifth anniversary of the IPO, together with an amount equal to the net present value of such Award Holder’s future expected payments, if any, under the Tax Receivable Agreement. Moreover, payments to holders of stock options that were unvested prior to the completion of the IPO are subject to vesting on the same schedule as such holder’s unvested stock options.

If we fail to make payment by the date specified by the Tax Receivable Agreement, the Tax Receivable Agreement generally provides for interest to accrue on the unpaid amount from the date so specified until the date of actual payment, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 5%, except under certain circumstances specified in the Tax Receivable Agreement where we are unable to make payment by such date, in which case interest would accrue at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%.

Further, the Tax Receivable Agreement provides that (i) upon certain mergers, stock and asset sales, other forms of business combinations, (ii) upon certain sales or other divestitures, (iii) upon certain proceedings seeking liquidation, reorganization or other relief under bankruptcy, insolvency or similar law, event of default under certain of our indebtedness for borrowed money, or other Credit Event (as defined therein), (iv) upon a breach of any of our material obligations (that is not timely cured) under the Tax Receivable Agreement, or (v) or other Changes of Control (as defined therein) or if, at any time, we elect an early termination of the Tax Receivable Agreement, our payment obligations under the Tax Receivable Agreement will accelerate and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We will be required to make a payment intended to be equal to the present value of future payments (calculated using a discount rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, which may differ from our, or a potential acquirer’s, then-current cost of capital) under the Tax Receivable Agreement, which payment would be based on certain assumptions, including the assumption that we and our subsidiaries have sufficient taxable income and tax liabilities to fully utilize anticipated future tax benefits. In these situations, our, or a potential acquirer’s, obligations under the Tax Receivable Agreement could have a substantial negative impact on our, or a potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying or preventing certain mergers, asset sales, other forms of business combinations or other Changes of Control. These provisions of the Tax Receivable Agreement may result in situations where the Pre-IPO Stockholders have interests that differ from or are in addition to those of our other stockholders.

In addition, certain transactions by us could cause us to recognize taxable income (possibly material amounts of income) without a current receipt of cash. Payments under the Tax Receivable Agreement with respect to such taxable income would cause a net reduction in our available cash. For example, internal restructurings or reorganizations involving the intercompany sale or license of intellectual property rights, transactions giving rise to cancellation of debt income, the accrual of income from original issue discount or deferred payments, a “triggering event” requiring the recapture of dual consolidated losses, or “Subpart F” income would each produce income with no corresponding increase in cash. In these cases, we may use some of the Pre-IPO Tax Assets to offset income from these transactions and, under the Tax Receivable Agreement, would be required to make a payment to our Pre-IPO Stockholders even though we receive no cash corresponding to such income.

Payments under the Tax Receivable Agreement will be based in part on our reporting positions. The Pre-IPO Stockholders (or their transferees or assignees) will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax benefits are subsequently disallowed, although future payments would be adjusted to the extent possible to reflect the result of such disallowance and any excess payments made to any Pre-IPO Stockholder (or such Pre-IPO Stockholder’s transferees or assignees) will be netted against future payments that would otherwise be made under the Tax Receivable Agreement, if any, after our determination of such excess. As a result, in certain circumstances, the payments we are required to make under the Tax Receivable Agreement could exceed the cash tax savings we actually realize.

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Contractual Obligations and Commitments

The following table summarizes our material cash requirements from known contractual and other obligations as of December 31, 2023 (in thousands):

(1)2022 Term Loan Facility debt payments include scheduled principal payments only.

(2)The 2022 Term Loan Facility is subject to variable interest rates. The interest rate on borrowings under the 2022 Term Loan Facility was 9.0% as of December 31, 2023. Assumes annual interest rate of 9.0% on the 2022 Term Loan Facility over the remaining term of the loan.

(3)Represents 85% of the estimated cash savings in U.S. federal, state or local that the Company realizes in its taxable income as a result of certain existing tax attributes as per the Tax Receivable Agreement. The Company has not considered financing costs that may be incurred with respect to when tax receivable payments are due from the Company’s tax filing dates (with no extensions) to the actual filing of tax returns under extension. See “Note 10 - Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

(4)Purchase obligations are commitments for contracted services and include non-cancelable payments.

(5)Does not reflect any borrowings under the 2022 Revolver. As of December 31, 2023, we had no outstanding borrowings under the 2022 Revolver. The Company is required to pay a commitment fee of 0.25% to 0.50% per annum on unused commitments under the 2022 Revolver based upon our First Lien Leverage Ratio (as defined in the 2022 Credit Agreement).

Critical Accounting Policies and Estimates

Our consolidated financial statements included elsewhere in this Annual Report have been prepared in accordance with GAAP. The preparation of financial statements requires us to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

We evaluated the development and selection of our critical accounting policies and estimates and believe that the following items are critical accounting estimates, as they (1) involve a higher degree of judgment or complexity and (2) are most significant to reporting our results of operations and financial position. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to the critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. More information on the Company’s significant accounting policies can be found in the footnotes to our audited consolidated financial statements included in “Note 2 - Summary of Significant Accounting Policies” in Item 8 of this Annual Report.

Revenue Recognition

Nature of estimates required: We recognize revenue when control of promised goods are transferred to a customer in an amount that reflects the consideration that we expect to receive in exchange for those goods. Control of the products that we sell are transferred at a point in time. Factors that determine the specific point in time a customer obtains control (and a performance obligation is satisfied) are (i) when we have a present right to payment for the goods, (ii) whether the customer has physical possession and title to the goods, and (iii) whether significant risks and rewards of ownership have transferred. Delivery is typically considered to have occurred at the time the title and risk of loss passes to the customer. Revenue from transactions, net of estimated and actual allowances, is generally recognized at a point in time based on the contractual terms with the customer.

Assumptions and approach used:

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Promotional allowance: In the normal course of business, we offer various incentives to customers such as sales discounts and other incentives and allowances, which give rise to variable consideration. The amount of variable consideration is estimated at the time of sale based on either the expected value method or the most likely amount, depending on the nature of the variability. Actual incentives and allowances upon completion of a promotion are inherently uncertain and thus may differ from our estimates. We regularly review and revise, when deemed necessary, our estimates of variable consideration based on both customer-specific expectations as well as historical rates of realization. If actual or expected promotional allowances were significantly greater or lower than the accrual for the allowance we had established, we would record a reduction or increase to net sales in the period in which we made such determination.

Sales returns and allowances: Our terms of sale provide limited return rights and allowances. We record estimated sales returns, discounts, and miscellaneous customer claims as reductions to net sales at the time revenues are recorded. We base our estimates upon historical experience and trends, and upon approval of specific returns or discounts. Actual returns and discounts in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and discounts were significantly greater or lower than the accrual for the allowance we had established, we would record a reduction or increase to net sales in the period in which we made such determination.

Inventory

Nature of estimates required: Inventory is comprised primarily of finished goods and are stated at the lower of cost (average cost method) or estimated net realizable value. Cost is computed based on average historical costs. We allocate the amortization of our patented formulations to the carrying value of our finished goods. The carrying value of inventories is reduced for any excess and obsolete inventory.

Assumptions and approach used: Excess and obsolete inventory reductions are determined based on assumptions about future demand and sales prices, estimates of the impact of competition, and the age of inventory. If actual conditions are less favorable than those previously estimated by management, additional inventory write-downs could be required.

Tax Receivable Agreement

Nature of estimates required: The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of the Company’s and its subsidiaries’ taxable income in the future and the tax rates then applicable to the Company and its subsidiaries. We expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital.

Assumptions and approach used: The Tax Receivable Agreement liability is based on current tax laws and the assumption that the Company and its subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement. Updates to our blended state tax rate, allocation of U.S. versus foreign sourced income and changes in tax rules on the amortization and depreciation of assets may significantly impact the established liability and changes would be recorded to other (expense) income 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 $198.2 million over the 12-year remaining period under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement, which began in fiscal year 2022, are not conditioned upon the parties’ continued ownership of equity in the Company. See “Note 10 - Income Taxes” in Item 8 of this Annual Report.

New Accounting Pronouncements

See “Note 2 - Summary of Significant Accounting Policies” in Item 8 of this Annual Report for information regarding new accounting pronouncements.

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ITEM 7 - 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 consolidated financial statements and related notes included elsewhere in this Annual Report (“Annual Report”). 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 “Special Note Regarding Forward-Looking Statements” section and in the “Risk Factors” section in this Annual Report.

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 performance in the prestige haircare 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 Direct to Consumer (“DTC”) channels that have been strategically 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 fifteen unique, complementary products specifically developed to provide a holistic regimen for hair health.

The strength of our business model and ability to scale have created a compelling financial profile characterized by revenue growth and very strong profitability. We have developed a mutually reinforcing, synergistic, omnichannel model that leverages the strength of each of our channels and our strong digital capabilities that we apply across our sales platforms. Our professional channel serves as the foundation for our brand. 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 penetration of our sales. 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 haircare category. We plan to continue growing awareness of our global brand, in an effort to deepen connections with existing customers as well as reach new audiences. We will also continue to invest in enhancing our brand equity. Our marketing model remains focused on implementing high return on investment, performance marketing activities aimed at fueling growth. Key levers of our marketing include organic social media activations, strategic paid media, education and training regarding our brand, community engagement with our professional hairstylists, influencer partnerships, and retailer activations such as sampling and in-store events.

Disrupting with Innovation

We believe we have a strong pipeline of disruptive innovation that leverages our science-based technology and patented Bis-amino ingredient. We plan to launch two-to-four products annually over the next five years. To support this pipeline, we intend to continue to invest in research and development to strengthen our internal innovation capabilities. We remain excited about the opportunity to enter adjacent categories in haircare and also other categories where our Bis-amino patents can serve as a foundation for entry that we believe is supported by consumer trust in our brand.

Amplifying Channel Coverage

In our professional channel, we have undertaken efforts to support strong relationships with the hairstylist community and maintain brand awareness by increasing our field support efforts, deepening partnerships with distributors and customers, and refreshing educational content. We also intend to pursue opportunities to further penetrate premium and prestige salons. In specialty retail, we are enhancing visual merchandising in stores, deploying targeted communications intended to enable new

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customer acquisition, and implementing a new program to staff third party Company-trained sales associates in retail stores. 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 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 the People’s Republic of China, as currently accessed through our cross-border e-commerce business model, we are pursuing a digital-first strategy.

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, creating a strong financial foundation for growth, and ensuring that we have the technology and data to support our growth.

Business Environment & Trends

We continue to monitor the effects of the global macro-economic environment, including the risk of recession, increasing inflationary pressures, competitive product discounting, currency volatility, rising interest rates, social and political issues, geopolitical tensions and regulatory matters. We also are mindful of inflationary pressures on our consumers, and are monitoring the impact that increasing inflationary pressures may have on consumer spending and preferences and inventory rebalancing at our customers in an increasingly competitive industry.

Competition in the beauty industry is based on a variety of factors, including innovation, product efficacy, accessible pricing, brand recognition and loyalty, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives and other activities. In recent years, we have seen increased competitive activity including discounting in the prestige haircare 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.

2022 Financial Highlights

•Net sales increased 17.7% to $704.3 million for the year ended December 31, 2022 from $598.4 million for the year ended December 31, 2021. For the year ended December 31, 2022, net sales in our professional channel grew 16.0%, our specialty retail channel grew 33.9%, and our DTC channel grew 3.0%, in each case as compared to the year ended December 31, 2021. During the same period, Net sales increased 15.4% in the United States and increased 20.9% internationally.

•Gross profit margin decreased to 73.8% for the year ended December 31, 2022 from 79.2% for the year ended December 31, 2021, primarily as a result of higher input costs for raw materials, warehousing, and transportation, product and channel mix, inventory and labeling stock write-off and disposal costs, and distribution start up costs.

•Operating expenses for the year ended December 31, 2022 increased by 11.1%, as compared to the year ended December 31, 2021, primarily as a result of increased sales and marketing expense, higher payroll due to workforce expansion, public company compliance costs, increased professional fees expenses, non-recurring executive reorganization costs, and increased share-based compensation expense and distribution and fulfillment expenses, partially offset by non-recurring litigation costs during the year ended December 31, 2021, one-time initial public offering costs, and cash settled unit compensation costs incurred in the year ended December 31, 2021.

•Operating income increased to $364.4 million for the year ended December 31, 2022 from $334.2 million for the year ended December 31, 2021.

•Net income increased to $244.1 million for the year ended December 31, 2022 from $220.8 million for the year ended December 31, 2021 .

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Results of operations for the years ended December 31, 2022, 2021 and 2020

Set forth below is the Company’s results of operations for its fiscal year ended December 31, 2022 (“fiscal year 2022”) versus its fiscal year ended December 31, 2021 (“fiscal year 2021”). For discussion of the Company’s results of operations for its fiscal year 2021 versus its fiscal year ended December 31, 2020, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for its fiscal year 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2022.

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

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Fiscal year 2022 compared to fiscal year 2021:

Net Sales

We distribute products through professional salon channels, specialty retailers, as well as direct to consumers through Olaplex.com and through third party e-commerce platforms. As such, our three business channels consist of professional, specialty retail and DTC as follows:

The growth in the professional channel was driven by volume growth from existing distribution customers and the net impact of new products launched since December 31, 2021, which include No. 9 Bond Protector Nourishing Hair Serum, No. 4C Bond Maintenance Clarifying Shampoo, and Broad Spectrum Chelating Treatment, as well as 1-liter sizes in No. 4 Bond Maintenance Shampoo, No. 5 Bond Maintenance Conditioner, and No. 4C Bond Maintenance Clarifying Shampoo. The Company experienced the strongest net sales growth in Germany, Italy and the U.S.

The growth in the specialty retail channel was driven by the addition of new customers, growth with existing customers and the net impact of new products launched since December 31, 2021, which include No. 9 Bond Protector Nourishing Hair Serum, and No. 4C Bond Maintenance Clarifying Shampoo. The Company experienced the strongest net sales growth in the U.S., Canada, Italy, Germany and France.

The growth in the DTC channel was driven by the net impact of volume growth from existing and new products launched since December 31, 2021, which include No. 9 Bond Protector Nourishing Hair Serum, and No. 4C Bond Maintenance Clarifying Shampoo, as well as the addition of new consumers purchasing Company products through this channel. The Company experienced the strongest net sales growth in the U.S. and the People’s Republic of China.

Cost of Sales and Gross Profit

Our cost of sales increased primarily due to growth in sales volume and inflationary pressures, as well as a $4.6 million increase due to 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, and a $1.6 million increase due to write-off and disposal costs related to unused labeling stock that became obsolete as a result of regulation changes in the E.U. The increase in cost of sales was partially offset by a $0.5 million decrease in the amortization of our acquired patented formulations.

Our gross profit margin, gross profit as a percentage of sales, decreased from 79.2% in the year ended December 31, 2021 to 73.8% in the year ended December 31, 2022 due to increased input costs for warehousing, transportation, and raw materials, which accounted for approximately 4 percentage points of the decline, with the remainder relating to inventory write-off and disposal costs, labeling stock write-off and disposal costs, and distribution start up costs, partially offset by favorable pricing and product and channel mix.

Operating Expenses

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The increase in selling, general and administrative expenses was primarily driven by increases of $14.5 million in sales and marketing expense, $8.9 million in payroll driven by workforce expansion, $8.6 million in public company compliance and other selling, general and administrative expenses, $4.9 million in professional fees, $4.0 million of non-recurring executive reorganization costs, $3.3 million in share-based compensation expense, and $1.8 million in distribution and fulfillment costs related to the increase in product sales volume. These increases were partially offset by decreases of $14.3 million in general and administrative expenses primarily related to non-recurring litigation costs, $10.0 million in non-capitalizable IPO and strategic transition costs and $6.5 million in cash-settled units compensation expense, in each case recorded in the year ended December 31, 2021 and which were not subsequently incurred in the year ended December 31, 2022.

Interest Expense

Interest expense decreased due to the Company refinancing its 2020 Credit Agreement with the new 2022 Credit Agreement in February 2022, which reduced the Company’s outstanding debt and lowered the interest rate in respect thereof during the year ended December 31, 2022 as compared to during the year ended December 31, 2021, as well as $2.8 million of interest income from highly liquid investments purchased with a maturity of three months or less. See “Liquidity and Capital Resources Requirements – Credit Facility” for additional information on the Company’s outstanding debt.

Other Income (Expense), Net

For the year ended December 31, 2022, other (expense) income, net increased $20.6 million compared to the year ended December 31, 2021, primarily due to the $18.8 million loss on extinguishment of debt associated with the Company’s debt refinancing that occurred in February 2022. Additionally, during the fourth quarter of 2022, the Company recognized other income of $3.1 million for a reduction to the liability in respect of the Tax Receivable Agreement, resulting primarily from an update to the blended state income tax rate used to measure the obligation, compared to $3.6 million in other income recognized during the same period in 2021. Other expense, net increased primarily due to an increase in foreign currency transaction losses driven by the strengthening of the U.S. dollar.

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Income Tax Provision

The Company’s effective tax rate was 20.0% for the year ended December 31, 2022, as compared to 19.9% for the year ended December 31, 2021. The Company’s effective tax rate for the year ended December 31, 2022 and 2021 was lower than the statutory tax rate of 21% primarily due to the benefit associated with the foreign derived intangible income deduction (“FDII”), which results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate, partially offset by the net impact of state income taxes.

Tax Receivable Agreement

The tax liability is based on current tax laws and the assumption that we and our 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. to foreign income may impact the established liability and changes would be recorded to other (expense) income in the period we made the determination. We expect that future payments under the Tax Receivable Agreement relating to the Pre-IPO Tax Assets could aggregate to $222.1 million over the 13-year remaining period under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned upon the Pre-IPO Stockholders’ continued ownership of the Company. During the year ended December 31, 2022, the Company made a payment to the Pre-IPO Stockholders of $4.2 million as required pursuant to the terms of the Tax Receivable Agreement. The remaining Tax Receivable Agreement payment obligation as of December 31, 2022 is recorded as $222.1 million, of which $205.7 million was recorded in long term liabilities and $16.4 million was recorded in current liabilities.

Financial Condition, Liquidity and Capital Resources

Overview

Our primary recurring source of cash is the collection of proceeds from the sale of our products to our customers, including cash periodically collected in advance of delivery or performance.

Our primary use of cash is for working capital and payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, fulfillment costs of customer orders, overhead costs, capital expenditures and debt servicing. We also utilize cash for strategic investments. Fluctuations in working capital are primarily caused by customer demand of our product, timing of when a retailer rearranges or restocks our products, expansion of space within our existing retailer base, expansion into new retail stores and fluctuation in warehouse and distribution costs. Capital expenditures typically vary and are currently limited, and future capital expenditure requirements depend on strategic initiatives selected for the fiscal year, including investments in infrastructure, expansion into new national and international distributors and expansion of our customer base.

A considerable portion of our operating income is earned outside the U.S.; however, the majority of our bank deposits are held within the U.S.

As of December 31, 2022, we had $322.8 million of cash and cash equivalents. In addition, as of December 31, 2022, we had borrowing capacity of $150 million under our 2022 Revolver (as defined below), providing us with a liquidity position of $472.8 million plus $144.3 million of working capital excluding cash and cash equivalents for a combined $617.1 million total liquidity position.

Cash Flows

The following table summarizes our cash flows for the periods presented:

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Operating Activities

The increase in net cash provided by operating activities was primarily a result of an increase in net income of $23.3 million, changes in working capital and adjusting items to Operating Cash Flows to reconcile to Net income from operations, partially offset by the loss on extinguishment of debt of $18.8 million related to the refinancing of the 2020 Credit Agreement, inventory and unused labeling write-offs and disposal adjustments of $8.2 million recorded in the year ended December 31, 2022.

Investing Activities

The Company’s investing activities during the years ended December 31, 2022 and 2021 included purchases of software, property and equipment. For the year ended December 31, 2021, the Company’s investing activities also included investments in unconsolidated affiliates.

Financing Activities

The Company’s financing activities for the year ended December 31, 2022 primarily consisted of cash outflows for payments on our long-term debt and debt issuance costs, partially offset by proceeds from the issuance of debt pursuant to the 2022 Credit Agreement, payments of debt issuance costs, and payments for shares withheld and retired for taxes and exercise price for SARs, partially offset by cash received by the Company from stock option exercises, For the year ended December 31, 2021, the Company’s financing activities primarily consisted of cash outflows for payments of principal and interest on our long-term debt, partially offset by cash received by the Company from stock option exercises and issuance of common stock.

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 (as defined below) 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 the Annual Report. 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

On February 23, 2022, Olaplex, Inc., an indirect wholly owned subsidiary of Olaplex Holdings, Inc., together with Penelope Intermediate Corp. acting as the parent guarantor, entered into a Credit Agreement, dated as of February 23, 2022 (the “2022 Credit Agreement”), by and among Olaplex, Inc., Penelope Intermediate Corp, Goldman Sachs Bank USA (“Goldman Sachs”), as administrative agent (the “Administrative Agent”), collateral agent and swingline lender, and each lender and issuing bank from time to time party thereto (the “Lenders”). The 2022 Credit Agreement refinanced and replaced the 2020 Credit Agreement with a seven-year $675,000 senior-secured term loan facility (the “2022 Term Loan Facility”) and a five-year $150,000 senior-secured revolving credit facility (the “2022 Revolver”), which includes a $25,000 letter of credit sub-facility and a $25,000 swingline loan sub-facility

The refinancing of the 2020 Credit Agreement resulted in recognition of loss on extinguishment of debt of $18.8 million which is comprised of $11.0 million in deferred financing fee write off, and $7.8 million of prepayment fees for the 2020 Credit Agreement. We incurred costs directly related to the 2022 Credit Agreement of $11.9 million, consisting primarily of lender fees of $1.7 million and third-party fees of $10.2 million during the year ended December 31, 2022. These fees were allocated between the 2022 Revolver and the 2022 Term Loan Facility. 2022 Term Loan Facility fees are capitalized and recorded as a reduction of the carrying amount of non-current debt, and 2022 Revolver fees are capitalized and recorded as Other Assets on the balance sheet.

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.

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The interest rate on outstanding amounts under the 2022 Term Loan Facility was 7.9% per annum as of December 31, 2022. We have not drawn on the 2022 Revolver as of December 31, 2022. The 2022 Term Loan Facility is repayable in mandatory quarterly installments equal to $1,688, with the balance payable at maturity. The 2022 Term Loan Facility and 2022 Revolver can each be prepaid at any time without any penalty or premium (subject to any applicable breakage costs). The 2022 Term Loan Facility is subject to customary mandatory prepayments with respect to excess cash flow, net proceeds from non-ordinary course asset dispositions and the issuance of additional non-permitted debt or certain refinancing debt, in each case as set forth in the 2022 Credit Agreement.

The 2022 Credit Agreement contains a number of covenants that, among other things, restrict the Company’s ability to (subject to certain exceptions) pay dividends and distributions or repurchase its capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The 2022 Credit Agreement also includes reporting, financial and maintenance covenants, including a springing first lien leverage ratio financial covenant. The Company was in compliance with these affirmative and negative covenants on December 31, 2022. Substantially all the assets of the Company constitute collateral under the 2022 Credit Agreement. The maturity date of the 2022 Term Loan Facility is February 23, 2029. The maturity date of the 2022 Revolver is February 23, 2027.

As of December 31, 2022, the Company had outstanding indebtedness under the 2022 Credit Agreement of $671.6 million, of which $8.4 million was classified as current. As of December 31, 2022, the Company had $150.0 million of available borrowing capacity under the 2022 Revolver.

On August 11, 2022, the Company entered into an interest rate cap transaction in connection with the 2022 Term Loan Facility, with a notional amount of $400 million, in order to limit its exposure to potential increases in future interest rates related to the 2022 Term Loan Facility. The Company has designated the interest rate cap as a cash-flow hedge for accounting purposes. See “Note 9. Long-Term-Debt – Interest Rate Cap Transaction” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

Tax Receivable Agreement

In connection with the Reorganization Transactions, we entered into the Tax Receivable Agreement that provides the Pre-IPO Stockholders the right to receive future payments from us equal to 85% of the amount of cash savings, if any, in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of 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 (collectively, the “Pre-IPO Tax Assets”) and the making of payments under the Tax Receivable Agreement.

Although the actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of the Company’s and its subsidiaries’ taxable income in the future and the tax rates then applicable to us and our subsidiaries, we expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital. See “Note 10. Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information. The tax liability is based on current tax laws and the assumption that we and our subsidiaries 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 (expense) income in the period we made the determination. We expect that future payments under the Tax Receivable Agreement relating to the Pre-IPO tax assets could aggregate to $222.1 million over the 13-year remaining period under the Tax Receivable Agreement. The Tax Receivable Agreement provides that interest, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%, accrues from the due date (without extensions) of the tax return to which the applicable tax benefits relate to the date of payment specified by the Tax Receivable Agreement. Payments under the Tax Receivable Agreement , which began in fiscal year 2022, are not conditioned upon the Pre-IPO Stockholders maintaining a continued ownership of the Company.

In connection with the Reorganization Transactions, on September 30, 2021, we recognized a liability of $232.9 million for the payments to be made under the Tax Receivable Agreement, which is accounted for as a reduction of additional paid-in capital on our consolidated balance sheet. Changes in the utilization of the Pre-IPO Tax Assets will impact the amount of the liability that will be paid pursuant to the Tax Receivable Agreement. Changes in the utilization of these Pre-IPO Tax Assets are recorded in income tax expense (benefit) and any changes in the obligation under the Tax Receivable Agreement is recorded in other income (expense). During the fourth quarters of 2022 and 2021, the Company recognized other income of $3.1 million and $3.6 million, respectively, for a reduction to the liability for the Tax Receivable Agreement resulting primarily from an update to the blended state income tax rate used to measure the obligation. The adjusted liability as of December 31, 2022 is $222.1 million, of which $205.7 million was recorded in long term liabilities and $16.4 million was recorded in current liabilities.

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For purposes of the Tax Receivable Agreement, the amount of cash savings in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the Pre-IPO Tax Assets will be computed by comparing our actual U.S. federal, state and local income tax liability with our hypothetical liability had we not been able to utilize the Pre-IPO Tax Assets, taking into account several assumptions and adjustments. Payments under the Tax Receivable Agreement are expected to give rise to certain additional tax benefits. Any such tax benefits that we are deemed to realize under the terms of the Tax Receivable Agreement are covered by the Tax Receivable Agreement and will increase the amounts due thereunder.

The aggregate amount payable pursuant to the Tax Receivable Agreement is dependent in large part on the reduction in taxes that we would have been required to pay absent the existence of the Pre-IPO Tax Assets. As a result, changes in tax law, and in particular the federal and state tax rates applicable to U.S. corporations, the tax rules on the amortization and depreciation of assets, and our split of U.S. to foreign income may materially impact the timing and amounts of payments by us to the Pre-IPO Stockholders pursuant to the Tax Receivable Agreement. Congress is considering a significant number of changes to U.S. tax laws, including an increase in the maximum tax rate applicable to U.S. corporations, which may materially increase our payment obligations to Pre-IPO Stockholders under the Tax Receivable Agreement.

Different timing rules apply to payments under the Tax Receivable Agreement to be made to holders that, prior to the completion of the IPO, held stock option (collectively, the “Award Holders”). Such payments will generally be deemed invested in a notional account rather than made on the scheduled payment dates, and the account will be distributed on the fifth anniversary of the IPO, together with an amount equal to the net present value of such Award Holder’s future expected payments, if any, under the Tax Receivable Agreement. Moreover, payments to holders of stock options that were unvested prior to the completion of the IPO are subject to vesting on the same schedule as such holder’s unvested stock options.

If we fail to make payment by the date specified by the Tax Receivable Agreement, the Tax Receivable Agreement generally provides for interest to accrue on the unpaid amount from the date so specified until the date of actual payment, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 5%, except under certain circumstances specified in the Tax Receivable Agreement where we are unable to make payment by such date, in which case interest would accrue at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%.

Further, the Tax Receivable Agreement provides that (i) upon certain mergers, stock and asset sales, other forms of business combinations, (ii) upon certain sales or other divestitures, (iii) upon certain proceedings seeking liquidation, reorganization or other relief under bankruptcy, insolvency or similar law, event of default under certain of our indebtedness for borrowed money, or other Credit Event (as defined therein), (iv) upon a breach of any of our material obligations (that is not timely cured) under the Tax Receivable Agreement, or (v) or other Changes of Control (as defined therein) or if, at any time, we elect an early termination of the Tax Receivable Agreement, our payment obligations under the Tax Receivable Agreement will accelerate and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We will be required to make a payment intended to be equal to the present value of future payments (calculated using a discount rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, which may differ from our, or a potential acquirer’s, then-current cost of capital) under the Tax Receivable Agreement, which payment would be based on certain assumptions, including the assumption that we and our subsidiaries have sufficient taxable income and tax liabilities to fully utilize anticipated future tax benefits. In these situations, our, or a potential acquirer’s, obligations under the Tax Receivable Agreement could have a substantial negative impact on our, or a potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying or preventing certain mergers, asset sales, other forms of business combinations or other Changes of Control. These provisions of the Tax Receivable Agreement may result in situations where the Pre-IPO Stockholders have interests that differ from or are in addition to those of our other stockholders.

In addition, certain transactions by us could cause us to recognize taxable income (possibly material amounts of income) without a current receipt of cash. Payments under the Tax Receivable Agreement with respect to such taxable income would cause a net reduction in our available cash. For example, internal restructurings or reorganizations involving the intercompany sale or license of intellectual property rights, transactions giving rise to cancellation of debt income, the accrual of income from original issue discount or deferred payments, a “triggering event” requiring the recapture of dual consolidated losses, or “Subpart F” income would each produce income with no corresponding increase in cash. In these cases, we may use some of the Pre-IPO Tax Assets to offset income from these transactions and, under the Tax Receivable Agreement, would be required to make a payment to our Pre-IPO Stockholders even though we receive no cash corresponding to such income.

Payments under the Tax Receivable Agreement will be based in part on our reporting positions. The Pre-IPO Stockholders (or their transferees or assignees) will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax benefits are subsequently disallowed, although future payments would be adjusted to the extent possible to reflect the result of such disallowance and any excess payments made to any Pre-IPO Stockholder (or such Pre-IPO Stockholder’s transferees or assignees) will be netted against future payments that would otherwise be made under the Tax Receivable

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Agreement, if any, after our determination of such excess. As a result, in certain circumstances, the payments we are required to make under the Tax Receivable Agreement could exceed the cash tax savings we actually realize.

Contractual Obligations and Commitments

The following table summarizes our material cash requirements from known contractual and other obligations as of December 31, 2022 (in thousands):

(1)2022 Term Loan Facility debt payments include scheduled principal payments only.

(2)The 2022 Term Loan Facility is subject to variable interest rates. The interest rate on borrowings under the 2022 Term Loan Facility was 7.9% as of December 31, 2022. Assumes annual interest rate of 7.9% on the 2022 Term Loan Facility over the remaining term of the loan.

(3)Represents 85% of the estimated cash savings in U.S. federal, state or local that the Company realizes in its taxable income as a result of certain existing tax attributes as per the Tax Receivable Agreement. The Company has not considered financing costs that may be incurred with respect to when tax receivable payments are due from the Company’s tax filing dates (with no extensions) to the actual filing of tax returns under extension. See “Note 10. Income Taxes” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for additional information.

(4)Purchase obligations are commitments for contracted services and include non-cancelable payments.

(5)Does not reflect any borrowings under the 2022 Revolver. As of December 31, 2022, we had no outstanding borrowings under the 2022 Revolver. The Company is required to pay a commitment fee of 0.25% to 0.50% per annum on unused commitments under the 2022 Revolver based upon our First Lien Leverage Ratio (as defined in the 2022 Credit Agreement).

Critical Accounting Policies and Estimates

Our consolidated financial statements included elsewhere in this Annual Report have been prepared in accordance with GAAP. The preparation of financial statements requires us to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

We evaluated the development and selection of our critical accounting policies and estimates and believe that the following items are critical accounting estimates, as they (1) involve a higher degree of judgment or complexity and (2) are most significant to reporting our results of operations and financial position. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to the critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. More information on the Company’s significant accounting policies can be found in the footnotes to our audited consolidated financial statements included in “Note 2 - Summary of Significant Accounting Policies” in Item 8 of this Annual Report.

Revenue Recognition

Nature of estimates required: We recognize revenue when control of promised goods are transferred to a customer in an amount that reflects the consideration that we expect to receive in exchange for those goods. Control of the products that we sell are transferred at a point in time. Factors that determine the specific point in time a customer obtains control (and a performance obligation is satisfied) are (i) when we have a present right to payment for the goods, (ii) whether the customer has physical possession and title to the goods, and (iii) whether significant risks and rewards of ownership have transferred. Delivery is typically considered to have occurred at the time the title and risk of loss passes to the customer. Revenue from transactions, net of estimated and actual allowances, is generally recognized at a point in time based on the contractual terms with the customer.

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Assumptions and approach used:

Promotional allowance: In the normal course of business, we offer various incentives to customers such as sales discounts and other incentives and allowances, which give rise to variable consideration. The amount of variable consideration is estimated at the time of sale based on either the expected value method or the most likely amount, depending on the nature of the variability. Actual incentives and allowances upon completion of a promotion are inherently uncertain and thus may differ from our estimates. We regularly review and revise, when deemed necessary, our estimates of variable consideration based on both customer-specific expectations as well as historical rates of realization. If actual or expected promotional allowances were significantly greater or lower than the accrual for the allowance we had established, we would record a reduction or increase to net sales in the period in which we made such determination.

Sales returns and allowances: Our terms of sale provide limited return rights and allowances. We record estimated sales returns, discounts, and miscellaneous customer claims as reductions to net sales at the time revenues are recorded. We base our estimates upon historical experience and trends, and upon approval of specific returns or discounts. Actual returns and discounts in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and discounts were significantly greater or lower than the accrual for the allowance we had established, we would record a reduction or increase to net sales in the period in which we made such determination.

Inventory

Nature of estimates required: Inventory is comprised primarily of finished goods and are stated at the lower of cost (average cost method) or estimated net realizable value. Cost is computed based on average historical costs. We allocate the amortization of our patented formulations to the carrying value of our finished goods. The carrying value of inventories is reduced for any excess and obsolete inventory.

Assumptions and approach used: Excess and obsolete inventory reductions are determined based on assumptions about future demand and sales prices, estimates of the impact of competition, and the age of inventory. If actual conditions are less favorable than those previously estimated by management, additional inventory write-downs could be required.

Tax Receivable Agreement

Nature of estimates required: The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of the Company’s and its subsidiaries’ taxable income in the future and the tax rates then applicable to the Company and its subsidiaries. We expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital.

Assumptions and approach used: The tax liability is based on current tax laws and the assumption that the Company and its subsidiaries 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 (expense) income in the period we made the determination. We expect that future payments under the Tax Receivable Agreement relating to the Pre-IPO Tax Assets could aggregate to $222.1 million over the 13-year remaining period under the Tax Receivable Agreement. Payments under the Tax Receivable Agreement, which began in fiscal year 2022, are not conditioned upon the parties’ continued ownership of equity in the company. See “Note 10 - Income Taxes” in Item 8 of this Annual Report.

New Accounting Pronouncements

See “Note 2. Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements” to our Consolidated Financial Statements included in Item 8. Financial Statements of this Annual Report for information regarding new accounting pronouncements.

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ITEM 7 - 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 consolidated financial statements and related notes included elsewhere in this Annual Report (“Annual Report”). 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” and in the “Risk Factors” section in this Annual Report.

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 tremendous 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 haircare 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 is able to repair disulfide bonds in human hair that are destroyed via chemical, thermal, mechanical, environmental and aging processes. Our current product portfolio comprises eleven 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 66% for the year ended December 31, 2021 as compared to the year ended December, 31, 2020, representing 43% of our total net sales for the period. Our specialty retail channel grew 247% for the year ended December 31, 2021 as compared to the year ended December, 31, 2020, representing 29% of our total net sales for the period. Our DTC channel, comprised of OLAPLEX.com and sales through third-party e-commerce platforms, grew 117% for the year ended December 31, 2021 as compared to the year ended December, 31, 2020, and represented 27% of our total net sales for the period. This channel also provides us with the opportunity to engage directly with our consumers to help power 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 $282.3 million for the year ended December 31, 2020 to $598.4 million for the year ended December 31, 2021, representing a 112% increase. Our net income increased from $39.3 million for the year ended December 31, 2020 to $220.8 million for the year ended December 31, 2021, representing a 462% increase, and our adjusted net income (see “⸺Non-GAAP Financial Measures”) increased from $131.1 million for the year ended December 31, 2020, to $275.7 million for the year ended December 31, 2021, representing a 110% increase. We have also experienced robust adjusted EBITDA (see “⸺Non-GAAP Financial Measures”) growth over the past year, increasing our adjusted EBITDA from $199.3 million for the year ended December 31, 2020, to $408.8 million for the year ended December 31, 2021, representing a 105% increase, with a decrease in our adjusted EBITDA margins (see “⸺Non-GAAP Financial Measures”) from 70.6% for the year ended December 31, 2020, to 68.3% for the year ended December 31, 2021 reflecting the investments necessary to scale our business.

Key Factors Affecting Our Performance

We believe that our continued success and growth are dependent on a number of factors. These factors provide both significant areas of opportunity as well as potential challenges that we will need to address in order to sustain the growth of our business. We have outlined some of these factors below, as well as in the section “Special Note Regarding Forward-Looking Statements” and in the “Risk Factors” section in this Annual Report.

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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 still only has aided brand awareness of approximately 45% among prestige haircare consumers, which is lower than most haircare peers. We believe awareness among the broader market is lower still. We believe the core elements of continuing to grow our awareness, and thus increase our penetration, are highlighting our products’ quality, our continued ability to drive innovative new haircare solutions and our digital first marketing tactics. 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’s 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, due to closures, employee absences, port congestion, labor and container shortages, and shipment delays. As a result, we expect higher costs to negatively impact the cost of sales and operating expenses in the near future. We expect to mitigate some of the impact to our business and our costs through cost savings initiatives, product mix optimization, strategic pricing, timing of shipments, and minimizing the use of air freight and congested ports.

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. Though we have a solid pipeline of 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.

Impact of COVID-19

The COVID-19 pandemic has impacted our business beginning in March 2020. The degree to which the COVID-19 pandemic will directly or indirectly impact our cash flow, business, financial condition, results of operations and prospects will depend on future developments that are highly uncertain and cannot be predicted, many of which are outside of our control. The impact of COVID-19 on our supply chain has been discussed above. We believe the COVID-19 pandemic shifted demand from our professional channel to the specialty retail and DTC channels, as consumers were unable to treat

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their hair in salons as a result of restrictions, such as mandatory lockdowns, that caused the closure of many of our professional salon partners and consumers turned to purchasing our products online for home treatment. This shift enabled us to scale our DTC capability faster than expected. Even as salons in our professional channel locations have reopened and as well as retail sales have gained momentum, we have not seen a decline in the demand for our products in our DTC channel, nor do we expect to, as COVID-19 restrictions continue to ease globally.

One impact on our business due to COVID-19 was the implementation of our Affiliate Program. We created this program during April and May of 2020 to support hairstylists during salon closures imposed by COVID-19 safety measures, allowing hairstylists to connect with their consumers and generate income by selling Olaplex products for at-home use. As we continue to monitor developments related to the COVID-19 pandemic, including the impacts on our customers, suppliers and consumers, we have taken and will continue to take further measures.

Components of Our Results of Operations and Trends Affecting Our Business

Net Sales

We develop, market and sell premium haircare products under our Olaplex brand through our wholly owned subsidiary, Olaplex, Inc., which is our primary operating subsidiary and conducts business under the name “Olaplex”. We operate through three customer channels: professional, specialty retail, and DTC.

Net sales are comprised of the transaction price to customers for product sales less expected allowances, discounts, and allowance for returns. Our growth in net sales is driven by a number of trends, including the levels of consumer spending, increasing awareness of and demand for our products, and the broader economic environment. Our largest channel, professional, includes sales through external distributors who sell to professional hairstylists throughout the world who use our products to treat their customers’ hair. Net sales in our professional channel also includes products sold to consumers for use at home. Net sales within this channel have continued to grow with increased awareness and distribution. Our specialty retail channel includes sales through national retail accounts, such as Sephora. Net sales in this channel have continued to grow through increased distribution across new stores within our existing customers, new customer relationships, and increasing sales within existing stores. We expect to continue to grow through increased penetration in additional stores within existing accounts as well as the addition of new retail customers and stores, both domestically and internationally. The DTC channel includes direct sales to the consumer through our website, olaplex.com, and sales through third-party e-commerce customers who resell our products solely through online platforms.

Cost of Sales

Cost of sales reflects the aggregate costs to procure our products, including the amounts invoiced by our third- party contract manufacturers and suppliers for finished goods, costs related to transportation to our distribution centers, and amortization of our patented formulations. For the 2020 fiscal year, we amortized a one-time non-recurring fair value step-up adjustment to inventory as part of purchase accounting related to the Acquisition that is recorded in cost of sales.

Gross Profit and Gross Margin

Gross profit is our net sales less cost of sales. Gross margin measures our gross profit as a percentage of net sales.

We have a network of domestic and international third-party manufacturers from whom we purchase finished goods. Over the past several years, we have worked to evolve our supply chain to increase capacity and technical capabilities while maintaining and reducing overall costs as a percentage of sales.

Operating Expenses

Our operating expenses consist of selling, general and administrative expenses (“SG&A”), amortization of brand name and customer relationship intangible assets and purchase accounting acquisition costs.

SG&A expenses include personnel-related expenses, including salaries, success payments, fringe benefits and share-based compensation. Other significant operating expenses include sales and marketing, research and development, outbound shipping, fulfillment, information technology costs, merchant fees, professional fees for accounting, auditing, consulting and legal services, and travel and overhead expenses.

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In relation to the Acquisition, and included in the operating expenses, are amortization of brand name and customer relationship intangible assets and non-recurring purchase accounting acquisition costs that consist of legal, accounting, and banking fees.

In the near term, we expect SG&A expenses to increase as we invest to support our growth initiatives, including investments in the Olaplex brand and infrastructure. Additionally, we expect our operating expenses will increase compared to prior periods due to the reporting and compliance costs associated with being a public company.

Interest (Expense)

Interest expense primarily consists of interest incurred on our outstanding indebtedness and amortization of debt issuance costs. See “Financial condition, liquidity and capital resources” below and a description of our indebtedness in Note 9 of the consolidated financial statements included elsewhere in this Annual Report.

Other Income (Expense), Net

Other income (expense), net primarily reflects gains (losses) caused by fluctuations of foreign currency exchange rates, as well as reduction of income that results from penalty payments received from distributors for sales in violation of their distribution agreements and adjustments to the Tax Receivable Agreement liability due to changes in interest rates or blended tax rates.

Income Tax Provision

We operate as a C-Corporation. The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain permanent tax adjustments. The U.S. federal statutory tax rate was primarily lower due to the foreign derived intangible income (“FDII”) deduction. This deduction results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, the impact of permanent tax adjustments, and the interaction of various tax strategies.

Net Income

Our net income for future periods will be affected by the various factors described above.

Segments

Operating segments are components of an enterprise for which separate financial information is available that is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Utilizing this criteria, the Company manages its business on the basis of three operating segments that are aggregated into one reportable segment given the operating segments have similar economic characteristics, classes of consumers, products, production, distribution methods, and operate in the same regulatory environments.

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Results of operations for the years ended December 31, 2021 and December 31, 2020

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

2021 compared to 2020:

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.

Net sales increased $316.1 million, or 112.0%, to $598.4 million for the year ended December 31, 2021, from $282.3 million for the year ended December 31, 2020.

Professional net sales increased $102.8 million, or 65.8%, to $259.0 million for the year ended December 31, 2021, from $156.2 million for the year ended December 31, 2020. Growth for professional was driven by volume growth from the increased velocity (sales per point of distribution) of existing products (including No.4 - Bond Maintenance Shampoo, No. 5 - Bond Maintenance Conditioner and No. 3 - Hair Perfector), the launch of new products ( No.8 - Bond Intense Moisture

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Mask, Professional only 4-in-1 Moisture Mask, No.4P- Blonde Enhancer Toning Shampoo and including No.0 - Intensive Bond Building Hair Treatment,) and the addition of new customers (primarily in key international markets in Europe). The Company experienced significant revenue growth in the U.S., U.K. and Italy.

Specialty retail net sales increased $125.1 million, or 246.6%, to $175.8 million for the year ended December 31, 2021, from $50.7 million for the year ended December 31, 2020. Growth for specialty retail was driven by volume growth from the increased velocity of existing products (including No. 4 - Bond Maintenance Shampoo, No. 5 - Bond Maintenance Conditioner and No. 3 - Hair Perfector), the launch of new products (No.8 - Bond Intense Moisture Mask, No.4P- Blonde Enhancer Toning Shampoo and No.0 - Intensive Bond Building Hair Treatment) and the addition of new retail customers in the U.S. Specifically, we added a new customer in the fourth quarter of 2021 which contributed $15 million in revenue growth.

DTC net sales increased $88.2 million, or 117.1%, to $163.6 million for the year ended December 31, 2021, from $75.3 million for the year ended December 31, 2020. Growth for DTC was driven by volume growth from the addition of new e-commerce customers, increased velocity from existing products (including No. 5- Bond Maintenance Conditioner, No. 4 - Bond Maintenance Shampoo, and no 3 - Hair Perfector) and the launch of new products (including No.8 - Bond Intense Moisture Mask, No.0 - Intensive Bond Building Hair Treatment and No.4P- Blonde Enhancer Toning Shampoo). Olaplex.com also saw strong growth as a result of increased traffic of new customers and higher average order value. Holiday kits, Black Friday, expansion into new countries including United Kingdom and Australia and increased digital marketing spend also contributed to increase in sales. The Company experienced significant growth in the U.S. and U.K. for the year ended December 31, 2021 as compared to the prior year.

Cost of Sales and Gross Profit

Our cost of sales increased $21.9 million or 21.3% to $124.5 million for the year ended December 31, 2021 from $102.7 million for the year ended December 31, 2020 due to a $64.6 million increase driven by increased sales volume and a $2.0 million increase in the amortization of our acquired patented formulations, partially offset by the absence of a $44.7 million expense as a result of the one-time fair value inventory adjustment due to the Acquisition in January 2020.

Our gross profit increased $294.2 million, or 163.8%, to $473.8 million for the year ended December 31, 2021 from $179.6 million for the year ended December 31, 2020. Our gross profit margin, as a percentage of sales, increased from 63.6% for the year ended December 31, 2020 to 79.2% for the year ended December 31, 2021, primarily as a result of the absence of the one-time fair value inventory adjustment due to the Acquisition in January 2020. Our adjusted gross profit margin (see “Non-GAAP Financial Measures”) decreased from 81.6% for the year ended December 31, 2020 to 80.5% for the year ended December 31, 2021 due primarily to higher input costs, particularly for inbound distribution. The favorable gross margin impact driven by channel mix (from the higher growth in specialty retail and DTC) was largely offset by unfavorable product mix (higher sales from lower margin products).

Operating Expenses

Our operating expenses increased $46.2 million, or 49.4%, from $93.5 million for the year ended December 31, 2020 to $139.7 million for the year ended December 31, 2021.

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SG&A expenses increased by $61.7 million, or 166.0%, from $37.2 million for the year ended December 31, 2020. In 2021, there were increases of $9.8 million in sales and marketing expense, $8.6 million in payroll driven by expansion of our workforce, $8.5 million in non-capitalizable IPO and strategic transition costs, $6.0 million in distribution and fulfillment costs related to the increase in product sales volume, $5.5 million in cash-settled units compensation expense (see Note 11 to the consolidated financial statements), $2.4 million in share-based compensation expense, and $6.6 million in other SG&A expenses pertaining to general business growth. Also included in SG&A costs for the year ended December 31, 2021, were costs incurred related to the LIQWD Matters of $14.3 million (see Note 14 to the consolidated financial statements included elsewhere in this Annual Report). We expect sales and marketing, research and development, payroll, and other SG&A 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.

Amortization of intangible assets increased $1.0 million or 2.4%. Acquisition costs decreased $16.5 million due to the Acquisition (see Notes 1 and 6 to the consolidated financial statements) occurring in 2020.

Interest Expense

Interest expense increased $22.5 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is due to the interest related to the Amended Original Credit Agreement (as defined herein) that the Company entered into for additional borrowings on December 18, 2020. See “Financial Liquidity and Capital Resources ⸺ Credit Facility”.

Other Income (Expense), Net

For the year ended December 31, 2021, net other income increased $2.8 million compared to the year ended December 31, 2020, primarily due the Tax Receivable Agreement liability adjustment recorded during the year. During the fourth quarter of 2021, the Company recognized other income of $3.6 million for a reduction to the liability for the Tax Receivable Agreement resulting primarily from an update to the blended state income tax rate used to measure the obligation. This was offset by an increase in foreign currency transaction losses of $0.9 million.

Income Tax Provision

The fiscal 2021 and 2020 provisions for income taxes represent U.S. federal, foreign, state and local income taxes. The effective rates differ from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain permanent tax adjustments. The U.S. federal statutory tax rates for 2021 and 2020 were primarily lower due to the FDII deduction, net of the effect of state and local income taxes. The FDII deduction results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, the impact of permanent tax adjustments, and the interaction

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of various tax strategies. See “Critical Accounting Policies and Estimate-Income Taxes and Tax Receivable Agreement” pertaining to Reorganization.

The provision for income taxes increased to $54.8 million, or an effective tax rate of 19.9%, for the year ended December 31, 2021 from a provision of $8.0 million, or an effective tax rate of 16.9%, for the year ended December 31, 2020. The increase in the provision for income taxes from the provision for the comparative prior year period is due to the increase in the Company’s income before taxes over this period. The effective tax rates in both periods are lower than the statutory rate primarily due to the FDII, net of the effect of state and local income taxes, and the effective tax rate for the year ended December 31, 2021 is also reduced by excess tax benefits associated with share-based compensation. The FDII deduction results in income from the Company’s sales to foreign customers being taxed at a lower effective tax rate. The increase in the effective tax rate from the comparative prior year period primarily resulted from a decrease in the portion of the Company’s earnings which are attributable to sales to non-U.S. customers, and therefore are eligible for the FDII deduction.

Non-GAAP Financial Measures

We prepare and present our consolidated financial statements in accordance with GAAP. However, management believes 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, which are non-GAAP financial measures, provide investors with additional useful information in evaluating our performance.

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 facilitates 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 is 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) fair value inventory step-up adjustment amortization;(6) Acquisition costs and financing fees; (7) costs incurred for LIQWD Matters; (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) fair value inventory step-up adjustment amortization 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) costs incurred for LIQWD Matters, (3) non-capitalizable IPO and strategic transition costs and (4) Financing fees.

We calculate adjusted net income as net income, adjusted to exclude: (1) amortization of intangible assets; (2) share-based compensation expense; (3) fair value inventory step-up adjustment amortization; (4) Acquisition costs and financing fees; (5) costs incurred for LIQWD Matters; (6) non-capitalizable IPO and strategic transition costs; (7) as applicable, tax receivable agreement liability adjustments and (8) the tax effect of non-GAAP adjustments. Adjusted net income per share is defined as adjusted net income per share using the weighted average basic and diluted shares outstanding.

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

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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 expenses, including, in the case of adjusted EBITDA and adjusted EBITDA margin, interest expense, (5) in the case of adjusted EBITDA and adjusted EBITDA margin, do not reflect tax payments that may represent a reduction in cash available to us and (6) do not include certain non-ordinary cash expenses that we do not believe are representative of our business on a steady-state basis. In addition, our use of non-GAAP measures may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted SG&A, adjusted net income, and adjusted net income per share in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider these non-GAAP measures alongside other financial measures, including our gross profit, gross profit margin, net income, net income per share and other results stated in accordance with GAAP.

The following tables present a reconciliation of net income and gross profit, as the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross profit margin, adjusted SG&A, adjusted net income and adjusted net income per share for each of the periods presented.

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(1)Includes acquisition costs related to the Acquisition of the Olaplex business and dividend financing costs.

(2)Includes dividend financing costs.

(3)Includes costs incurred related to the resolution of the LIQWD Matters of $14.3 million as discussed in Note 14 to the consolidated financial statements included elsewhere in this Annual Report.

(4)Includes the non-cash, non-recurring fair value inventory step-up adjustment amortization as part of the purchase accounting on the Acquisition Date, utilizing the comparative sales method in accordance with ASC 820-10-55-21.

(5)Represents non-capitalizable professional fees and executive severance incurred in connection with the IPO and the Company’s public company transition.

(6)Represents applicable tax receivable agreement liability adjustments.

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, such as compensation and benefits, as well as general operating expenses for marketing, fulfillment costs of customer orders, overhead costs, capital expenditures, and debt servicing. We also utilize cash for strategic investments. Fluctuations in working capital are primarily caused by customer demand of our product, timing of when a retailer rearranges or restocks our products, expansion of space within our existing retailer base, expansion into new retail stores

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and fluctuation in warehouse and distribution costs. 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, investments in supply chain and R&D capabilities and expansion of our customer base.

A considerable portion of our operating income is earned outside the U.S.; however, we do not have bank time deposits held outside of the U.S.

As of December 31, 2021, we had $186.4 million of cash and cash equivalents. In addition, as of December 31, 2021, we had borrowing capacity of $51.0 million under our 2020 Revolver, providing us with a liquidity position of $237.4 million plus $75.9 million of working capital excluding cash and cash equivalents for a combined $313.3 million liquidity position.

Although there is no current need, we primarily examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to maintain financial flexibility and may from time to time elect to raise capital through the issuance of additional equity or the incurrence of additional debt.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

For the year ended December 31, 2021, net cash provided by operating activities was $200.0 million. This included net income of $220.8 million, plus $48.9 million in depreciation and amortization of fixed assets, patents and other intangibles, $2.8 million in amortization of debt issuance costs, $2.5 million in deferred taxes, $3.6 million of Tax Receivable Agreement liability adjustment and $4.0 million in share-based compensation. Additionally, there was a $76.4 million increase in working capital excluding cash during the period. The increase in net working capital was largely driven by a $98.4 million increase in accounts receivable, inventory, and other current assets for customer deposits and prepaids offset partly by an increase of $22.0 million in accounts payable, accrued expenses and other current liabilities caused by increased inventory and other purchases.

For the year ended December 31, 2020, net cash provided by operating activities was $129.0 million. This included net income of $39.3 million, plus $45.9 million in amortization of patents and other intangibles, $44.7 million for fair value of acquired inventory, $1.8 million in amortization of debt issuance costs, $1.5 million in share-based compensation expense offset partly by a $4.4 million increase in deferred tax assets. Additionally, there was a $0.2 million decrease in working capital excluding cash during the period. The decrease in net working capital was largely driven by a $23.7 million increase in accounts payable, accrued expenses and other liabilities caused by increased inventory and other purchases, offset partly by an increase of $14.3 million increase in inventory to support growth in the business, a $7.1 million increase in accounts receivable reflecting the overall growth in net sales and a $2.1 million increase in other current assets for customer deposits and prepaids.

Investing Activities

For the year ended December 31, 2021, net cash used in investing activity was $6.3 million. This was due to $4.5 million in purchase of investments and $1.8 million in purchase of property and equipment and software.

For the year ended December 31, 2020 net cash used in investing activity was $1,381.6 million. This was due to the net cash outflow related to the Acquisition in January 2020.

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Financing Activities

For the year ended December 31, 2021, net cash used in financing activities was $18.3 million. This was primarily driven by $20.1 million of principal payments on term debt, offset by $0.6 million of cash proceeds received from the issuance of common shares and $1.1 million cash proceeds received from exercise of employee stock options.

For the year ended December 31, 2020, net cash provided by financing activities was $1,264 million. This was primarily driven by $959.9 million from the issuance of common shares in connection with the Acquisition in January 2020 and additional issuance of shares in May 2020.

In connection with the Acquisition, on the Acquisition Date, we received cash proceeds of $450.0 million from the issuance by Olaplex, Inc. of term loans pursuant to the Original Credit Agreement. In addition, in December

2020, we received $350 million of proceeds from the issuance by Olaplex, Inc. of term loans pursuant to the Amendment to the Original Credit Agreement (as defined herein) and used the proceeds to fund the payment of a $470.0 million dividend to Penelope Group Holdings, which further distributed $470.0 million to holders of all of its Class A common units. Additional offsets to the issuance of the two debt instruments include payment of $15.6 million of debt issuance costs and $10.7 million in principal payments related to the Original 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 and draws on our 2020 Revolver (as defined herein) 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 2020 Revolver (as defined herein) 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 the Annual Report. 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.

Credit Facility

On January 8, 2020, Olaplex, Inc. entered into a secured credit agreement (the “Original Credit Agreement”) consisting of a $450 million term loan facility (the “2020 Term Loan Facility”) and a $50 million revolving facility (the “2020 Revolver” and together with the Term Loan Facility, the “2020 Credit Facilities”), which includes a $10 million letter of credit sub-facility and a $5 million swingline loan facility. In addition, on December 18, 2020 Olaplex, Inc. entered into the Amendment to the Original Credit Agreement (the “Amendment” and together with the Original Credit Agreement, the “2020 Credit Agreement”) to increase the 2020 Term Loan Facility by $350 million and increase the Revolver capacity by $1 million to a revised $800 million Term Loan and a $51 million Revolver facility. The unused balance of the 2020 Revolver was $51 million as of December 31, 2021 and December 31, 2020.

The 2020 Term Loan Facility maturity date was January 8, 2026 and the loans made under the 2020 Term Loan Facility were secured by substantially all of our assets. Installment payments on the 2020 Term Loan Facility were required to be made in quarterly installments of $5,028,000, with the remaining balance due upon maturity. The 2020 Term Loan Facility could be prepaid at any time subject to a 2% or 1% penalty provision (with certain exceptions) if paid prior to July 8, 2021 and July 8, 2022, respectively, and is subject to mandatory prepayments with respect to (i) excess cash flow, which was defined as adjusted EBITDA less certain customary deductions, subject to certain threshold amounts of excess cash flow during the relevant period and percentage reductions of the prepayment amount upon the attainment of certain consolidated first lien net leverage ratio levels, (ii) certain non-ordinary course asset dispositions that result in net proceeds in excess of $2.5 million during the relevant measurement period, unless reinvested in accordance with the terms of the 2020 Credit Agreement within twelve months (with an additional 180 days to reinvest, if committed within 12 months) of receipt of such proceeds, or (iii) issuance of additional non permitted debt or certain refinancing debt.

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Both the 2020 Revolver and the 2020 Term Loan Facility beared interest, at Olaplex, Inc.’s option, at either a rate per annum equal to (i) an adjusted LIBOR determined by reference to the cost of funds for U.S. dollar deposits (or any other applicable currency available under the 2020 Credit Agreement), as adjusted for statutory reserve requirements for the applicable interest period (with a 1.00% floor), plus an applicable margin ranging from 6.25% to 6.50% based on our consolidated first lien net leverage ratio or (ii) a base rate determined by reference to the highest of (x) the federal funds effective rate plus 0.5%, (y) the one-month LIBO rate plus 1.0% and (z) the prime rate, plus an applicable margin ranging from 5.25% to 5.50% based on our consolidated first lien net leverage ratio. The interest rate on both outstanding amounts under the 2020 Revolver and the outstanding 2020 Term Loan Facility was 7.5% per annum as of December 31, 2021 and December 31, 2020, respectively. The 2020 Revolver had a maturity date of January 8, 2025.

We incurred costs directly related to the 2020 Credit Facilities of $15.6 million, consisting primarily of lender fees of $13.5 million and third-party fees of $2.1 million during 2020. These fees, which were allocated between the 2020 Revolver and the 2020 Term Loan Facility and are recorded as a reduction of the carrying amount of non-current debt.

The 2020 Credit Facilities contained a number of covenants that, among other things, restricted our ability to (subject to certain exceptions) pay dividends and distributions or repurchase our capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The 2020 Credit Facilities also included reporting, financial and maintenance covenants that required us to, among other things, comply with certain consolidated secured net leverage ratios. As of December 31, 2021 and December 31, 2020, we were in compliance with our financial maintenance covenant.

Refinancing of the 2020 credit agreement

On February 23, 2022, Olaplex, Inc. refinanced the 2020 Credit Agreement with a seven-year $675 million senior-secured term loan facility (the “2022 Term Loan Facility”) and a five-year $150 million senior-secured revolving credit facility (the “2022 Revolver” and together with the 2022 Term Loan Facility, the “2022 Credit Facilities”), which includes a $25 million letter of credit sub-facility and a $25 million swingline loan sub-facility (collectively, the “2022 Credit Agreement”).The 2022 Credit Agreement replaced the Company’s Credit Agreement. Using proceeds from the Term Loans, Olaplex, Inc. repaid the outstanding borrowings under the Credit Agreement.

The 2022 Term Loan Facility maturity date is February 23, 2029 and the 2022 Revolver maturity date is February 23, 2027. Installment payments on the Term Loan are required to be made in quarterly installments of $1,687,500, with the remaining balance due upon maturity. The 2022 Term Loan Facility can be prepaid at any time subject to a 1% penalty provision (with certain exceptions) if paid prior to August 23, 2022, and is subject to mandatory prepayments with respect to (i) excess cash flow, which is defined as adjusted EBITDA less certain customary deductions, subject to a certain threshold amount of excess cash flow during the relevant period and percentage reductions of the prepayment amount upon the attainment of certain consolidated first lien net leverage ratio levels, (ii) certain non-ordinary course asset dispositions that result in net proceeds in excess of a certain threshold amount during the relevant measurement period, unless reinvested in accordance with the terms of the 2022 Credit Agreement within twelve months (with an additional 180 days to reinvest, if committed within 12 months) of receipt of such proceeds, or (iii) issuance of additional non permitted debt or certain refinancing debt.

Both the 2022 Revolver and the 2022 Term Loan Facility bear interest at rates based on the ratio of (i) Olaplex, Inc., and its subsidiaries’ consolidated first lien net indebtedness to (ii) Olaplex, Inc., and its subsidiaries’ consolidated adjusted EBITDA for applicable periods specified in the 2022 Credit Agreement (the “First Lien Leverage Ratio”). The interest rate per annum applicable to the loans under the 2022 Term Loan Facility and 2022 Revolver will be based on a fluctuating rate of interest equal to the sum of an applicable rate and, at the election of Olaplex, Inc. from time to time, (1) a base rate determined by reference to the highest of (a) the rate of interest publicly announced by Goldman Sachs Bank USA (in its capacity as administrative agent under the 2022 Credit Agreement, the “Administrative Agent”) as its “prime rate” in effect at its principal office in New York City (or if the Administrative Agent has no “prime rate,” the rate last quoted by the Wall Street Journal as the “prime rate” or, if the Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the federal reserve board in federal reserve statistical release H.15 (519) as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein or any similar release by the federal reserve board), (b) the greater of the (x) federal funds effective rate and (y) overnight bank funding rate, plus 0.50% and (c) one-month adjusted secured overnight financing rate (“SOFR”) plus 1.00%, (2) an adjusted SOFR determined by reference to the higher of (a) a rate equal to the SOFR in the form of a term rate published by the CME Term SOFR administrator (or any successor thereof) for an interest period of one, three or six months (or if such term rate is unavailable, a daily simple rate for an interest payment period of one, three or six months published by the federal reserve board of New York) two U.S. government securities business days prior to the commencement of such tenor (plus, solely with respect to the Term B

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Loans, a credit spread adjustment of 0.10% for all such interest periods) and (b) 0.00%, with respect to the 2022 Revolver and, 0.50%, with respect to the 2022 Term Loan Facility, and (3) with respect to a borrowing in Euros under the 2022 Revolver, a euro interbank offered rate (“EURIBOR”) determined by reference to the higher of (a) the Euro interbank offered rate administered by the European Money Markets Institute (or any successor thereof) for a period equal to one, three, six, or, if available to all relevant affected Lenders, twelve months or a shorter period (as selected by Olaplex, Inc.) appearing on Reuters Screen EURIBOR01 Page (or otherwise on the Reuters screen) two target days prior to the commencement of the applicable interest period and (b) 0.00%. The 2022 Revolver and swingline loans (which must be in base rate) have applicable rates equal to (x) 2.75%, in the case of base rate loans, 3.75%, in the case of adjusted SOFR loans and 3.75%, in the case of EURIBOR loans, if the First Lien Leverage Ratio is greater than 1.20:1.00, and (y) 2.50%, in the case of base rate loans, 3.50%, in the case of adjusted SOFR loans and 3.50%, in the case of EURIBOR loans, if the First Lien Leverage Ratio is less than or equal to 1.20:1.00. Loans under the 2022 Term Loan Facility have applicable rates equal to (x) 2.75%, in the case of base rate loans, and 3.75%, in the case of adjusted SOFR loans, if the First Lien Leverage Ratio is greater than 1.20:1.00, and (y) 2.50%, in the case of base rate loans, and 3.50%, in the case of adjusted SOFR loans, if the First Lien Leverage Ratio is less than or equal to 1.20:1.00.

The 2022 Credit Agreement contains a number of covenants that, among other things, restrict Olaplex, Inc.’s ability to (subject to certain exceptions) (i) pay dividends and distributions or repurchase its capital stock, (ii) prepay, redeem, or repurchase certain indebtedness, (iii) incur additional indebtedness and guarantee indebtedness, (iv) create or incur liens, (v) engage in mergers, consolidations, liquidations or dissolutions, (vi) sell, transfer or otherwise dispose of assets, (vii) make investments, acquisitions, loans or advances and (viii) enter into certain transactions with affiliates. The 2022 Credit Agreement also includes, among other things, customary affirmative covenants (including reporting 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. Such affirmative and negative covenants and events of default are substantially similar to those contained in the refinanced Credit Agreement, subject to certain exceptions and thresholds set forth in the 2022 Credit Agreement. The 2022 Term Loan Facility and 2022 Revolver are secured by substantially all of the assets of Olaplex, Inc. and the other guarantors, subject to certain exceptions and thresholds, which is substantially the same as the collateral that secured the obligations under the refinanced Credit Agreement.

Tax Receivable Agreement

In connection with the Pre-IPO Reorganization, we entered into the Tax Receivable Agreement that provides the Pre-IPO Stockholders the right to receive future payments from us equal to 85% of the amount of cash savings, if any, in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of 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 this offering (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 this offering) and which are available to us and our wholly-owned subsidiaries (collectively, the “Pre-IPO Tax Assets”) and the making of payments under the Tax Receivable Agreement. These payment obligations are our obligations and not obligations of any of our subsidiaries and are not conditioned upon the Pre-IPO Stockholders maintaining a continued direct or indirect ownership interest in us.

We expect that we will be able to utilize the Pre-IPO Tax Assets to reduce the amount of tax that we and our subsidiaries would otherwise be required to pay in the future; however, the Tax Receivable Agreement will require us to pay the Pre-IPO Stockholders 85% of the resulting cash savings. If we did not enter into the Tax Receivable Agreement, we would be entitled to realize the full economic benefit of the Pre-IPO Tax Assets.

Although the actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors including the amount, character and timing of the Company’s and its subsidiaries’ taxable income in the future and the tax rates then applicable to us and our subsidiaries, we expect the payments that will be required to be made under the Tax Receivable Agreement will be substantial and to be funded out of working capital. See Note 10 to the consolidated financial statements included elsewhere in this Annual Report. Payments under the Tax Receivable Agreement may be significantly greater than the benefits we realize in respect of the Pre-IPO Tax Assets. Based on current tax laws and assuming that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the Tax Receivable Agreement, (i) we expect that future payments under the Tax Receivable Agreement relating to the Pre-IPO Tax Assets could aggregate to $229.3 million over the 14-year period under the Tax Receivable Agreement and (ii) we expect payments to occur begin in 2022. Payments under the Tax Receivable Agreement are not conditioned upon the parties’ continued ownership of the Company. The Tax Receivable Agreement provides that interest, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%, accrues from the due

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date (without extensions) of the tax return to which the applicable tax benefits relate to the date of payment specified by the Tax Receivable Agreement.

In connection with the Reorganization Transactions, on September 29, 2021, we have recognized a liability of $232.9 million for the payments to be made under the Tax Receivable Agreement, which is accounted for as a reduction of additional paid-in capital on our consolidated balance sheet. Changes in the utilization of the Pre-IPO Tax Assets will impact the amount of the liability that will be paid pursuant to the Tax Receivable Agreement. Changes in the utilization of these Pre-IPO Tax Assets are recorded in income tax expense (benefit) and any changes in the obligation under the Tax Receivable Agreement is recorded in other income (expense). During the fourth quarter of 2021, we recognized other income of $3.6 million for a reduction to the liability for the Tax Receivable Agreement resulting primarily from an update to the blended state income tax rate used to measure the obligation. The adjusted liability as of December 31, 2021 is $229.3 million, of which $225.1 was recorded in long term liabilities and $4.2 million was recorded in current liabilities.

For purposes of the Tax Receivable Agreement, the amount of cash savings in U.S. federal, state or local income tax that we or our subsidiaries realize (or are deemed to realize in certain circumstances) as a result of the utilization of the Pre-IPO Tax Assets will be computed by comparing our actual U.S. federal, state and local income tax liability with our hypothetical liability had we not been able to utilize the Pre-IPO Tax Assets, taking into account several assumptions and adjustments. Payments under the Tax Receivable Agreement are expected to give rise to certain additional tax benefits. Any such tax benefits that we are deemed to realize under the terms of the Tax Receivable Agreement are covered by the Tax Receivable Agreement and will increase the amounts due thereunder.

The aggregate amount payable pursuant to the Tax Receivable Agreement is dependent in large part on the reduction in taxes that we would have been required to pay absent the existence of the Pre-IPO Tax Assets. As a result, changes in tax law, and in particular the tax rate applicable to U.S. corporations and the tax rules on the amortization and depreciation of assets, may materially impact the timing and amounts of payments by us to the Pre-IPO Stockholders pursuant to the Tax Receivable Agreement. Congress is considering a significant number of changes to U.S. tax laws, including an increase in the maximum tax rate applicable to U.S. corporations, which may materially increase our payment obligations to Pre-IPO Stockholders under the Tax Receivable Agreement.

Different timing rules apply to payments under the Tax Receivable Agreement to be made to holders that, prior to the completion of the IPO, held stock option (collectively, the “Award Holders”). Such payments will generally be deemed invested in a notional account rather than made on the scheduled payment dates, and the account will be distributed on the fifth anniversary of the IPO, together with an amount equal to the net present value of such Award Holder’s future expected payments, if any, under the Tax Receivable Agreement. Moreover, payments to holders of stock options that were unvested prior to the completion of the IPO are subject to vesting on the same schedule as such holder’s unvested stock options.

If we fail to make payment by the date specified by the Tax Receivable Agreement, the Tax Receivable Agreement generally provides for interest to accrue on the unpaid amount from the date so specified until the date of actual payment, at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 5%, except under certain circumstances specified in the Tax Receivable Agreement where we are unable to make payment by such date, in which case interest would accrue at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%.

Further, the Tax Receivable Agreement provides that (i) upon certain mergers, stock and asset sales, other forms of business combinations, (ii) upon certain sales or other divestitures, (iii) upon certain proceedings seeking liquidation, reorganization or other relief under bankruptcy, insolvency or similar law, event of default under certain of our indebtedness for borrowed money, or other Credit Event (as defined therein), (iv) upon a breach of any of our material obligations (that is not timely cured) under the Tax Receivable Agreement, or (v) or other Changes of Control (as defined therein) or if, at any time, we elect an early termination of the Tax Receivable Agreement, our payment obligations under the Tax Receivable Agreement will accelerate and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We will be required to make a payment intended to be equal to the present value of future payments (calculated using a discount rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, which may differ from our, or a potential acquirer’s, then-current cost of capital) under the Tax Receivable Agreement, which payment would be based on certain assumptions, including the assumption that we and our subsidiaries have sufficient taxable income and tax liabilities to fully utilize anticipated future tax benefits. In these situations, our, or a potential acquirer’s, obligations under the Tax Receivable Agreement could have a substantial negative impact on our, or a potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying or preventing certain mergers, asset sales, other forms of business combinations or other Changes of Control.

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These provisions of the Tax Receivable Agreement may result in situations where the Pre-IPO Stockholders have interests that differ from or are in addition to those of our other stockholders.

In addition, certain transactions by us could cause us to recognize taxable income (possibly material amounts of income) without a current receipt of cash. Payments under the Tax Receivable Agreement with respect to such taxable income would cause a net reduction in our available cash. For example, internal restructurings or reorganizations involving the intercompany sale or license of intellectual property rights, transactions giving rise to cancellation of debt income, the accrual of income from original issue discount or deferred payments, a “triggering event” requiring the recapture of dual consolidated losses, or “Subpart F” income would each produce income with no corresponding increase in cash. In these cases, we may use some of the Pre-IPO Tax Assets to offset income from these transactions and, under the Tax Receivable Agreement, would be required to make a payment to our Pre-IPO Stockholders even though we receive no cash corresponding to such income.

Payments under the Tax Receivable Agreement will be based in part on our reporting positions. The Pre-IPO Stockholders (or their transferees or assignees) will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax benefits are subsequently disallowed, although future payments would be adjusted to the extent possible to reflect the result of such disallowance and any excess payments made to any Pre-IPO Stockholder (or such Pre-IPO Stockholder’s transferees or assignees) will be netted against future payments that would otherwise be made under the Tax Receivable Agreement, if any, after our determination of such excess. As a result, in certain circumstances, the payments we are required to make under the Tax Receivable Agreement could exceed the cash tax savings we actually realize in respect of the attributes in respect of which the Tax Receivable Agreement required us to make payment.

Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of our subsidiaries to make distributions to us. To the extent that we are unable to make payments under the Tax Receivable Agreement for specified reasons, such payments will be deferred and will accrue interest at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3% at a rate equal to LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 3%, which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made.