# OLAPLEX HOLDINGS, INC. (OLPX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OLAPLEX HOLDINGS, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1868726/000186872624000010/olpx-20231231.htm
Accession: 0001868726-24-000010
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OLPX/
All MD&A years: /company/OLPX/mda/
Previous year: /company/OLPX/mda/fy2022/ (FY 2022)
Next year: /company/OLPX/mda/fy2024/ (FY 2024)

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:

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["","(in thousands)","","% of Net sales","","(in thousands)","","% of Net sales","","(in thousands)","","% of Net sales"],["Net sales","$","458,300","","","100.0","%","","$","704,274","","","100.0","%","","$","598,365","","","100.0","%"],["Cost of sales:"],["Cost of product (excluding amortization)","131,323","","","28.7","","","177,221","","","25.2","","","116,554","","","19.5"],["Amortization of patented formulations","8,345","","","1.8","","","7,500","","","1.1","","","7,989","","","1.3"],["Total cost of sales","139,668","","","30.5","","","184,721","","","26.2","","","124,543","","","20.8"],["Gross profit","318,632","","","69.5","","","519,553","","","73.8","","","473,822","","","79.2"],["Operating expenses:"],["Selling, general, and administrative","168,942","","","36.9","","","113,877","","","16.2","","","98,878","","","16.5"],["Amortization of other intangible assets","41,468","","","9.0","","","41,282","","","5.9","","","40,790","","","6.8"],["Total operating expenses","210,410","","","45.9","","","155,159","","","22.0","","","139,668","","","23.3"],["Operating income","108,222","","","23.6","","","364,394","","","51.7","","","334,154","","","55.8"],["Interest expense","(57,954)","","","(12.6)","","","(43,953)","","","(6.2)","","","(61,148)","","","(10.2)"],["Interest income","18,828","","","4.1","","","2,775","","","0.4","","","\u2014","","","\u2014"],["Other income (expense), net"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","(18,803)","","","(2.7)","","","\u2014","","","\u2014"],["Tax receivable agreement liability adjustment","7,404","","","1.6","","","3,084","","","0.4","","","3,615","","","0.6"],["Other income (expense), net","220","","","\u2014","","","(2,256)","","","(0.3)","","","(1,012)","","","(0.2)"],["Total other income (expense), net","7,624","","","1.7","","","(17,975)","","","(2.6)","","","2,603","","","0.4"],["Income before provision for income taxes","76,720","","","16.7","","","305,241","","","43.3","","","275,609","","","46.1"],["Income tax provision","15,133","","","3.3","","","61,169","","","8.7","","","54,825","","","9.2"],["Net income","$","61,587","","","13.4","","","$","244,072","","","34.7","","","$","220,784","","","36.9"]]
[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["Net sales by Channel:"],["Professional","$","180,084","","","$","300,472","","","$","(120,388)","","","(40.1)","%"],["Specialty retail","135,079","","","235,310","","","(100,231)","","","(42.6)","%"],["DTC","143,137","","","168,492","","","(25,355)","","","(15.0)","%"],["Total net sales","$","458,300","","","$","704,274","","","$","(245,974)","","","(34.9)","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,","","$ Change","","% Change"],["","2023","","2022"],["Cost of sales","$","139,668","","","$","184,721","","","$","(45,053)","","","(24.4)","%"],["Gross profit","$","318,632","","","$","519,553","","","$","(200,921)","","","(38.7)","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["Selling, general, and administrative expenses","$","168,942","","","$","113,877","","","$","55,065","","","48.4","%"],["Amortization of other intangible assets","41,468","","","41,282","","","186","","","0.5","%"],["Total operating expenses","$","210,410","","","$","155,159","","","$","55,251","","","35.6","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["Interest expense","$","(57,954)","","","$","(43,953)","","","$","(14,001)","","","31.9","%"],["Interest income","18,828","","","2,775","","","$","16,053","","","578.4","%"],["Interest expense, net","(39,126)","","","(41,178)","","","2,052","","","(5.0)","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["Loss on extinguishment of debt","$","\u2014","","","$","(18,803)","","","$","18,803","","","(100.0)","%"],["Tax receivable agreement liability adjustment","7,404","","","3,084","","","4,320","","","140.1","%"],["Other income (expense), net","220","","","(2,256)","","","2,476","","","(109.8)","%"],["Total other income (expense) , net","$","7,624","","","$","(17,975)","","","$","25,599","","","(142.4)","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(in thousands)","For the Year Ended December 31,"],["","2023","","2022","","$ Change","","% Change"],["Income tax provision","$","15,133","","","$","61,169","","","$","(46,036)","","","(75.3)","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["(in thousands)","2023","","2022"],["Net cash provided by (used in):"],["Operating activities","$","177,532","","","$","255,324"],["Investing activities","(3,614)","","","(2,682)"],["Financing activities","(30,326)","","","(116,222)"],["Net increase in cash","$","143,592","","","$","136,420"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","Total","Less Than One Year","1-3 Years","3-5 Years","More Than Five Years"],["2022 Term Loan Facility debt (1)","$","663,188","","$","6,750","","$","13,500","","$","13,500","","$","629,438"],["Interest on 2022 Term Loan Facility debt (2)","304,179","60,484","118,140","115,846","9,709"],["Related party payable pursuant to the Tax Receivable Agreement (3)","198,171","12,675","26,765","30,343","128,388"],["Purchase obligations (4)","14,080","4,121","8,242","1,717","\u2014"],["Operating lease liabilities","3,157","370","1,173","839","775"],["Total contractual obligations (5)","$","1,182,775","$","84,400","$","167,820","$","162,245","$","768,310"]]
[[/GREPCENT_TABLE]]

(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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