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To Our Client Owners, Founders, Managers and Dedicated Staff:

CoValence Laboratories (aka: CoValence) weathered our 2008-2009 fiscal year reasonably well despite the economic challenges that accelerated across the world economies. As in the past, we attribute this to our client brands continued leadership in their markets, and the results-focused products we continue to conceptualize, manufacture and deliver to them. Consumers can pull back from spending on skin care for many reasons, but they hold onto products that work for them which continue to be indicative of our clients’ positive sales.

Like every company in this last year, we are carefully watching our expenditures, credit extensions, cash flow and risk management decisions in all areas. We want to assure you that we will continue to be a financially sound company at present and into the future. This is one piece that does not need to be of concern to you—as you manage your own companies.

Even though we continue to increase our batch sizes, we have considerable manufacturing growth capacity. We are also dynamically building our product development capability — New platforms include hair and body, as well as our standard development of OTC formulas such as acne and sun care. In addition to our product development, we are most excited about the building of our ingredient Intellectual Property. All of these modalities reflect decades of development and offer a competitive advantage for our clients.

Our Global Regulations Department is a vital addition to the many ways we support our clients. The ability to be globally compliant is a necessity for any brand that is directed towards growth. Global regulations, organic/green trends and mass market competition are all issues we are keenly aware of as well as their direct impact on our clients. Therefore, decisions during the product development stage are decided based on the knowledge we have in regards to industry and global imperatives.

We understand the complexity of building a successful brand which is why CoValence is committed to remain a strong company and to implement the capabilities our clients need to grow without limits. The entire CoValence staff personally and professionally stands behind, promotes and protects the commitment to supporting our clients’ success.

Linda Walker
CEO / President / Owner *

* CoValence employees are owner partners with Linda Walker through an ESOP.

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RECENT IMPLEMENTATIONS

We have always strived to improve in all areas of service and manufacturing processes for our clients. After last year’s economic downturn, we put all service and logistical analysis on the fast track. The following information will give you a snapshot into how our improvements directly benefit our clients’ businesses.

BATCH ANALYSIS: Our new batching strategy has helped our clients reduce their product cost, in addition to reducing lead times from 6 – 8 weeks to 2 – 4 weeks.

CERTIFICATIONS: We are on pace to receive our NOP and ECOCERT certifications by Q3-2010.

REGULATIONS: We have improved and streamlined our global regulation processes in order to put our clients on a faster track in the EU, as well as countries of their choosing. We continue to attend PCPC, FDA and national legislation meetings as well as on-line webinars to stay abreast to all of the on-going regulatory changes.

EQUIPMENT: In order to keep up with our clients’ proactive marketing and sales initiatives, we utilize the following equipment throughout our manufacturing and filling processes: Groen mixing vessels, Microfluidics homogenizers, Kalix carton and REB and Norden filling machines.

DEVELOPMENT: Our Account Executives continue to be trained through our internal Development Boot Camp program, learning about ingredients and how to combine ingredients that effectively fulfill the product requests of our clients.

INGREDIENT and CONCEPT TRENDS

One of our most unique qualities is our attention to ingredients – past, current, trends and I.P.

SUSTAINABILITY: We continue to expand our organic, natural and green ingredient offerings. In 1996, we were the first skin care manufacturer to introduce the natural and green concept of Chirality – a decade before sustainability became a standard.

COSMECEUTICAL and PROFESSIONAL: Our Account Executives, Regulatory, R&D and QC Departments work around the clock to make sure that all of the products we develop fit within the client’s philosophy as well as national and international regulations. Through our News-Wire, Facebook and Twitter blogs we are diligently teaching the importance of ingredients as well as how one can decipher between professional and pro-mimic products. These processes are not easy, but we are experts at hitting the desired target.

NATURAL BRIGHTENING and ANTI-AGE PRODUCTS: We consider ourselves the ‘Brightening’ Experts due to our vast history working with natural brighteners, such as Kojic Acid in 1991. We were the first to create a unique lightening/anti-age complex that included Kojic Acid blended with Hydroquinone, along with other brighteners and AHAs.

PLANT STEM CELLS: The interest of Plant Stem Cells will continue to increase, complimenting the rise of peptides the last few years. Notably, our Plant Stem Cells-6 ™ Series, launching Q1-2010, will rival anything that is currently on the market.

CLOSE TO OUR HEARTS: ‘Heart’ ingredients are the purified core that carries the key component of a botanical. We have developed products around heart ingredients for years and we strongly feel that consumers will start demanding products with heart ingredients as they become savvy to the botanical and nutrient benefits.

CoVALENCE I.P.: In order for a skin care brand to be successful in the future, their attention must be focused on the ingredients. Meaning — How do the ingredients look to a consumer? Do the products contain unique ingredients that demand a higher price? How does a brand create a niche concept if their lab solely uses single ingredients that their competitors use? — As a lab that focuses on our clients’ needs, we have concluded that it is our obligation to create unique concept blends as well as our own ingredients that are utilized in our clients’ products. We have a number of ingredient projects in the works and it would be our pleasure to discuss these projects on an individual basis with our clients.

SKIN CARE MANUFACTURING PERSPECTIVE

Over the past 3 – 4 years, there has been a rapid convergence of several factors that have substantially implicated the raw ingredient industry and therefore the very nature of the skin care industry itself. Manufacturers and brands have, in turn, been affected.

These factors have imposed change and some fragmentation amidst the ingredient industry leading to more competition, mergers and buy-outs. As a consequence, CoValence has had no choice but to absorb and manage this evolution of the vendors’ decisions and practices. While some changes have proven beneficial, others have presented complex navigational issues that markedly impacted aspects of our manufacturing, as well as the skin care industry as a whole. The following information briefly illustrates these key factors.

INGREDIENT VENDORS and MASS MARKET vs. PRO BRANDS
Up until a few years ago, ingredient vendors promoted novel therapeutic ingredients, such as peptides, primarily to professional brands. Since mass market brands were not capitalizing on professional ingredients, ingredient pricing and minimums were favorable to the smaller-scale professional manufacturer. But over the last few years, mass market brands (ex: Olay ®) have shifted to mimicking professional brands, and thus have put a greater demand on professional ingredient supplies. While one would think this evolvement would lower ingredient pricing, the result has been the opposite – many ingredients have reached a premium, with pricing and minimums skewed to favor the consumption of mass manufacturers. As we have built good supplier relationships, we are still able to help our clients be competitive in the professional arena. However, ingredient costs and minimums will continue to have pressure from factors separate from the economy, including the following discussion points.

INGREDIENT VENDORS vs. GREEN MOVEMENT and NATURAL/ORGANIC MANUFACTURING
The demand for natural and organic ingredients has escalated exponentially over the past few years, as have the certification groups vying to have their stamp on natural/organic products— NOP, ECOCERT and numerous others. This has put an immense strain on availability – natural and organic ingredients have a finite supply and are reliant on consistent sustainability. Additionally, mass market brands are going the green route, adding stress to the supply. As a result, these ingredients have volatile pricing – costs will rollercoaster between harvests, seasons and manufacturing needs. There is immense pressure on ingredient vendors to keep up with demands and to create or source new innovative ingredients. Manufacturers, in turn, must do their best to adapt to the fluctuations in the natural and organic ingredient market – as fallout from the recent trends, keeping costs and supplies level and predictable for our clients has become exceedingly difficult.

INGREDIENT VENDORS vs. GLOBAL REGULATIONS
Recent global regulations (ex: EU) have put an enormous strain on ingredient production and availability. Due to the required transparency of raw ingredient formulas in export documentation, ingredient vendors have been forced to disclose proprietary details. Some ingredients have been denied export – as a result in some instances, ingredient vendors have chosen to discontinue ingredients. Some ingredient vendors have denied us paperwork, forcing us to discontinue an ingredient

Due to global regulations, ingredient vendors have had to reformulate some ingredients in order to get them approved for export, as well as supply far larger amounts of paperwork than in the past. These costs are passed to manufacturers. Another factor to keep in mind for the near future is the potential impact of REACH on ingredient vendors. REACH is a new EU regulation on chemicals and their safe use. If all goes according to plan, this has the potential to reshape the structure of raw material suppliers due to the enormous registration costs involved. There could be some additional shake-out of suppliers from this initiative, but thankfully, these issues have calmed down as the economy weakened the last year.

Unfortunately, we do not have control over ingredient vendors’ decisions or global trends. However, we do have control over our reaction to these changes. Therefore, rest assured, if for any reason an ingredient is removed from our offering we will immediately start researching viable replacements or alternatives, with the least amount of struggle for our clients. After some experience with these ingredient fluctuations, we have pleasantly found most replacements or alternatives have proven to be far more beneficial for the end product and in turn better for our clients’ brands.

Categories: CoValence Specific

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