Pompano Beach, Fla., Nov. 14, 2014 — DS Healthcare Group, Inc. (NASDAQ:DSKX), a leading developer of personal care and specialty pharmaceutical products, today issued the following letter to shareholders:
Dear Fellow Shareholder,
Like you, I have been watching the screen in disappointment as our stock has made a continuous decline to record lows. So everyone is wondering, what’s going on? It’s time to set the record straight.
We are getting calls from shareholders who are saying things like “what are you not telling me? There is no way that the stock would decline so quickly unless something is wrong”. It is clear that there is a lot of confusion and now panic. As some shareholders are only watching the chart and otherwise have no other information, it is easy to assume the worst.
If you take a moment to consider the facts it should be obvious that at these prices our stock is spectacularly undervalued. For the first time in history, our market capitalization has dropped below our annual revenue levels. As of the time of this writing our market capitalization is $11.4m while last year’s revenue was $13.7m with even more revenue expected this year, with 6 consecutive years of revenue increases. Our total assets as of September 30th, 2014 were $7.9m. Considering only our cosmetic products business, competitors in our space typically see valuations that are several times revenue. Our negative earnings which were mainly the result of lower than normal industry product margins were caused by: 1.) The company’s unwavering commitment to manufacture and distribute the most cutting edge and highest quality products, which in turn have built strong relationships with our customers and 2.) Inefficiencies in our infrastructure and supply chain.
However, I believe the value of what we have built is many times greater than the negative earning seen in the last few years. The company has established a network of dedicated domestic and international distributors in over a dozen countries and many of them depend on DS Healthcare for a significant portion of their annual revenue and income. Because we sell our products primarily through a distribution model – to distributor who in turn sells to retailer and retailer to consumer – last year’s revenue of $13.7m from distribution translates into approximately $55m spent on DS Healthcare products last year by consumers. What is the current and future value of this distribution network alone, putting the value of everything else aside?
There are three primary mechanisms of growth in our consumer products business:
– Increasing the size of our distribution network by continuously adding new distributors and key retailers. Quite simply, having the product on more shelves creates more revenue.
– Providing dedicated support to existing distributors through education, training, and marketing programs. An example of such a program might be running a promotional offer where any customer who buys a particular product gets a free sample of some other product. Or having regular meetings with distributors’ staff and providing education, training, and exciting offers.
– Continuously introducing innovative new products through existing and growing distribution. Quite simply, having more products that people want on existing shelves creates more revenue.
We have been making steady progress and significant strides in all three of these mechanisms. In particular, serious effort went into support of existing relationships because we learned that growing the size of our distribution is easy (new regions and retailers want our products because they are innovative and have almost no direct competitors) but supporting our distribution has been difficult which lead to some underperforming and failing distributors (no matter how good your product is, merely placing it on a shelf and doing nothing else is a recipe for failure). This year our team has refocused their efforts on our infrastructure, communication, and management of many key accounts. Since many of these accounts are only at a small fraction of their potential, working with and supporting our distribution partners will have a dramatic increase in sales in those regions.
And as I have always said, DS Healthcare represents a fundamentally stable and resilient business. If you take away any of the exciting upside, DS Healthcare is here to stay. Our current business can be viewed as follows:
– Proprietary products and technologies, with strong branding (no “me-too” products that are just like competitors, this is pretty obvious)
– Diversified customer base
– Relatively few competitors within our space and healthy market share
– Diversified products – no one product more than 20-25% of sales
– Diversified regions – company sells in over a dozen countries which lowers our regulatory risk (every country has its own regulations for personal care products)
– Many possibilities of reducing manufacturing and overhead costs
– Stable and growing revenue since inception (no year has been down from the one before with 39% average year over year growth over 6 years)
– Our consumer products are relatively recession proof with an average retail price of $35
We are also rapidly advancing towards profitability which can be considered the main issue raised by shareholders. Our operations have become more efficient and streamlined this year. Under new management in charge of our supply chain and we have fewer mistakes in production and better planning. This has resulted in fewer rush charges (things like air shipping of materials instead of ground), fewer mistakes, and virtually no back orders which have previously affected repeat order volume from customers. With better supply chain management we are now seeing better margins. These efficiencies have also extended to other parts of the company.
If today’s stock price were any indicator of our business results, I can see how some of you might think the company is in trouble. However, the fact remains that as of this moment we have never been in a better position with our business and our prospects have never been as positive. In the first 5 weeks of the current quarter the company has already received in excess of $2.8m in purchases. In my opinion, these are good results that indicate that we are headed in the right direction.
Our working capital needs are fully met to maintain our operations and to execute our business model. Working capital has increased considerably from last quarter and I am pleased to report that our long-term debt has been reduced to zero.
I wanted you to get a feel for what is happening within our distribution network so we asked a few of our major distributors for their comments. Here is what they are saying (I included all comments, not just ones that I thought sounded nice):
“DS Laboratories has been a brand that has shown fantastic growth within our market since launching in March of 2012. Their products stand alone in multiple categories. We are excited for the upcoming fiscal year 2015 to be able to launch out their new programs, which include new marketing, in-depth education and rewards plans for our staff and our salon base. These new programs will ensure large growth for 2015 and beyond. The vision for DS Laboratories branding and programs has our team excited for the future with this great brand.” Ro Lal, Sales Director, West Coast Beauty
“Following our last planning meeting, I wanted to reach out to share the excitement and confidence that I am feeling about the upcoming year with DS Labs. I have seen nothing but positive momentum since we launched the Hair care line in January of 2014. With the new rewards program and educational support etc, I am confident that we have covered all the elements of the strategic plan to execute and achieve our mutually desired sales objectives in 2015. In addition, I am extremely excited to launch the skin care portion of the line with my team. Keep up the good work! I appreciate the partnership and know that the best is to come in 2015!” Craig Barton, Sr. Vice President of Sales, CanRad Beauty www.CanRad.com
“I am writing this email to tell you that the DS Laboratories brand has been an important addition to the brands that we offer to our customers at Beauty Craft. The brand is unique within the beauty industry with unique formulas and marketing. Beauty Craft and DS Laboratories have partnered for several years and look forward to many more years together. We are excited for the future with innovative programs and products that are helping our customers provide solutions for their customers and in turn result in increased purchases from Beauty Craft. The best part is that consumers who use DS Laboratories continue to buy the products.” Max Wexler, President, Beauty Craft, http://beautycraft.com/
“Premier has been a DS Labs Distributor for the past 3 years. We have watched the brand develop in the Professional Beauty Industry as the potential market leader in it’s category. Of recent, we have seen a new management team that is working diligently to take DS Labs to the next level. With this has come changes to its marketing and education strategy, of which will better adapt to our industry and lead to future growth.” Steve Cohen, President, Premier Beauty.
“DS has been a great partner brand for Paramount for one simple reason – DS products deliver results and exceed customer expectations.” Jeff Hagler, CEO, Paramount Beautywww.
“I have taken time to reflect upon your strategic plan moving forward into 2015. The three areas you have chosen to focus on will most certainly give us the strength to grow sales and market share. I am most interested in the “industry first” reward program DS labs is implementing. This type of innovative thinking will give the brand as much unique positioning in the market place as the fabulous proprietary formulations. I look forward to the branding refinement to continue on the path you started this year. The development of local market educators and or brand managers will give a great daily focus to the brand. When you add these initiatives to the logistic improvements already made this year by DS labs, I anticipate a great year ahead for us both. We look forward to a long and prosperous partnership.” Graham Kenny, Director of Sales, International Beauty Services.
Under the leadership of Dr. Brijesh Patel, PhD, our head of research and development, we are not only developing better products which will begin shipping in the near future but many important advances in technology which will certainly be part of revenue creation in the future. These are products and technologies that not only improve efficacy but also sensory feel and more targeted use of costly ingredients.
A new branding initiative is also on the way. Our brand is recognized by consumers as a technology and science oriented innovator of personal care products. However, it has been a double edge sword that has alienated some consumers. We are currently perceived as a solution that you turn to when you have a problem but not necessarily as a part of daily, healthy lifestyle. For instance, in the professional beauty industry, women represent the bulk of spending and revenue. We think that by combining technology and beauty in our marketing will reposition our products as the ultimate hair care solution to women and that technology leads to better cosmetic results. So by appealing to the female customer base and not just the male customer we can have a large increase in revenue in the channel where women are the predominant shopper. The market for cosmetic shampoos is enormous and products like Revita deliver far better cosmetic results because it works on the scalp rather than just the hair. You will see images from our new branding effort appear on our website shortly.
But everything I have been describing until now just represents our consumer goods business, the value of which I believe exceeds the current marketing capitalization and stock price. What about the other components of our business? It appears that our business model is poorly understood and I will try to clarify it here. Many technology oriented companies have no revenue at all, yet many of them have market capitalization far greater than ours mainly driven on investor speculation. Well, this speculation or any of the value of our other projects is not priced into our stock. What would DS Healthcare look like if it had no consumer goods business and revenue? What would we be worth?
What is the value of pioneering projects like the opening of our hair recovery clinic in Coral Gables, Florida? It is one of a kind medical center where patients can get completely customized solutions for their hair loss and will utilize the latest advances in hair loss therapy most of which are completely unknown to the average physician or dermatologist and are the culmination of years of our research. We can achieve spectacular results for most patients, in most cases a complete full head of hair.
What is the value of attracting the attention of a Fortune 100 company (whose name they asked us not to disclose publically) who approached us for the development of a topical OTC hair loss product for massive distribution? What is the value of this cooperation? How much revenue can it generate in the future and how many other companies of similar size may want our technology for their products? What is the value of those contracts?
How about the value of two newly developed potent drugs (with patents filed) for the treatment for hair loss that could form the basis of a New Drug Application with the FDA? What would be the value of approval of a highly effective topical drug if the only current option on the market for patients is Propecia?
And it seems that few have noticed other important milestones like the approval of therapeutic level 2 treatments granted in Brazil. Many have tried and failed due to Brazil’s complex regulatory environment. The Brazilian government has approved the use of the following claims on our packages:
— 95% experienced reduced hair loss.
— 90% experienced hair strengthening.
— 75% experienced faster hair regrowth.
What is the value of such an approval? This alone could be worth more than our entire current market capitalization.
The list goes on. What is the value of the DS Laboratories brand and trademarks? What are our trademarks worth without any other assets attached? In a brand valuation performed by the Great American Group Advisory & Valuation Services, LLC (this was required by our lender which secured a part of the credit facility with our trademarks) conducted in March, 2013 found that the DS brand had a value of $5.14m, when it was worth less than it is now.
How much is DS Healthcare really worth? I couldn’t say for sure but certainly many times more than where our stock is today. Raghuram Selvaraju, a respected biotech analyst with Aegis Capital gave DS Healthcare a target price of $5.50 per share (the target date would be right around the time of this letter) after thorough analysis of our fundamentals. This was completely unpaid, independent research.
This is not to say that we don’t have our share of challenges, obstacles, and problems. In fact, it is not possible to have a growing business in the consumer goods sector without these challenges. But we have the drive and the determination to overcome them as we have been and overall our situation is full of exciting prospects for our shareholders.
I realize that there is a lot to take in and I will be personally available to each of you to discuss whatever questions or concerns you may have. You can call me directly on 347-276-2598 or email at Daniel@dskx.biz.
I hope that those of you who fear that something is wrong can see that our stock is simply undervalued and if anything presents a unique opportunity to become a shareholder or increase your position at the lowest price ever seen. In the words of the legendary Buffett “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” and this has never been truer than it is today, especially when others are fearful for the wrong reasons.
Chief Executive Officer
Chief Investment Officer
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