Outcome of Independent Investigation
This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.
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For immediate release |
13 January 2023 |
REVOLUTION BEAUTY GROUP PLC
("Revolution Beauty", the "Group" or the "Company")
Outcome of Independent Investigation
Update on Financial Position and FY22 Audit
Revolution Beauty Group plc (AIM: REVB), the multi-channel mass beauty innovator, today announces the completion of its independent investigation, conducted by law firm Macfarlanes LLP ("Macfarlanes") and forensic accountant Forensic Risk Alliance ("FRA").
Background
As announced on 23 September 2022, the Company's auditor, BDO LLP ("BDO"), wrote to the Board on 21 September 2022 to identify a number of serious concerns that had arisen during the course of its work on the audit of the Company's accounts for the financial year ended 28 February 2022 ("FY22"). As a result of these matters, BDO indicated that it was not at that time able to complete its audit of the FY22 accounts, which were due to be published by 31 August 2022. Trading in the Company's shares was suspended on 1 September 2022 as a result of the non-publication of the FY22 accounts.
BDO recommended that the Board appoint independent external advisers to undertake an independent investigation, and the Company appointed Macfarlanes and FRA on 23 September 2022 for this purpose. The Board also formed an Investigation Committee, comprising Derek Zissman (Deputy Chairman and Senior Independent Non-Executive Director) and Elizabeth Lake (CFO since May 2022), to lead the process with Macfarlanes and FRA.
Macfarlanes and FRA have now completed their investigation, the findings of which have been presented to the Investigation Committee and the Board in a privileged and confidential investigation report.
This announcement summarises the investigation, in compliance with the Company's legal and regulatory obligations under MAR and the AIM Rules. None of the information set out in this announcement is, or is intended to operate as, any waiver of legal privilege.
Issues identified in the investigation
The relevant issues addressed in the investigation are summarised below.
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1) |
Acquisition of Medichem Manufacturing Ltd ("Medichem") |
BDO identified concerns in relation to the Company's acquisition of Medichem, which was wholly owned by Tom Allsworth (Executive Chairman and co-founder of the Company), which was completed on 26 October 2021. The acquisition occurred upon the exercise of a call option to purchase Medichem's shares, which was granted under a call option agreement dated 13 July 2021. Details of the call option agreement were set out in the Company's AIM Admission Document. The option was exercised following the completion of an independent valuation of Medichem.
The total consideration payable by the Company was approximately £26 million (including payments to reflect a post-completion net asset adjustment), of which initial consideration of £7 million was paid on completion. Deferred consideration of £19 million (plus interest) remains outstanding, payable in £4.75 million annual increments (plus interest) on the first, second, third and fourth anniversaries of the completion date. The £4.75 million (plus interest) that was due in October 2022 has not yet been paid.
The investigation identified a number of issues including that, in the financial periods prior to the acquisition of Medichem, two factors in particular appear to have impacted upon Medichem's reported results:
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(i) |
The Company's sales of products produced by Medichem reduced in the period between April 2021 and September 2021, but the Company's purchases of products from Medichem in this period remained at similar levels due to over-forecasted demand. This resulted in increased stock holdings of Medichem products at the Company. The Company reduced its purchases from Medichem from October 2021 onwards. |
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(ii) |
A number of finished products were acquired from third parties by Medichem during 2020 and 2021 and subsequently sold to the Group with a markup applied. It is estimated that during 2020 and 2021 approximately £0.7 million of profit was recognised within Medichem as a result of these transactions. The Company had also previously acquired certain of these products directly from the relevant third parties. |
It appears that the authors of the independent valuation of Medichem commissioned by the Board prior to the exercise of the call option (which valued Medichem above the option exercise price) did not consider whether these matters (or certain other relevant matters) should have any impact on Medichem's fair value. Because these matters (and certain other relevant matters) were not at that time known to all members of the Board, they were also not considered either at the time of entering into the call option or at the time of the exercise of the call option.
On 19 December 2022, Revolution Beauty commissioned a further independent valuation, which is expected to be completed in the near future, and which will incorporate these matters into the assessment. There is as yet no certainty as to the impact (if any) that these matters may have on the considerations of either the new independent valuer or the Board regarding the fair valuation of Medichem as at October 2021, or what (if any) actions the Company may take as a result.
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2) |
Revenue recognition in February 2022 |
BDO raised concerns about sales made to three key distributors (the "Distributors") in February 2022, the final month of FY22. Various issues were identified in the investigation with respect to the sales volumes, timing, terms and rationale for the sales to each of the Distributors. The list below summarises the key facts identified in the investigation in relation to these sales. It is not a comprehensive list of the matters investigated (and the Company's FY22 revenue remains subject to the completion of the audit), but the key matters identified are as follows:
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Materially larger than normal orders were placed by each of the Distributors in February 2022, in each case at the request of Revolution Beauty.
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Sales to two of the Distributors (on a combined basis in relation to a single territory) in February 2022 were around 70% of all FY22 orders from these Distributors (i.e. the significant majority of orders for the financial year were placed in the final month of the financial year, a departure from normal practice). |
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Sales to the other Distributor in February 2022 were around 56% of all FY22 orders with this Distributor (i.e. again, the majority of orders were placed in the final month of the financial year, a departure from normal practice). |
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The stock sent to one of the Distributors went to a UK warehouse, rather than to a warehouse in the Distributor's overseas jurisdiction, a departure from normal practice. The warehouse in question is also used by the Company. |
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Each of the stock orders included products available within Revolution Beauty's inventory at the time, rather than products that the Distributors themselves had ordered from the Company. |
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Following challenge by BDO as to the non-settlement of the invoices raised in relation to these sales, which remained outstanding at the time of the audit, the Company took steps to agree payment plans with the distributors with payment dates significantly later than the usual payment terms, in one case agreeing that most cash would be received after February 2023. |
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From July 2021, two members of the Company's Board (Adam Minto, the Company's co-founder and former CEO, and Tom Allsworth) made personal loans or other investments of approximately £1 million (in aggregate) to one of the Distributors. In January 2022, Adam Minto also provided a £0.3 million personal loan to the owners of another of the Distributors. None of these arrangements were disclosed to the Company's Board at the relevant time. |
The investigation identified that:
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none of the above sales should have been recognised in FY22 (a conclusion which the Company had also already reached independently of the investigation); |
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these sales were only undertaken for the purposes of meeting sales targets for FY22, and not all of the products ordered were required by the Distributors at the time; and |
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each of the Distributors ordered the relevant products following a request from the Company's management at the time and obtained advantageous and non-standard payment terms. |
These sales were included in the revenue figures published in the Company's FY22 pre-close trading on 6 May 2022 (the "May 22 Trading Update"), but will be reversed in the FY22 results. As such, the revenues resulting from these orders (of approximately £9 million in total) will not be recognised in the final FY22 accounts, and the FY22 inventory and provisioning calculations will also be revised accordingly.
In addition, stock has been returned by two of the Distributors and, as at the date of this announcement, significant payments remain outstanding from each of the Distributors.
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3) |
Supplier rebates and support payments |
BDO raised concerns relating to volume rebates due from two suppliers in the Company's financial statements for FY19, and to subsequent supplier support payments recorded as liabilities by the Company to the same two suppliers. While these matters were considered as part of the investigation, and certain irregularities were identified, no material issues were revealed that are expected to have an ongoing impact with respect to the Company or its business.
These matters are, however, expected to necessitate certain prior year adjustments to the FY19 and FY21 financial statements (the Company's FY21 was an extended 14-month period and as such no FY20 existed), which will be addressed at the same time as the other prior year adjustments described in this announcement. As explained further below, the prior year adjustments may have a material impact on the FY22 results announced in the May 22 Trading Update.
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4) |
Inventory provisioning |
BDO raised a number of concerns relating to the Company's historical inventory provisioning practices, including with respect to changing of policies. BDO were appointed as the Company's auditor for FY19, and signed unqualified opinions in respect of the Company's FY19 and FY21 accounts, as well as an unqualified opinion in respect of the historical financial information contained within the Company's AIM Admission Document.
The investigation noted that, as a matter of historical practice, the Company's management team historically believed that all inventory held was saleable at above cost price, in part due to the minimal risk of obsolescence of colour cosmetic products, and that accordingly no inventory provision was required in the Company's accounts. This was the inventory provisioning methodology that was in place in FY18, prior to BDO taking over as the Company's auditor in FY19.
A revised inventory provisioning methodology was implemented and a provision included within the Company's FY19 accounts. The same inventory provisioning methodology was used in respect of the Company's FY21 accounts, albeit with certain assumptions adjusted.
Prior to the publication of the May 22 Trading Update, the Company proposed certain changes to its inventory provisioning methodology, in part as a result of changes in the business and the market environment following the COVID-19 pandemic. An adjustment to increase the inventory provision was included by the Company within the results published in the May 22 Trading Update. The revised methodology and the related adjustment were not provided in advance to BDO.
As the FY22 audit has progressed, discussions regarding a revised provisioning methodology have continued between the Company's new management team and BDO. The Board believes that the proposed methodology to be used for FY22 will be appropriate, robust and consistent with current and historically available data, as well as consistent with the requirements of financial reporting standards for a publicly traded UK plc. The adoption of this new provisioning methodology, as well as certain other matters that form part of the ongoing work towards finalising the audit, is likely to result in a very significant additional inventory provision for FY22, substantially in excess of the provision assumed in the May 22 Trading Update.
As noted above, it is anticipated that material prior year adjustments to inventory provisioning will be required relating to the Group's results for FY21 and FY19, on the basis of the changed methodology. The new provisioning methodology will therefore be used for those prior financial years as well as for FY22.
This work remains ongoing in conjunction with the finalisation of the audit, and it is not yet possible to precisely identify the expected scale of the necessary adjustments. This will have the effect of making material adjustments to the financial periods that formed part of the historical financial information contained within the Company's AIM Admission Document.
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5) |
Personal loans made by directors |
BDO raised concerns around personal loans made by Adam Minto and Tom Allsworth to an employee that appeared to be unusual and required investigation.
The investigation identified a number of other personal loans made by Adam Minto to a number of senior managers of the Group and certain of the Group's non-executive directors (at the time), as well as loans from Adam Minto and Tom Allsworth to the Distributors or their affiliates (as detailed in issue 2 above). None of these loans had been disclosed to the Revolution Beauty Board at the relevant time.
The current Revolution Beauty Board views these loans as unacceptable business practices that should not have occurred and will not be repeated.
Financial and Governance impacts of the investigation
The current Board of Revolution Beauty takes the issues identified in the investigation extremely seriously. As a result, the Board (acting upon recommendations from Macfarlanes and FRA, as well as from the Investigation Committee) has taken corrective actions to address the shortcomings and issues raised in the report. In particular, the Board has taken the following key actions:
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1. |
The Board is working closely with BDO to finalise the FY22 audit with a view to the publication of the FY22 annual report and accounts as soon as possible. Further details are set out below. |
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2. |
In respect of the acquisition by the Company of Medichem, a new independent valuation of Medichem is in the process of being undertaken (as described above). Following receipt of the independent valuation, the Board will determine whether further actions are required. |
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3. |
The Company has adopted and communicated updated internal processes regarding: |
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Ensuring clear communication of the fact that any matters relating to compliance, whistleblowing or fraud should be brought to the attention of the CEO via the Company's anonymous reporting platform, and that any necessary steps will be taken. |
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The clear assignment to the CEO and CFO of responsibility for ensuring that matters that pose or may pose a risk to the Group's performance or reputation or put any Group entities at risk of criminal liability, are escalated to the Board at the earliest opportunity. |
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Adoption of an updated rigorous programme to ensure the Company's policies and procedures are fully understood, so that: (a) there is clear and regular communication of its commitment to ethical business practices to ensure all Group employees have a good understanding of what is suitable behaviour; and (b) the Company's whistleblowing policy is known to all employees so that any suspected incidents can be reported promptly and dealt with quickly and appropriately. |
Banking group support
The Group continues to appreciate the support of its group of banking partners. As at 31 December 2022, net debt was c.£20 million, with £32 million drawn of the £40 million facility. The Company has agreed a short-term liquidity covenant with its banking partners, which it anticipates will be replaced by a revised covenant package tailored to the Group's position once the FY22 financial statements are finalised.
Current trading
As stated in the announcement on 23 September 2022, the second half of Revolution Beauty's 2023 financial year (ending 28 February 2023) is taking place against a challenging backdrop, particularly the ongoing macroeconomic impact of inflationary headwinds and declining consumer confidence.
Notwithstanding the above, the Board considers that the Group's commercial and product proposition for consumers, and relationships with its customers and suppliers, remain robust. The Board remains confident in the long-term prospects of the business.
The Board will make a detailed current trading statement at the time the FY22 results are published.
FY22 audit and suspension of trading
Although the audit of the Group's FY22 accounts remains ongoing, the issues identified in the investigation mean that (as summarised above) the Board now expects a number of material adjustments to the FY22 results, in particular in relation to inventory provisioning and revenue.
As announced on 23 September 2022, it is expected that these adjustments will have a material impact on the Group's anticipated FY22 adjusted EBITDA profitability of £22 million that was announced in the May 22 Trading Update. The Board also now expects, as a result of changing the inventory provisioning policies of the Group, that there will also be material prior year adjustments to the Group's accounts for FY19 and FY21. In addition, but separate to the investigation, it is expected there will be a prior year adjustment for the FY19 and FY21 accounts in relation to impairment of stands.
The Board will continue to work closely with BDO to complete the audit of the Group's FY22 accounts as soon as possible. An update on the expected date of publication of Revolution Beauty's FY22 accounts will be provided at the earliest opportunity.
The Company will also continue to work with its Nominated Adviser towards lifting the suspension of trading in its shares as soon as possible following the release of its FY22 accounts and the subsequent release of the Company's interim financial statements for the 6-month period to 31 August 2022.
Board and senior management changes
Since the May 22 Trading Update, Adam Minto, Andrew Clark, Gita Samani and Ed Rumsey have all resigned from the Board of the Company. Several members of senior management have also left the business. N ew CEO Bob Holt was appointed on 17 October 2022 and new CFO Elizabeth Lake was appointed on 12 May 2022.
As announced on 14 October 2022, Tom Allsworth has stepped back from day-to-day involvement in the business. He has remained on the Board and has continued to assist with relevant matters relating to the investigation, but has not been involved in the day-to-day running of the business or assessment of the investigation by the current Board, nor with any of the Board's proposed actions as summarised in this announcement. It is anticipated that Tom will step down from the Board prior to the publication of the FY22 accounts.
Changes in senior leadership and management are fundamental to improving the culture of Revolution Beauty, and the Board will continue to invest in new talent to ensure that the right team, processes, financial controls, and infrastructure are in place to drive the Revolution Beauty business forward in accordance with the highest standards.
The Board is currently seeking new non-executive directors to join the Board, with a view to ensuring that the Board has the appropriate skills, experience and balance to provide appropriate challenge to management and the executive team as the Group looks to the future.
Looking forward with confidence
Under the new leadership of Bob Holt and Elizabeth Lake, the Company and its Board have already taken swift and decisive a ctions to address the historical issues identified in the investigation and summarised in this announcement.
The Board recognises there is further work to do, and the management team and Board are focused on further strengthening the Company's internal control processes, both operational and financial, and on ensuring that the Company is built on firm foundations for the future.
Derek Zissman, Investigation Committee Chair, Deputy Chairman and Senior Independent Non-Executive Director of Revolution Beauty said :
" The Board takes the findings of this independent investigation extremely seriously. While the Company has outstanding products, talented colleagues and a loyal customer base, it is clear the Group has had material leadership issues, and failed to meet the standards required of a UK plc. Under new CEO, Bob Holt, we have already begun taking action to ensure we have strengthened processes and the right team in place to deliver the true potential of Revolution Beauty for our shareholders, employees and all our stakeholders. Over the coming months we will be taking further steps to implement change and take the company forward."
Bob Holt, Chief Executive Officer said:
"The investigation has brought to light a number of serious issues with the running of this business under the previous senior management team and makes clear there is more to be done. What is in no doubt is that the fundamentals of Revolution Beauty remain strong, and the mass market beauty opportunity is as compelling today as it has ever been. Together with Elizabeth Lake, our CFO, and the Board, we are committed to addressing past deficiencies so that we can deliver the true potential of this business. "
The person responsible for arranging the release of this announcement on behalf of the Company is Elizabeth Lake, the Chief Financial Officer of the Company.
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For further information please contact: |
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Revolution Beauty Investor Relations |
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Bob Holt / Elizabeth Lake |
Investor.Relations@revolutionbeautyplc.com |
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J oint Corporate Brokers
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Zeus (NOMAD): Nick Cowles /Jamie Peel /Jordan Warburton
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Tel: +44 (0) 161 831 1512 |
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Liberum: Clayton Bush / Edward Thomas / Miquela Bezuidenhoudt |
Tel: +44 (0) 203 100 2222 |
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Media enquiries: |
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Headland Consultancy Rosh Field / Will Smith / Marta Parry-Jones |
Tel: +44 (0)20 3805 4822 Revolutionbeauty@headlandconsultancy.com |
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