An independent investigation into troubled cosmetics maker Revolution Beauty identified concerns, including over certain historical sales, inventory provisioning methods and personal loans made by a former CEO.
The probe was instigated by the company’s auditors BDO last autumn and has already claimed the scalp of former chief executive officer Adam Minto who stepped down from the post in November
Shares in Revolution was suspended last September after it failed to submit an audit of its full year 2022 accounts; they had been due to be announced on 31 August but BDO said it could not complete them as a result of its concerns.
Revolution Beauty’s auditor had found personal loans made by Minto and Tom Allsworth – founder of Medichem – to an employee and some distributors.
The investigation was carried out by the law firm Macfarlanes LLP alongside and forensic accountant Forensic Risk Alliance.
The beauty retailer bought Medichem Manufacturing for £23m in October 2021.
Last September Revolution’s auditor BDO wrote to its board identifying 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”.
BDO said this meant it would not be able to complete its audit the company’s full year 2022 accounts, which had been due to be published by 31 August 2022.
Trading in the Company’s shares was suspended on 1 September 2022 as a result and BDO recommended the board carry out an independent external investigation.
The board also formed an investigation committee which include Derek Zissman, deputy chairman and senior independent non-executive director and Elizabeth Lake, chief finance officer.
Issues identified in the investigation also included some around the acquisition of Medichem.
The acquisition involved a call option to purchase Medichem’s shares; and the investigation found that £19m of the agreed £27m remains outstanding; the first instalment of £4.75m, plus interest, was due in October 2022 and has has not yet been paid.
The investigation identified marks ups in prices on a “number of finished products were acquired from third parties by Medichem during 2020 and 2021”.
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.
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.
They include “materially larger than normal orders were placed by each of the distributors in February 2022, in each case at the request of Revolution Beauty”.
For example, a large majority of orders were placed by distributors in the final month of the financial year, “a departure from normal practice”, according to the investigation run by law firm Macfarlanes and consultants Forensic Risk Alliance (FRA).
None of the sales identified in the announcement should have been included in its company accounts for the full year to February 28, it concluded.
This means that around £9m worth of revenues resulting from the orders will be removed from the revised accounts.
In 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 £1m to one of the distributors.
In January 2022, Adam Minto also provided a £0.3million personal loan to the owners of another of the distributors. The investigation noted: “None of these arrangements were disclosed to the company’s board at the relevant time.
The beauty firm, which has 15,000 stores worldwide, said it expected adjustments to its full-year 2022 results, specifically relating to inventory provisioning and revenue.
In an announcement the company stated: “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.”
It added: “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
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.”