TIDMREVB
RNS Number : 6038M
Revolution Beauty Group PLC
13 January 2023
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.
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.
Acquisition of Medichem Manufacturing Ltd ("Medichem")
1)
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
GBP26 million (including payments to reflect a post-completion net
asset adjustment), of which initial consideration of GBP7 million
was paid on completion. Deferred consideration of GBP19 million
(plus interest) remains outstanding, payable in GBP4.75 million
annual increments (plus interest) on the first, second, third and
fourth anniversaries of the completion date. The GBP4.75 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:
(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.
(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 GBP0.7 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.
Revenue recognition in February 2022
2)
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:
-- Materially larger than normal orders were placed by each
of the Distributors in February 2022, in each case at
the request of Revolution Beauty.
-- 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).
-- 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).
-- 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.
-- 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.
-- 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.
-- 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 GBP1 million (in aggregate) to one of the
Distributors. In January 2022, Adam Minto also provided
a GBP0.3 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:
-- none of the above sales should have been recognised in
FY22 (a conclusion which the Company had also already
reached independently of the investigation);
-- 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
-- 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
GBP9 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.
Supplier rebates and support payments
3)
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.
Inventory provisioning
4)
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.
Personal loans made by directors
5)
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:
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.
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.
3. The Company has adopted and communicated updated internal
processes regarding:
- 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.
- 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.
- 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.GBP20
million, with GBP32 million drawn of the GBP40 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 GBP22 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.
For further information please
contact:
Revolution Beauty Investor Relations
Bob Holt / Elizabeth Lake Investor.Relations@revolutionbeautyplc.com
J oint Corporate Brokers
Zeus (NOMAD): Nick Cowles /Jamie Tel: +44 (0) 161 831 1512
Peel /Jordan Warburton
Liberum: Clayton Bush / Edward
Thomas / Miquela Bezuidenhoudt Tel: +44 (0) 203 100 2222
Media enquiries:
Headland Consultancy Tel: +44 (0)20 3805 4822
Rosh Field / Will Smith / Marta Revolutionbeauty@headlandconsultancy.com
Parry-Jones
- Ends -
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