Proactive Investors - An independent investigation into Revolution Beauty Group PLC (LON:REVB) by law firm Macfarlanes and forensic accountant Forensic Risk Alliance (FRA) identified several concerning issues, including over some historical sales and personal loans made by its former chief executive.
Worries about several sales made to three distributors were raised by auditors BDO last year. Executive chairman and founder Tom Allsworth stepped down in October and chief executive Adam Minto resigned with immediate effect in November, with Bob Holt made interim chief executive and then given the role on a permanent basis.
Holt said today that 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".
These issues included "materially larger than normal" orders in the final months of the 2022 financial year, the statement said, with Macfarlanes and FRA having agreed with the company's previous verdict that "none of the above sales should have been recognised" in the period.
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", with each of the distributors receiving a request from the company's management at the time and given advantageous and non-standard payment terms.
BDO also identified concerns in relation to the company's October 2021 acquisition of Medichem, which was wholly owned by Tom Allsworth, executive chairman and co-founder of the company, for an initial consideration of £7mln rising to £26mln - though the deferred consideration of £19mln plus interest remains outstanding.
A further independent valuation is being carried out that will incorporate new factors into the assessment, including Revolution having increased orders from Medichem in the run-up to the deal even though sales of these products had reduced, and Revolution buying certain other products from Medichem at marked-up prices even though it had purchased them elsewhere for less before.
"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," the statement said.
BDO also raised concerns about inventory provisioning, loans made by directors and supplier rebates and support payments, that the investigation also passed comment.
The board said it has taken corrective actions to address the shortcomings and issues raised in the report, including new internal processes and a new audit is being completed, with the shares to remain suspended until its results are published.
The group said it continues to have the support of its banks, with net debt of circa £20mln at the end of December, with £32mln drawn of a £40mln facility.
A short-term liquidity covenant has been agreed, which the company anticipates will be replaced by "a revised covenant package tailored to the group's position once the FY22 financial statements are finalised".
On current trading the group said the consumer backdrop was challenging, but its commercial and product proposition, along with its relationships with customers and suppliers, "remain robust" and the board "remains confident in the long-term prospects of the business".
A detailed current trading statement will be provided when full-year results are published.
"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," said Holt.
"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."