Revolution Beauty Group plc distributes beauty and personal care products in the UK and listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) in July 2021. In August 2022, it announced a delay in the publication of its annual results, the shares were suspended and auditor BDO flagged serious concerns identified during its audit. In January 2023, an independent investigation revealed a series of accounting issues which included possibly inflated consideration for a company acquired from Revolution’s chairman, channel stuffing just before the February year end in order to inflate revenues, incorrectly estimated supplier rebates, and inadequate inventory provisions. The former CEO and co-founder agreed to pay a settlement in connection with these accounting issues with no admission or acceptance of liability. Despite the latter, Revolution’s shares are down 84% since its IPO and this appears to be a confirmed fraud primarily caused by channel stuffing in order to meet sales targets.
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Revolution Beauty Group plc is a United Kingdom-based beauty and personal care products company. The principal activity of the company is to sell and distribute beauty products, makeup, haircare, and skincare under a variety of brands. The products are distributed through various channels, including retailers, department store chains, wholesalers, distributors, and e-commerce channels. In 2023, the company had a retail footprint of c.17,500 doors across retail chains in the United Kingdom, the United States and internationally.
The company started trading on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) in July 2021, raising £300m in its IPO.
On 2 August 2022, the company announced a delay in its annual results, which was due on 4 August. It said results would be released on 30 August 2022. The delay was due to additional time required to complete the audit. The company added that management was not aware of any material issues that have been raised by the auditors during the audit process to date.
On 11 August 2022, Revolution Beauty Group issued an update on the group's audit. It said that the auditors had subsequently raised accounting issues. The company noted that these could have a material impact on the results for FY22 that had previously been issued. It added that in the event that material adjustments were required, the Group profitability for FY22 could be materially reduced across a number of potential adjustments including stock and bad debt provisioning and revenue recognition.
On 19 August 2022, the company said that it did not expect to be able to release the audited results for FY22 by 31 August 2022 and if not, then, trading in the company's shares would be suspended with effect from 1 September 2022 until such time as the audited results are released.
On 1 September 2022, trading of Revolution Beauty Group shares were suspended pending publication of the company's annual audited accounts.
On 23 September 2022, in a further update on the audit, the company informed shareholders that BDO, the auditor, had written to the board and identified a number of serious concerns that had arisen during the course of its work on the FY22 audit. These were amongst others, the group's ability to provide sufficient and accurate audit evidence in respect of a number of key audit areas and the validity of certain commercial arrangements entered into by the company. BDO indicated that it was not able to sign an audit report in respect of the FY22 accounts. BDO recommended that an independent external advisers be appointed to undertake an independent investigation regarding the concerns raised and report their findings to an independent committee. The company appointed Macfarlanes LLP and Forensic Risk Alliance to commence an independent investigation into the matters raised by BDO.
On 14 October 2022, the company announced that Tom Allsworth (executive chairman) and Adam Minto (CEO) had voluntarily agreed to step away from the day-to-day management of the business for the time being, in order to allow them to support the independent investigation. The company appointed Bob Holt as Interim Chief Operating Officer.
On 9 November 2022, Adam Minto resigned as a director and stepped down from the business with immediate effect. The company said that this was as a result of the events since IPO and the transition from a private company to a public company.
On 28 November 2022, the company appointed Bob Holt as CEO.
On 16 December 2022, independent directors Gita Samani and Edward Rumsey resigned with immediate effect.
On 13 January 2023, Revolution Beauty Group announced that the investigation had been completed. It released a summary of the investigation. The issues identified included the following:
- Acquisition of Medichem Manufacturing Ltd - In October 2021 the company acquired Medichem for £26m from Revolution Beauty Group's chairman. £7m was paid and £19m was outstanding to be paid in annual increments of £4.75m. The £4.75m (plus interest) that was due in October 2022 had not yet been paid. Questions were raised about the valuation of Medichem as:
- Sales of Medichem products reduced in the period between April 2021 and September 2021, but the company's purchases of Medichem's products in this period remained at similar levels due to over-forecasted demand. This resulted in increased stock holdings of Medichem products.
- A number of third party finished products were acquired from by Medichem during 2020 and 2021 and subsequently sold to the company with a mark-up applied. It was estimated that during 2020 and 2021 approximately £0.7m of profit was recognised within Medichem from these transactions. The company had also previously acquired some of these products directly from the third parties.
- Revenue recognition in February 2022 - BDO raised concerns about sales made to three key distributors in February 2022, the final month of FY 2022. Revenues resulting from these orders were approximately £9m in total. BDO's concerns included:
- Materially larger than normal orders were placed by each of the distributors in February 2022, in each case at the request of Revolution Beauty Group,
- Sales to two of the distributors in February 2022 were around 70% of all FY 2022 orders; 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 FY 2022 orders; 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 was also used by Revolution Beauty Group.
- Each of the stock orders included products available within Revolution Beauty Group's inventory at the time, rather than products that the distributors themselves had ordered from the company.
- Following a challenge by BDO as to the non-settlement of the outstanding invoices raised in relation to these sales, the company took steps to agree payment plans with the distributors. Payment dates agreed were significantly later than the usual payment terms, in one case agreeing that most cash would be received after February 2023.
- From July 2021, Adam Minto, co-founder and former CEO, and Tom Allsworth, chairman, made personal loans or other investments of approximately £1m to one of the distributors. In January 2022, Adam Minto also provided a £0.3m 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.
- Investigators concluded that:
- none of the above sales should have been recognised in FY 2022;
- these sales were only undertaken for the purposes of meeting sales targets for FY 2022, and not all of the products ordered were required by the distributors at the time;
- 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.
- 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. These were expected to necessitate certain prior year adjustments to the FY 2019 and FY 2021 financial statements (the company's FY 2021 was an extended 14-month period and as such no FY 2020 existed),
- Inventory provisioning - BDO raised a number of concerns relating to the company's historical inventory provisioning practices, including with respect to changing of policies. 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. An adjustment to increase the inventory provision was included by the company within the results published in the May 2022 Trading Update. The revised methodology and the related adjustment were not provided in advance to BDO.
- Personal loans made by directors - BDO raised concerns around personal loans made by Adam Minto and Tom Allsworth. 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 Group board at the relevant time.
On 25 May 2023, Tom Allsworth resigned as chairman and director of the company. Derek Zissman was appointed as the non-executive chairman. The company published its FY 2022 annual report.
On 20 June 2023, the company announced that on the 19 May it sent a letter of claim to founder and former CEO, Adam Minto, alleging various breaches of fiduciary, statutory, contractual, or tortious duties to the company resulting in the delay of the 2022 financials and the suspension of it shares. The company said it was seeking to recover “substantial sums” related to exceptional costs incurred as a result of the alleged matters.
On 27 June 2023, at the company AGM, its chief executive, chief financial officer and chairman were re-appointed to its board despite shareholder Boohoo leading a successful vote to oust them. The three directors were reinstated after the AGM left the company with only one director remaining.
On 28 June 2023, trading of Revolution Beauty Group's shares resumed on the LSE.
On 18 July 2023, CEO Bob Holt and chairman Derek Zissman agreed to resign as part of a settlement agreement with the company's largest shareholder, Boohoo. Boohoo had raised “serious concerns” about the Revolution Beauty board following the recent AGM, whilst also accusing the beauty retailer of “lack of transparency”.
On 21 July 2023, the Financial Conduct Authority (FCA) notified Revolution Beauty Group that it had commenced an investigation into potential breaches of the market abuse regulations in relation to matters in the period from July 2021 to September 2022. The company said it was cooperating fully with the FCA.
On 13 December 2023, CFO, Elizabeth Lake resigned with effect from 31 December 2023.
On 5 February 2024, Revolution Beauty Group's co-founder and former CEO Adam Minto reached a settlement agreement with the company. He would pay £2.9m as part of a deal to resolve accounting issues that led to the delay of the group’s 2022 results. As part of the settlement, there was no admission or acceptance of liability by either party, the company added.
On 19 February 2024, the company announced a change of auditor. BDO resigned by mutual agreement. This appointment followed a tender process overseen by the audit committee, which resulted in the recommendation of MHA as the new auditor. BDO were not asked to participate in the tender process.
COMMENT: Revolution Beauty Group is a confirmed fraud committed primarily using channel stuffing. However, as the fraud was detected as part of the annual audit process and before the annual report publication, it could not have been detected using the accounting screen.
Revolution Beauty Group: Update on the Groups Audit, 11 Aug 2022
Revolution Beauty Group: Further Update on the Groups Audit, 19 Aug 2022
Revolution Beauty Group: Further Update on the Groups Audit, 23 Sep 2022
FT: Revolution Beauty auditor raises ‘serious concerns’ over accounts, 23 Sep 2022
Revolution Beauty Group: Outcome of Independent Investigation, 13 Jan 2023
The Independent: Revolution Beauty probe finds concerns over £9m sales and ‘unacceptable’ loans, 13 Jan 2023
Revolution Beauty Group: Potential legal proceedings against Minto, 20 Jun 2023
Internet Retailing: Revolution Beauty CEO and chair agree to resign as 'compromise' reached with Boohoo, 18 Jul 2023
Retail Systems: Revolution Beauty faces investigation from FCA, 24 Jul 2023
BoF: Revolution Beauty CFO to Step Down; Co-Founder Agrees Settlement, 13 Dec 2023
Revolution Beauty Group: Adam Minto Settlement Agreement, 5 Feb 2024
BOF: Revolution Beauty Agrees $3.6 Million Settlement With Co-Founder Minto, 5 Feb 2024
Accountancy Age: MHA takes over as auditor for Revolution Beauty, 22 Feb 2024
GMT Research: Revolution Beauty Group - AGS FY 2022
Revolution Beauty Group: Annual Report - YE Feb. 2022
Revolution Beauty Group: IPO Document, Jul 13, 2021
LSE: Revolution Beauty Group filings