A probe into the accounts of online retailer Revolution Beauty has uncovered a series of problems, including potentially insufficient checks on an acquisition and loans made to distributors to encourage sales.
An independent investigation, commissioned by the company’s directors after its auditors refused to sign off on the accounts, also found that co-founders Adam Minto and Tom Allsworth lent money to other senior employees and made substantial changes to the company’s accounting policies.
The findings by law firm Macfarlanes will have a “material impact” on the group’s results for the year to February 2022, which have yet to be published, and will also involve restatements of prior-year results, Revolution warned on Friday.
Revolution was one of the largest initial public offerings on London’s junior market in 2021. But its first year as a listed company was disastrous, with its shares collapsing in value before they were suspended in September 2022 after it failed to file audited accounts on time.
The company later revealed that auditor BDO had refused to sign off its accounts because of “serious concerns”.
Derek Zissman, the independent director overseeing the investigation, said there had been “material leadership issues” and that the company “had failed to meet the standards of a UK plc”.
The investigation, launched in September, found that a fair value report ahead of Revolution’s 2021 acquisition of Medichem Manufacturing “did not appear to consider” the possible effect of certain commercial factors on the company’s likely value.
These included purchases of products from third parties that Medichem, which was owned by Allsworth, sold on to Revolution at a profit.
Revolution agreed to pay Allsworth £26mn for Medichem, though £19mn of this was deferred and has not yet been paid. In December, the retailer commissioned a new valuation report on Medichem.
Concerns were also raised over “materially larger than normal orders” sent to distributors in February 2022, the final month of Revolution’s 2021-22 financial year. The orders were placed at Revolution’s request and the goods had not been paid for by the end of that month.
The probe found that “none of the sales should have been recognised in full-year 2022” figures, and that they were “only undertaken for the purposes of meeting sales targets”.
The transactions will be removed from the accounts, resulting in a £9mn reduction in sales.
The investigation also found that Minto and Allsworth “made personal loans or other investments of approximately £1mn (in aggregate) to one of the distributors”, and that Minto “also provided a £300,000 personal loan to the owners of another of the distributors”.
These arrangements were not disclosed to the board at the time, Revolution said.
Revolution amended its accounting policies in relation to inventory ahead of a trading update in May 2022, but did not tell BDO, its auditor, about the changes in advance.
After revisions, the policy is now regarded as appropriate but applying it will result in a “very significant additional inventory provision for 2022” and adjustments to the previous two years’ accounts, according to the report.
Revolution said it would work with BDO to complete its audit and release its 2022 results “as soon as possible” so the share suspension can be lifted.
Its banks have remained supportive, but the company said it would have to agree “a revised covenant package tailored to the group’s [financial] position” once the accounts have been published.
Minto resigned from the company in November last year and Allsworth, who has stepped back from day-to-day involvement, has indicated he will leave the board before the 2022 accounts are published.
Both have been contacted for comment.