ASIC has expanded its investigation into SurfStitch

Surf at Sydney’s Tammaramma. Brook Mitchell/Getty Images

SurfStitch, already facing two class actions and legal action by a shareholder over a content contract, has revealed that corporate regulator ASIC has expanded its investigation into the online retailer.

ASIC (Australian Securities and Investments Commission) started an investigation 12 months ago into market disclosures made by the clothing retailer.

“Since then, the scope of the investigation has expanded and, so far as the company is aware, the investigation is ongoing,” SurfStitch said in a market update today.

“The company and its employees have been co-operating and will continue to co-operate fully with ASIC.”

SurfStitch is working to stem losses from the business and is looking at sales of its media assets and the potential to offload other assets.

Next week, the company faces an extraordinary meeting called by Crown Financial, a susbtantial shareholder in SurfStitch, to remove one director, chairman Sam Weiss. Crown has also launched legal action over a disputed contract.

Separate class actions have been launched in the Supreme Courts of Queensland and New South Wales. SurfStitch is accused of misleading and deceptive conduct and breaching its continuous disclosure obligations.

The potential damages could be as high as $100 million, dwarfing the company’s market cap of about $19 million.

“The cost and disruption of the Crown Financial litigation, the Queensland and NSW Actions and the ASIC investigation continue to affect the listed entity and impact its cash position,” the company said.

“This does not prevent the ability of the key underlying retail businesses to trade and remain viable.

“The current board and management inherited a business that was in need of a turnaround, with loss making businesses and operational challenges.

“Notwithstanding these legacy issues, the company is working steadily to stem losses within the business, improve the key underlying retail business operations and deal with the litigation challenges in an orderly fashion.”

SurfStitch is in a trading halt until the company’s full year results, including a large loss, are announced in August.

The company is forecasting an underlying EBITDA (earnings before interest, tax, depreciation and amortisation) loss for the full year of between $10.5 million to $11.5 million, a sharp deterioration from the $5 million to $6.5 million forecast in February and the previous estimate of a $4 million to $5 million loss.

SurfStitch says the retail environment has made it difficult to deliver the planned sales and gross margin improvements as quickly as expected.

However, the company says it has made substantial progress in to cutting costs, streamlining operations and transferring its core SurfStitch.com website to a new platform.

Surfstitch’s management was restructured after the surprise departure of CEO and co-founder Justin Cameron in March 2016. The company then said it understood Cameron was pursuing a potential acquisition of the business in conjunction with private equity. There has been no news since.

The company found that the integration of a string of acquired businesses has been slower than anticipated and the benefits lower than expected.

In April, SurfStitch sold action and extreme sport video business Garage Entertainment to the Madman Media Group for a loss. SurfStitch in 2015 paid $15 million in cash and shares for Garage and its assets including the acclaimed Australian documentary Bra Boys.

In December, SurfStitch sold its surfboard subsidiary Surf Hardware International at a loss to investment company Gowing Bros Ltd for $17 million. The company company says the business it bought 12 months ago for $23.7 million wasn’t a good strategic fit.

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