Award-winning Financial Journalist

Ashish Saxena

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/5566" target="_blank" data-smartkarma-citation="entities:5566:1">Surfstitch Group Ltd (SRF)</a>, reported a net loss of A$154.7 mln for FY16. A major part of it was due to an impairment of goodwill, intangibles, plant, property and equipment and aged inventory totalling A$99.3 mln. We had anticipated the numbers to be disappointing in an earlier insight <a href="https://www.smartkarma.com/insights/surfstitch-group-is-a-further-impairment-of-goodwill-inevitable-now" target="_blank" data-smartkarma-citation="insights:3649">Surfstitch Group: Is A Further Impairment Of Goodwill Inevitable Now?</a>.Surprisingly, SRF appears to have retreated from the outlook for FY17 that it shared in a <a href="http://www.asx.com.au/asxpdf/20160609/pdf/437sk7p4f82k9q.pdf" target="_blank">June 9 update</a>. In that update, it said it expects to return to profitability and be cash-flow-positive in FY17. But in its FY16 earnings release, SRF has forecasted an EBITDA loss of A$2-3 mln while the cash from operations is forecasted to decline by A$6-7 mln. SRF recorded a cash outflow in operations of A$30.4 mln in FY16. Apparently, the latest outlook statement doesn't commit to a profitable and a cash-flow-positive FY17.SRF's CEO Michael Sonand is working on a stabilisation plan to ensure better control of cash flows. The plan includes implementing a new executive structure, accelerating a brand rationalisation program, reviewing all expenditures, managing working capital and reducing workforce by 65% in North America and by 25% in UK.Within a few months of acquiring Surf Hardware International (SHI) for A$24.3 mln in cash in December, SRF now finds it to be a misfit. Which is why it is now looking to divest SHI and has hired the services of Deloitte Finance Advisory. It is worth pointing out that SRF recorded an A$13.1 mln goodwill on SHI's acquisition and has already impaired A$5.3 mln of it as on June 30.The relentless fall in SRF's stock price since Justin Cameron's resignation in March has left hundreds of investors in a difficult spot. According to the annual reports, SRF had 2,705 shareholders on August 18 compared to 1,127 shareholders on August 20 last year. Correspondingly, the number of shareholders holding an unmarketable parcel of shares (meaning shareholding worth less than A$500) increased to 703 from just 23 a year ago. Hundreds of such trapped shareholders might be an easy target for Melbourne-based law firm Gadens which has launched a preliminary investigation into events a SRF, with an aim of launching an A$500 mln class action against the company and its directors. Gadens has invited all current and past SRF shareholders to go to <a href="https://classactions.gadens.com/" target="_blank">https://classactions.gadens.com</a>to register their interest in participating in a possible shareholder class action.In the previous insight titled <a href="https://www.smartkarma.com/insights/surfstitch-group-can-gadens-gather-enough-evidence-for-a-class-action" target="_blank" data-smartkarma-citation="insights:4282">Surfstitch Group: Can Gadens Gather Enough Evidence For A Class Action?</a>, we highlighted some of the reasons why Gadens might have a case here.And with its <a href="http://www.asx.com.au/asxpdf/20160830/pdf/439rg49h5k9cxd.pdf" target="_blank">2016 annual report</a> now out, SRF might have a lot more to answer about. In this insight, you'll read about:<ul><li>It's restated audited numbers for FY15 that got restated yet again.</li><li>Legal proceedings in courts of Queensland leading to damages up to US$10 mln (or A$13 mln).</li><li>How SRF paid for Justin Cameron's accrued leaves despite his alleged resignation in middle of the contract.</li><li>Huge rise in base salaries of top management in a year of massive loss for the company.</li><li>Mismatch in the opening and closing balances of Justin Cameron's and Lex Pedersen's shareholdings on June 30 and July 1 last year.</li><li>Millions of shares sold in open market by insiders during FY16.</li><li>Significant rise in value of transactions between SRF and a related company of Justin Cameron and Lex Pedersen.</li><li>How former COO Mark Storey left just 6 days before the end of the year, with SRF paying in lieu of notice and accelerating vesting of his performance rights.</li></ul>

Surfstitch Group Ltd (SRF), reported a net loss of A$154.7 mln for FY16. A major part of it was due to an impairment of goodwill, intangibles, plant, property and equipment and aged inventory totalling A$99.3 mln. We had anticipated the numbers to be disappointing in an earlier insight Surfstitch Group: Is A Further Impairment Of Goodwill Inevitable Now?.Surprisingly, SRF appears to have retreated from the outlook for FY17 that it shared in a June 9 update. In that update, it said it expects to return to profitability and be cash-flow-positive in FY17. But in its FY16 earnings release, SRF has forecasted an EBITDA loss of A$2-3 mln while the cash from operations is forecasted to decline by A$6-7 mln. SRF recorded a cash outflow in operations of A$30.4 mln in FY16. Apparently, the latest outlook statement doesn't commit to a profitable and a cash-flow-positive FY17.SRF's CEO Michael Sonand is working on a stabilisation plan to ensure better control of cash flows. The plan includes implementing a new executive structure, accelerating a brand rationalisation program, reviewing all expenditures, managing working capital and reducing workforce by 65% in North America and by 25% in UK.Within a few months of acquiring Surf Hardware International (SHI) for A$24.3 mln in cash in December, SRF now finds it to be a misfit. Which is why it is now looking to divest SHI and has hired the services of Deloitte Finance Advisory. It is worth pointing out that SRF recorded an A$13.1 mln goodwill on SHI's acquisition and has already impaired A$5.3 mln of it as on June 30.The relentless fall in SRF's stock price since Justin Cameron's resignation in March has left hundreds of investors in a difficult spot. According to the annual reports, SRF had 2,705 shareholders on August 18 compared to 1,127 shareholders on August 20 last year. Correspondingly, the number of shareholders holding an unmarketable parcel of shares (meaning shareholding worth less than A$500) increased to 703 from just 23 a year ago. Hundreds of such trapped shareholders might be an easy target for Melbourne-based law firm Gadens which has launched a preliminary investigation into events a SRF, with an aim of launching an A$500 mln class action against the company and its directors. Gadens has invited all current and past SRF shareholders to go to https://classactions.gadens.comto register their interest in participating in a possible shareholder class action.In the previous insight titled Surfstitch Group: Can Gadens Gather Enough Evidence For A Class Action?, we highlighted some of the reasons why Gadens might have a case here.And with its 2016 annual report now out, SRF might have a lot more to answer about. In this insight, you'll read about:It's restated audited numbers for FY15 that got restated yet again.Legal proceedings in courts of Queensland leading to damages up to US$10 mln (or A$13 mln).How SRF paid for Justin Cameron's accrued leaves despite his alleged resignation in middle of the contract.Huge rise in base salaries of top management in a year of massive loss for the company.Mismatch in the opening and closing balances of Justin Cameron's and Lex Pedersen's shareholdings on June 30 and July 1 last year.Millions of shares sold in open market by insiders during FY16.Significant rise in value of transactions between SRF and a related company of Justin Cameron and Lex Pedersen.How former COO Mark Storey left just 6 days before the end of the year, with SRF paying in lieu of notice and accelerating vesting of his performance rights.

Surfstitch: 2016 Annual Report Reveals Payments to Justin Cameron and Mark Storey on Departure