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SurfStitch strikes back against former CEO, Coastalcoms

Embattled online surf wear retailer SurfStitch has struck back against former chief executive Justin Cameron and would-be suitor Kim Sundell’s Coastalcoms group, alleging they conspired to inflate revenues and profits in the first half of 2016.

SurfStitch said on Friday it had filed claims and counterclaims in the District Court of Queensland alleging that Mr Sundell’s companies, Coastalcoms and Three Crowns Investments, “were knowingly involved in, and knowingly assisted, certain alleged breaches of statutory and fiduciary duties by Mr Justin Cameron, the former CEO of the SurfStitch Group”.


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“Mr Cameron caused the company and SurfStitch Holdings Pty Ltd to enter into a contractual scheme with Coastalcoms and TCI, allegedly for the purpose of inflating the revenue and profit of SurfStitch for the first half of the 2016 financial year in a manner that contravened the provisions of the Corporations Act 2001,” SurfStitch said.

“Mr Cameron did not inform the board of the full nature of the contractual scheme nor that the arrangements were contrived to boost revenue for the first half of 2016,” the company said.

As a result of this scheme, $20.3 million included as revenue in the first half of 2016 had to be reversed in the full-year accounts, contributing to SurfStitch’s $155 million bottom-line loss.

The company claims Coastalcoms, Three Crowns and their directors, Kim Sundell and David Wooldridge, are liable to compensate SurfStitch for the loss or damage suffered as a result of the alleged breaches of statutory and fiduciary duties.

Mr Sundell called the claims “ridiculous” and denied any “common goal” between his business and Mr Cameron to impact revenue or profit numbers of SurfStitch.

“The theme throughout their counterclaim is that there is a contra arrangement … (which) was fully known by many if not all the officers and directors of the Company. This wasn’t a secret arrangement between Justin and us, in fact quite the opposite,” he told AFR Weekend.

“SRF claims that the arrangement price was artificially high. The prices were nominated by SRF not us. SRF was a company that was on a spending spree paying higher prices for everything and even though this involved contra arrangements. The contra aspects had no net financial effect. What seems to have gotten SRF into difficulty is its own lack of internal controls, poor governance and the failure of its officers to act properly with the company’s own information.”

Mr Sundell is suing SurfStitch in the Queensland District Court for $15 million over a failed content deal negotiated by Mr Cameron and simultaneously proposing to take the company over and break it up.

It is understood SurfStitch is not taking legal action against Mr Cameron and he is not included in the latest claims.

Mr Cameron told AFR Weekend he was “shocked” by the announcement, and strenuously denies SurfStitch’s allegations.

He said SurfStitch did not put its allegations to him ahead of making them public.

“As per the SurfStitch June ASX release, those contracts took effect after my departure from SurfStitch,” said Mr Cameron, who is overseas. “This is in relation to a commercial dispute with a third party that I’m not part of. I can’t comment on any claims between those parties.

“I’m a significant shareholder in SurfStitch and like all shareholders I’m disappointed in the current happenings of the business. Im keeping a watching brief around any potential opportunities around the company.”

Those that know Mr Cameron said given the significant time and passion he put into the business over a decade with co-founder Lex Pedersen, he would take any opportunity to resurrect SurfStitch.

However, the the Australian Securities and Investments Commission is investigating SurfStitch’s original disclosures of the Coastalcoms transaction and could take action against Mr Cameron if it finds evidence of wrongdoing.

SurfStitch also said it sold surfboard accessories maker Surf Hardware International for $17 million to Gowings Bros Ltd, the investment company of former Gowings chief John Gowing.

SurfStitch acquired Surf Hardware from private equity firm Crescent Capital and Macquarie Capital for $24.3 million 12 months ago as part of Mr Cameron’s failed strategy to turn SurfStitch into the Amazon Prime of the actions sports sector.

Mr Cameron left the company abruptly earlier this year after the first of a series of profit downgrades.

SurfStitch’s new management slashed the value of SHI by $6.5 million in June, including $5.3 million of goodwill impairments, and put the company up for sale, saying it was no longer core to the group’s strategy. New chairman Sam Weiss said on Friday that SHI was a good business but not a good strategic fit.

“This strategic decision to divest SHI enables the Group to focus management’s attention and financial resources on its core business, e-commerce retailing,” Mr Weiss said.

SurfStitch’s 2017 guidance for underlying EBITDA losses of $2 million to $3 million included $2.2 million in earnings from Surf Hardware. As a result of the sale, SurfStitch now expects underlying EBITDA losses of $4 million to $5 million this year, excluding any additional impairment charges arising from the transaction.

Between December 2014, when the company floated, and December 2015, SurfStitch outlaid more than $120 million in cash and shares on five acquisitions, including $21 million for Stab, an online surf content platform, $15 million for Magicseaweed and Rollingyouth, a user-generated surf forecasting network, and $15 million for Garage Entertainment, which makes action-sports films and videos.

These assets were written down by more than $28 million after Mr Cameron’s shock departure in March, contributing to the company’s $155 million bottom-line loss in the 2016 financial year.

SurfStitch was the worst performer on the market last year, losing $500 million in market value as its shares fell from a high of $2.09 to just 16¢.

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