![Surfstitch CEO Mike Sonand says his priority is to stabiilise the business.](/content/dam/images/g/r/1/5/f/o/image.related.afrArticleLead.620x350.gr46d2.png/1472550381169.jpg)
If you thought it was safe to go back into the water when it comes to troubled surfwear retailer Surfstitch, then think again.
The company is now embroiled in legal action over content licensing deals gone sour, adding to the long list of problems keeping chief executive Mike Sonand awake at night.
The company's shares fell 52 per cent to 11¢ shortly after Sonand outlined the latest challenges facing the former market darling, which reported a $155 million annual loss on Tuesday.
Surfstitch is now worth $64 million compared to more than $500 million in November last year. This extraordinary erosion of shareholder value follows a period of rapid expansion, six major acquisitions, two capital raisings, and the surprise departure of its founding chief executive, Justin Cameron.
Sonand, brought in to stabilise the company, does not mince his words when it comes to explaining what went wrong under former management.
The company's revenues were falling as costs were rising at a time when conditions in North America were challenging. This was due to a string of acquisitions and rising expenses from global branding deals and an e-commerce rollout.
Sonand says his priority is to stabilise the business by maintaining its cash balance and getting costs and capital expenditure under control. Surfstitch is also looking to sell assets to achieve this, but Sonand says the company will not be pushed into a fire sale.
"We are going to assess offers as they do come in. We want to make sure we get value for money. It is not a fire sale," he said.
Paying the price
Sonand also said he had not had any contact with Cameron, whose abrupt departure from the company in March still remains a mystery.
"I've never met him ... I've never conversed with him."
However, the company's other co-founder, Lex Pendersen, remains on board as the head of business development. Sonand says he is an important "brand ambassador" for the group.
While it remains unclear how the company will get back on its feet, there was only one question on the company's analyst call on Tuesday. This is a contrast to a year ago when the company was an e-commerce poster child and a screaming "buy".
Surfstitch is now paying the financial price for its aggressive expansion strategy.
It recorded a loss of $154.7 million in the 2016 financial year after notching up $99.3 million in impairments following a review of the company's assets.
Sonand says he does not anticipate further writedowns. "We have had a realistic look at those assets and we have been aggressive so we don't go back in six months and review the valuations."
Legal proceedings
The underlying pre-tax loss was $18.8 million before the asset writedowns, which was in line with the guidance it gave in June.
Revenue rose because of the string of acquisitions that have ultimately turned out to be the company's main problem. Retail gross margins fell from 46 per cent to 39 per cent.
Underlying EBITDA was a loss of $18.8 million. The company is forecasting an EBITDA loss of $2 million to $3 million and slowing sales growth to less than 10 per cent.
The company has also outlined details of legal proceedings in Queensland over content agreements with Coastalwatch and Three Crowns Investments. Court proceedings were launched in August and Surfstitch says "it is possible that further proceedings may be commenced".
Sonand has now done some of the heavy lifting and is implementing a strategy designed to get customers back to its sites, but it is going to be a long time before the investment community has confidence in this company again. There are still a lot of unanswered questions around Surfstitch's spectacular rise and equally dramatic fall from grace.