16 June 2016, Written by Jenna Rathbone


SURFSTITCH hasn't been able to catch a break this week, with the ASX questioning the online retailer about suspicious share trading ahead of its second profit downgrade in as many months.

On June 9 the Gold Coast-based company emerged from a trading halt and announced that pro-forma earnings before interest, tax, depreciation and amortisation was likely to slump to a loss of $17.3-18.3 million.

At the time SurfStitch attributed the profit downgrade to a failed licence agreement granted to a third party to use the company's content contained in its subsidiaries - SurfStitch, Garage Entertainment, Rolling Youth and MagicSeaweed.

Although the extent of the breakdown wasn't fully made clear, SurfStitch amended the contract and reversed $20.3 million in revenue, resulting in an $18 million loss.

SurfStitch shares dropped from 46c on June 2 to 40.5c on June 6 on above-average turnover. The company went into a trading halt the following day.  

The ASX has questioned whether SurfStitch was aware of the issues relating to the content contract and if the company complied with disclosure obligations.

SurfStitch claims it was made aware of certain information about the contract late on June 6 and decided to make further enquiries to assess whether it was appropriate to release another trading update.

"It was not appropriate to make an ASX announcement, as opposed to requesting a trading halt, at that time as the company needed to establish all the relevant information," says SurfStitch in a statement to the ASX.

"The company had not heard any rumours or seen any evidence that confidentiality in relation to the relevant information, or the company's assessment of that information, had been lost.  The company is not aware why the share trading occurred."

The latest profit downgrade is the second this year and comes after a revision to its guidance for EBITDA from as much as $18 million to as little as $2 million in May.

That news came on the heels of a massive share slump in February, when the company failed to offer a full-year profit guidance for FY16.

SurfStitch shares floated at $1 each in December 2014, rose to a high of $2.13 in November 2015 and today are trading around 25c. SurfStitch's market capitalisation has dropped by more than $500 million.

Gadens Lawyers is currently in the midst of preparing a potential class action against the troubled business on behalf of investors.

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Author: Jenna Rathbone
About: Jenna Rathbone is a Queensland-based journalist who writes on a range of issues including business and property affairs and social issues.
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