EMBATTLED action sports retailer SurfStitch's (ASX:SRF) sale of its Surf Hardware International business has been overshadowed by sensational claims by the company against its former CEO Justin Cameron (pictured).

The news has emerged after SurfStitch filed its defence against a legal action brought by one of its major shareholders, and shed light on Cameron's sudden departure from the company in March this year.

SurfStitch today announced it had sold Surf Hardware International to Gowing Bros (ASX:GOW) for $16 million, a steep discount to $23.7 million it paid for the business a year ago.

However, a separate announcement detailing SurfStitch's defence against a lawsuit brought by Coastalcoms Pty Ltd has revealed the nature of a legal stoush that has preoccupied the company for months.

Coastalcoms and related entity Three Crowns Investments, which are controlled by Kim Sundell and David Wooldridge and who also control a major stake in SurfStitch, are suing SurfStitch over an alleged breach of contract that occurred earlier this year.

In its defence of three separate claims, filed in both the District Court and Supreme Court of Queensland, SurfStitch has alleged both Sundell and Wooldridge were 'knowingly involved in, and accordingly assisted, certain alleged breaches of statutory and fiduciary duties by Justin Cameron'.

SurfStitch has alleged that Cameron, a co-founder of SurfStitch, had caused the company to enter into a contractual scheme with Coastalcoms and Three Crowns in order to inflate revenue figures for SurfStitch in the first half of FY16.

It alleges this was done 'in a manner that contravenes the Corporations Act' and that the agreement had boosted the company's revenue by $20.3 million during the financial period in question. SurfStitch reversed the revenue figure in its accounts on June 9.

"Mr Cameron did not inform the board of the full nature of the contractual scheme nor that the transaction was contrived to boost revenue for 1H FY16," says the company in a statement to the ASX.

SurfStitch is now making a counter-claim that Coastalcoms, Three Crowns and its directors are liable for damages caused by the alleged breaches of duty.
The company says the claims are yet to be proven by a court and it has declined to comment further on the matter. It has also sought to have the three cases heard simultaneously in the Supreme Court.

News of the Surf Hardware International (SHI) sale and clarification of the legal stoush the company is facing helped buoy SurfStitch's shares today.
They rose more than 10 per cent to a high of 18.5c, even though the sale of the SHI business is expected to double the company's underlying loss in FY17.

SurfStitch's FY17 had been expecting an underlying EBITDA loss of $2 million to $3 million in FY17, including SHI's contribution of $2.2m for the seven months the end of June next year.

"As a direct result of the sale of SHI, the company's underlying EBITDA for FY17 is now expected to be an underlying EBITDA loss of $4m to $5m excluding any impairment charge arising from this transaction,"  says the company.

"SurfStitch's FY17 cash outlook will materially improve compared to that disclosed to the market at the time of the AGM, as a direct result of this transaction."

Under the agreement with Gowings Bros, a listed investment group, SurfStitch will receive an initial cash payment of $10 million with the remaining $6 million deferred through a fixed and floating charge against the business.

SHI is priced at $17.8 million in the SurfStitch accounts, so it will book a loss of at least $1.8 million on the transaction plus costs.

SurfStitch CEO Mike Sonand says while SHI was profitable it was not a strategic fit for the group.

"Over recent months we have undergone a robust sale process, handled by Deloitte Corporate Finance, and after discussions with many local and global potential buyers, we have now finalised a deal with Gowing Bros which provides the best outcome for shareholders," Sonand says.

The acquisition was one of a number of private equity investments by Gowing Bros in recent years.

Gowing's general manager Garth Grundy says the company believes it can add value to the business which manufactures and supplies surf related hardware products under the FCS,  Gorilla, Softech and Hydro brands.

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