ACQUISITION OF For personal use only SURF HARDWARE ... · TRANSACTION OVERVIEW 1 The Acquisition...
Transcript of ACQUISITION OF For personal use only SURF HARDWARE ... · TRANSACTION OVERVIEW 1 The Acquisition...
ACQUISITION OF SURF HARDWARE INTERNATIONAL AND INSTITUTIONAL PLACEMENT
25 NOVEMBER 2015
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DISCLAIMER NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES
Disclaimer
This Presentation has been prepared by SurfStitch Group Limited ACN 602 288 004 (“SurfStitch Group”).
Summary information
This Presentation contains summary information about SurfStitch Group and its activities current as at 25 November 2015. The information in this Presentation is subject to change without notice
and does not purport to be complete or comprehensive. It does not purport to summarise all information that an investor should consider when making an investment decision. It should be read in
conjunction with SurfStitch Group’s other periodic and continuous disclosure announcements lodged with the ASX, which are available at www.asx.com.au.
The information in this Presentation has been obtained from or based on sources believed by SurfStitch Group to be to be reliable. To the maximum extent permitted by law, SurfStitch Group, the
underwriters and their affiliates, officers, employees, agents and advisors do not make any warranty, express or implied, as to the currency, accuracy, reliability or completeness of the information
in this Presentation and disclaim all responsibility and liability for the information (including, without limitation, liabil ity for negligence).
Neither the underwriters nor any of their affiliates, or their respective related bodies corporate, directors, officers, partners, employees and agents (“Underwriter Group”) have caused or authorised
the issue, submission, dispatch or provision of this document, nor do they make any recommendation as to whether any potential investor should participate in the offer of securities referred to in
this document. None of the Underwriter Group makes or purports to make any statement in this document and further, no member of an Underwriter Group accepts any fiduciary obligation to or
relationship with any investor or potential investor in connection with the offer of securities or otherwise.
SurfStitch Group reserves the right to vary the timetable included in this Presentation.
Not financial product advice
This Presentation is not financial advice or a recommendation to acquire SurfStitch Group securities and has been prepared without taking into account the objectives, financial situation or needs of
individuals. Before making an investment decision prospective investors should consider the appropriateness of the information having regard to their own objectives, financial situation and needs
and seek such legal, financial and/or taxation advice as they deem necessary or appropriate to their jurisdiction.
Financial data
All dollar values are in Australian dollars (A$) unless otherwise stated and all financial data is unaudited.
Future performance
This Presentation contains certain “forward looking” statements. The words “anticipated”, “expected”, “projections”, “forecast”, “estimates”, “could”, “may”, “target”, “consider” and “will” and other
similar expressions are intended to identify forward looking statements. Forward looking statements, opinions and estimates provided in this Presentation are based on assumptions and
contingencies which are subject to certain risks, uncertainties and change without notice, as are statements about market and industry trends, which are based on interpretations of current market
conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be
relied upon as an indication or guarantee of future performance. Should one or more of the risks or uncertainties materialise, or should underlying assumptions prove incorrect, there can be no
assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, SurfStitch Group and its directors, officers, employees, advisers, agents and
intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.
An investment in SurfStitch Group securities is subject to investment and other known and unknown risks, some of which are beyond the control of SurfStitch Group, including possible loss of
income and capital invested. Please see the Appendix section of this Presentation for further details. SurfStitch Group does not guarantee any particular rate of return or the performance of
SurfStitch Group, nor does it guarantee the repayment of capital from SurfStitch Group or any particular tax treatment. Persons should have regard to the risks outlined in this Presentation.
Not an offer
This Presentation is not an offer or an invitation to acquire SurfStitch Group securities or any other financial products and is not a prospectus, product disclosure statement or other offering
document under Australian law or any other law.
This Presentation may not be released or distributed in the United States.
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TRANSACTION OVERVIEW
1
The Acquisition
‒ SurfStitch Group has entered into definitive agreements to acquire 100% of the shares of SHI Holdings Pty Ltd (“Surf Hardware
International” or “SHI”) – the “Acquisition”
‒ Enterprise value of A$23.7 million – to be paid 100% in cash
‒ Compelling acquisition multiple of 7.5x FY16E EBITDA with 10%+ earnings accretion in FY16E on a full year pro forma basis
The Company
‒ SHI is the leading global designer, marketer and distributor of innovative and high performance water board sports products and
accessories
‒ In its established markets, SHI has a leading ~55% market share of total retail fins sales and ~40% market share of total plug sales,
with strong adoption from top tier manufacturers and retailers
‒ Houses four highly recognised water board sports brands, namely: FCS, Gorilla, Hydro and Softech. SHI’s brands are ubiquitous in
the global surf industry and in the broader water board sports market such as SUP and Kitesurfing
‒ Operates in the U.S., Australia, France and Japan, and has longstanding distributor relationships in other markets
‒ History of innovation with significant intellectual property and brand equity
‒ Strong financial profile, FY16E revenue of A$38.9 million (up 13% from FY15) and FY16E normalised EBITDA of A$3.2 million
(up 23% from FY15)
Highlights
‒ Enhances SurfStitch Group’s ability to engage with core customers at all points of the surf and action sports life cycle. With access to
33 (22 men and 11 women) top professional athletes to deliver relevant and authentic content, established relationships with shapers
and the ability to develop products that appeal to both the masses and core consumer
‒ Acquisition expected to deliver a range of strategic benefits across SurfStitch Group’s content and e-commerce businesses
‒ Acquisition expected to be earnings accretive and margin enhancing in FY16E
Institutional
Placement
‒ Fully-underwritten placement of approximately 25.6 million shares to institutional investors to raise approximately A$50 million (the
“Placement”). Fully-underwritten floor price of A$1.95 per share, with the final issue price to be determined via a bookbuild
‒ Proceeds from the Placement will be used to fund the repayment of certain debts of SHI as part of the Acquisition and transaction
costs, as well as to provide SurfStitch Group with the flexibility to pursue further strategic growth initiatives including complementary
acquisition opportunities. Proceeds will also be used for working capital and general corporate purposes
‒ SurfStitch Group reaffirms FY16E guidance of A$15–18 million EBITDA for the business, excluding SHI, and provides FY16E guidance
of A$18–22 million EBITDA1, including the contribution of SHI on a full year pro forma basis
Note: 1 Excludes transaction costs and one-time non-recurring expenses
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BUSINESS OVERVIEW
Gorilla
‒ Flagship ‘performance brand’
‒ Produces premium fin control
systems for water board sports
(surf, longboard, SUP, kitesurfing)
together with the market leading
range of board sports accessories
‒ Category leading brand renowned
for the invention of its market
leading detachable surfboard fin
systems (FCS I and FCS II)
‒ 9 of the top 10 rated male surfers
and 8 of the top 10 female surfers
ride the FCS II system
‒ Lifestyle oriented surf brand
‒ Produces functional traction pads,
grips, leashes, fins, board covers
apparel and other surf
accessories
‒ Brand image and target market
focused primarily on the youth
surf culture, music, fashion and
arts, in addition to catering to core
surfers
‒ Growth strategy focused on range
expansion to include new product
categories
‒ Swim fin and bodyboard brand
‒ Produces functional body boards
and swim propulsion fins, catering
to a broad audience of ocean
enthusiasts
‒ Products designed to enhance
water flow and increase
hydrodynamic performance
‒ Renowned for its innovative V-
Rail swim technology, allowing for
faster trajectory through the water
‒ Leading global softboard brand
‒ Produces premium quality
softboards for the surf specialty
market, catering for all skill levels
‒ Developed the first hand shaped
softboard, and the first mesh
bottom softboard
‒ Signature softboard series
developed and endorsed by WSL
World Champion Tom Carroll for
advanced level surfers
Hydro Softech FCS
2 F
or p
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Elite athletes Board manufacturers Retailers
LEVERAGES ATHLETES, BOARD SHAPERS, RETAILERS AND GLOBAL BRANDS
‒ 22 out of the top 34 surfers on the Men’s
World Surfing tour and 11 out of the top 17
surfers on the Women’s tour use FCS
products
‒ Enhances SurfStitch Group’s ability to
leverage athletes across its digital media
stable – a key driver of conversion
‒ Adopted by leading surfboard, SUP and Kite
board manufacturers around the world
‒ Sells to 750+ board manufacturers globally
‒ Provides opportunity to secure enhanced
and exclusive supply agreements with board
manufacturers globally (3 million+ boards
manufactured annually)
‒ Deep relationships with global and local core
surf retailers around the world
‒ Sells to 2,500+ core retail doorways
worldwide – providing next phase of Click
and Collect capabilities for the Group
‒ Strong brand awareness and infrastructure
in key markets of South America and Asia
(Japan) to accelerate Group growth in these
markets
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MICK FANNING
GABRIEL MEDINA
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COMPLEMENTARY GLOBAL FOOTPRINT AND DISTRIBUTION NETWORK
‒ Strong overlap between SHI’s and SurfStitch Group’s key markets
‒ SHI’s market-leading positions in South America and Asia provide opportunity for the Group to accelerate growth in these key markets
‒ Scope to accelerate SHI’s D2C offering via SurfStitch Group’s e-commerce portals
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SHI Office locations
Overlapping regions
SSG only
SHI only
SSG Office locations
U.S.
Offices: California, Florida
Key markets: U.S., Canada,
Mexico, Brazil, Peru, Chile,
Costa Rica
Europe
Office: France
Key markets: France,
UK, Spain, Portugal,
Germany
Australasia
Office: Sydney
Key markets: Australia,
New Zealand, South Africa,
Indonesia, Thailand
Japan
Office: Chiba
Key market: Japan
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SHI’S BUSINESS MODEL CREATES A HIGHLY BENEFICIAL AND VIRTUOUS CYCLE
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Shaper
Retailer
Customer
Product
Product development
FCS plugs are sold
directly to shapers
(ensures ongoing repeat
sales of FCS fins)
Boards arrive with FCS plugs
Customers demand,
and are locked into
FCS fins
Customer buys
boards and
detachable fins to fit Customer feedback via
social media and other
digital content platforms
received by FCS product
development team
Engagement on
social media and
SurfStitch Group’s
content networks
featuring FCS
products utilised
by athletes
Athletes
Wide range of fins available
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Product
Leverage relevant content to attract and
retain a rapidly evolving and increasingly
sophisticated customer base
Significantly enhance customer
engagement levels among action sports
and surf consumers
ENHANCING THE SURFSTITCH ECOSYSTEM
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Product
Online reach of over 9 million
people globally via tier 1 athlete
social media accounts
Partnerships with high profile
athletes (sponsored and non
sponsored)
Market leading position with board
manufacturers and global brands
(collaboration)
Globally recognised brands
Vertical product integration
Strong relationships with
board manufacturers and
global brands
Click and collect
opportunities via core
doorway retail networks
Product E–commerce
Product Content & Community
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SURFSTITCH GROUP IS UNIQUELY PLACED TO LEVERAGE CONTENT ACROSS VERTICAL BRANDS
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Athletes Shapers
‒ World’s number 1 adventure
channel (SVOD) – 3,000+ titles
‒ Long form and short form content
creation (videos/documentaries)
that will reach a wide audience
and showcase the world’s elite
athletes using SHI products
‒ World’s leading surf forecasting
utility
‒ Largest surf library of user
generated content on the web
‒ Targeted advertising to surf
enthusiasts and users of SHI
hardware
‒ World’s leading online surf
publishing network
‒ Loyal following of surf enthusiasts
and trusted destination of surfing
product reviews
‒ Content platform where SurfStitch
Group can provide unique insight
into the lives of athletes and
shapers, product reviews, new and
exclusive content
SurfStitch Group’s unique content platforms will allow it to increase SHI’s brand awareness and legitimise the authenticity of its brands
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ROADMAP TO MARGIN ENHANCEMENT VIA VERTICAL PRODUCT STRATEGY
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Today 12 months 2 – 3 years
<1%
Sales
5–10%
Sales
20–30%
Sales
% G
rou
p S
ale
s
Marg
in %
Group GP margin:
46% Group GP margin:
50–55%
SurfStitch Group’s focus is on core action sports products, legitimised by athletes, authenticated by our content networks
Hard goods 20%+ of Group sales and fastest growing market segment
Minimise fast fashion risk and price deflation
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PERFORMANCE BASED FLAGSHIP DOORWAYS WILL BE THE GLOBAL
DESTINATION FOR THE ACTION SPORTS AND YOUTH DEMOGRAPHIC
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Omni Channel leverage Consumer participation
Media and digital content Athlete promotion
Enhanced shopping experience leveraging
content and e-commerce across physical
doorways
Providing Group's 600+ Brands unique and
exclusive opportunities to launch products
globally in a combined bricks, digital and
content world
The hardware section will showcase a full
range of action sports hardware and
consumer participation opportunities
SurfStitch Group’s full media and content
spectrum will be on display SurfStitch Group and SHI’s athlete
partnerships and SHI’s brand ambassadors
will draw customers to the stores
SurfStitch Group will open 3x flagship
SWELL stores in key cities across the
globe
The stores will be the destination for
the action sports and youth
demographic
The stores will feature ‘doorways’ into
each section of the SurfStitch Group
ecosystem
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HIGHLY EXPERIENCED MANAGEMENT TEAM TO DRIVE GROWTH AMBITIONS
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Justin Cameron Chief Executive
Officer
15+ years
Co
mm
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e
Lex Pedersen
Co-Founder,
President
15+ years
NORTH
AMERICA
Justin Stone
Managing
Director
10+ years
EUROPE
Justin Hillberg
General
Manager
8+ years
ASIA-PACIFIC
Glo
bal
Merc
h Chis Athas
Global Retail / Merch Director
30+ years in leading retail
Co
nte
nt
& C
om
mu
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Sam
McIntosh
Founder
Stab Magazine
15+ years
Ben
Freeston
Founder
Magicseaweed
15+ years
Michael
Lawrence
Founder Garage
Entertainment
10+ years
A global e-commerce
platform with
infrastructure in key
markets across the world
providing consumers
access to 600+ action
sports brands with next
day delivery to 130+
countries and exclusive
action sports content
Market leading audience
in digital content
provides the key avenue
for athletes to legitimise
core brands amongst
consumers and elevate
awareness
Exclusive core hardware
products with higher
margins, developed with
customer feedback in
mind
Content that captures
and monetises
customers with
authentic stories,
athletes that
legitimise our brands,
and exclusive
assortment that
retains loyal
customers and
encourages repeat
visitation
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PATHWAY FOR A$1 BILLION IN REVENUE
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Today
A$199 million
Growth in existing
markets
Content driven
focus
Vertical brand
focus
Growth in new
markets
In 5 years
A$1 billion
Group focus on driving long term strong double digit revenue and EBITDA Growth
‒ Penetration
‒ Flagship Stores
‒ AOV
‒ Conversion
‒ Order Frequency
‒ Awareness
‒ New market
segments
‒ Asia
‒ South America
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SHI ALIGNS WITH SURFSTITCH GROUP’S STRATEGIC OBJECTIVES
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‒ SHI’s globally recognised brands and high performance products appeal to SurfStitch Group’s core demographic
‒ Access to high profile athletes (both sponsored and not sponsored), board shapers and brands provides opportunities to
curate relevant and engaging content, which can be displayed on SurfStitch Group’s digital media platforms
‒ Provides greater leverage to ‘Hard Goods’, which has proven to be one of SurfStitch Group’s fastest growing categories
‒ Opportunity to create new products through ongoing innovation and by leveraging SHI’s intellectual property and brand
equity
‒ Opportunity to consolidate SHI’s warehousing and fulfilment functions with SurfStitch Group in each region, to maximise
distribution efficiencies
‒ Ability to quickly integrate and scale-up SHI’s e-commerce capabilities within SurfStitch Group’s existing portals
‒ Margin enhancement from vertical integration, marketing savings, shared services synergies and branding partnership
opportunities
‒ The Acquisition is expected to be earnings accretive and margin enhancing in FY16E
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INSTITUTIONAL PLACEMENT
Overview
‒ Fully-underwritten institutional placement of ordinary shares to qualified and sophisticated institutional investors
to raise approximately A$50 million (the “Placement”)
‒ Placement of approximately 25.6 million new ordinary shares, representing 10.3% of issued capital. New
shares issued under the Placement will rank equally with existing shares of SurfStitch Group
‒ Fully-underwritten floor price of A$1.95 per share, representing a 2.3% and 5.3% discount to the 5-day VWAP
of A$2.00 and last close of A$2.06, respectively. Final issue price to be determined via a bookbuild
Use of proceeds
‒ Used to fund the repayment of certain debts of SHI as part of the Acquisition and transaction costs, as well as
to provide SurfStitch Group with the flexibility to pursue further strategic growth initiatives including
complementary acquisition opportunities. Proceeds will also be used for working capital and general corporate
purposes
Timetable
‒ Trade date of 26 November 2015
‒ Settlement of the placement is scheduled to take place on 1 December 2015
‒ Allotment and quotation of shares expected to occur on the ASX on 2 December 2015
SurfStitch Group is undertaking a fully-underwritten A$50 million institutional placement
Note: IRESS market data as at 25 November 2015
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Bookrunners ‒ J.P. Morgan and UBS AG, Australia Branch are Joint Bookrunners, Lead Managers and Underwriters
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FY16E EARNINGS GUIDANCE
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Guidance and Outlook
‒ For the four months ending 31 October 2015, Group YTD
revenue growth of 40%+
‒ Reaffirm FY16E guidance of A$15–18 million EBITDA for the
business, excluding SHI
‒ Pro forma FY16E EBITDA1 of A$18–22 million, assuming a full
year contribution of SHI
‒ Acquisition expected to be highly accretive, with 10%+ earnings
accretion in FY16E on a full year pro forma basis
‒ Net cash position, following the completion of the Placement
and the Acquisition expected to be c.A$45 million
‒ Global content strategy delivering early signs of strong
momentum in core markets
‒ No dividend currently planned. Cash will continue to be
reinvested in growth given recognisable double digit growth
opportunities
Note: 1 Excludes transaction costs and one-time non-recurring expenses
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HIGHLY ATTRACTIVE PRODUCT PORTFOLIO
24%
30% 5%
9%
7%
7%
6%
9% 3%
FY16E
Revenue
‒ Diverse revenue base, with scope for future additional growth
across all categories
‒ Cross promotional activities with SurfStitch Group’s content
businesses expected to drive further growth
Production sets Retail fins
Grips Board covers
Leashes Retail other
Hydro Softboards
3rd party brands
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Diversified revenue base Broad spectrum of water board sports
SURF LONGBOARD
SUP KITE
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LEADING MARKET SHARE ACROSS CORE PRODUCT CATEGORIES
Plugs Leashes Board covers Retail fins Traction pads
33%
41%
55%
FY13 FY14 FY15
33%
39% 41%
FY13 FY14 FY15
16%
19%
22%
FY13 FY14 FY15
12%
14%
16%
FY13 FY14 FY15
9% 9%
12%
FY13 FY14 FY15
‒ Significant market share
gains from launch of FCS II
‒ Increased penetration
amongst other water board
sport categories (SUP, Kite)
‒ Highest levels of plug market
share in Australia, U.S.,
Europe and Japan
‒ Expanded into growing water
board sports markets
‒ Leash growth achieved
through provision of a high
quality product and range
updates (e.g. colour)
‒ Growth in board covers
primarily from introduction of
innovative premium product
offerings, widely accepted by
the market
‒ Growth in grips driven by
introduction of industry first
printed tailpads and
expansion of the athlete
series
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Source: SHI market share estimates based on global board manufacturers databases. Note: market shares for board covers and traction pads are global weighted average market shares
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SurfStitch Group is subject to risks that are both of a general nature and risks which are specific to its business activities. Any or a combination of these risk factors may have a
material adverse effect on SurfStitch Group’s business, financial performance and operations. The following pages outline what SurfStitch Group considers to be some of the
potential risks associated with SurfStitch Group’s business, and general risks associated with an investment in SurfStitch Group.
Integrity and performance of SurfStitch Group’s Websites, databases and systems
The performance of SurfStitch Group’s Websites and databases is critically important to SurfStitch Group’s ability to attract and retain customers and to make sales to
customers. SurfStitch Group relies upon third party operators for key aspects of maintaining its Websites and databases and selling its products. If a prolonged system failure
or corruption were to occur, it could damage SurfStitch Group’s business reputation and brand name thereby reducing the attractiveness of its Websites to visitors and
negatively impacting its ability to make sales to customers, which could have a material adverse effect on SurfStitch Group’s business, financial performance and operations.
Continued growth of retail e-commerce in general and growth in demand for Action Sports products may be affected by factors outside of SurfStitch Group’s
control
Whilst e-commerce sales in the categories in which SurfStitch Group’s business operates have been growing, there can be no guarantee that this growth will continue in the
future. The B2C retail e-commerce market and the Action Sports segment in which SurfStitch Group’s business operates are subject to factors outside SurfStitch Group’s
control. This includes factors such as the market outlook for economic growth, the availability and cost of credit, interest rates, taxation, unemployment levels, and consumer
confidence and sentiment. If one or more of these factors leads to growth slowing or a contraction in this segment or market, SurfStitch Group may be unable to meet its
business objectives which could have a material adverse effect on SurfStitch Group’s business, financial performance and operations.
The growth of internet penetration and rate of migration to online platforms
A number of factors including the migration from more traditional retailing to online retailing platforms have underpinned growth in e-commerce. There can be no assurance
that the rate of penetration and migration will continue to increase in the future despite increased internet penetration and a migration of retail sales to online platforms in many
geographies in recent years. If the rate of penetration and migration does not increase in line with SurfStitch Group’s expectations, it may have a material adverse effect on its
business, financial performance and operations.
Competition could adversely affect prices and demand for Action Sports products and decrease its market share
The Action Sports segment is highly competitive. Competition can arise from a number of sources including traditional retailers, omni-channel mono and multi-branded
retailers, and pure play e-commerce competitors. SurfStitch Group’s market share in online Action Sports may decline if its competitors increase their focus on growing online
sales through increasing investment in their online operations. In addition, competitors may also merge or form strategic partnerships, which could increase competition and
could have a material adverse effect on SurfStitch Group’s business, financial performance and operations.
SurfStitch Group relies on third party suppliers for its products and IT platform
SurfStitch Group relies on products and IT platform supplied by third parties. Any disruption to the availability or supply of products and IT services to SurfStitch Group or any
deterioration in the terms on which products and services are supplied to SurfStitch Group could have a material adverse effect on SurfStitch Group’s business, financial
performance and operations.
KEY RISKS
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Changes in technology
SurfStitch Group’s ability to compete effectively in the future may be impacted by its ability to maintain or develop appropriate technology platforms for the efficient delivery of
its services. The cost of implementing emerging and future technologies could be significant. No assurance can be given that SurfStitch Group will have the resources to
acquire or the ability to develop new competitive technologies. In addition, maintaining or developing appropriate technologies may require significant capital investment by
SurfStitch Group.
SurfStitch Group’s Websites may experience a reduction in visits if SurfStitch Group is significantly slower than its competitors to adapt to technological change. This could
impact SurfStitch Group’s ability to attract new and retain existing customers, which could materially adversely affect SurfStitch Group’s business, financial performance and
operations.
SurfStitch Group’s future growth may place significant demands on management and its infrastructure
In recent periods, SurfStitch Group has experienced significant revenue growth and SurfStitch Group intends to continue with the rapid growth of its operations, which may
include entering into new markets. SurfStitch Group expects that this growth will result in an increased level of responsibility for both existing and new management personnel
and require the recruitment, training, integration and management of the staff to support this expected growth. Furthermore, as SurfStitch Group’s operations grow further, it
will need to continue to improve and upgrade its systems and infrastructure.
If SurfStitch Group is unable to manage the demands placed onto management and its infrastructure, its business, financial performance and operations may be materially
adversely affected.
SurfStitch Group’s expansion into new markets may not be successful
SurfStitch Group may explore expansion opportunities into new markets. Any expansion into markets outside SurfStitch Group’s key markets would expose it to a number of
risks including different regulatory requirements, difficulties managing staffing and foreign operations, differences in consumer behaviour, exchange rates fluctuations, potential
political and economic instability, potential difficulties in enforcing contracts and intellectual property rights, the potential for higher rates of fraud and adverse tax
consequences.
Any of these factors could materially adversely affect SurfStitch Group’s business, financial performance and operations.
SurfStitch Group’s Websites may be excluded from or ranked lower in organic search results due to changes to search engines’ algorithms or terms of services
A significant proportion of SurfStitch Group’s customers access SurfStitch Group’s Websites by clicking on a link in search engines’ “organic” listings, which are listings not
dependent on advertising or other payments. Search engines rely on algorithms to determine which websites are included in the search results. Search engines often modify
their algorithms and ranking criteria to prevent their organic listings from being manipulated, which could hinder SurfStitch Group’s SEO activities. These algorithms and
ranking criteria may be confidential or proprietary information, and SurfStitch Group may not understand or have access to complete information on the methods used to rank
its Websites. If SurfStitch Group is unable to recognise and adapt quickly to such changes in search engine algorithms, or if the effectiveness of SurfStitch Group’s SEO
activities is affected for any other reason, SurfStitch Group could suffer a significant decrease in traffic to its Websites and conversion rates.
In addition, a website can be excluded from a search engine’s organic listing if it is found to violate the search engine’s terms of services, which could be modified in the future.
Such exclusion may significantly affect SurfStitch Group’s ability to direct higher margin customer traffic to SurfStitch Group’s Websites, which could materially adversely affect
SurfStitch Group’s business, financial performance and operations.
KEY RISKS (CONT’D)
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SurfStitch Group may experience a significant increase in the cost of, or become more reliant on, SEM
A significant proportion of SurfStitch Group’s revenues are attributable to customers who access SurfStitch Group’s Websites by clicking on links that SurfStitch Group paid to
list on search engines’ results pages. SurfStitch Group frequently places a very large number of bids on key words at a certain cost per click, which is paid to the search
engine, in order to place these listings with a search engine. The cost of search engine marketing generally increases as the importance of online advertising increases and
competition to be ranked higher in paid listings increases. Furthermore, SurfStitch Group might have to submit higher bids in order to purchase certain key words to offset a
reduction in its click-through rate. In addition, if SurfStitch Group’s Websites were to experience a reduction in natural search visibility in search engines (i.e. a fall in its
websites’ organic search ranking), it may increase SurfStitch Group’s reliance on SEM. If this were to occur there is no guarantee that SurfStitch Group’s Websites’ natural
search visibility will improve in a timely manner or at all.
SurfStitch Group’s business, financial performance and operations may be materially adversely affected by any increase in the cost of or in its reliance on SEM, or any
decrease in the effectiveness of its SEM.
SurfStitch Group’s acquisition strategy may be unsuccessful
SurfStitch Group may make acquisitions in circumstances where the Directors believe that those acquisitions are complementary to SurfStitch Group’s strategy and enhances
its growth prospects. SurfStitch Group may encounter a number of issues associated with making acquisitions including the difficulties involved in integrating companies,
businesses or assets, as well as the diversion of financial and management resources from SurfStitch Group’s core business.
To the extent that the acquisition of SHI and future acquisitions are not successfully integrated with SurfStitch Group’s existing business, SurfStitch Group’s business, financial
performance and operations could be materially adversely affected.
Surf Hardware International relies on third party suppliers for its products and IT platform
Surf Hardware International (“SHI”) relies on products and IT platform supplied by third parties. Any disruption to the availability or supply of products and IT services to SHI or
any deterioration to the terms on which products and services are supplied to SHI could have a material adverse effect on SHI’s business, financial performance and
operations.
Unauthorised use of Surf Hardware International’s intellectual property or independent development of technology
Surf Hardware International (“SHI”) regards substantial elements of its Websites, software tools, applications, customer databases and underlying technology as proprietary.
Third parties may copy or otherwise obtain and use SHI’s proprietary information without authorisation or may develop similar technology independently despite precautionary
measures that SHI takes. Furthermore, competitors may be able to design around SHI’s technology or develop competing technologies substantially similar to those of SHI
without any infringement of its proprietary rights. SHI may seek to protect its proprietary information through legal action which could be unsuccessful and expensive and would
divert management’s attention from its business operations. This could have a material adverse effect on SHI’s business, financial performance and operations.
Other key risks
A number of other key risks relating specifically to an investment in SurfStitch Group include risks associated with changes in customer preferences, changes in seasonal
trading patterns, SurfStitch Group’s reliance on the efficient operation of its distribution centres, SurfStitch Group’s dependence on recruiting and retaining experienced and
high-performing staff and SurfStitch Group’s dependence on its Executive Directors, reputational and operational risks (such as IT risks) and general risks.
KEY RISKS (CONT’D)
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INTERNATIONAL OFFER RESTRICTIONS This document does not constitute an offer of new ordinary shares ("New Shares") of the Company in any jurisdiction in which it would be unlawful. In particular, this document
may not be distributed to any person, and the New Shares may not be offered or sold, in any country outside Australia except to the extent permitted below.
Hong Kong
WARNING: This document has not been, and will not be, registered as a prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of
Hong Kong, nor has it been authorised by the Securities and Futures Commission in Hong Kong pursuant to the Securities and Futures Ordinance (Cap. 571) of the Laws of
Hong Kong (the "SFO"). No action has been taken in Hong Kong to authorise or register this document or to permit the distribution of this document or any documents issued in
connection with it. Accordingly, the New Shares have not been and will not be offered or sold in Hong Kong other than to "professional investors" (as defined in the SFO).
No advertisement, invitation or document relating to the New Shares has been or will be issued, or has been or will be in the possession of any person for the purpose of issue, in
Hong Kong or elsewhere that is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to New Shares that are or are intended to be disposed of only to persons outside Hong Kong or only to professional
investors (as defined in the SFO and any rules made under that ordinance). No person allotted New Shares may sell, or offer to sell, such securities in circumstances that amount
to an offer to the public in Hong Kong within six months following the date of issue of such securities.
The contents of this document have not been reviewed by any Hong Kong regulatory authority. You are advised to exercise caution in relation to the offer. If you are in doubt
about any contents of this document, you should obtain independent professional advice.
New Zealand
This document has not been registered, filed with or approved by any New Zealand regulatory authority under the Financial Markets Conduct Act 2013 (the "FMC Act"). The New
Shares are not being offered or sold in New Zealand (or allotted with a view to being offered for sale in New Zealand) other than to a person who:
‒ is an investment business within the meaning of clause 37 of Schedule 1 of the FMC Act;
‒ meets the investment activity criteria specified in clause 38 of Schedule 1 of the FMC Act;
‒ is large within the meaning of clause 39 of Schedule 1 of the FMC Act;
‒ is a government agency within the meaning of clause 40 of Schedule 1 of the FMC Act; or
‒ is an eligible investor within the meaning of clause 41 of Schedule 1 of the FMC Act.
Singapore
This document and any other materials relating to the New Shares have not been, and will not be, lodged or registered as a prospectus in Singapore with the Monetary Authority
of Singapore. Accordingly, this document and any other document or materials in connection with the offer or sale, or invitation for subscription or purchase, of New Shares, may
not be issued, circulated or distributed, nor may the New Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore except pursuant to and in accordance with exemptions in Subdivision (4) Division 1, Part XIII of the Securities and Futures Act, Chapter 289 of
Singapore (the "SFA"), or as otherwise pursuant to, and in accordance with the conditions of any other applicable provisions of the SFA.
This document has been given to you on the basis that you are (i) an existing holder of the Company’s shares, (ii) an "institutional investor" (as defined in the SFA) or (iii) a
"relevant person" (as defined in section 275(2) of the SFA). In the event that you are not an investor falling within any of the categories set out above, please return this document
immediately. You may not forward or circulate this document to any other person in Singapore.
Any offer is not made to you with a view to the New Shares being subsequently offered for sale to any other party. There are on-sale restrictions in Singapore that may be
applicable to investors who acquire New Shares. As such, investors are advised to acquaint themselves with the SFA provisions relating to resale restrictions in Singapore and
comply accordingly.
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