Anatomy of a meltdown

WebTech Wireless, the Burnaby, B.C., mobile services provider, takes some big hits.

May 13 was Mother's Day, and it certainly turned out to be a mother of a bad weekend for Anwar Sukkarié. Beginning that Friday, the CEO and co-founder of WebTech Wireless Inc. (TSX: WEW), an up-and-coming provider of mobile telematics systems and services based in Burnaby, B.C., was scrambling to put out fires while simultaneously starting some of his own. By the following week, it was hard to tell which blazes were burning hotter — or whether they would engulf the company.

Here's how it began: early on May 11, WebTech issued a news release dismissing speculation about a pending lawsuit that had driven the stock down 21.5% over the three previous trading sessions to $5.33. But at 1:10 p.m., trading was halted and soon after WebTech announced that it had, in fact, just been served with a patent infringement lawsuit filed the previous day in Texas by a company called LunarEye Inc.

Another, bigger shoe was about to drop. Just prior to holding a conference call after market close, ostensibly to discuss the lawsuit, WebTech issued a second bad-news release: its reseller in Brazil, Crown Telecom, was not delivering on the accounts payables it owed WebTech. Crown also hadn't been paying WebTech interest on a recent US$12-million loan to finance its operations. “We had been working with Crown to resolve their working capital challenges, and as such, we are disappointed, really, that they were not able to take advantage of opportunities open to them,” said Sukkarié in the call. “We want to get paid.”

Crown is the middleman in a deal to pre-install 490,000 units of WebTech's telematics hardware in Volkswagens as part of a national anti-theft program worth $67 million over 12 months. For a firm with $16.34 million in revenue in fiscal 2006 (ended July 31), the Brazil deal is a major contract that fuelled a 572% rise in WebTech stock between Sept. 12, 2006 and mid-April, when it hit a 52-week high of $7.39.

With the crises, the stock dropped as low as $2.52 early on May 14. The same morning, WebTech held another conference call to announce that it had granted Crown an extension until May 26 in exchange for partial payment, and that Crown was pursuing several financing avenues. Sukkarié hastily cancelled a business trip to Japan and instead flew to Brazil to see Crown execs, and to meet with Volkswagen directly — raising the possibility that Crown might be cut out of the deal altogether.

Upon his return, Sukkarié may have to field questions from securities regulators. On April 12, he and Cameron Fraser, WebTech's co-founder, each sold 500,000 shares at $6.70. On May 16, they offered to reverse the stock sales, while claiming they hadn't had “any knowledge of the recently announced events.” But in the earlier conference call, Sukkarié told investors he met with Volkswagen weeks ago partly because the automaker was concerned about Crown's financial health: “You see, they know about Crown's working capital issue. ? So they were kind of worried. So we were contacted by them. ? I was in Brazil I think a couple of weeks ago, and I met with them direct.”

WebTech spokesperson Corey Grant says that prior to May 11, the company was confident the deadline would be met. “There was really no reason to believe it would go in any other direction,” says Grant. “And it was a surprise to us, literally, when the payment did not arrive on that Friday.”

Some analysts have slashed their stock price targets, while others are more optimistic. “This is a whole bunch of stuff blown out of proportion here,” says Greg Reid, tech analyst with Wellington West Capital Markets. “Six months down the road, we'll say, ‘Man that was messy, but it was the ultimate buying opportunity on the name.'” One way or another, Sukkarié and WebTech will likely have learned lessons that even most mothers couldn't have taught.