Sorrento Networks Corp. (Nasdaq: FIBR) has raised $10 million by selling shares directly to institutional investors, the company announced Monday (see Sorrento Completes Stock Placement). The private placement was first mentioned last week during Sorrento’s conference call for its fourth quarter in fiscal 2001 (see Sorrento Reports Earnings, Financing).

In the transaction, the company issued 1,525,995 shares of common stock and 381,499 warrants. The shares were bought at $6.55 a piece, says Joe Armstrong, Sorrento’s CFO. Also, Sorrento can buy back the warrants at a penny a piece within six months if the company’s stock price doubles, he says.

On news of the deal, Sorrento's stock price lost 0.78 (-10.12%) to close at 6.94.

No investment banks were involved in the transaction, says Armstrong. The company declined to name the private placement investors and the firm that structured the deal. Sorrento’s 8-K filing with the SEC, which may contain such information, also wasn’t available by press time.

Sorrento needs the funds to ramp up its GigaMux metro DWDM (dense wavelength-division multiplexing) boxes and EPC integrated access devices and ready its TeraMatrix optical switching router for shipping later this year.

In fiscal 2001, the optical equipment division of Sorrento, called Sorrento Networks Inc., saw its revenues grow to $26.5 million from $12.5 million, a 112 percent increase.

The parent company, formerly Osicom but now called Sorrento Networks Corp., reported that its revenues shrank to $44.6 million in fiscal 2001 from $68.4 million in fiscal 2000, a 34.8 percent decrease. Part of that revenue dropoff can be attributed to the divestiture of Sorrento's NetSilicon and Entrada subsidiaries, which contributed revenues for fiscal year 2000, but not fiscal year 2001.

So, if you treat Sorrento Networks Inc. and Sorrento Networks Corp. as one entity, the company has seen a 12.1 percent decrease in revenues from fiscal 2000 to fiscal 2001.

The challenge for Sorrento is to keep mining its GigaMux product for steady revenue growth until the TeraMatrix product has a chance to take hold in the market.

Sorrento has been shipping its GigaMux product since 1997 and now has “more than 20” customers, according to Armstrong. Those include Deutsche Telekom AG (NYSE: DT), Cox Communications Inc. (NYSE: COX), United Pan-Europe Communications NV (UPC) (Nasdaq: UPCOY), AT&T Broadband, Southern California Edison, El Paso Global Networks, Inrange Technologies Corp., and Belgacom SA.

The order sizes for the GigaMux, according to Armstrong, swing from around $400,000 to more than $5 million. During Q4 of fiscal 2001, Sorrento shipped to seven old customers and three new ones. During Q3, it shipped to one new customer and six repeats.

By the end of this calendar year, Sorrento’s TeraMatrix product should be finishing up lab tests and beginning revenue shipments, Armstrong says. That couldn’t come at a better time, given that Cisco’s own metro DWDM offering might represent a significant challenge to Sorrento’s GigaMux product by year’s end (see Cisco Marches Deeper Into the Metro).

In a conversation with Light Reading at OFC last week, Sorrento CEO Xin Cheng said that the metro DWDM market is big enough for all comers, but expressed a hint of concern at Cisco’s ability to commit a sizeable sales force to pushing its product.

Still dogging Sorrento’s stock is the lack of interest from Wall Street analysts, whose research reports can be a great source of ongoing publicity for “covered” stocks. Sorrento shareholders say until the company buys itself some coverage from a big bank, it can’t hope for much better valuation.

Cheng told Light Reading he’s aware of the concern. “These things take time,” he said. “We’re working on it.”

— Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com