Sorrento Fuels Up
The company filed an 8-K with the Securities and Exchange Commission today, revealing details of the transaction. Specifically, the deal gives bondholders the right to convert shares 9.75 percent above the closing price of Sorrento stock on August 1, 2001, which was $6.69 a share. This is a good deal for investors, says one bond dealer, as convertible offerings often require a 15 percent to 25 percent premium to reach the conversion price.
In essence, this means that if the stock goes above $7.34 a share, the institutional investors could convert their bonds to Sorrento common stock at a price higher than what they paid for them. The investment banking firm, SG Cowen Securities, assisted the company in raising the financing from a syndicate of several institutional investors.
The financing closes another chapter in the unconventional life of Sorrento. Last year, original parent company Osicom planned to spin off Sorrento as an IPO, but those plans were shelved (see Osicom Investors Rebel). Eventually, Osicom simply changed its name to Sorrento (see Osicom Prepares for Transformation). But without cash from an initial public offering, the company was underfunded as its losses continued, and it eventually started running low on cash (see Sorrento Shares Fall on Financing News).
By the time it reported its second-quarter earnings in June, the company only had about $8 million in cash and was burning through it at a rate of about $2 million to $2.5 million per month, according to a report issued by Daniel Shin, an analyst with Robert W. Baird & Co. Inc. (see Sorrento Picks Up Brokerage Coverage).
In June, the company said it was working on a $15 million debt financing arrangement with Silicon Valley Bank, but that hasn’t yet come to fruition.
Now, with the $32 million in financing under its belt, the company should be able to continue operating at least until the second half of 2002, says Shin. The company could also raise $30 million or so by selling off its interest in NetSilicon, another one of Osicom’s original subsidiaries.
Financing isn’t the only issue plaguing Sorrento at the moment. The company must also resolve a dispute with its preferred shareholders. The preferred shareholders have filed to sell their shares, but Sorrento says it doesn't have a legal obligation to pay up. The company is also in need of big contracts to propel it toward profitability. “Generally, this is a very positive step,” says Shin. “At least one third of the puzzle has been resolved, and I’m sure the rest will fall into place as a result.”
So what’s next for Sorrento? With a market capitalization of about $93 million, the company could be a good acquisition candidate. It has been in the metro optical transport market longer than its key competitor ONI Systems Inc. (Nasdaq: ONIS), which has a market capitalization of $3.17 billion. And Sorrento has a long list of customers, including AT&T Broadband, Cox Communications Inc. (NYSE: COX), Deutsche Telekom AG (NYSE: DT), United Pan-Europe Communications NV (UPC) (Nasdaq: UPCOY), and Inrange Technologies Corp. (Nasdaq: INRG).
Sorrento’s stock was down 0.22 (3.24%) to 6.56 a share in mid-afternoon trading.
- Marguerite Reardon, Senior Editor, Light Reading