Cable Tech

Sorrento Teeters on the Edge

The past two weeks have marked another chapter in the strange history of Sorrento Networks Corp. (Nasdaq: FIBR) investor relations. The million-dollar question: Have Sorrento investors finally hit the jackpot, or are they about to lose all their money to the house?

The happy faction of investors in the networking company formerly known as Osicom is celebrating last week's surprising quarterly numbers. Shares have doubled in the past two weeks, from just under $6, to their current price of about $12. The other, more skeptical portion of the Sorrento shareholder base is looking at the balance sheet and wondering, "Where's the cash?"

The concerns come partly from a recent flap involving the company and the holders of its Series A Preferred Stock -- a class of shares that pays dividends and holds certain privileges not held with common stock. Investors holding more than half the company's Series A Preferred shares have filed to sell those shares. But all they got in return was a letter saying, in effect, that Sorrento can't pay up until it's profitable.

During the quarterly earnings conference call last week, Sorrento addressed the matter by saying it can only redeem Series A Preferred shares using specific funds, such as "positive retained earnings and capital surplus." It's worth noting that Sorrento just posted a first-quarter loss of $5.8 million, or 45 cents a share. Sorrento's revenues grew 179 percent from the year-ago quarter, but the company is still several months away from profitability (see Sorrento Announces Q1 Results).

The company's annual report, dated May 1, acknowledged the matter, saying its shareholders had the right to ask for the redemption of the Series A shares, which would be worth about $49 million. "If such request is made and [Sorrento] is found to have lawfully available funds to redeem all or a portion of such shares, it may have a material adverse affect on our business," the report states.

But is that their final answer?

Indeed, liquidity appears to be a concern. Sorrento officials say the company has plenty of cash, but it began the first quarter of fiscal 2002 with only $8.9 million in cash. That's $8.9 million left over from the total of $20 million it had last quarter -- $10 million in cash plus $10 million in funding it received during that quarter (see Sorrento Reveals Recent Investors).

Sorrento did, however, report having some $84 million in total assets for the quarter. This includes $26.9 million in inventory and $28.6 million in marketable securities, investments that could easily be sold for cash.

On the quarterly conference call, Sorrento's CFO Joe Armstrong said that the company burned through about $3.5 million a month during fiscal Q1. Light Reading confirmed with Armstrong today, through a spokesman, that Sorrento's cash burn is projected to be about the same this quarter but is expected to improve later in the year. That means, in a worst-case scenario, it could run out of cash within a couple of months and it would be forced to liquidate its investments and other assets.

The company says the answer to its liquidity problems is in a pending line of credit, said to be around $15 million, from Silicon Valley Bank. But, as of Tuesday afternoon, the company had not yet completed the process to secure that credit line.

Jim Dixon, Sorrento's chief executive, said the preferred shareholder matter was "not about not having the cash to make the [payment]. It's about being authorized by charter, by law, or by this agreement to be able to make such a disbursement." Dixon said Sorrento has hired SG Cowen Securities to work out some sort of agreement.

Sadly, the latest crisis comes just as Sorrento appears to be ramping up its product development and landing some decent customers. Its top five customers, which made up 75 percent of its sales last quarter, include 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.

At the Supercomm 2001 convention next week, Sorrento will host the first-ever public demonstration of its entire product line, including the firm's optical routing switch, the TeraMatrix, which isn't expected to ship until either the fourth quarter of fiscal 2002 or the first quarter of fiscal 2003.

Even as other aspects of Sorrento's business are improving, this latest inkling of financial instability comes at a time when Sorrento is trying to improve its reputation with Wall Street and convince financial analysts to begin monitoring (and, in essence, promoting) its stock. Even The Chapman Company's Joe Gladue, the lone analyst watching Sorrento now, wrote in a March 28 note that "the relatively capital-poor nature of Sorrento versus its competitors raises the risk of owning the stock."

The company cut its operating expenses to $10.7 million during Q1 from $15 million during Q4 fiscal 2001. It also cut 22 jobs -- about 8 percent of its staff -- at the beginning of this month.

Sorrento shares dropped 1.43 (10.73%) to 11.90, its lowest point since about a week ago, when news of the firm's improved earnings first broke. Over the past two weeks, Sorrento shares have gained over 100 percent, from $5. The company's shares had hit a 52-week low of $3.50 as recently as April.

- Phil Harvey, Senior Editor, Light Reading
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Scott Raynovich 12/4/2012 | 8:21:42 PM
re: Sorrento Teeters on the Edge Voyager,

The CFO himself says they are 2-3 months away from running out of money. That is a factual statement. Can the picture be any clearer?

The story also points out that preferred Series A investors are asking for their money back. Seems like a fairly important statement of fact to me.

"Teeters on the Edge," (my head) is meant to convey the delicate sense of balance between the two possibilities of turning profitable and running out of money (hence, "The Edge"). How is this not an accurate description of what's going on ? It's all in the financials. You just have to add up the numbers--they do the analysis themselves.
Voyager 12/4/2012 | 8:21:42 PM
re: Sorrento Teeters on the Edge Mr. Harvey,

Whew! In my opinion, your title alone, shows your seeming bias AGAINST, Sorrento Networks, FIBR. Why couldn't you have done a more BALANCED, FAIR and IMPARTIAL article about them?

You also failed to point out that the main reason the stock was down today, was most likely because the NAZ was down over 75 points today!

How about the very fact, that Sorrento Network's Metro DWDM products are MUCH better than Ciena's, which YOU don't mention here, but YOU YOURSELF had said, in an earlier article here:


Why the sudden 180 here?

Yes, FIBR can be a risky investment, but it seems based even on just your title, that your main goal, right from the start, is to give the impression that the doors for FIBR will close tomorrow.

I guess the part that really makes me wonder most why the attack mode by you ... is like I said, your title.

You start off with 'Sorrento Teeters on the Edge' and don't stop trashing the company from that point on.

Why the attack against FIBR now I ask? Is it because you are more 'pro' Ciena, and don't want Sorrento Networks to succeed?

All I'm asking ... is why the attack mode here by you.
fernphoton 12/4/2012 | 8:21:41 PM
re: Sorrento Teeters on the Edge Again another bias negatively slanted article against Sorrento. A quick list of others:

- "Sorrento, Hot Product or Hot Air"
- "Sorrento Puffs Itself Up For An IPO"
- "Osicom Investors Rebel"

You claim you are unbiased, but why it is always a negative slant with your articles and this company. Could you not have done a piece titled "Sorrento Has Record Quarter" or "Sorrento Improves Margins And Bottomline"? Aren't these just as newsworthy and accurate from the conference call? Yes, they are. However, in keeping with your history you chose the one issue which you could focus negatively.
My question to you is why is it this way everytime?
edzed 12/4/2012 | 8:21:41 PM
re: Sorrento Teeters on the Edge You forgot to mention that Sorrento owns 6.9MM shares of NetSilicon (NSIL-O $5.11). The investment is worth ~ $35MM at current prices !!!

No, it is not the same as cash. But it is also not the same as being up against the wall.

C'mon Light Reading, where's the research?
Scott Raynovich 12/4/2012 | 8:21:40 PM
re: Sorrento Teeters on the Edge Edzed: Question for your big brain. What happens when Sorrento tries to dump all those shares on the market. Does the price of NSIL stay the same?
fernphoton 12/4/2012 | 8:21:40 PM
re: Sorrento Teeters on the Edge One would have thought that a fair and unbiased report of a companies balance sheet would have mentioned the approximately $40 million in Net Silicon. I would think this would help tilt the scales a bit in their favor while they are "teetering".
Noorizen 12/4/2012 | 8:21:39 PM
re: Sorrento Teeters on the Edge Scott,

"The CFO himself says they are 2-3 months away from running out of money."

Could you point me to the specific link or reference for this statement that you have attributed to Sorento's CFO.

Thnaks in advance.
lightreader 12/4/2012 | 8:21:39 PM
re: Sorrento Teeters on the Edge it may if you smaller sales as need be!
fernphoton 12/4/2012 | 8:21:38 PM
re: Sorrento Teeters on the Edge

"The CFO himself says they are 2-3 months away from running out of money. That is a factual statement. Can the picture be any clearer?"

I'm going to call Joe Armstrong in the morning and share your above quote with him. In the meantime if you could post the link or excerpt from the conference call where Mr Armstrong said the company is 2 to 3 months away from running out of money I would appreciate it.

Thank You
Voyager 12/4/2012 | 8:21:37 PM
re: Sorrento Teeters on the Edge I don't know about you guys, but I've printed out a HARD copy of the article, and am also printing out hard copies of these quotes attributed to Mr. Armstrong, to send to IR and the company in the AM.


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