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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dlharding 12/4/2012 | 8:17:36 PM
re: Sorrento Teeters on the Edge Notice that they come up with hot button pushing articles. Think it has to do with ad revenue declines? Look at all of the LR house ads that cover the pages, more than half of them are for LR events, pages, or revenue generating services. Would seem to raise an honest question about LR's health and stability.

Oh no, now I am starting to sound like a LR reporter.....making trouble starting rumors and passing innuendo as the basis for my story.

Maybe we can get a quote from Clavenna....
mirage 12/4/2012 | 8:19:19 PM
re: Sorrento Teeters on the Edge Just a question, how many articles were written about employees leaving other companies. I CAN'T FIND ONE! Yet this RAG magazine decides to write an article about 2 engineers leaving Sorrento. Come on people, its fairly obvious they have a problem with Sorrento. Did they cover the Terabeam announcement? Nope. Why? Its only the hotest wireless company out there and its CEO is the former head of AT%T wireless. Oh yeah, I forgot, they picked Sorrento so why should that be news. Lightreading.com RAG RAG RAG. If Sorrento advertised with them more, I'm positive the articles would improve.

russ4br 12/4/2012 | 8:19:45 PM
re: Sorrento Teeters on the Edge May it be that the folks at Sorrento spent so much time and energy fighting at this humble chat room that they FORGOT that SuperComm is happening next week?

Can we say "Lack of Focus" or "Not Executing" or "Keep your eyes on the ball!!!" ?????

Rephrasing the headline as one of Sorrento-¦s die-hard supporters suggested: It-¦s Break or Break-Trough ...

good luck at the show!


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Previous post by lo_mein_noodles #87

Noorizen....I'm sorry to break it to you but here's the headline from the FIBR press release...

"Corning and Sorrento Networks to Demonstrate OC-192 Metro DWDM Solution at SUPERCOMM `01"

I guess this comment by you shows A)you have no idea what you are talking about, or B) Sorrento has no idea what they are demonstrating at the show?? or C) back to those series A shareholders that can't cash in their stock because Sorrento says they don't have the cash to do it...

"This demonstration of Sorrento and Corning products working together to set new standards (...error free transmission of OC-48 (2.5 Gbps) over 925 kilometers with directly-modulated lasers and without dispersion compensation) is important as it can be a compelling selling point for their respective products."

Whoop de do to the power of three...
lghtswtch 12/4/2012 | 8:19:57 PM
re: Sorrento Teeters on the Edge cfcaller: I am not concerned with negative articles by themselves - or (ex)employees that are baring their souls. However, where there are violently opposing camps, that's where I think there may be fundamental problems. Even then, I use it as one of many inputs.

russ4br 12/4/2012 | 8:20:06 PM
re: Sorrento Teeters on the Edge Voyager said:

"Be it real, or imagined on my part, it still FEELS the same way."

=> Voyager, please keep in mind that it's hard for us on this message board to keep in sync with you INNER WORLD OF FEELINGS. I thought we were discussing the financial situation of Sorrento Networks - which indeed don't look very good ...

cfaller 12/4/2012 | 8:20:11 PM
re: Sorrento Teeters on the Edge Good point! I didn't think of that, that's probably a pretty good strategy...

An earlier poster (fk) mentioned how strangely similar reactions (i.e. message board flames) have occurred with negative articles about Cisco, Corvis, and Sorrento. Would you go so far as to advise to stay away from all three of these companies?

For the record, I would...
Voyager 12/4/2012 | 8:20:16 PM
re: Sorrento Teeters on the Edge Lo_mein_noodles,

No, that is not what I said. Just said that I think that Sorrento Networks, like some persons in life, are survivors. In other words, when life knocks them down, they get back up and keep on going, instead of giving up.

Let's just say also, that we have a difference of opinion here. I'm a telecom Tech, I like Sorrento's Metro DWDM product, and feel it is much better than Ciena's product (at least right now), which I've worked on.

Only think I have ever had against Sorrento, was it's management (which in all honesty, sometimes has driven me and many of the FIBR longs crazy in the past I think). HOwever, based on the last CC, Mangement seems to finally be (now) going in a positive (IE: Right) direction.

As for the NSIL shares, I don't think it will come down to that. All I meant was that if it came down to the choice of the parent company closing it's doors for good, or selling NSIL shares, they'd sell the NSIL shares.

Lastly, like I said, I differ in my opinion about Sorrento Networks than you do. It doesn't mean that your view is less valid than mine is, just that it's different. Same with the author of this article. I don't agree with some of his opinions, but the way the article is now, it is a lot more fair and IMO, less slanted in a neg way, than the first version was.

As the old saying goes, "I may not agree with your opinion, but will fight to the death for your right to say it."

I also claim that right for myself as well.

Best Wishes ....

JMHO, FWIw ....

lghtswtch 12/4/2012 | 8:20:17 PM
re: Sorrento Teeters on the Edge Scott - Let femphoton and voyager post... their rantings and intimidation are counter-productive. If before we would not have given it a second thought, their actions will remind us longer than otherwise that maybe there is something wrong with the company they represent. I for one follow the bulletin boards to see what companies may be in trouble. Good companies don't draw attention.
lo_mein_noodles 12/4/2012 | 8:20:20 PM
re: Sorrento Teeters on the Edge So Voyager,
I guess what you are saying is, as long as Sorrento can continue to find new suckers, I mean investors, they will be around a long time. hmmmm Brilliant, just Brilliant, why didn't I think of that? Oh yeah, because Osicom thought of it first. i wonder what the new name of the company will be when they roll over again. Since you state how easy they can raise money by selling NSIL stock....why don't they do that to pay the series A shareholders that are trying to get their money back, now??
Lastly, isn't it funny how "uncanny" and "unethical" sound so much alike?
PS...I can smell a whacked out femphoton blast coming any second now....Blow fem blow!!!!
Voyager 12/4/2012 | 8:20:20 PM
re: Sorrento Teeters on the Edge Cfaller,

No, I'm not saying that one way or the other, though I don't remember seeing Mr. Gladue saying as such. However, just because I don't remember seeing it, doesn't mean I he didn't.

All I was saying, was that it appears that his views, at least now, are more positive, than what the article implies.

I also say again, to be honest here, that if the Article had come out in the form it is now, I wouldn't of been ticked off at it, like I was with the first version of it. This because while I might not of agreed with it, the addition of those few sentences, made a world of difference.

I also still don't like the title ... but heck, I'm not the author either.

Are they in a tight area in regards to money that makes them a more risky investment, yes. However, I don't feel that Sorrento Networks has a 'problem' here to the degree that the article implied, ESPECIALLY the first version of the article, which gave the impression that FIBR could close their doors and go into bankruptcy at any time. This, because of the very fact, that they can if need be, sell shares of NSIL to get cash, if it came down that.

Add to that, the very fact, that you have to admit, that Sorrento Networks (FIBR) has an uncanny knack at surviving. IMO, many other companies, when faced with the same obsticals that FIBR has faced, would of went belly up a LONG time ago. That is also why I feel that Sorrento Networks, in one form or another, will be around for the duration.


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