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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
http://www.lightreading.com
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Voyager 12/4/2012 | 8:21:37 PM
re: Sorrento Teeters on the Edge Scott (or Mbstockjock, as I think you posted this over on the Yahoo board as well),

Like I said, I don't have a problem with someone stating facts, in a fair and impartial article, even if the facts are 'painful' to see in print.

However, the Title tends to set the tone of an article, it always has, and it always will.

This because the Title is the FIRST thing that the reader sees, and thus, forms a LOT of the impression they have, as they read the article, in other words, and as I said before, it sets the tone for the article itself.

With all the companies falling down around our ears of late, something titled 'Teeters on the edge' along with what was in the rest of the article, give the impression that FIBR is about to go under ANY second now.

If I remember correctly, the CFO also said in Wednesday's CC, that they are working with a bank to get a line of credit, and that they were pretty close to doing so.

Also, their revenue INCREASED this last (first) quarter, over the same quarter last year. If I remember correctly, 1Q this same time last year, was -1.47 a share or something close to that. This time it was a loss of less than 50 cents a share (don't have the exact figures off the top of my head right now).

One thing I will say for FIBR, is that they are survivors. They have had things thrown in their path, that would of DESTROYED lesser people and companies, and yet THEY have survived. They just keep on going, when others would of given up LONG ago.

They (Sorrento Networks) seem to have IMO, an uncanny knack of getting through pretty much anything (any obstical) thrown their way, and IMO, they will get through this as well... the article and the financing issues BOTH.

Sorry, while I could be wrong here (and I don't think I am), IMO, I smell the shorts hand in this, and it wouldn't be the first time that it's been done to FIBR in this mannor either.

The shorts couldn't scare the longs or potential investors via the message board, they couldn't do a bear attack on the stock, to drive it down and STAY down, so here they are, resorting to this kind of thing IMO.

I'm tweeked right now, and I'm sure that too shows as well. I'm so sick and tired of the bullies picking on FIBR, that I'm seeing RED big time right now.

Like I said, sure, he could of said that financing was a concern, but then he could of went on to do a fair and balanced report on them, with a more fair title to start off with.

His title says it all IMO, what his intent was ... to try to cut FIBR down.

Man, I wish I had a ton of money right now ... I'd go out and start buying the FIBR stock up left and right for two reasons.

1) Most important - Because I believe in the company, and also feel they've finally gotten their management issues behind them.

2) Revenge - To really tweek off the shorts, but good, and give them a taste of their OWN medicine.

JMHO, FWIW .....

Voyager
Scott Raynovich 12/4/2012 | 8:21:37 PM
re: Sorrento Teeters on the Edge From the story:

"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."

Voyager 12/4/2012 | 8:21:36 PM
re: Sorrento Teeters on the Edge Author: Scott Raynovich Number: 10
Subject: Re: You sure seem have it 'in' for Sorrento, don't you? Date: 5/29/2001 9:35:59 PM


From the story:

"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

---------

So, where do you (AND the author, who said at the end of that paragraph this:

"That means it could run out of cash within a couple of months.") get that the company will be out of cash in 2-3 months? Even there, it says that the company said that the 'burn rate' is expected to improve later in the year. Plus, if I remember the CC, they've cut expenses and such.

JMHO, FWIW ....

Voyager
fernphoton 12/4/2012 | 8:21:36 PM
re: Sorrento Teeters on the Edge So you post on Raging Bull under the user name "mbstockjock". Oddly enough your posts seem to all be of the negative variety. Could it be that you have a personal reason to write the kind of negative articles you do? Could it be a short position? I wonder if the editors of lightreading know that there is the possibility that one of their writers has been doing negative pieces on companies in which he/she has short positions and are looking to profit from their positions as "journalists".
I'm going to contact any and everyone that I can at Lightreading. However, first I'm going to inform Sorrento management, investor relations, and then the SEC.
Noorizen 12/4/2012 | 8:21:34 PM
re: Sorrento Teeters on the Edge I enjoyed your article on Sorrento. I especially appreciate your ability to make otherwise mundane stories about technology companies very interesting, colorful, and a pleasure to read. This is a great quality that most technology writer lack. Thank you!

I have been following Sorrento fairly closely, and actually listened to their recent conference call. Your observations may be quite correct that the company seems poised to make some splash in the metro optical networking space. They seem to be expecting contracts from additional customers including carries class service providers that could allow them to grow quite rapidly.

Your comments about the generally poor capital situation of the company are a fair reflection of the reality. However, your overall conclusion - Sorrento Teeters on the Edge GÇô may not be a fair representation of the situation. At least based on my reading of the financials and listening to the conference call.

The loss for the Q1 was approximate $5.7 mil. The company reported approx. $9 mil. in cash. At the conference call, the company provided guidance for growing revenues and increasing gross margins, on quarter over quarter basis.

The inventory increase by $12 mil. was explained as shipments by the supplier ahead of schedule, and as such representing cash equivalents that would cover the cost of sales for this current quarter.

The company owns about 7 mil. shares of NSIL presently trading around $5. Sure, if the company dumped all shares in short period of time, the price of NSIL will become depressed. However, this investment can be systematically liquidated raise cash if needed. Even at an average price of $2, this represents enough cash to finance losses for two more quarters.

All this, though suggests a relatively weaker capital structure, still does not reflect a company that is teetering on the edge.

Here is my question: In reaching your conclusions, were you able to consider the company's ownership of 7 mil. shares of NSIL, and the specific inventory situation, in additions to the available cash?

The situation with the Series A preferred shares is relatively simple in my opinion, and does not reflect necessarily negatively on the company. Actually, it could very well be a indication of better fortunes for Sorrento in the near future.

The preferred shares were purchased in the hope of a hot IPO. Since no IPO is on the horizon, that investment is practically dead money. The preferred shareholders also know that they cannot redeem their shares unless there are positive retained earnings, and therefore conversion to the parentGÇÖs common is the only practical and available choice. Such a conversion will make their investment liquid, and they will be able to benefit from any price appreciation in the parentGÇÖs stock.

Thanks again for continuing to provide interesting stories on companies in the optical networking space.


Voyager 12/4/2012 | 8:21:34 PM
re: Sorrento Teeters on the Edge Check this paragraph out here:

The three investors bought Sorrento shares at $6.55 a piece. Sorrento's filing says it can buy back the warrants at a penny a piece within six months if its stock price exceeds $13.11 and stays there for twenty consecutive trading days (see Sorrento Shares Fall on Financing News ). At midday today, Sorrento shares were down $0.65 (10.6%) to 5.53.

from here: http://www.lightreading.com/do...

So, if I'm reading this right ... if FIBR closes for 20 days at or above $13.11 a share, the Warrent holders LOSE money on the deal. Instead of getting $6.55 a piece, they only get 1 cent a piece.

I smell a rat here IMO, as we were moving in that very direction ... of closing at or above $13.11 a share.

JMHO, FWIW ....

Voyager
Voyager 12/4/2012 | 8:21:33 PM
re: Sorrento Teeters on the Edge Good, and FAIR post here. States the risks, but also is fair at the same time. Why couldn't Mr. Harvey done the same thing?

JMHO, FWIW ....

Voyager
Noorizen 12/4/2012 | 8:21:33 PM
re: Sorrento Teeters on the Edge In your earlier post (post no. 2) you commented:

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

I requested a substantiation of this statement that you had attributed to Sorrento's CFO. In response you posted the following excerpt from the lightreading story under discussion:

"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."

No where in the above noted excerpt do I see what you had attributed to the CFO, specifically, "The CFO himself says they are 2-3 months away from running out of money."

May be you did not understand my question. Let me try once again. Could you point me to the specific link or reference for this specific statement that you have attributed to Sorrento's CFO.

Again, thanks for the indulgence.
Scott Raynovich 12/4/2012 | 8:21:32 PM
re: Sorrento Teeters on the Edge fernphoton: sorry to dissapoint, but mbstockjock is not me. I do not post on Raging Bull. Also, as stated clearly in our ethics policy, I do not own stock in companies we write about. I do not have any position in Sorrento stock, nor any other of the stocks in the LR Index.

Editorial disclosure is here:

http://www.lightreading.com/ab...
denny_g 12/4/2012 | 8:21:31 PM
re: Sorrento Teeters on the Edge Did you ever stop to think that if the Series A holders thought the company was about to go extinct, there would be NO way they could get their money back. Don't you think they are smart enough to realize that if there was no way they could get their money back, there would be no point in even asking for it? Wouldn't that be a pretty stupid and futile gesture? So wouldn't it seem likely that they do see some reasonable means the company could satisfy their demands?

And if the market thought they would likely be flat broke in 3 months, do you think the stock would have risen so far on such strong volume. Do you think it would have gone up at all? Why don't you write a little article about why the stock went up, AFTER all that info came out? BTW, what the heck is the point of your article in the first place?
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