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Nasdaq Delists Riverstone

Starting tomorrow, shares of Riverstone Networks Inc. (Nasdaq: RSTNE) stock will no longer be traded on the Nasdaq exchange.

The company says it plans to appeal the delisting decision, which it announced yesterday after the market closed. The appeal won't stop Nasdaq’s delisting Riverstone in the interim, however.

On Monday, Riverstone missed a deadline for filing amended financial statements and said it was seeking an extension from Nasdaq (see Riverstone Asks Nasdaq for More Time). The company admitted last month that it had overstated 2002 revenues by as much as $85.5 million. It also said it may have also overstated as much as $13.3 million in revenues for 2003 (see Riverstone Rethinks Revenues and Riverstone Oops! Level Rises).

Riverstone's shares will likely continue to be quoted by traders on the so-called "pink sheet" for over-the-counter stocks that don't match the Nasdaq criteria.

At least one analyst, Erik Suppiger of Pacific Growth Equities Inc., has dropped coverage of the company, citing news of the delisting and concerns over the uncertainty of the company’s stock. “We are concerned that the company’s current cost structure is excessive for its revenue base and we believe the appropriate steps are not being taken to minimize cash burn,” writes Suppiger in his final investment note on the company today.

Suppiger says revenues need to be about $40 million to $45 million a quarter to achieve breakeven cash flow, but the company only generated about $12.7 million in the May quarter. It’s highly unlikely the company will be able to achieve these revenue targets in the foreseeable future, he says, especially now that the company will be delisted from Nasdaq.

“I think the delisting will impact customer confidence,” said Suppiger in a telephone interview. “It’s definitely an event that will make customers more leery about the company’s financial situation. Competitors will also use this to their advantage to put some fear into customers.”

Riverstone also faces the risk that it could be forced to repay its convertible debt. Currently, the company has a large stash of cash, roughly $327 million, or $2.71 per share. But Suppiger warns that if the company is forced to repay its debt, it could spend about $132 million of its cash, leaving about $195 million, or $1.52 per share. The company is still burning through about $10 million to $15 million a quarter.

Riverstone's accounting practices also are being investigated by the Securities and Exchange Commission (SEC). With all these factors lined up, Riverstone’s stock is too risky an investment, writes Suppiger.

The company’s stock was trading down $0.20 (16.39%) to $1.02.

— Marguerite Reardon, Senior Editor, Light Reading

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