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Sorrento Shares Fall on Financing News

Light Reading
News Analysis
Light Reading
3/26/2001

Sorrento Networks Corp. (Nasdaq: FIBR) has raised $10 million by selling shares directly to institutional investors, the company announced Monday (see Sorrento Completes Stock Placement). The private placement was first mentioned last week during Sorrento’s conference call for its fourth quarter in fiscal 2001 (see Sorrento Reports Earnings, Financing).

In the transaction, the company issued 1,525,995 shares of common stock and 381,499 warrants. The shares were bought at $6.55 a piece, says Joe Armstrong, Sorrento’s CFO. Also, Sorrento can buy back the warrants at a penny a piece within six months if the company’s stock price doubles, he says.

On news of the deal, Sorrento's stock price lost 0.78 (-10.12%) to close at 6.94.

No investment banks were involved in the transaction, says Armstrong. The company declined to name the private placement investors and the firm that structured the deal. Sorrento’s 8-K filing with the SEC, which may contain such information, also wasn’t available by press time.

Sorrento needs the funds to ramp up its GigaMux metro DWDM (dense wavelength-division multiplexing) boxes and EPC integrated access devices and ready its TeraMatrix optical switching router for shipping later this year.

In fiscal 2001, the optical equipment division of Sorrento, called Sorrento Networks Inc., saw its revenues grow to $26.5 million from $12.5 million, a 112 percent increase.

The parent company, formerly Osicom but now called Sorrento Networks Corp., reported that its revenues shrank to $44.6 million in fiscal 2001 from $68.4 million in fiscal 2000, a 34.8 percent decrease. Part of that revenue dropoff can be attributed to the divestiture of Sorrento's NetSilicon and Entrada subsidiaries, which contributed revenues for fiscal year 2000, but not fiscal year 2001.

So, if you treat Sorrento Networks Inc. and Sorrento Networks Corp. as one entity, the company has seen a 12.1 percent decrease in revenues from fiscal 2000 to fiscal 2001.

The challenge for Sorrento is to keep mining its GigaMux product for steady revenue growth until the TeraMatrix product has a chance to take hold in the market.

Sorrento has been shipping its GigaMux product since 1997 and now has “more than 20” customers, according to Armstrong. Those include Deutsche Telekom AG (NYSE: DT), Cox Communications Inc. (NYSE: COX), United Pan-Europe Communications NV (UPC) (Nasdaq: UPCOY), AT&T Broadband, Southern California Edison, El Paso Global Networks, Inrange Technologies Corp., and Belgacom SA.

The order sizes for the GigaMux, according to Armstrong, swing from around $400,000 to more than $5 million. During Q4 of fiscal 2001, Sorrento shipped to seven old customers and three new ones. During Q3, it shipped to one new customer and six repeats.

By the end of this calendar year, Sorrento’s TeraMatrix product should be finishing up lab tests and beginning revenue shipments, Armstrong says. That couldn’t come at a better time, given that Cisco’s own metro DWDM offering might represent a significant challenge to Sorrento’s GigaMux product by year’s end (see Cisco Marches Deeper Into the Metro).

In a conversation with Light Reading at OFC last week, Sorrento CEO Xin Cheng said that the metro DWDM market is big enough for all comers, but expressed a hint of concern at Cisco’s ability to commit a sizeable sales force to pushing its product.

Still dogging Sorrento’s stock is the lack of interest from Wall Street analysts, whose research reports can be a great source of ongoing publicity for “covered” stocks. Sorrento shareholders say until the company buys itself some coverage from a big bank, it can’t hope for much better valuation.

Cheng told Light Reading he’s aware of the concern. “These things take time,” he said. “We’re working on it.”

— Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com

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Techhead
Techhead
12/4/2012 | 8:40:33 PM
re: Sorrento Shares Fall on Financing News
Keep repeating to yourself, THE PRODUCTS WORK WELL, THE PRODUCTS WORK WELL, And WE HAVE MORE CUSTOMERS THAN YOU DO! 21 and you can only name 8
Guess who the others are, you mentioned terabeam so that is 9. As the products sell, the add on sales for the switch and management software will be easy.
bcbothun
bcbothun
12/4/2012 | 8:40:28 PM
re: Sorrento Shares Fall on Financing News
First, since I hasstled you after the last article let me say that this one was well written and balanced. Well done.

I have a question about this section though, especially the third paragaph.


"In fiscal 2001, the optical equipment division of Sorrento, called Sorrento Networks Inc., saw its revenues grow to $26.5 million from $12.5 million, a 112 percent increase.

The parent company, formerly Osicom but now called Sorrento Networks Corp., reported that its revenues shrank to $44.6 million in fiscal 2001 from $68.4 million in fiscal 2000, a 34.8 percent decrease. Part of that revenue dropoff can be attributed to the divestiture of Sorrento's NetSilicon and Entrada subsidiaries, which contributed revenues for fiscal year 2000, but not fiscal year 2001.

So, if you treat Sorrento Networks Inc. and Sorrento Networks Corp. as one entity, the company has seen a 12.1 percent decrease in revenues from fiscal 2000 to fiscal 2001."

Right now Sorrento Corp is made up of only two parts; Sorrento Inc and Meret Optical. Since Sorrento Inc increased its revenues by $14 million fromFy 00 to Fy 01, the only way that Sorrento Corp could have had an overall decrease in revs (if you really strip out all of the revs from divested units) is if Meret had a decrease of over $14 million. I am absolutely certain that Meret didn't have over $10 million in revs for 2000. I don't think they have done over $8 million in a year, EVER.

If Sorrento Inc GREW more than Meret shrank, and they are the only two parts of Sorrento Corp, how could Sorrento Corp have seen a decrease of 12%?

I think your sentence should have read likie this;

"All of that revenue dropoff can be attributed to the divestiture of Sorrento's NetSilicon and Entrada subsidiaries, which contributed revenues for fiscal year 2000, but not significantly to fiscal year 2001. The two remaining pieces of Sorrento Networks Corp. saw an overall increase of 60% from 20.8 million in 00 to $33.5 million in 01. (Actually, ESAN did contribute $11 million to FY 01 revenues since it was not merged with SYNC until Q 3.)

soothaandi
soothaandi
12/4/2012 | 8:40:25 PM
re: Sorrento Shares Fall on Financing News
Phil,

In your article you say "Sorrento shareholders say until the company buys itself some coverage from a big bank, it canGÇÖt hope for much better valuation."

Who are these "Sorrento shareholders" you are referring to? Are these major, knowledgeable greybeard shareholders you spoke to?

I hope you are not simply attributing these things based on anonymous posts on various threads like RagingBull and Yahoo! That would undermine everything else you say in your article, which is based on fact and sources who are in the know.

A clarification would be sincerely appreciated. Thank you.
DCITDave
DCITDave
12/4/2012 | 8:40:16 PM
re: Sorrento Shares Fall on Financing News
I think I got the numbers right. But let me see what's in the 10-K when it's filed and if a correction is necessary I'll make it.

Or, if Joe Armstrong calls back today I'll run the numbers with him.

Also, if you see that the 10-K is up before I do, will you phone me and let me know?

Thanks.

ph
DCITDave
DCITDave
12/4/2012 | 8:40:16 PM
re: Sorrento Shares Fall on Financing News
Good question.

I spoke with more than one Sorrento shareholder on the phone. One institutional and a couple of individuals.

If I were to use a message board post in any article I would have attributed it as such.

I can't give you the names of the Sorrento shareholders I spoke with. I can only tell you that they hold stock and don't work for the company.
DCITDave
DCITDave
12/4/2012 | 8:40:15 PM
re: Sorrento Shares Fall on Financing News
huh?
Honest_Ed
Honest_Ed
12/4/2012 | 8:40:12 PM
re: Sorrento Shares Fall on Financing News
What is going to be the next step, we all know that $10Million will not last very long. Will job cut be next on the plate? That should start from the top?
dave@dwdmr.com
[email protected]
12/4/2012 | 8:40:10 PM
re: Sorrento Shares Fall on Financing News
This transaction smells like a PIPE. If the money is from one of a small number of companies that specialize in this type of Financing the outlook for Sorrento is bleak.

Red Herring had an article on it recently and I take the liberty of quoting

"In general, the negative stigma attached to death-spiral offerings emanates from short-selling by investors that are aware of the dilutive effects of such a PIPE, according to Mr. Overstreet. The growing trend toward these alternatives highlights the perils that small public companies face when shopping for new funding. And for existing investors, the questionable history of such transactions shows the dangers of this last-resort financing."

So the most important question that Sorrento needs to immediately clarify is who is behind the financing.
Honest_Ed
Honest_Ed
12/4/2012 | 8:39:59 PM
re: Sorrento Shares Fall on Financing News
The financing could be from one of current Sorrento's investor. The financing will keep it afloat for the time being until it can find a buyer. The $2 Billion buyout will be out of question, a $80-100 Million may be possible.
natalie
natalie
12/4/2012 | 8:39:56 PM
re: Sorrento Shares Fall on Financing News
What is PIPE financing? Other than a risky alternative... (thanks!)
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