Sorrento Shares Fall on Financing News

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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[email protected] 12/4/2012 | 8:39:52 PM
re: Sorrento Shares Fall on Financing News Hi Natalie

PIPE stands for (private investments in a public entity).

Here is web site that is focused solely on this area. It also has explanations of what to look for in a PIPE and how its structure can fundamentally affect the value of a company.


Sorrento's management need to provide clarity on this issues so that unsophiticated investors do not get badly burnt.

I for one will assume that until Sorrento's management provides basic information on the transaction that it is because the terms are onerous and when they become public it will lead to a further dramatic fall in the share price.
bcbothun 12/4/2012 | 8:39:45 PM
re: Sorrento Shares Fall on Financing News I dug out the old 10Qs and 10Ks today to look this up and it really is harder to figure these splits than it should be. Part of the trouble is that Meret and Sorrento Inc were once part of a single division called Optical Networking. That old Optical networking unit is the Sorrento Corp of today.

In Fy 00 Sorrento Corp did $68.4 Million in revs.
In Fy 01 Sorrento Corp did $44.6 Million in revs.

The $68 included $28.8 from ESAN, $20.1 from NSIL and $19.5 from Optical networking, $12.6 of which was Sorrento Inc.

The $44 included $11.8 from ESAN, $26.5 from Sorrento Inc and $6.1 from Meret.

The best apples to apples numnbers would be the $19.5 Optical networking number and the $32.6 Sorrento Inc plus Meret number, IMHO.

That would clearly show flat numbers for Meret and big increases for Sorrento Inc, but an overall uptrend for the two remaining parts of Sorrento Corp.

optical illusion 12/4/2012 | 8:39:44 PM
re: Sorrento Shares Fall on Financing News It's a tough call to say PIPES are necessarily bad. Large companies issue them frequently for project financing. Time Warner issues private equity for its various subsidiaries (some of which it doesnt even control) all the time.

Also, to say PIPES automatically have onerous terms is not necessarily the case. Sometimes companies issue them exactly to avoid dilutive issues (with respect to voting) that they would face in the public markets.

Sorrento may be paying a dividend on the privately placed paper, but mgmt may have done it to preserve their voting control.

No, it may not be great for the investor, but it may serve management's interest and the long term viability of the company.

Finally, not everyone refers to this garbage paper as PIPES. PIPES is a term used by fly-by-nite bankers who finance flimsy companies. Reputable companies tend to think of the buyers of this paper as the suckers, not the issuer.

Techhead 12/4/2012 | 8:39:39 PM
re: Sorrento Shares Fall on Financing News this isn't a death sprial, it is straight shares, nothing specialexcept if you think about it, they have an advantage of being able to buy back the warrents for a penny! My guess is that the filing will show the dollars came from a a private source that they used before, so nothing sinister.
[email protected] 12/4/2012 | 8:39:33 PM
re: Sorrento Shares Fall on Financing News We do not have enough information to say what the structure of the deal is.

It is unusual that a company will not reveal who provided the funding as well as the exact terms. That suggests that there is a further foot to drop.

From teh collapse of the share price I would expect that the PIPE investors have been shorting the stock which is classic death spiral PIPEs.
flanker 12/4/2012 | 8:39:31 PM
re: Sorrento Shares Fall on Financing News Dave:

Stick to recruiting, you have no idea what you're talking about. Post IPO private equity has been around since the dinosaurs. If they didn't file an 8-k yet, it means they don't thinks its a material event.

[email protected] 12/4/2012 | 8:39:29 PM
re: Sorrento Shares Fall on Financing News Having worked in financial Services for 6 years (including Wall Street) before getting into headhunting I think maybe I know what I am talking about. Ever even been on a Trading Floor

Thought so.

Maybe something causing a 40+% drop in the value of a company is not a material issue to you but on Wall Street that is known as "road kill"

The shorts are going to be all over FIBR
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