Reverse Split Fuels Sorrento Rally

Shares of metro DWDM equipment maker Sorrento Networks Corp. (Nasdaq: FIBR) have been on fire lately, but, as the old folk say, a mansion might not be worth much if it's on fire.

Sorrento's stock was up $4.56 (52.78%) to $13.20 in afternoon trading on Monday. That follows a pop of nearly 90 percent last Friday.

The meteoric rise is attributable to a couple of factors: The company did a one-for-twenty reverse split of its shares last week (see Sorrento Issues Reverse Split). The reverse split reduced the number of shares of common stock outstanding to 885,000 from about 17.7 million. Sorrento's float, or the number of shares it has available for trading, is 600,000 shares. This is a small float, which makes it easier to raise the stock's price and, since each buy or sell means more, makes the stock more volatile.

One thing that might be happening here, according to one Sorrento shareholder, is a short squeeze. The rise in price of Sorrento's shares may have caused some short sellers to liquidate and cover their position by purchasing the stock, which pushes the price higher.

But the spectacular rise in recent days may disguise the fact that this is still a company with unresolved shareholder and management issues whose value has been deeply discounted. Even at its heightened stock price, Sorrento is trading at below cash, meaning its market capitalization ($10 million) is less than the cash and investments ($22 million) it has on hand.

Sorrento shareholders are anxiously waiting for the company to lay out a comprehensive capital restructuring plan, which will exorcise a few of the company's old demons and put it in a position to raise more funding. Nasdaq has given Sorrento until Dec. 9 to submit a plan that can be implemented by Jan. 8, 2003 (see Sorrento Tries to Stay Listed).

For more than a year, Sorrento has been doing another sort of restructuring, thanks to several months of shareholder pressure. It has purged its controversial management team and ousted its CEO, Xin Cheng (see Cheng Out at Sorrento). It also infused the board of directors with new faces and independent leadership.

However, some ghosts of Sorrento Past remain. For one thing, the company is still paying some of its ousted managers "consulting" fees, thanks to contracts put in place by the ancien régime.

But with the capital restructuring, one issue that is expected to be resolved is Sorrento's tiff with its Series A shareholders. More than a year ago, a group of investors filed to sell their Sorrento shares but got nothing because Sorrento couldn't fund the "put" the shareholders requested. (A put is an option contract that gives the owner the right to sell a specific amount of a security at a specific price within a specific time.)

The company is also wrestling with what to do about the convertible debentures it sold in a private placement funding round back in August. The debentures -- convertible bonds that can be converted into stock -- are due August 2, 2004, and have a face value of $32.2 million, which is more than Sorrento can afford.

The metro DWDM company reported $4.5 million in revenues for its quarter ended July 31 (see Sorrento Revenues Fall). By contrast, competitor ADVA AG Optical Networking (Frankfurt: ADV) is expected to report revenues in the $20 million range during its next quarterly report.

Sorrento did not return calls for this article, but the company's new managers appear determined to put out their fires and start rebuilding. "I wish to reassure all of you on this call that Sorrento's management is committed to the survival of this company, and that we have a plan to weather this down market and to emerge stronger than before," said Sorrento CEO, Phil Arneson, in a September conference call. "We firmly believe that at current revenue levels, and given our expected burn rate, we have the cash resources to make it through the storm."

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