x
Financial

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
Nuetrino 12/4/2012 | 9:24:15 PM
re: Reverse Split Fuels Sorrento Rally Your right in illustrating the absolutely wacky executive structre and inept team at Sorrento.

Remember "OSICOM"? Where it all began for Sorrento - that was the most caustic group of managers I've ever seen. Sorrento actually had some decent technolgy in the early days of WDM - they blew it!!! The shareholders have a good case in blasting the leadership of Sorrento - these guys are forever clueless and squandered a lot of other peoples money.
TheChief 12/4/2012 | 9:24:24 PM
re: Reverse Split Fuels Sorrento Rally 12 VP's add only $750,000 to the burn rate at the Maximum.
==================================================

12 VP's @ $750,000 = $62,500. I hope this in jest!
bcbothun 12/4/2012 | 9:24:25 PM
re: Reverse Split Fuels Sorrento Rally "That alone contributes $1.5 million to the burn rate at the minimum."

12 VP's add only $750,000 to the burn rate at the Maximum. So who are they? If you know they exist, you should be able to name them all and their positions.
GhostBuster 12/4/2012 | 9:24:31 PM
re: Reverse Split Fuels Sorrento Rally Oooops, a typo! It could be >$3 mil because no senior VP is willing to accept a job with such a low pay :-)), The "poor" engineers have to work 3x as hard as ADVA to combat the high overhead
GhostBuster 12/4/2012 | 9:24:32 PM
re: Reverse Split Fuels Sorrento Rally yes, but do you know there are over a dozen senior VPs at Sorrento for a company of only 100 head counts? That alone contributes $1.5 million to the burn rate at the minimum.
denny_g 12/4/2012 | 9:24:38 PM
re: Reverse Split Fuels Sorrento Rally You wrote an article saying the stock is up and you don't know why and call that journalism? You rehash old news from earlier articles and reference them and call that journalism? You are the laziest pseudo-reporters I've ever seen. You didn't even bother to mention their recent claim of new European orders. Why don't you get off your butts and sniff around the company for yourselves? Why don't you find out who their customers are and whether they are ordering? Why don't you check into their head count and find out if they are dumping people like everyone else or not? Either way, it would give you a good idea of their business.

BTW, you also forgot to mention that 80% of ADVA's revenues come from European enterprise customers. They haven't suffered from the telecom collapse because they don't sell much to telecoms, just like CSCO. Maybe you could even do a little digging on their customers.

Mech4 12/4/2012 | 9:24:40 PM
re: Reverse Split Fuels Sorrento Rally Any possibility of some unannounced business?

LR should be digging just a bit deeper here.
bcbothun 12/4/2012 | 9:24:42 PM
re: Reverse Split Fuels Sorrento Rally Phil,

"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 - message board) is expected to report revenues in the $20 million range during its next quarterly report."

Isn't this comparison a little unfair?

You left out The non-metro DWDM portion of Sorrento's revenues (yes, I know they are small, less than $1 million) but included ADVA's non metro DWDM revenues which are huge. ADVA claims to be the third largest Metro optical company behind Nortel and ONI, but the last numbers I saw listed them also behind CIEN, FIBR and CSCO. I think if you just compare apples to apples Sorrento's revenues actually stack up pretty well.
your_mama 12/4/2012 | 9:24:50 PM
re: Reverse Split Fuels Sorrento Rally that can account for revenue differntial to
an extent....
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE