Sorrento Restructures, Trims Losses
The company can't be too lax, however, as its sales have softened and its revenues dropped to about half of what they were a year ago. Also, though the company is reporting an uptick in orders, some $5 million worth of its backlogged orders stem from a two-year old startup with no earnings history in which Sorrento has taken a $5 million equity investment.
Still, Sorrento is cleaning its house at a furious pace, and its restructuring progress has its executives glowing with optimism. "Our objective is to achieve cash flow breakeven by the end of the third quarter of 2003," says CEO Phil Arneson.
For its third quarter of fiscal year 2003, ended October 31, 2002, Sorrento reported revenues of $5.5 million, compared with $10.1 million for the year-ago period. It added two new customers during the quarter, bringing its list of direct customers to more than 25, with more than 1,600 nodes deployed worldwide.
The company reported a net loss of $8.86 a share, or $6.9 million, compared with a net loss of $22.24 a share, or $15.9 million, as reported during the year-ago quarter.
Sorrento says it took orders with bookings exceeding $13 million during the third quarter. A substantial contributor to bookings included $5 million in orders from Unlimited Fiber Optic Communications Inc. (UFO), a San Francisco-based startup that aims to build metro optical networks for enterprise customers.
UFO has raised $22.5 million in funding to date, $5 million of which came from Sorrento, which UFO picked to be the sole supplier of DWDM and CWDM gear for its networks. Jeff Phillips, Sorrento's VP of corporate development, sits on UFO's board.
Thanks to a restructuring agreement it reached with bondholders and Series A shareholders, Sorrento has set things in motion to erase a huge chunk of its $81 million in debt and to allow it to raise working capital in the future. The company announced it would be giving about 87.5 percent of the company's common stock, on a diluted basis, to its Series A shareholders and convertible debenture holders to accomplish the restructuring. Sorrento expects to get common shareholder approval of the proposed restructuring in a proxy that will be issued early in 2003.
The debt left after the restructuring will be a $12.5 million convertible debenture, with a 7.5 percent interest rate that will mature in August 2007. The company will also simplify its corporate structure by merging all of its subsidiaries into Sorrento Networks Corp., the publicly traded entity.
The downside comes for existing common shareholders, who stand to be substantially diluted. After the restructuring, Sorrento's existing shareholders will keep 7.5 percent of Sorrento's common stock and will get warrants to buy about 5 percent of the remaining stock. That additional stock is exercisable at a 10 percent premium over an average closing price before the restructuring is finished.
Sorrento's gross margins during the quarter were 17 percent, down 33 percent from the year-ago quarter. It has $13.7 million in cash and investments, and that included a $5 million prepaid order from one customer, likely UFO.
The company says its revenues per employee have climbed to $40,000 from $29,000 in just nine months. Arneson, however, says much more improvement is needed. "I will not be satisfied until we see this [revenue per employee] ratio well over $100,000."
Sorrento shares closed up $0.09 (0.9%) to $10.06 in trading on Thursday, before the news was announced.
— Phil Harvey, Senior Editor, Light Reading