MAY 29, 2001
Sorrento Teeters on the Edge
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The past two weeks have marked another chapter in the strange history of Sorrento Networks Corp. (Nasdaq: FIBR - message board) investor relations. The million-dollar question: Have Sorrento investors finally hit the jackpot, or are they about to lose all their money to the house?
The happy faction of investors in the networking company formerly known as Osicom is celebrating last week's surprising quarterly numbers. Shares have doubled in the past two weeks, from just under $6, to their current price of about $12. The other, more skeptical portion of the Sorrento shareholder base is looking at the balance sheet and wondering, "Where's the cash?"
The concerns come partly from a recent flap involving the company and the holders of its Series A Preferred Stock -- a class of shares that pays dividends and holds certain privileges not held with common stock. Investors holding more than half the company's Series A Preferred shares have filed to sell those shares. But all they got in return was a letter saying, in effect, that Sorrento can't pay up until it's profitable.
During the quarterly earnings conference call last week, Sorrento addressed the matter by saying it can only redeem Series A Preferred shares using specific funds, such as "positive retained earnings and capital surplus." It's worth noting that Sorrento just posted a first-quarter loss of $5.8 million, or 45 cents a share. Sorrento's revenues grew 179 percent from the year-ago quarter, but the company is still several months away from profitability (see Sorrento Announces Q1 Results ).
The company's annual report, dated May 1, acknowledged the matter, saying its shareholders had the right to ask for the redemption of the Series A shares, which would be worth about $49 million. "If such request is made and [Sorrento] is found to have lawfully available funds to redeem all or a portion of such shares, it may have a material adverse affect on our business," the report states.
But is that their final answer?
Indeed, liquidity appears to be a concern. Sorrento officials say the company has plenty of cash, but it began the first quarter of fiscal 2001 with only $8.9 million in cash. That's $8.9 million left over from the total of $20 million it had last quarter -- $10 million in cash plus $10 million in funding it received during that quarter (see Sorrento Reveals Recent Investors ).
On the quarterly conference call, Sorrento's CFO Joe Armstrong said that the company burned through about $3.5 million a month during fiscal Q1. Light Reading confirmed with Armstrong today, through a spokesman, that Sorrento's cash burn is projected to be about the same this quarter but is expected to improve later in the year. That means it could run out of cash within a couple of months.
The company says the answer to its liquidity problems is in a pending line of credit, said to be around $15 million, from Silicon Valley Bank. But, as of Tuesday afternoon, the company had not yet completed the process to secure that credit line.
Jim Dixon, Sorrento's chief executive, said the preferred shareholder matter was "not about not having the cash to make the [payment]. It's about being authorized by charter, by law, or by this agreement to be able to make such a disbursement." Dixon said Sorrento has hired SG Cowen Securities to work out some sort of agreement.
Sadly, the latest crisis comes just as Sorrento appears to be ramping up its product development and landing some decent customers. Its top five customers, which made up 75 percent of its sales last quarter, include AT&T Broadband, Cox Communications Inc. (NYSE: COX - message board), Deutsche Telekom AG (NYSE: DT - message board), United Pan-Europe Communications NV (UPC) (Nasdaq: UPCOY - message board), and Inrange Technologies Corp.
At the Supercomm 2001 convention next week, Sorrento will host the first-ever public demonstration of its entire product line, including the firm's optical routing switch, the TeraMatrix, which isn't expected to ship until either the fourth quarter of fiscal 2002 or the first quarter of fiscal 2003.
Even as other aspects of Sorrento's business are improving, this latest inkling of financial instability comes at a time when Sorrento is trying to improve its reputation with Wall Street and convince financial analysts to begin monitoring (and, in essence, promoting) its stock. Even The Chapman Company's Joe Gladue, the lone analyst watching Sorrento now, wrote in a March 28 note that "the relatively capital-poor nature of Sorrento versus its competitors raises the risk of owning the stock."
The company cut its operating expenses to $10.7 million during Q1 from $15 million during Q4 fiscal 2000. It also cut 22 jobs -- about 8 percent of its staff -- at the beginning of this month.
Sorrento shares dropped 1.43 (10.73%) to 11.90, its lowest point since about a week ago, when news of the firm's improved earnings first broke. Over the past two weeks, Sorrento shares have gained over 100 percent, from $5. The company's shares had hit a 52-week low of $3.50 as recently as April.
- Phil Harvey, Senior Editor, Light Reading
lightreading.com |
