Entrada Faces Its Demons

Its almost a sure bet that when Entrada Networks(Nasdaq: ESAN) holds its annual stockholders meeting on Sept. 27 in San Diego, there won’tbe many happy faces, despite the splendid fall weather. Not many might even bother to make the trip now thatthe company’s stock market value is down to $1.2 million and the stock has sunken to 11 cents a share with little hope for a rebound.

Entrada, now nearly broke, has announced a restructuring into threesubsidiaries, each with its own management, sales force and financialstatements. The company figures this might attract investors to itsstruggling storage area network transport division. (See Disaster for Entrada? ).The division, named Torrey Pine after an endangered California tree, has yetto see any revenues. Its key product, the Silverline 222 SAN-over-IP switch, whichwas supposed to have been shipped by now, has been delayed until at leastDecember due to problems with its processing power.

The other subsidiaries are the adaptor card unit Rixon Networks and SyncResearch, which sells and services frame relay products. The company plansto move Rixon from Maryland to Irvine, Calif., closer to companyheadquarters.

Ironically, Entrada stated in a press releasethat these two divisions are profitable, despite the shifting focus. Yet as the company pares down itsstaff to 70 or 80 people, only half of the employees will be in thesedivisions. The other half will be in the money-losing SAN transportbusiness.

Throughout its last two quarters, Entrada has averaged $1 million permonth cash burn rate. As of July 31, the end of its second quarter, Entradahad only $1.8 million in cash left on its balance sheet and was burdened by$1.7 million in debt. For the quarter, the company lost $2.8 million, or 26cents a share, on $2.2 million in revenues. The company's history reflects a compiled $48 million deficit.In April 2000, Entrada brought in a new CEO, Kanwar Chadha. The companyimmediately enjoyed three quarters of revenue growth and positive cash flowthrough January 2001, the end of Entrada’s fiscal year. For those first ninemonths, Chadha was awarded a $93,000 bonus on top of his $141,000 salary.(He was also awarded options to purchase 500,000 shares of stock at therange of $3 to $4 a share, but with the options deep underwater, it’sunlikely he will ever be able to exercise them.)

Buoyed by his success, Chadha hired more sales personnel and increasedresearch and development spending just when information technologyspending was slowing to a crawl. Sales of the company’s legacy frame relayproducts plunged and anticipated increased sales of fast Ethernet LANproducts never materialized. Revenue fell from $8 million in the Januaryquarter to $1.3 million in the April quarter.

When the company’s earlier focus was frame relay products, it operatedunder the name Sync Research, now the name of its frame relay division. Last year, the name was changed to Entrada after the frame relay business hadslowed and Chadha began rebuilding the company around its newly acquired SANrouters unit.

Long-term holders of the company’s stock must be writhing. In 1995, thestock traded at a split adjusted $276 a share. Even then, the company had amere $35 million in annual sales and couldn’t manage to stay out of thered.

But in 1999, with revenues sagging and its frame relay products losingtheir luster, the company had a one-for-five reverse stock split. Thatboosted its sagging share price, which had plunged to 47 cents. Althougheach investor ended up with one-fifth as many shares, each share was worthmore than $2, which gave the stock some liquidity to attract institutionalinvestors such as pension plans and mutual funds. (Virtually everyinstitutional investor shuns penny stocks and many even avoid $2 stocks.)Now, it’s the same dilemma, only worse. To avoid being de-listed fromNasdaq, a company’s stock must trade consistently above $1 a share. Entradais currently at 11 cents, nearly 99 percent off its 52-week high of $8. Forany hope of that happening, Entrada needs to find some investors, keypartners or major customers by October 22. Companies that are de-listed arerelegated to the over-the-counter trading board where trading is thin andinstitutional investors are nearly nonexistent.

A company press release yesterday noted the restructuring will be "aimedat presenting a clearer picture to the investment community." Fortunately,it can’t be much bleaker than the current picture.

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com