CoSine still searching for acquisitions

CoSine Communications, the erstwhile vendor of IP service delivery products, is still searching for other companies to acquire, five months after its own shareholders successfully blocked an acquisition by Tut Systems. But the company has long since discontinued its products and emptied its inventory. And today it reported net losses of $31,000 for the third quarter and $1.5 million for the first nine months of the year.

At the end of September, the company had $23 million in cash and investments.

In July, CoSine’s board approved a strategy wherein the company would acquire one or more other business operations, though none have been identified so far, the company revealed today in filings with the U.S. Securities and Exchange Commission.

Last month the company’s former chief financial officer, Terry Gibson, rejoined CoSine as its new CFO and chief executive. Gibson resigned as CFO in January 2005 but has been a consultant to the company since. He also received a retention bonus equal to his 2004 base salary for staying with the company for the second half of last year. Upon his return, he has been granted options to purchase 100,000 shares of CoSine common stock.

Following an unsuccessful 2004, CoSine announced plans in January 2005 to be acquired by broadband equipment vendor Tut Systems for about $24.1 million in stock. That deal was challenged in court by CoSine’s own shareholders, who accused management of “self-dealing” and argued that CoSine should seek to acquire another business instead. As a result, the Tut deal was cancelled in May.

Since the end of last year, “all inventory had been sold, scrapped or written off, and there was no inventory awaiting customer acceptance,” the company said in its filings. “Our business [has] consisted of primarily a customer service capability operated by a third party.”

Nevertheless, the company earned more than $2.3 million in revenue so far this year. Only $216,000 came from products, the rest from services. And $785,000 of it (all from services) came in the third quarter alone. That $2.3 million came from at least six different countries, but the largest portion, $1.3 million ($457,000 in the third quarter alone), came from North America.

Steel Partners II, an entity that owns 24% of CoSine’s common stock and led the effort to block the Tut acquisition, has since spent more than $40,000 conducting a study to analyze the effect of the company’s past ownership changes on the availability of its net operating loss carry-forwards, which the company now hopes to apply to businesses it acquires. CoSine, which has agreed to reimburse the group for the cost of the study, has paid more than $22,000 of those expenses so far.

“CoSine’s redeployment strategy will involve the acquisition of one or more operating businesses with existing or prospective taxable earnings that can be offset by use of [CoSine’s] net operating loss carry-forwards,” company filings said.