CoSine: Not Ready to Sell
Two weeks ago, after the company’s poor first-quarter results were reported, Mellon HBV Alternative Strategies LLC, which now owns over 6 percent of the company, filed a Schedule 13-D with the Securities and Exchange Commission (SEC) demanding that the company retain an investment bank to look for a buyer or begin the liquidation process before the shareholder meeting scheduled for May 6 (see CoSine Investors Lash Out).
In the letter, filed with the SEC and sent to CoSine’s management and board of directors, the firm threatened to “seek stockholder consent to call a special meeting to remove one or more members of the board of directors and to replace such person(s) with person(s) nominated or supported by us who would undertake their fiduciary responsibility to act in the best interests of CoSine and its stockholders, which may include a sale or liquidation of CoSine, among other transactions.”
May 6 has come and gone, and CoSine has not hired a bank and has reiterated its commitment to move forward.
“Mellon is a minority investor in the company,” David Messina, vice president of marketing for CoSine told Light Reading in an interview today. “They clearly have their own opinion, but we will continue to execute on our business plan, which is to march toward profitability.”
According to sources attending the shareholder meeting yesterday, investors, including Mellon, questioned the company about its burn rate and operating expenses. The company has been spending about $9 million in cash per quarter, and last quarter only brought in $2.2 million in revenue. It will need to generate at least $20 million in order to break-even.
During the meeting, the company’s management team described in more detail CoSine’s strategic plan, which includes product enhancements to target additional market segments, as well as potential partnerships. The company also touted its marquee list of customers, including Sprint Corp. (NYSE: FON), Cable & Wireless (NYSE: CWP), and Equant (NYSE: ENT; Paris: EQU).
But those close to the situation say that Mellon is still not satisfied with the board’s plan. Mellon representatives met with the board of directors privately after the general meeting. Details of that caucus are not known. Mellon had not returned calls by press time.
Observers close to Mellon speculate that the company is preparing to make a tender offer to existing shareholders. For the past several months, the firm has been buying up whatever shares it could in the open market. Now it appears that it will solicit additional shares from existing holders in order to gain control. Mellon’s hope is that the board will feel compelled to consider its requests more seriously if it acquires more shares.
So far, CoSine executives remain adamant about the company’s long-term prospects.
“I can’t say what the board would do if Mellon ended up being a majority shareholder,” says Messina. “But we have a plan in place to get us to profitability, and we’re solid on our decision to move forward. Mellon, as an investor, should be focusing on the value of the company.”
A large part of the company’s shortfall in the first quarter had to do with orders from Sprint that were not fulfilled by the end of the quarter. Traditionally, Sprint has been a strong CoSine customer. The lack of orders from the carrier and the fact that CoSine did not give guidance for the second quarter has alarmed many investors. But Sprint says it is still committed to CoSine as a supplier.
“You can’t read too much into what you saw there,” says Barry Tishgart, director of product management for business data solutions at Sprint. “There are more orders that might not have been reflected during last quarter. We are very much in support of the CoSine deployments. I’d say we are a very satisfied customer.”
Tishgart also says that the company is monitoring CoSine’s financial health carefully. He admits that the stability of a supplier is a major factor in any purchasing decision, but he says the CoSine platform is a good product that he expects will be around for some time.
“We are not naïve about CoSine’s situation,” he says. “But we don’t think they are in any short-term jeopardy. We’re confident in the future of the product whether it’s with CoSine or with another company.”
CoSine was down slightly, $0.01 (0.19%) to $5.19 in trading today.
— Marguerite Reardon, Senior Editor, Light Reading