MathStar Inc’s (OTC:MATH) board has filed the slides from its presentation to shareholders at the 2008 annual meeting. In the presentation, MATH’s board discusses in some detail its rationale for recommending that stockholders reject Tiberius Capital’s $1.25 per share cash tender offer. We’ve unpacked the slide show below to see if we can arrive at a decision about Greenbackd’s position in MATH.

We’ve been following MATH since December last year (see our post archive here) when it was trading at $0.68. We initiated the position because MATH was trading below its net cash value and had two substantial stockholders lobbying management to liquidate. The stock is up 79.4% to close yesterday at $1.22, giving it a market capitalization of $11.2M. We estimate MATH’s net cash value to be around $11.7M or $1.27 per share. That value is predominantly cash and short term investments and doesn’t take into account any further value that the sale of the FPOA technology and intellectual property may yield. The board’s estimate of the company’s liquidation value is slightly higher than ours, at $1.40 per share. The board’s estimate also excludes revenue from any sales of the MATH’s existing inventory of field programmable object array chips or its FPOA technology.

Prior to Tiberius Capital’s offer, MATH had received several unsolicited merger proposals from PureChoice, Inc, all of which have been rejected by MATH. Two activist investors, Mr. Zachary McAdoo of The Zanett Group and Mr. Salvatore Muoio of S. Muoio & Co., have been urging MATH’s board to consider liquidation rather than a merger. MATH’s board has suspended the company’s operations and has been exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.”

Tiberius Capital launched its tender offer for MATH on June 1 this year at $1.15 cash per share, bidding for 51% of the outstanding shares. Robert T. Sullivan, one of the principals of Tiberius said in the press release announcing the initial offer:

We are making the tender offer to enhance shareholder value. The potential strategies that we may cause MathStar to pursue include a partial repurchase of Shares, an extraordinary dividend, liquidation, selling or licensing MathStar’s technology assets, a business re-start in which MathStar would hire new personnel to improve and commercially exploit its technology assets, and/or a merger or other business combination. We will use the balance of 2009 to carefully examine whether to re-start MathStar’s business and/or to identify a suitable merger partner.

Tiberius Capital has since increased its offer to$1.25 per share in cash. MATH’s board continues to recommend against acceptance. The board’s presentation to the annual meeting discusses in some detail the board’s rationale for recommending against Tiberius’ offer, and the other possibilities for MATH.

**The Annual Meeting Presentation**

MATH’s board values MATH as follows:

- $1.40 per share in cash; plus
- NOLs (which could shelter up to $10 per share in future earnings (if any)); plus
- MATH’s FPOA intellectual property; plus
- MATH’s status as a public company:

MATH has been reviewing other “business combination opportunities,” presumably in an effort to capture the additional value beyond MATH’s cash (i.e. the value of the NOLs, other IP and status as a public company). All have been rejected “primarily on the basis of valuation, excessive risk to upside, or excessive risk to our cash position.”

The presentation sets out what MATH seeks in a merger partner:

MATH is presently conducting “deep due diligence” on two possible business opportunities, the first a private company “that could proactively use a portion of MathStar’s cash” and the second “a possible restart involving video encoding technology, which we could acquire and commercialize.”

The first opportunity – the private company – has annual revenues “over $10M.” The terms for the deal with the private company are as follows:

The second opportunity – the restart – seems to be technology only, with no established revenue. Says MATH, “We would plan to build a sustainable profitable revenue stream derived from sales of software solutions, board-level solutions and, eventually, chip solutions.” The terms for the restart deal are as follows:

The final material slide sets out MATH’s board’s plan for 2009:

**Conclusion**

MATH’s board’s view boils down to this: Tiberius Capital’s $1.25 per share offer should be rejected because it is lower than the board’s $1.40 per share estimate of MATH’s liquidation value, which value also excludes the value of the MATH’s NOLs (which could shelter up to $10 per share in future earnings (if any)), the value of MATH’s FPOA intellectual property and the value of MATH’s status as a public company. In MATH’s board’s view, the better options for MATH are the two business opportunities. Let’s consider those now:

The first deal – the private company – makes use of MATH’s status as a public company and makes capturing the value of the NOLs a possibility. From that perspective, it’s a commendable deal. On the downside, we do not know if the new combined entity will generate any net income to make use of the NOLs. We do know that MATH’s existing shareholders will be diluted down from owning 100% of MATH’s cash to approximately 50% of MATH’s cash and 50% of a unknown private company generating annual revenues of “over $10M,” although there is no word on the profitability of the private company.

The second deal is harder to value. With no revenue history, the restart technology-only deal is a crapshoot. It seems quite conceivable to us that MATH spends a large portion of its cash on the technology and then spends the rest on commercializing it, never generating any revenue, let alone net income.

Our own estimate of MATH’s value is considerably more conservative than MATH’s board’s view. We ascribe minimal value to MATH’s FPOA technology and status as a public company. The NOLs certainly have value, but we question how successful MATH can be in harnessing that value given the regulations around preserving them. We also believe it will be extremely difficult for MATH to find a worthwhile merger partner, and the length of time MATH has taken in its search seems to bear out this view. MATH needs 50%+ of the combined entity and has only limited cash, which means either a tiny merger partner or an acquisition of technology with no revenue – lo and behold, those are the two options on the table. The second deal – the restart – is a non starter. We’ll take cash over commercially unproven, pre-revenue technology any day. The first deal – the private company – is better than the second, but not by much. It still doesn’t meet Greenbackd’s threshold for a deal, which is the exchanging of a known quantity of cash for unknown earnings. Long term readers of this site will recognize that our vast preference for cash over unknown future earnings means that we will almost always lean away from deals of this stripe.

So where does that leave our position in MATH? Our estimate of MATH’s liquidation value is its net cash value after deducting around $2M of cash burn, professional fees and other liquidation costs, or around $11.7M or $1.27 per share. If a near-term liquidation was a real possibility, our estimate of the liquidation value would be closer to the board’s view of $1.40 per share. Given the foregoing presentation by the board, we don’t believe that liquidation is likely in the near-term or at all. It seems much more likely that the board will undertake one of the two business opportunities outlined above, and we don’t believe either is likely to increase the value of our stake in MATH with any certainty. Accordingly, we’re going to consider our ongoing position in MATH in light of the results of the annual meeting. More tomorrow.

[Full Disclosure: ** **We do not have a holding in MATH. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

on July 14, 2009 at 4:30 pm |JimIn your article, you mention you have a holding in MATH yet at the bottom of the article in your disclosure, you say you don’t. :) You leave me scratching my head sometimes :)

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on July 14, 2009 at 6:05 pm |greenbackdThe article refers to the Greenbackd Portfolio. The disclosure refers to our P.A.

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on July 14, 2009 at 8:33 pm |Value InvestorOk, thank you.

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on July 14, 2009 at 12:54 am |Daniel M. RyanThe fellow at “Can Turtles Fly” has been grousing about the same options:

http://can-turtles-fly.blogspot.com/2009/07/mathstar-shareholders-vote-against.html

I believe he was hoping for a liquidation.

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