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MathStar Inc. (NYSEARCA:MATH) has filed its 10K for the year ended December 31, 2008.

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 is a net cash stock with two substantial stockholders lobbying management to liquidate. The stock is up 21.3% to $0.825 Tuesday, giving it a market capitalization of $7.6M.

We initially estimated MATH’s liquidation value to be $14.4M or $1.57 per share. The balance sheet had around $14M or $1.52 per share in value at December 31. Adjusting for contractual obligations and another quarter of cash burn at, say, $0.6M per quarter, we now estimate MATH’s liquidation value to be around $12.0M or $1.31 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 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 seems to agree, twice rejecting unsolicited merger proposals, suspending the company’s operations and exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.” From the 10K:

During the three months ended June 30, 2008, we announced a curtailment of operations as our Board evaluated strategic alternatives. Strategic alternatives that are being evaluated by our Board of Directors and management include, but are not limited to, restarting the company; merging with or acquiring another company, including or excluding our intellectual property (IP); increasing operations in another structure; or liquidation. The primary criteria for determining the strategic alternative is to maximize shareholder value, which may or may not include the use of the accumulated net operating losses (NOL). Although we have curtailed operations, we have met all financial obligations with vendors, key suppliers, and strategic partners. We have engaged a third party investment banking firm to explore the sale of intellectual property and patents and potential merger and acquisition alternatives.

The value proposition updated

MATH has rapidly burned cash throughout the year, mainly on research and development. The company has now put a stop to its R&D activities, which has reduced the cash burn significantly from $1.6M in the September quarter to $0.4M in the December quarter. The company’s value rests on its vestigial holding of cash and equivalents (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

math-summary-2008-12-31

Off-balance sheet arrangements and contractual obligations

According to MATH’s 10K, it has no off-balance sheet arrangements, but has around $1.4M in non-cancellable commitments for design licenses and operating leases.

Adjusting for the $1.4M in non-cancellable commitments for design licenses and operating leases and another quarter of cash burn at around $0.6M, we estimate the liquidation value to be around $12.0M or $1.31 per share.

Conclusion

At its $0.835 close Tuesday, MATH has a market capitalization of just $7.6M. Our updated liquidation valuation is still some 60% higher at $12.0M or $1.31 per share, so we believe that MATH still represents good value. With other potentially valuable assets and Messrs. McAdoo and Muoio pushing the board to liquidate the company, we’re going to maintain our position in MATH.

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.

Source: MathStar's 10K: Value Proposition Update