Frank Voisin is a value investor and independent analyst whose site, Frankly Speaking, contains Frank’s investment theses as well as educational material to help investors avoid value traps. Subscribe to Frank’s feed here.
OPTi Inc. (OTC:OPTI) is a Palo Alto, California based company that sold its operating business in 2002 and retained its intellectual property. Since then, the company has been engaged in numerous lawsuits with well known companies in an effort to gain licensing agreements, settlements, and/or jury awards for perceived breaches of its patents. The company has been successful in these pursuits.
On September 30, 2006, the company successfully negotiated a $11 million settlement with NVIDIA. This money was received. The company also was to receive up to twelve quarterly royalty payments of $750,000 from NVIDIA so long as it still used OPTI’s “Predictive Snoop” technology. These payments were not received because NVIDIA claimed it was no longer using that technology. OPTI did not believe this and sued for breach of the license agreement. The arbitrator sided with OPTI and awarded the royalty payments. I believe this has now been received.
OPTI brought another arbitration against NVIDIA because OPTI believes its technology is still being used. This is unresolved.
On April 30, 2010, the company successfully negotiated a litigation settlement and license agreement with AMD. AMD agreed to pay OPTI $32 million in five installments. The company recognized this amount as revenue, with the amount still to be received under Accounts Receivable. No money will be owing under the license agreement after the $32 million is paid. As of today, just one $7 million payment should still be due on April 1, 2011. AMD has paid promptly, so there appears to be little concern over this amount.
On April 23, 2009, a jury in the US District Court for the Eastern District of Texas ruled in OPTI’s favour against Apple, agreeing that Apple willfully infringed OPTI’s patents, that OPTI’s patents were valid, and awarded OPTI $19 million. On December 3, 2009, the court issued a final judgment in favour of OPTI, also granting $2.7 million in pre-judgment interest. Both parties have appealed, so this is unresolved.
OPTI sued Atmel Corp, Broadcom Corp, Renesas Technology America Inc, Silicon Storage Technology Inc, SMSC, STMicroelectronics, and VIA Technologies, claiming infringement of various patents held by OPTI. The company settled with these companies at various times from 2009 to 2010 for, in the aggregate, $5,675,000. These amounts have been received.
From the above, we see that the company has obtained payment of $45.43 million, with $7 million still due. Additionally, there is $21.7 million (or possibly more) likely in OPTI’s favour from Apple, and an unknown amount from NVIDIA if that company is found to still be infringing upon OPTI’s patents.
Now, let’s look at the company itself. The company’s most recent financial statements show a Cash + Receivables less Total Liabilities of $25,232,000. However, since those statements were filed, the company paid a $0.65 dividend, which is equal to $7,569,900, so the total remaining should be $17,662,100. Also, since filing, the company has received approximately $9 million in agreed-upon payments, which has changed the mix between accounts receivable and cash but not affected the company’s total assets (i.e. no new settlements have been obtained). The company is also burning through approximately $1.2 million per quarter in SG&A, so let’s say there is about $16,000,000 of value remaining (not including the unresolved lawsuits – we’ll get to that). $16 million is approximately $1.37 per share. This means that by purchasing the shares today for $2.20, the buyer is saying there is approximately $0.83 worth of intangible value to this company, or $9,666,180.
Where does this $9.7 million of intangible value come from? If we look at the unresolved legal issues, the only one that has any certainty is the Apple case, where OPTI was awarded $21.7 million. Though the case is under appeal by both sides, let’s use that figure for lack of anything better. This means that market is willing to pay about $0.45 on the dollar for this payment, which would include the time value of money and the risk of losing in appeal or negotiating privately between the parties to avoid further delay and legal fees (the court specifically denied compensation for legal fees, so OPTI is paying that out of pocket).
Would you pay $0.45 on the dollar for a future payment unknown both in timing and in amount (though, admittedly, the amount canbe reasonably estimated)? I should add that, since the company is burning through approximately $1.2 million per quarter, the amount you will receive declines at a rate of $0.41 per year (assuming they can’t cut back on that SG&A figure). Delay the payment from Apple by a year, and you are paying $0.76 on the dollar (=0.45/(1-0.41)). Delay by two years and you are paying $2.50 for every $1.00 received (=0.45/(1-0.41-0.41)). In effect, this is a bet on a very quick resolution with Apple.
Or maybe it isn’t. What else can it be? It could be a bet on more settlements. Perhaps NVIDIA will settle and agree to start paying the quarterly licensing fee (this will offset 5/8th of the quarterly SG&A drag). Or maybe another company will be identified that is infringing upon OPTI’s patents, in which case the company might have some other avenues for generating income. The fact is any investment based on this is simply speculation, just like an investment based on a quick resolution with Apple.
Author Disclosure: No Position.