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Opportunity Missed? (EPAX)

July 24, 2015

On July 13 Ambassador Group announced a plan to cease operations by year-end and liquidate the business, returning capital to shareholders. The day after the announcement the stock took a wild ride down to $1.50 a share from the previous day’s closing of $2.40, ending the day at $1.78. On the surface of things this kind of made sense since the book value as of the end of Q1 was $1.83 a share. But EPAX is (was?) in a very seasonal business where cash is received upfront as a deposit and recognized only when the trip takes place, so it behooved anyone interested in the underlying value of the liquidation to look a bit deeper. In fact, on July 16 the company issued another press release updating the amount of ‘cash available to shareholders’ at the end of 2Q; it had increased to $45.3 million from the $31.7 million on the balance sheet at the end of Q1. The stock rebounded the next day to the $2.20-2.40 per share level and has remained there since. What can I say? I was on ‘vacation’ at the seashore and missed the wild swing in the share price when the liquidation announcement was made. The lesson here is that you have to have done your analysis beforehand and be ready when Mr. Market acts so foolishly! Well, what now, you’re asking. Are shares still trading at a discount to liquidation value? For that, we needed some estimate of shutdown costs which the company has, as of today, kindly provided ($2.3 to $4.5 million). Still, the analysis is not straight forward; the company will be recognizing cash received as deposits over the balance of the year as well as prepaid and other expenses incurred or to be incurred. Assuming all sales & marketing efforts ceased as of the end of Q2, a quick and dirty liquidation analysis might look something like this:

Cash on balance sheet as of 6/30/15 (millions) $71.0
adjusted for:
  prepaid expenses $12.2
  payment of A/P ($4.4)
  deposits ($33.5)
Cash available for shareholders as of 6/30 $45.3
Balance of year cash expenses:
  Est. G&A expenses 3Q & 4Q ($4.6)
  Shutdown expense (avg of high and low) ($3.4)
Net cash available to shareholders after shutdown $37.3
shares outstanding 17.284 million
per share cash available for distribution $2.16

Now that’s not a very enticing proposition! You can pay $2.25 to buy a share today and get back $2.16 sometime over the next two years! But, as in any liquidation, there are some upsides to company projections. Do the PP&E assets have any value? Those assets are primarily depreciated computer equipment and software so I wouldn’t hold out much hope here; the company notes that this item will be written off entirely in the 2Q financials. (Remember the company has already sold its headquarters building last year). G&A expense for the balance of the year could be lower; I was using the 1Q run rate of $2.3 million but the company announced it will begin laying off staff in August. And of course, shutdown expenses could be lower. All in all, however, I don’t see that much upside. But maybe that’s just my shortsightedness. If you see the magic bunny that could be pulled out of the hat please let me know!

Edit: Sold my entire position at $2.40 today as I think there are situations with greater upside out there.

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8 Comments
  1. Epaxer permalink

    Few notes:
    1) Cash generation for Q3 – I think you are missing the cash generation that typically occurs in Q3 of every year. The peak travel months are June / July. In their 8K, they note that “During the third quarter of each year (July to September), deployable cash traditionally increases as summer travel is complete and the majority of the Company’s travel revenue has been recognized with minimal liability balances remaining to complete payment for summer travel program costs.”
    2) I think your G&A expenses are way too high here. They business is effectively shutting down after July 27 (according to 8K). The business wind down expenses are included in the shutdown expenses.
    3) Not sure why you think it will take 2 years to liquidate. I would be surprised if it didn’t get completed by Q4 2015 / Q1 2016.

    Otherwise, I like the risk-reward here. You either get your money back ($2.25/shr) or there’s liquidation upside.

  2. Epaxer,

    Thanks for your comments. My answers below.

    1) I think the Deposits line represents cash already received for travel in Q3 and Q4; it only becomes ‘deployable’ when it is recognized as revenue when the travel takes place (thus the increase in deployable cash in Q2) Likewise prepaid expenses are incurred before travel then expensed per GAAP matching principals when travel takes place. I don’t know if there is additional cash that will be received when traveler travels (is everything prepaid by the traveler, or are there additional amounts the traveler has to fork over at the time of travel?), or additional expense. So I could be underestimating or overestimating. But for a look ahead, glance back at last year’s cash flow statements for Q3 and Q4 to see what’s likely to happen.
    2) Yes, I agree, my straight-lining G&A was meant to overestimate expense, so perhaps we might pick up a few million there (at best!). This translates into maybe $.12 or $.13 per share… not a lot of upside.
    3) Never underestimate how hard it is for some people to be separated from their cash! You are right that, given the composition of the Board, it is more than likely liquidation distributions could be made this year or early next, but my guess is that they will hold on to 20% of the cash to cover any contingencies at least for a year.

    • Epaxer permalink

      re: #1) you are correct in that it represents cash already received. But the offset in deployable cash is “participants deposits”. If you look historically, that number goes waaaay down in Q3, partially offset by a decline in cash & equivalents. Net-net, between Q2 and Q3 over the last 3 years, deployable cash has increased between $3 – $5 million in Q3 (I have excluded the BookRags sale proceeds). That’s because they actually make money on the services rendered. The problem has never been making money for services rendered, but rather the ROI of spending S&M $$ on acquiring customers did not make sense. It is also consistent with the comment in the 8-K that deployable cash will increase in Q3.

      As you pointed out, sales & marketing spend will be brought to a halt. That is a big number, and that cost take-out is not reflected in the deployable cash (+ benefit). That could be another $5 million in cash not spent and not reflected in the Q2 deployable cash number.

      I think your downside is very protected here, and you have upside optionality on the cash increase for Q3 (which they have already said will occur). At $2.40, you’re looking at minimal downside.

      I like that bet.

      re: #3) yup, I think the shareholders’ pushed for this liquidation, it was planned for a while, and they want their money asap. The board is a strong one. Additionally, in a non-asset intensive business such as this with a clean balance sheet, I would be shocked if the liquidation didn’t get done by Q1 2016 at the latest.

  3. Paolo permalink

    Why are you deducting G&A in 3Q and 4Q? They’re going to effective shut the doors as of July 27 and operate a skeleton crew to wind down operations. That number needs to come way down or else you’re double-counting the shut-down costs.

    As with all liquidations, the company and its lawyers has one goal: don’t get sued. So there is zero incentive to put out a number that is anything but conservation. I will bet you my pinkie finger that this liquidation is higher than $37.3 million (and likely a good bit higher than their estimate of $45 million. Again, you need to carefully re-read the company’s definition of deployable cash (emphasis added):

    The Company believes the deployable cash measurement is useful in understanding cash available to deploy for current and future business opportunities, as it represents an estimate of *excess* cash available for capital deployment. This non-GAAP measure is based on assumptions and should *not* be construed as the maximum amount of cash sources available to run the business.

    As of June 30, 2015, deployable cash was approximately $45.3 million, up from $31.7 million at March 31, 2015. During the third quarter of each year (July to September), deployable cash traditionally increases as summer travel is complete and the majority of the Company’s travel revenue has been recognized with minimal liability balances remaining to complete payment for summer travel program costs.

  4. Thankyoujay permalink

    Jay –

    Thank you for mentioning EPAX on your blog. I did the work on it and made it a pretty big position at around 2.30. I also wanted to thank you for mentioning EMRI on May 6th. I made that a huge position as well. Keep up the good work!

  5. Could have waited a bit more

  6. DiviCents permalink

    Great information Jay.

    I’v e done the same thing, been on vacation and come home to some crazy market swing!

    Glad you got out at 2.40

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