Form 10QSB for QUEPASA CORP
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14-Aug-2006
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Quarterly Report on Form 10-QSB and the information incorporated by reference may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, we direct your attention to Item 1. Financial Statements, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosures About Market Risk. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our future business operations and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "believe," "plan," "will," "anticipate," "estimate," "expect," "intend" and other phrases of similar meaning. Known and unknown risks, uncertainties and other factors could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from our expectations.
The following discussion of our financial condition and results of operations for the six months ended June 30, 2006 and 2005 should be read in conjunction with our condensed consolidated financial statements, the notes related thereto, and the other financial data included elsewhere in this Form 10-QSB.
Company Overview
Quepasa.com is the largest and longest-established, bicultural, Hispanic online community. We seek to entertain, enrich, and empower the members of our rapidly growing internet community. Our interactive website delivers content, products, and services to our users in both English and Spanish. We are focusing our business on our online social network which is comprised chiefly of Hispanic and Latino 18-to-34 year olds living in the United States and in Central and South America.
During the second quarter of 2006, we initiated significant changes in our enterprise, including the appointment of an experienced and disciplined Chief Executive Officer, a review and reorientation of our corporate strategy, a complete redesign of our site, the implementation of a branding campaign, the hiring of additional product development, financial, and technical staff, and a revamping of various corporate financial and operating procedures designed to improve internal controls and speed new product introductions. Importantly, we have proactively eliminated or reduced the sale of some products and advertisements that, when fully accounted for, either negatively impacted margins and/or detracted from the brand image we seek to build.
During the second quarter, we launched Quepasa Market Intelligence (QMI), a market research/political polling enterprise. QMI provides real-time access to the opinions of our community members. Through QMI, we intend to conduct paid surveys on behalf of clients that generate data from our members. We intend that the information gleaned from these research projects will assist QMI's clients in making decisions related to product use, brand preferences, and potential voting behavior.
During the second quarter, we generated revenues from three primary sources; pay-for-performance search advertisements, Google AdSense, and third-party banner advertisements on our site. Pay-for-performance search revenue is recognized in the period in which the "click-throughs" occur. "Click-throughs" are defined as the number of times an internet user clicks on an advertisement or search result. Pay-for-performance revenue is recognized when there is evidence that the qualifying transactions have occurred at a set price. Google AdSense revenue is recognized in the period in which it is earned. We recognize revenue related to banner advertisements ratably over the contract period. Advertisers generally make advance deposits, which are recorded as deferred revenue, for pay-for-performance services which are recorded as revenue when an internet user clicks on a sponsored advertisement. Most advertisers utilize self-service tools to open and manage accounts online including tracking, price management and measurement features.
Our operating expenses during the second quarter consisted mainly of search services, sales and marketing, product and content development, and general and administrative expenses.
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We intend to provide an increasing array of services to our site visitors that are designed to promote social interaction and information sharing. These entertaining, enriching, or empowering products are designed to attract and adhere traffic to our site. Our intention during the remainder of this year and next is to introduce a variety of entertaining, enriching, and empowering products and services that grow large enough to produce positive cash flows. We expect these products and services to drive increased visitors to our site. As traffic grows, we expect that an increasing number of major consumer product firms, healthcare providers, financial institutions, and other enterprises seeking a nexus with the emerging Hispanic majority will advertise on our site. We intend to actively pursue such advertising by mounting a reinvigorated sales program targeting large advertising agencies and their clients.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
We recognize that subjective and sometimes complex judgments affect important accounting policies. These critical accounting policies relate to revenue recognition including the viability and worth of receivables, valuation and useful lives of long-lived assets, valuation of equity transactions such as the fair value assigned to common stock options and warrants, and litigation. Revenue recognition resulting from sales of paid search advertising placement is discussed in Note 1 to our consolidated financial statements. We believe our estimates and assumptions related to these critical accounting policies are appropriate under the circumstances. However, should future events or occurrences result in unanticipated consequences, there could be a material adverse impact on future financial condition and results of operations.
Liquidity and Capital Resources
We have generated significant net losses and negative cash flows from our inception and anticipate that we will experience continued net losses and negative cash flows for the remainder of 2006. These losses will be primarily attributable to the costs of developing and introducing new products and the lag time between product introductions and sales volumes significant enough to drive positive cash flows. We intend to control costs tightly and speedily either adjust or pare unprofitable products.
At June 30, 2006, we had $1.3 million in cash and cash equivalents compared to $1.4 million at June 30, 2005. We anticipate, however, a bolstering of our cash reserves in the remaining quarters of 2006, primarily due to the exercise of outstanding options and warrants.
Net cash used in operating activities was $1.1 million for the six months ended June 30, 2006 as compared to $1.4 million for the six months ended June 30, 2005. For the six months ended June 30, 2006, net cash used by operations consisted of a net loss of $3.0 million offset by non-cash expenses of $1.5 million in executive acquisition expense, $380 thousand in stock based compensation and $42 thousand in depreciation and amortization expense. Net cash used by operations for the six months ended June 30, 2005 consisted of the net loss of $1.6 million, which was offset by non-cash expenses of $52 thousand in depreciation and amortization plus $247 thousand in stock options granted for professional services.
Net cash used in investing activities was $72 thousand for the six months ended June 30, 2006 as compared to net cash used by investing activities of $30 thousand for the six months ended June 30, 2005. The primary use of cash was for investments in capital equipment.
Net cash provided by financing activities was $1.1 million for the six months ended June 30, 2006 as compared to $431 thousand for the six months ended June 30, 2005. In the six months ended June 30, 2006, we received $1.1 million from the issuance of common stock. In the six months ended June 30, 2005, we received $435 thousand, net of commissions, from the issuance of common stock.
On July 31, 2006, the Company received $2.87 million in cash related to the exercise of warrants from Richard L. Scott Investments, LLC and affiliates. In exchange for $2.87 million, the Company issued 1,000,000 shares of common stock. In addition, the Company issued 134,820 shares of common stock for cash of $597,003 related to the exercise of warrants.
We believe that our current cash balances, cash generated from our operations, and our financing activities are sufficient to finance our level of operations through 2007.
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Results of Operations
Comparison of the six months ended June 30, 2006 with the six months ended June 30, 2005
For the six months ended June 30, 2006, the net loss attributable to common stockholders was $3.0 million compared to a net loss of $1.6 million for the six months ended June 30, 2005. The increased loss was attributable primarily to a one time charge in executive acquisition expense of $1.5 million for the six months ended June 30, 2006.
Comparison of the three months ended June 30, 2006 with the three months ended June 30, 2005
For the three months ended June 30, 2006, the net loss attributable to common stockholders was $883 thousand compared to a net loss of $956 thousand for the three months ended June 30, 2005. The decreased loss was attributable, in part, to the reduction in professional fees and is partially offset by the increase in stock based compensation.
Revenues
For the three months ended June 30, 2006, the Company generated revenues of $84 thousand compared to $160 thousand in revenue for the three months ended June 30, 2005. For the six months ended June 30, 2006, the Company generated revenues of $248 thousand compared to $286 thousand in revenue for the six months ended June 30, 2005. For the six months ended June 30, 2006, our revenue was primarily generated from three principal sources: revenue earned from pay-for-performance search advertisements, Google AdSense and banner advertisements. During the six months ended June 30, 2006, we have made some changes to our business model that focus more on profitable revenues and, as a result, the amount of revenues generated in recent periods has declined while our gross margins have increased compared to the six months ended June 30, 2005.
Pay-for-Performance Revenue. Pay-for-performance search advertisements are recognized in the period in which the "click-throughs" occur. "Click-throughs" are defined as the number of times a user clicks on an advertisement or search result. Pay-for-performance revenue is recognized when there is evidence that the qualifying transactions have occurred. During the three months ended June 30, 2006 and 2005, pay-for-performance revenue accounted for 84% and 98% of total revenue, respectively. During the six months ended June 30, 2006 and 2005, pay-for-performance revenue accounted for 78% and 99% of total revenue, respectively.
Google AdSense. The Company recognizes revenue from Google AdSense in the period it is earned as reported by Google. During the three months ended June 30, 2006 and 2005, Google AdSense revenue accounted for 16% and 0% of total revenue, respectively. During the six months ended June 30, 2006 and 2005, Google AdSense revenue accounted for 17% and 0% of total revenue, respectively.
Banner Advertising Revenue. The Company recognizes revenue related to banner advertisements ratably over the contract period. During the three months ended June 30, 2006 and 2005, banner advertising revenue accounted for 0% and 2% of total revenue, respectively. For the six months ended June 30, 2006 and 2005, banner advertising revenue accounted for 5% and 1% of total revenue, respectively. Payments received from advertisers prior to displaying their advertisements on our website are recorded as deferred revenue, as are all payments received from advertisers for performance based marketing initiatives.
Operating Expenses
Our principal operating expenses are, or have been: Search Services, Sales and Marketing, Product and Content Development, General and Administrative, and Depreciation and Amortization. Operating expenses for the three months ended June 30, 2006 were $975 thousand, a decrease from $1.1 million for the three months ended June 30, 2005. The decreased expenses are principally attributable to the decrease in general and administrative expenses to $797 thousand for the three months ended June 30, 2006, from $865 thousand for the three months ended June 30, 2005, a decrease in search services expenses to $47 thousand for the three months ended June 30, 2006, from $122 thousand for the three months ended June 30, 2005, a decrease in sales and marketing expense to $34 thousand for the three months ended June 30, 2006, from $58 thousand for the three months ended June 30, 2005 and a decrease in depreciation and amortization expense to $20 thousand for the three months ended June 30, 2006 from $27 thousand for the three months ended June 30, 2005. These decreases were offset by the increase in product and content development expenses to $77 thousand for the three months ended June 30, 2006, from $32 thousand for the three months ended June 30, 2005.
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For the six months ended June 30, 2006, the operating expenses increased to $3.3 million, from $1.9 million for the six months ended June 30, 2005. The increased expenses are principally attributable to the increase in general and administrative expenses to $2.9 million for the six months ended June 30, 2006, from $1.4 million for the six months ended June 30, 2005 and an increase in product and content development expenses to $118 thousand for the six months ended June 30, 2006, from $74 thousand for the six months ended June 30, 2005. These increases were partially offset by the decreases in search services expenses to $165 thousand for the six months ended June 30, 2006, from $227 thousand for the six months ended June 30, 2005, a decrease in sales and marketing expense to $58 thousand for the six months ended June 30, 2006, from $147 thousand for the six months ended June 30, 2005, and a decrease in depreciation and amortization expense to $42 thousand for the six months ended June 30, 2006, from $52 thousand for the six months ended June 30, 2005.
Search Services Expenses. Our search services expenses decreased to $47 thousand in the three months ended June 30, 2006, from $122 thousand in the three months ended June 30, 2005. For the six months ended June 30, 2006, search services expenses decreased to $165 thousand from $227 thousand for the six months ended June 30, 2005. These decreases are attributable to our focus on more profitable segments of our revenue model and correspond to our decreases in revenue for the same periods.
Sales and Marketing Expenses. Our Sales and marketing expenses decreased to $34 thousand in the three months ended June 30, 2006, from $58 thousand for the three months ended June 30, 2005. For the six months ended June 30, 2006, sales and marketing expenses decreased to $58 thousand from $147 thousand for the six months ended June 30, 2005. These changes are mainly attributable to restructuring within our sales and marketing workforce through June 30, 2006. In July 2006, we expanded our sales and marketing efforts and anticipate increased costs associated with these changes.
Product and Content Development Expenses. Our product and content development expenses increased to $77 thousand in the three months ended June 30, 2006, from $32 thousand in the three months ended June 30, 2005. For the six months ended June 30, 2006, product and content development expenses increased to $118 thousand from $74 thousand for the six months ended June 30, 2005. This increase is attributable to changes in our development staff. Quepasa.com de Mexico provides significantly all of our design, translation services, and website management and development services for the Company. We have recently expanded our product and content development efforts and anticipate increased costs associated with these changes.
General and Administrative Expenses. Our general and administrative expenses decreased to $797 thousand in the three months ended June 30, 2006, from $865 thousand in the three months ended June 30, 2005. This decrease is principally attributable to the decrease in professional fees expense to $158 for the three months ended June 30, 2006, from $390 thousand for the three months ended June 30, 2006 and the decrease in advertising expense to $45 for the three months ended June 30, 2006, from $79 thousand for the three months ended June 30, 2005. These decreases are partially offset by the increase in stock-based compensation to $156 thousand for the three months ended June 30, 2006, from $0 for the three months ended June 30, 2005, and the increase in travel and entertainment expenses to $36 thousand for the three months ended June 30, 2006 from $11 thousand for the three months ended June 30, 2005.
For the six months ended June 30, 2006, our general and administrative expenses increased to $2.9 million in the six months ended June 30, 2006, from $1.4 million in the six months ended June 30, 2005. This increase is principally attributable to the increase in Executive acquisition costs to $1.5 million for the six months ended June 30, 2006, from $0 for the six months ended June 30, 2005, the increase in stock-based compensation to $380 thousand for the six months ended June 30, 2006, from $0 for the six months ended June 30, 2005 and an increase in dues and subscriptions expense to $57 thousand for the six months ended June 30, 2006, from $20 thousand for the six months ended June 30, 2005. These increases were partially offset by the decrease in professional fees expense to $247 thousand for the six months ended June 30, 2006, from $490 thousand for the six months ended June 30, 2005, the decrease in advertising expense to $72 thousand for the six months ended June 30, 2006, from $117 thousand for the six months ended June 30, 2005, and postage and printing expense to ($3) thousand for the six months ended June 30, 2006, from $18 thousand for the six months ended June 30, 2005.
Depreciation and Amortization Expense. Our depreciation and amortization expense decreased to $20 thousand in the three months ended June 30, 2006 from $27 thousand for the three months ended June 30, 2005. For the six months ended June 30,2006, depreciation and amortization expense decreased to $42 thousand from $52 thousand for the six months ended June 30, 2005. This decrease is associated with the fixed assets that have become fully depreciated.
Other Income (Expense). Other income (expense), which primarily consists of interest income offset by interest expense, was $8 thousand in the three months ended June 30, 2006, an increase from $2 thousand in the three months ended June 30, 2005. For the six months ended June 30,2006, interest income (expense) increased to $15 thousand from $1 thousand for the six months ended June 30, 2005. This increase is attributable to income on our cash deposits in interest bearing accounts.