Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission File Number: 001-33105
QUEPASA CORPORATION
(Exact name of registrant as specified in its charter)
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|
NEVADA
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86-0879433 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
7550 E. Redfield Rd., Suite A
Scottsdale, AZ 85260
(Address of principal executive offices)
(480) 348-2665
(Issuers telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.): Yes o No þ
The number of outstanding shares of the registrants Common Stock as of August 13, 2007 was
12,270,761 shares.
Transitional Small Business Disclosure Format (Check one): Yes o No þ
QUEPASA CORPORATION AND SUBSIDIARIES
INDEX
Explanatory Note Restatement of Financial Information; Going Concern Qualification
On October 22, 2007 Quepasa Corporation (the Company) announced that the Companys
management had determined that a restatement of the consolidated financial statements for the
fiscal year ended December 31, 2006 and for the interim periods ended March 31, 2006, June 30,
2006, September 30, 2006, March 31, 2007, and June 30, 2007 were required. On October 30, 2007 the
Company filed Amendment No. 2 on Form 10-KSB/A that restated the consolidated financial information
in the Selected Financial Data for the year ended December 31, 2006, the unaudited selected
quarterly financial information for quarters ended March 31, 2006, June 30, 2006, and September 30,
2006, and the related financial information and disclosures originally filed with the Securities
and Exchange Commission (the SEC) on Form 10-KSB on April 17, 2007 and Form 10-KSB/A on May 4,
2007. This Amendment No. 1 (Amendment No. 1) on Form 10-QSB/A includes the restatement of the
unaudited condensed consolidated financial statements for the interim period ended June 30, 2007
and the unaudited selected quarterly financial information for the interim period ended June 30,
2006, and the related financial information and disclosures originally filed with the Securities
and Exchange Commission (the SEC) on Form 10-QSB on August 15, 2007. As soon as practicable, the
Company will file the Form 10-QSB for the interim period ended September 30, 2007, which will
reflect the restatement for the interim period ended September 30, 2006.
This restatement relates to errors associated with the Companys valuation of certain warrants
and stock option awards granted in 2006 and 2007. Upon review of the assumptions applied in the
Black-Scholes option pricing models used to value these warrant and stock option awards, the
Company identified errors in the assumptions for the expected volatility rates and expected terms.
In addition, the Company determined that certain reclassifications between operating expense line
items on the consolidated statements of operations were required for the three and six months ended
June 30, 2007. These reclassifications had no effect on total operating expenses or net loss. This
restatement had no effect on the Companys cash flows from operating, investing, or financing
activities for 2006 or 2007.
The following table sets forth the effects of the restatement on net loss for the applicable
periods (dollars in thousands, except per share amounts):
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For the Six Months Ended |
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|
For the Three Months Ended |
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|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
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|
June 30, 2007 |
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|
June 30, 2006 |
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|
June 30, 2007 |
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|
June 30, 2006 |
|
Net loss, as previously reported |
|
$ |
( 6,799 |
) |
|
$ |
(7,891 |
) |
|
$ |
( 3,643 |
) |
|
$ |
(1,058 |
) |
Total adjustments |
|
|
( 77 |
) |
|
|
(2,089 |
) |
|
|
( 28 |
) |
|
|
(119 |
) |
|
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|
|
|
|
|
|
|
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|
Net loss, as restated |
|
$ |
( 6,876 |
) |
|
$ |
(9,980 |
) |
|
$ |
( 3,671 |
) |
|
$ |
(1,177 |
) |
|
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|
|
|
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|
The following table sets forth the effects of the restatement on net loss per share,
basic and diluted:
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For the Six Months Ended |
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|
For the Three Months Ended |
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|
(Unaudited) |
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|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
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June 30, 2007 |
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June 30, 2006 |
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June 30, 2007 |
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|
June 30, 2006 |
|
Net loss per share, as
previously reported |
|
$ |
( 0.56 |
) |
|
$ |
( 0.98 |
) |
|
$ |
( 0.30 |
) |
|
$ |
( 0.13 |
) |
Total adjustments |
|
|
( 0.00 |
) |
|
|
(0.26 |
) |
|
|
( 0.00 |
) |
|
|
( 0.01 |
) |
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Net loss per share, as restated |
|
$ |
( 0.56 |
) |
|
$ |
(1.24 |
) |
|
$ |
( 0.30 |
) |
|
$ |
( 0.14 |
) |
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The following items are amended as a result of this Amendment No. 1:
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Part I Item 1. Financial Statements (Unaudited) |
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Part I Item 2. Managements Discussion and Analysis or Plan of Operation |
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Part I Item 3. Controls and Procedures |
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Part II Item 6. Exhibits |
1
The Company has attached to this Amendment No. 1 updated certifications executed as of the
date of this Form 10-QSB/A by the Chief Executive Officer and Chief Financial Officer, as required
by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. These updated certifications are
attached as Exhibits 31.3, 31.4, 32.3, and 32.4, respectively, to this Form 10-QSB/A.
Except as discussed above, we have not modified or updated disclosures presented in the
original quarterly report on Form 10-QSB filed on August 15, 2007, except as required to reflect
the effects of the restatement. Accordingly, this Form 10-QSB/A does not reflect events occurring
after the filing of our original Form 10-QSB or modify or update those disclosures affected by
subsequent events, except as specifically referenced therein. Information not affected by the
restatement is unchanged and reflects the disclosures made at the time of the original filing of
Form 10-QSB. Accordingly, this Amendment No. 1 should be read in conjunction with the Companys
filings made with the SEC subsequent to filing the Form 10-QSB including any amendments to those
filings.
Please refer to Note 5, Restatement of Previously Issued Interim Financial Information, of
the notes to the unaudited condensed consolidated financial statements for a detailed discussion of
the effects of the restatement.
As described in Note 6, Subsequent Events Going Concern Consideration, of the notes to
the unaudited condensed consolidated financial statements, based on the Companys cash balances of
approximately $4.4 million as of November 12, 2007 and recurring negative operating cash flows,
there is substantial doubt about the Companys ability to continue as a going concern for the next
twelve months. However, we are actively pursuing financial commitments from certain investors to
provide additional funding to support the business. In addition, we are exploring strategic
alternatives to reduce the amount of cash required to effectively operate the business and generate
positive cash flows and profitability.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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June 30, |
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December 31, |
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2007 |
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2006 |
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As restated (1) |
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|
As restated (1) |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
|
$ |
9,348,490 |
|
|
$ |
14,093,811 |
|
Accounts receivable trade |
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|
64,570 |
|
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|
74,355 |
|
Other current assets |
|
|
241,102 |
|
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|
332,478 |
|
|
|
|
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Total current assets |
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|
9,654,162 |
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|
14,500,644 |
|
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|
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Property and equipment net |
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|
1,015,795 |
|
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|
546,481 |
|
Jet rights net |
|
|
936,086 |
|
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|
986,457 |
|
Other assets |
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|
140,796 |
|
|
|
55,102 |
|
|
|
|
|
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|
Total assets |
|
$ |
11,746,839 |
|
|
$ |
16,088,684 |
|
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|
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|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
|
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|
|
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|
Accounts payable |
|
$ |
1,234,847 |
|
|
$ |
711,486 |
|
Accrued expenses |
|
|
100,372 |
|
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|
92,070 |
|
Unearned grant income |
|
|
81,042 |
|
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|
94,980 |
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Total current liabilities |
|
|
1,416,261 |
|
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|
898,536 |
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COMMITMENTS AND CONTINGENCIES (see Note 2) |
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STOCKHOLDERS EQUITY: |
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|
Preferred stock, $.001 par value; authorized -
5,000,000 shares; none issued and outstanding |
|
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|
Common stock, $.001 par value; authorized - 50,000,000
shares; 12,270,761 shares issued and outstanding at
June 30, 2007 and 11,705,861 shares issued and
outstanding at December 31, 2006 |
|
|
12,271 |
|
|
|
11,706 |
|
Additional paid-in capital |
|
|
145,287,279 |
|
|
|
143,271,109 |
|
Accumulated deficit |
|
|
(134,970,505 |
) |
|
|
(128,094,164 |
) |
Accumulated other comprehensive income |
|
|
1,533 |
|
|
|
1,497 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
10,330,578 |
|
|
|
15,190,148 |
|
|
|
|
|
|
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|
Total liabilities and stockholders equity |
|
$ |
11,746,839 |
|
|
$ |
16,088,684 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
(1) See Note 5 Restatement of Previously Issued Interim Financial Information
3
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
|
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For the Six Months Ended |
|
|
For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
As Restated (1) |
|
|
As Restated (1) |
|
|
As Restated (1) |
|
|
As Restated (1) |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
REVENUES |
|
$ |
125,742 |
|
|
$ |
248,472 |
|
|
$ |
73,260 |
|
|
$ |
83,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
OPERATING COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Search services |
|
|
|
|
|
|
165,330 |
|
|
|
|
|
|
|
47,178 |
|
Sales and marketing |
|
|
845,274 |
|
|
|
139,664 |
|
|
|
351,132 |
|
|
|
88,994 |
|
Product and content development |
|
|
2,209,448 |
|
|
|
431,474 |
|
|
|
1,212,638 |
|
|
|
240,609 |
|
General and administrative |
|
|
4,060,610 |
|
|
|
9,465,722 |
|
|
|
2,209,578 |
|
|
|
871,450 |
|
Depreciation and amortization |
|
|
196,261 |
|
|
|
41,769 |
|
|
|
103,658 |
|
|
|
20,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING COSTS AND EXPENSES |
|
|
7,311,593 |
|
|
|
10,243,959 |
|
|
|
3,877,006 |
|
|
|
1,268,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(7,185,851 |
) |
|
|
(9,995,487 |
) |
|
|
(3,803,746 |
) |
|
|
(1,184,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
291,824 |
|
|
|
16,269 |
|
|
|
127,438 |
|
|
|
8,024 |
|
Interest expense |
|
|
|
|
|
|
(824 |
) |
|
|
|
|
|
|
(359 |
) |
Gain on sale of property and equipment |
|
|
3,449 |
|
|
|
|
|
|
|
3,449 |
|
|
|
|
|
Other income |
|
|
14,237 |
|
|
|
|
|
|
|
1,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE) |
|
|
309,510 |
|
|
|
15,445 |
|
|
|
132,416 |
|
|
|
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES |
|
|
(6,876,341 |
) |
|
|
(9,980,042 |
) |
|
|
(3,671,330 |
) |
|
|
(1,176,879 |
) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET LOSS |
|
$ |
(6,876,341 |
) |
|
$ |
(9,980,042 |
) |
|
$ |
(3,671,330 |
) |
|
$ |
(1,176,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED |
|
$ |
(0.56 |
) |
|
$ |
(1.24 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, BASIC AND DILUTED |
|
|
12,189,975 |
|
|
|
8,021,436 |
|
|
|
12,238,879 |
|
|
|
8,155,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(6,876,341 |
) |
|
$ |
(9,980,042 |
) |
|
$ |
(3,671,330 |
) |
|
$ |
(1,176,879 |
) |
Foreign currency translation adjustment |
|
|
36 |
|
|
|
(18,261 |
) |
|
|
(8,527 |
) |
|
|
(12,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS |
|
$ |
(6,876,305 |
) |
|
$ |
(9,998,303 |
) |
|
$ |
(3,679,857 |
) |
|
$ |
(1,189,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
(1) See Note 5 Restatement of Previously Issued Interim Financial Information
4
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders Equity
For the Six Months Ended June 30, 2007 (as restated)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income |
|
|
Equity |
|
BalanceDecember
31, 2006 (as
restated) |
|
|
|
|
|
$ |
|
|
|
|
11,705,861 |
|
|
$ |
11,706 |
|
|
$ |
143,271,109 |
|
|
$ |
(128,094,164 |
) |
|
$ |
1,497 |
|
|
$ |
15,190,148 |
|
Issuance of stock
options for
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
912,097 |
|
|
|
|
|
|
|
|
|
|
|
912,097 |
|
Issuance of common
stock to directors
for compensation |
|
|
|
|
|
|
|
|
|
|
32,500 |
|
|
|
33 |
|
|
|
191,455 |
|
|
|
|
|
|
|
|
|
|
|
191,488 |
|
Exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
526,000 |
|
|
|
526 |
|
|
|
883,824 |
|
|
|
|
|
|
|
|
|
|
|
884,350 |
|
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
6,400 |
|
|
|
6 |
|
|
|
28,794 |
|
|
|
|
|
|
|
|
|
|
|
28,800 |
|
Foreign currency
translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
36 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,876,341 |
) |
|
|
|
|
|
|
(6,876,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceJune
30, 2007
(Unaudited) |
|
|
|
|
|
$ |
|
|
|
|
12,270,761 |
|
|
$ |
12,271 |
|
|
$ |
145,287,279 |
|
|
$ |
(134,970,505 |
) |
|
$ |
1,533 |
|
|
$ |
10,330,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
(1) See Note 5 Restatement of Previously Issued Interim Financial Information
5
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
As Restated |
|
|
As Restated |
|
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,876,341 |
) |
|
$ |
(9,980,042 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
196,261 |
|
|
|
41,769 |
|
Issuance of warrants for strategic initiatives |
|
|
|
|
|
|
7,387,979 |
|
Issuance of stock options and warrants for compensation |
|
|
912,097 |
|
|
|
1,388,656 |
|
Issuance of common stock to directors for compensation |
|
|
191,488 |
|
|
|
|
|
Grant income |
|
|
(14,146 |
) |
|
|
|
|
Gain on sale of property and equipment |
|
|
(3,449 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable trade |
|
|
9,785 |
|
|
|
35,807 |
|
Other current assets |
|
|
96,139 |
|
|
|
(9,493 |
) |
Other assets |
|
|
(90,376 |
) |
|
|
(20,850 |
) |
Accounts payable |
|
|
686,682 |
|
|
|
106,362 |
|
Accrued expenses |
|
|
(154,953 |
) |
|
|
(61,068 |
) |
Deferred revenue |
|
|
|
|
|
|
(29,412 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,046,813 |
) |
|
|
(1,140,292 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
3,449 |
|
|
|
|
|
Purchase of property and equipment |
|
|
(613,789 |
) |
|
|
(72,357 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(610,340 |
) |
|
|
(72,357 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
|
|
|
|
(3,263 |
) |
Proceeds from exercise of stock options and warrants |
|
|
913,150 |
|
|
|
1,066,000 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
913,150 |
|
|
|
1,062,737 |
|
Effect of foreign currency exchange rate on cash |
|
|
(1,318 |
) |
|
|
(18,261 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(4,745,321 |
) |
|
|
(168,173 |
) |
Cash and cash equivalents at beginning of period |
|
|
14,093,811 |
|
|
|
1,441,889 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
9,348,490 |
|
|
$ |
1,273,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
824 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
(1) See Note 5 Restatement of Previously Issued Interim Financial Information
6
QUEPASA CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1Description of Business and Summary of Significant Accounting Policies
Quepasa Corporation (the Company), a Nevada corporation, was incorporated in June 1997. The
Company is a Spanish/English language Internet portal and online community targeting the U.S.
Hispanic and Latin American markets. The Companys web site provides users search engine
capabilities and performance based marketing applications as well as traditional portal services
centered around the Spanish market. The quepasa.com web site is operated and managed by the
Companys majority owned Mexico-based subsidiary, Quepasa.com de Mexico S.A. de C.V. Because the
language preference of many U.S. Hispanics is English, the web site also offers users the ability
to access information and services in the English language.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information required to be included in a complete set of consolidated financial
statements in accordance with accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the six
months ended June 30, 2007 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2007. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
related notes included in the Companys 2006 Annual Report on Form 10-KSB, as amended.
Reclassifications
Certain prior period amounts in the condensed consolidated statements of operations and
comprehensive loss and condensed consolidated statements of cash flows have been reclassified to
conform to the current periods presentation.
Loss Per Share
Loss per share is computed by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the applicable period. Diluted
earnings per share is determined in the same manner as basic earnings per share, except that the
number of shares is increased to include potentially dilutive securities using the treasury stock
method. Since the Company incurred a net loss in all periods presented, all potentially dilutive
securities were excluded from the computation of diluted loss per share since the effect of
including them is anti-dilutive.
The following table summarizes the number of dilutive securities outstanding for each of the
periods presented, but not included in the calculation of diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Stock options |
|
|
1,498,200 |
|
|
|
2,718,875 |
|
Warrants |
|
|
4,432,500 |
|
|
|
4,194,240 |
|
|
|
|
|
|
|
|
Total |
|
|
5,930,700 |
|
|
|
6,913,115 |
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a tax position if
that position is more likely than not of being sustained on audit, based on the technical merits of
the position. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a
material effect on the Companys consolidated financial position, cash flows, and results of
operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
clarifies the definition of fair value, establishes guidelines for measuring fair value, and
expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements and eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 will be effective on January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 157 but does not believe that the adoption of
SFAS 157 will have any material impact on its consolidated financial position, cash flows, or
results of operations.
7
Note 2Commitments and Contingencies
Operating Leases
The Company leases its facilities under three non-cancelable operating leases which expire in 2007
and 2009. Future minimum lease payments under these leases as of June 30, 2007 are approximately as
follows:
|
|
|
|
|
2007 |
|
$ |
196,000 |
|
2008 |
|
|
334,000 |
|
2009 |
|
|
135,000 |
|
|
|
|
|
Total |
|
$ |
665,000 |
|
|
|
|
|
Litigation
On March 14, 2005, Mr. Craig Behar filed a complaint against the Company in Maricopa County
Superior Court (case no. CV2005-004439) in Phoenix, Arizona. The complaint contains allegations of
breach of contract and unpaid wages and seeks damages under various causes of action in amounts up
to $311,400. The Company has reviewed Mr. Behars complaint with its counsel and finds the claims
to be wholly without merit and intends to vigorously defend itself. Moreover, management believes
that the amount of damages claimed by Mr. Behar have been grossly overstated in an attempt to
induce the Company to settle the action rather than to proceed to litigation.
In addition, the Company is a party to certain other legal proceedings that arise in the
ordinary course and are incidental to its business. Although litigation is inherently uncertain,
based on past experience, management does not believe that the currently pending and threatened
litigation or claims will have a material adverse effect on the Companys consolidated financial
position or results of operations. However, future events or circumstances, currently unknown to
management, will determine whether the resolution of pending or threatened litigation or claims
will ultimately have a material effect on consolidated financial position, cash flows or results of
operations in any future reporting periods.
Note 3Stock Option Plans
A summary of employee stock option activity under the 1998 Stock Option Plan during the six
months ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
Options |
|
Stock Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2006 (1) |
|
|
2,248,075 |
|
|
$ |
2.42 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(526,000 |
) |
|
|
1.66 |
|
Forfeited or expired |
|
|
(656,875 |
) |
|
|
1.91 |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 (1) |
|
|
1,065,200 |
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 (2) |
|
|
757,200 |
|
|
$ |
2.57 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes stock options to purchase 110,000 shares of common stock at a weighted average
exercise price of $1.93 per share being held by consultants. |
|
(2) |
|
Excludes stock options to purchase 100,000 shares of common stock at a weighted average price
of $1.50 per share being held by a consultant. |
On June 27, 2007, the stockholders approved the 2006 Stock Incentive Plan (the 2006
Plan). All stock options previously granted under the 2006 Plan that were subject to stockholder
approval are now outstanding. Pursuant to the terms of the 2006 Plan, the Company may issue up to
3,700,000 shares of common stock plus an additional number of shares of common stock equal to the
number of shares previously granted under the 1998 Stock Option Plan that either terminate, expire,
or lapse after the date of the Board of Directors approval of the 2006 Plan. As of June 30, 2007,
there are 4,356,875 shares of common stock reserved for issuance under the 2006 Plan. Pursuant to
the terms of the 2006 Plan, eligible individuals may be granted incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock, or
stock grant awards. In June 2007, the Company granted 32,500 unrestricted shares of common
stock to its directors pursuant to the 2006 Plan.
8
A summary of employee stock option activity under the 2006 Stock Incentive Plan during the six
months ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
Options |
|
Stock Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2006 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
323,000 |
|
|
|
10.00 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
323,000 |
|
|
$ |
10.00 |
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
75,000 |
|
|
$ |
10.00 |
|
|
|
|
|
|
|
|
The fair values of share-based payments are estimated on the date of grant using a
Black-Scholes option pricing model that uses the weighted average assumptions noted in the
following table. Expected volatility is based on historical volatility of the Companys common
stock. The Company has elected to use the simplified method described in Staff Accounting Bulletin
107, Share-Based Payment, to estimate the expected term of employee stock options. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of each employee stock option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Risk-free interest rate: |
|
|
5.0 |
% |
|
|
4.6 |
% |
Expected term: |
|
5 Years |
|
|
5 years |
|
Expected dividend yield: |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility: |
|
|
156 |
% |
|
|
170 |
% |
The Company recognized compensation expense for the issuance of options and warrants of
$597,307 and $449,157 for the three months ended June 30, 2007 and 2006, respectively. For the six
months ended June 30, 2007 and 2006, the Company recognized compensation expense of $912,097 and
$721,075, respectively.
As of June 30, 2007, there was $2,447,186 in total unrecognized compensation cost, which is
expected to be recognized over a weighted average period of 1.50 years.
Note 4Related Party Transactions
Alonso Ancira, a member of our Board of Directors, serves on the Board of Directors of
Mexicans & Americans Thinking Together Foundation, Inc. (Organization). The Company made net
payments of $125 thousand and $125 thousand to this Organization as part of a Corporate Sponsorship and Management Services
Agreement (the CSMSA) during the three and nine months ended June 30, 2007. See the Contractual
Obligations and Commitments section within Item 2. Managements Discussion and Analysis or Plan of
Operation.
Note 5Restatement of Previously Issued Interim Financial Information
5a. April 2007 Restatement (as originally filed)
In the fourth quarter of 2006, the Company identified accounting errors related to its
accounting for stock options and warrants during 2006. Accordingly, the Company has restated its
interim financial information for the three and six months ended June 30, 2006. The Company
revisited the assumptions applied in its valuation of certain warrants and stock option awards.
Upon review of the assumptions applied during the three and six months ended June 30, 2006, it was
determined that certain assumptions related to the expected term and volatility used in the
Black-Scholes option pricing model needed correction. These corrections resulted in a charge of
$174,899, which resulted in an increase in net loss of $174,899 or ($0.02) per share for the three
months ended June 30, 2006 and a charge of $4,843,467, which resulted in an increase in net loss of
$4,843,467 or ($0.60) per share for the six months ended June 30, 2006. In addition, the Company
determined that
certain reclassifications between operating expense line items on the consolidated statements of
operations were required for the three and six months ended June 30, 2006. These reclassifications
had no effect on total operating expenses or net loss. The restatements had no effect on the
Companys cash flows from operating, investing or financing activities for the six months ended
June 30, 2006.
9
The following table summarizes the effects of the restatement on the Companys interim
financial information for the three and six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Total |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(890,891 |
) |
|
$ |
(174,899 |
) |
|
$ |
(1,065,790 |
) |
Net loss |
|
|
(883,226 |
) |
|
|
(174,899 |
) |
|
|
(1,058,125 |
) |
Loss per share |
|
|
(0.11 |
) |
|
|
(0.02 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,063,445 |
) |
|
|
(4,843,467 |
) |
|
|
(7,906,912 |
) |
Net loss |
|
|
(3,048,000 |
) |
|
|
(4,843,467 |
) |
|
|
(7,891,467 |
) |
Loss per share |
|
|
(0.38 |
) |
|
|
(0.60 |
) |
|
|
(0.98 |
) |
The following table summarizes the effects of the restatement and reclassifications on
the Companys operating costs and expenses for the three and six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Search |
|
|
Sales and |
|
|
Content |
|
|
General and |
|
|
and |
|
|
|
|
|
|
Services |
|
|
Marketing |
|
|
Development |
|
|
Administrative |
|
|
Amortization |
|
|
Total |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
47,178 |
|
|
$ |
33,686 |
|
|
$ |
76,562 |
|
|
$ |
797,152 |
|
|
$ |
20,220 |
|
|
$ |
974,798 |
|
Total adjustments |
|
|
|
|
|
|
|
|
|
|
38,036 |
|
|
|
136,863 |
|
|
|
|
|
|
|
174,899 |
|
Total reclassifications |
|
|
|
|
|
|
55,308 |
|
|
|
116,433 |
|
|
|
(171,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
47,178 |
|
|
$ |
88,994 |
|
|
$ |
231,031 |
|
|
$ |
762,274 |
|
|
$ |
20,220 |
|
|
$ |
1,149,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
165,330 |
|
|
$ |
57,918 |
|
|
$ |
118,371 |
|
|
$ |
2,928,529 |
|
|
$ |
41,769 |
|
|
$ |
3,311,917 |
|
Total adjustments |
|
|
|
|
|
|
|
|
|
|
72,443 |
|
|
|
4,771,024 |
|
|
|
|
|
|
|
4,843,467 |
|
Total reclassifications |
|
|
|
|
|
|
81,746 |
|
|
|
222,194 |
|
|
|
(303,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
165,330 |
|
|
$ |
139,664 |
|
|
$ |
413,008 |
|
|
$ |
7,395,613 |
|
|
$ |
41,769 |
|
|
$ |
8,155,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of the restatement on the Companys
stockholders equity as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Stock |
|
|
Stock |
|
|
Paid-in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(Unaudited) |
|
As of June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
|
|
|
$ |
8,520 |
|
|
$ |
118,683,701 |
|
|
$ |
(117,536,133 |
) |
|
$ |
(23,972 |
) |
|
$ |
1,132,116 |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
4,843,467 |
|
|
|
(4,843,467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
|
|
|
$ |
8,520 |
|
|
$ |
123,527,168 |
|
|
$ |
(122,379,600 |
) |
|
$ |
(23,972 |
) |
|
$ |
1,132,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5b. October 2007 Restatement
In October 2007, the Company identified errors related to its accounting for stock options and
warrants granted during 2006 and 2007. Accordingly, the Company has restated its interim financial
information for the three and six months ended June 30, 2006 and June 30, 2007. Upon review of the
assumptions applied in the Black-Scholes option pricing model for warrants and stock option awards
granted in 2006 and 2007, the Company determined that errors existed in the expected
volatility rates and expected terms used in the valuation process of the warrants and stock
option awards. As a result, the Company recorded an additional $119 thousand and $2.1 million in
non-cash stock compensation expense during the three and six months ended June 30, 2006,
respectively, and an additional $28 thousand and $77 thousand in non-cash stock compensation
expense during the three and six months ended June 30, 2007. In addition, the Company determined
that certain reclassifications between operating expense line items on the consolidated statements
of operations were required for the three and six months ended June 30, 2007. These
reclassifications had no effect on total operating expenses or net loss. The restatements have no
impact on the Companys cash flows from operating, investing, or financing activities.
10
The following table summarizes the effects of the restatement on the Companys interim
financial information for the three and six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Total |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(1,065,790 |
) |
|
$ |
(118,754 |
) |
|
$ |
(1,184,544 |
) |
Net loss |
|
|
(1,058,125 |
) |
|
|
(118,754 |
) |
|
|
(1,176,879 |
) |
Loss per share |
|
|
(0.13 |
) |
|
|
(0.01 |
) |
|
|
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,906,912 |
) |
|
|
(2,088,575 |
) |
|
|
(9,995,487 |
) |
Net loss |
|
|
(7,891,467 |
) |
|
|
(2,088,575 |
) |
|
|
(9,980,042 |
) |
Loss per share |
|
|
(0.98 |
) |
|
|
(0.26 |
) |
|
|
(1.24 |
) |
The following table summarizes the effects of the restatement on the Companys interim
financial information for the three and six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Total |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(3,775,573 |
) |
|
$ |
(28,173 |
) |
|
$ |
(3,803,746 |
) |
Net loss |
|
|
(3,643,157 |
) |
|
|
(28,173 |
) |
|
|
(3,671,330 |
) |
Loss per share |
|
|
(0.30 |
) |
|
|
(0.00 |
) |
|
|
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,108,411 |
) |
|
|
(77,440 |
) |
|
|
(7,185,851 |
) |
Net loss |
|
|
(6,798,901 |
) |
|
|
(77,440 |
) |
|
|
(6,876,341 |
) |
Loss per share |
|
|
(0.56 |
) |
|
|
(0.00 |
) |
|
|
(0.56 |
) |
The following table summarizes the effects of the restatement on the Companys operating costs
and expenses for the three and six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Search |
|
|
Sales and |
|
|
Content |
|
|
General and |
|
|
and |
|
|
|
|
|
|
Services |
|
|
Marketing |
|
|
Development |
|
|
Administrative |
|
|
Amortization |
|
|
Total |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
47,178 |
|
|
$ |
88,994 |
|
|
$ |
231,031 |
|
|
$ |
762,274 |
|
|
$ |
20,220 |
|
|
$ |
1,149,697 |
|
Total adjustments |
|
|
|
|
|
|
|
|
|
|
9,578 |
|
|
|
109,176 |
|
|
|
|
|
|
|
118,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
47,178 |
|
|
$ |
88,994 |
|
|
$ |
240,609 |
|
|
$ |
871,450 |
|
|
$ |
20,220 |
|
|
$ |
1,268,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
165,330 |
|
|
$ |
139,664 |
|
|
$ |
413,008 |
|
|
$ |
7,395,613 |
|
|
$ |
41,769 |
|
|
$ |
8,155,384 |
|
Total adjustments |
|
|
|
|
|
|
|
|
|
|
18,466 |
|
|
|
2,070,109 |
|
|
|
|
|
|
|
2,088,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
165,330 |
|
|
$ |
139,664 |
|
|
$ |
431,474 |
|
|
$ |
9,465,722 |
|
|
$ |
41,769 |
|
|
$ |
10,243,959 |
|
11
The following table summarizes the effects of the restatement and reclassifications on the
Companys operating costs and expenses for the three and six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and |
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
Search |
|
|
Sales and |
|
|
Content |
|
|
General and |
|
|
and |
|
|
|
|
|
|
Services |
|
|
Marketing |
|
|
Development |
|
|
Administrative |
|
|
Amortization |
|
|
Total |
|
|
|
(Unaudited) |
|
For the three months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
|
|
|
$ |
314,772 |
|
|
$ |
1,339,238 |
|
|
$ |
2,091,165 |
|
|
$ |
103,658 |
|
|
$ |
3,848,833 |
|
Total adjustments |
|
|
|
|
|
|
3,761 |
|
|
|
3,900 |
|
|
|
20,512 |
|
|
|
|
|
|
|
28,173 |
|
Total reclassifications |
|
|
|
|
|
|
32,599 |
|
|
|
(130,500 |
) |
|
|
97,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
|
|
|
$ |
351,132 |
|
|
$ |
1,212,638 |
|
|
$ |
2,209,578 |
|
|
$ |
103,658 |
|
|
$ |
3,877,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
|
|
|
$ |
805,553 |
|
|
$ |
2,332,875 |
|
|
$ |
3,899,464 |
|
|
$ |
196,261 |
|
|
$ |
7,234,153 |
|
Total adjustments |
|
|
|
|
|
|
7,122 |
|
|
|
7,073 |
|
|
|
63,245 |
|
|
|
|
|
|
|
77,440 |
|
Total reclassifications |
|
|
|
|
|
|
32,599 |
|
|
|
(130,500 |
) |
|
|
97,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
|
|
|
$ |
845,274 |
|
|
$ |
2,209,448 |
|
|
$ |
4,060,610 |
|
|
$ |
196,261 |
|
|
$ |
7,311,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of the restatement on the Companys
stockholders equity as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Stock |
|
|
Stock |
|
|
Paid-in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(Unaudited) |
|
As of June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
|
|
|
$ |
8,520 |
|
|
$ |
123,527,168 |
|
|
$ |
(122,379,600 |
) |
|
$ |
(23,972 |
) |
|
$ |
1,132,116 |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
2,088,575 |
|
|
|
(2,088,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
|
|
|
$ |
8,520 |
|
|
$ |
125,615,743 |
|
|
$ |
(124,468,175 |
) |
|
$ |
(23,972 |
) |
|
$ |
1,132,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of the restatement on the Companys
stockholders equity as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Stock |
|
|
Stock |
|
|
Paid-in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(Unaudited) |
|
As of June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported |
|
$ |
|
|
|
$ |
12,271 |
|
|
$ |
143,053,292 |
|
|
$ |
(132,736,518 |
) |
|
$ |
1,533 |
|
|
$ |
10,330,578 |
|
Roll-forward of fiscal
2006 restatement |
|
|
|
|
|
|
|
|
|
|
2,156,547 |
|
|
|
(2,156,547 |
) |
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
77,440 |
|
|
|
(77,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
$ |
|
|
|
$ |
12,271 |
|
|
$ |
145,287,279 |
|
|
$ |
(134,970,505 |
) |
|
$ |
1,533 |
|
|
$ |
10,330,578 |
|
Note 6 Subsequent Events
6a. Going Concern Consideration:
Based on the Companys cash balances of approximately $4.4 million as of November 12, 2007 and
recurring negative operating cash flows, there is substantial doubt about the Companys ability to
continue as a going concern for a reasonable period of time after such date. However, the Company
is actively pursuing financial commitments from certain investors to provide additional funding to
support the business. In addition, the Company is exploring strategic alternatives to reduce the
amount of cash required to effectively operate the business and generate positive cash flows and
profitability.
The accompanying consolidated financial statements, as restated, have been prepared assuming
that the Company will continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty.
12
Item 2. Managements Discussion and Analysis or Plan of Operation
Forward-Looking Information
You should read the following discussion in conjunction with our condensed consolidated
financial statements, which are included in Item 1 of this Form 10-QSB. Managements Discussion and
Analysis or Plan of Operation contains statements that are forward-looking. These statements are
based on current expectations and assumptions, which are subject to risk, uncertainties and other
factors. Actual results may differ materially because of the factors discussed in the subsection
below titled Risk Factors.
Company Overview
Quepasa.com is one of the largest and longest-established, bicultural, Hispanic online
communities. 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 focus 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.
As a result of the implementation of our new business model we intend to provide an increasing
array of products and services such as videos, music, ringtones, chat, email and online dating to
our website visitors that are designed to promote social interaction and information sharing. These
products and services are designed to attract and adhere traffic to our website. During 2007, as a
result of increased traffic on our website, we determined that our technology infrastructure
required substantial upgrades in order to meet the increased demand and to continue to scale our
performance for our users. Our intention during 2007 is to introduce a more robust website with a
variety of products and services that grow and produce positive cash flows. We expect these
products and services to drive visitors to our website. As traffic grows, we expect an increasing
number of major consumer product firms, healthcare providers, financial institutions, and other
enterprises seeking a nexus with the emerging Hispanic market. We intend to actively pursue such
advertising by mounting a sales program targeting large advertising agencies and their clients.
During 2006 and through the second quarter of 2007, we had significant performance growth on
our website. The areas of growth we experienced on the site included page views, registered
members, and unique visitors. Total page views for the second quarter of 2007 were 91 million,
compared to 37 million for the same period in 2006, a 146% increase. Total new members for the
second quarter of 2007 were 33 thousand, compared to 25 thousand for the same period in 2006, a 32%
increase. Daily unique visitors for the second quarter 2007 totaled 3.7 million, compared to 1.8
million for the same period in 2006, a 106% increase.
Revenue sources
During the six months ended June 30, 2007, our revenue was generated from three principal
sources: revenue earned from the sale of banner advertising on our website, the Google AdSense
program, and subscription sales. During the same period for the six months ended June 30, 2006, our
revenue also included revenue earned from performance based insertion of results from our
directory and search engine based on proprietary technologies.
Banner Advertising Revenue. Banner revenue is generated when an advertiser purchases a banner
placement within our quepasa.com website. We recognize revenue related to banner advertisements
upon delivery.
Google AdSense Revenue. Google AdSense revenue is generated when a quepasa.com user clicks on
a Google advertiser through either the displayed advertisements associated with content or by
utilizing the Google search feature. We recognize revenue from Google AdSense in the period it is
reported by Google.
Subscription Sales . As part of the new business model, subscription sales result from the
purchase of mobile content and Internet television programming. Subscription based sales are
generated through various content channels of the site, including the ringtone store and the
television channel. We recognize revenue from subscription sales as products and services are
delivered.
Performance-based Revenue . Performance-based revenue, or paid search results, is generated
when an Internet user searches for a keyword and clicks on an advertisers listing on our website.
Performance-based revenue is 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. Performance-based revenue is recognized when there is evidence that the qualifying
transactions have occurred at a set price. As of December 31, 2006, the performance based revenue
model was discontinued as a result of implementing the new business model.
13
The majority of our revenues correlate to the number and activity level of users on our
website. During 2006 and into the second quarter of 2007, we redesigned and enhanced our website to
provide a more relevant and user friendly experience. We believe that enhancing the user experience
leads to a more valuable experience to both our users and advertisers and provides additional
opportunities to introduce users to our products and services. By providing a more robust community
experience, while providing continued new products and services we seek to become an essential part
of our users online experience. We believe this deeper engagement of new and existing users and
our website design, coupled with the growth of the Internet as an advertising medium will increase
our revenues in 2007.
Operating Expenses
Our principal operating expenses consist of:
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search services expenses; |
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product and content development expenses; |
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sales and marketing expenses; |
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general and administrative expenses; and |
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depreciation and amortization. |
Search Services Expenses. Our search services expenses consist of payments made to our
affiliates and partners that have either integrated our performance based search services into
their sites or provided traffic to our directory listings. There are generally two economic
structures of the affiliate and partner agreements: fixed payments based on a minimum amount of
traffic delivered and variable payments based on the amount of searches or paid clicks associated
with affiliate or partner traffic. We expense search services costs under two methods; fixed
payments are expensed pro-rata over the term of the agreement and agreements based on a percentage
of revenue are expensed based on the underlying revenue multiplied by the agreed upon rate. As of
December 31, 2006, we have discontinued our search services.
Product and Content Development Expenses. Product and content development expenses consist of
personnel costs associated with the development, testing and upgrading of our website and systems,
content fees, and purchases of specific technology, particularly software and hardware related to
our infrastructure upgrade.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and
expenses of marketing and sales personnel, and other marketing-related expenses including our mass
media-based branding and advertising.
General and Administrative Expenses. General and administrative expenses consist primarily of
costs related to corporate personnel, occupancy costs, general operating costs and corporate
professional fees, such as legal and accounting fees. As we move forward with our new business
model, we anticipate an increase in general operating expenses, specifically, administrative
salaries and dues and subscriptions and we anticipate a decrease in certain expenses, specifically,
professional fees related to costs associated with business advisory services and financial
consulting services.
Depreciation and Amortization Expenses. Our depreciation and amortization expenses have
consisted primarily of depreciation related to our property and equipment and the amortization
pertaining to jet rights acquired in 2006.
Other Income (Expense). Other income (expense) consists primarily of interest earned and
earned grant income. We have invested our cash in money market funds and interest bearing checking
and saving accounts, which are subject to minimal credit and market risk. Earned grant income
represents the amortized portion of a cash grant received from the Mexican government for approved
capital expenditures. The grant is being recognized on a straight-line basis over the useful lives
of the purchased assets.
Results of Operations
Comparison of the three and six months ended June 30, 2007 with the three and six months ended June
30, 2006
Our results of operations for the three and six months ended June 30, 2007 and 2006 were
characterized by expenses that significantly exceeded revenues during the periods. For the three
and six months ended June 30, 2007, we reported net losses of $3.7 million and $6.9 million,
respectively, compared to net losses of $1.2 million and $10.0 million for the three and six months
ended June 30, 2006. During the three and six months ended June 30, 2007, we incurred $597 thousand
and $912 thousand, respectively, in expenses related to issuance of stock options and warrants
compared to $449 thousand and $8.8 million for the three and six months ended June 30, 2006. During
the three and six months ended June 30, 2006, $7.4 million represented costs associated with
certain strategic initiatives, including acquiring the services of the Companys Chief Executive
Officer. In addition, we focused on evaluating and enhancing our business infrastructure resulting
in an increase in professional fees of $729 thousand and $1.8 million, an increase in travel and
entertainment of $128 thousand and $271
thousand and an increase in dues and subscriptions of $53 thousand and $124 thousand for the three
and six months ended June 30, 2007, respectively, over the same periods in 2006. As a result, we
increased our product and content development related expenses by approximately $1.0 million and
$1.8 million, sales and marketing expense increased by $262 thousand and $706 thousand, and
depreciation and amortization by $83 thousand and $154 thousand, for the three and six months ended
June 30, 2007, respectively, over the same periods in 2006.
14
Revenues
We generated $73 thousand of revenue for the three months ended June 30, 2007, a decrease of
$11 thousand, or 13%, from the $84 thousand of revenue generated for the three months ended June
30, 2006. For the six months ended June 30, 2007 we generated $126 thousand of revenue, a decrease
of $122 thousand or 49% from $248 thousand for the six months ended June 30, 2006. These changes
are attributable to a decrease in performance-based revenue partially offset by increases in banner
advertising and Google AdSense revenue. In order to generate significant revenue under the new
business model, we must continue to enhance the development and marketing of our banner advertising
inventory. For the six months ended June 30, 2007, our revenue was primarily generated from banner
advertising.
Banner Advertising Revenue. Banner advertising revenue for the three months ended June 30,
2007 increased by approximately $55 thousand, or 1,833 %, compared to the prior year. For the six
months ended June 30, 2007 banner advertising revenue increased by approximately $82 thousand, or
twelve fold, from $10 thousand in the prior year. We currently expect banner advertising revenue to
increase for 2007 compared to 2006 as we increase our user base and activity levels on our website.
For the three and six months ended June 30, 2007, banner advertising revenue accounted for
approximately 79% and 73% of total revenue, respectively, compared to 4% and 4% in 2006.
Google AdSense. Google AdSense revenue for the three months ended June 30, 2007 increased by
approximately $2 thousand, or 15%, as compared to the prior year as a result of the increase in
user traffic. For the six months ended June 30, 2007, Google AdSense revenue decreased by
approximately $10 thousand, or 23%, as compared to the prior year as a result of the change from
the old business model. We currently expect Google AdSense revenue to increase for 2007 compared to
2006 as we increase our user base and activity levels on our website. For the three and six months
ended June 30, 2007, Google AdSense revenue accounted for approximately 21% and 26% of total
revenue, respectively, compared to 16% and 17% in 2006.
Performance-based Revenue. Performance-based revenue for the three months ended June 30, 2007
decreased by approximately $67 thousand, or 100 %, as compared to the prior year. For the six
months ended June 30, 2007 performance based revenue decreased by approximately $196 thousand, or
100 %, as a result of the change from the old business model. During 2006, we shifted our business
model from the less profitable performance based revenue to a banner advertising revenue model. As
of December 31, 2006, we have discontinued our performance based services.
Subscription Sales. Subscription based revenue for the three and six months ended June 30,
2007 resulted in approximately 0% of total revenues. Subscription based sales were generated
through various content channels of the site, including the ringtone store and the television
channel.
Operating Costs and Expenses
Search Services. Search services expenses decreased $47 thousand and $165 thousand, or 100 %,
for the three and six months ended June 30, 2007. This change is attributable to a discontinuation
of our expenses related to online distribution agreements and corresponds to the discontinued
performance based revenue at the end of 2006.
We do not intend to incur any search services expenses during 2007 as a result of the changes
in our new business model.
Sales and Marketing. Sales and marketing expense increased $262 thousand, or 295%, to $351
thousand, from $89 thousand for the three months ended June 30, 2007 and June 30, 2006,
respectively. For the six months ended June 30, 2007, sales and marketing expense increased $706
thousand, or 505%, to $845 thousand from $140 thousand for the six months ended June 30, 2006.
During 2007, as a result of expanding our sales and marketing efforts to acquire more advertisers
and traffic, our expense increased compared to 2006. In 2007 we maintained sales offices in New
York City and Miami and hired sales and marketing personnel to bolster our sales initiatives. These
increases are partially offset by a decrease in commission expense related to the decline in
revenue.
We currently believe that sales and marketing expenses will increase in 2007 compared to 2006,
as we continue to grow and expand our reach to advertisers and users.
15
Product and Content Development. Product and content development expenses increased $1.0
million, or 404%, to $1.2 million from $241 thousand for the three months ended June 30, 2007 and
June 30, 2006, respectively. For the six months ended June 30, 2007, product and content
development expenses increased $1.8 million, or 412%, to $2.2 million from $431 thousand for the
same period in 2006. As a result of our efforts to evaluate and upgrade our technology
infrastructure, we had significant increases in our product and content development expense. During
the six months ended June 30, 2007, these higher expense costs consisted mainly of increases in
technology consulting of $829 thousand, increases associated with technology personnel of $576
thousand, and increases in our Mexico operations of $256 thousand. Quepasa.com de Mexico provides
substantially all of our design, translation services, and website management and development
services for us.
We currently believe that product and content development expenses will increase significantly
in 2007 compared to 2006, as we continue to invest in our infrastructure and personnel to provide
an enhanced product to our users and advertisers.
General and Administrative. General and administrative expenses consist primarily of
compensation related expenses (including stock-based compensation), salaries, travel and
entertainment, dues and subscriptions expense, and professional fees.
General and administrative expenses increased $1.3 million, or 154%, to $2.2 million,
from $871 thousand for the three months ended June 30, 2007 and June 30, 2006, respectively. For
the six months ended June 30, 2007, general and administrative expenses decreased $5.4 million, or
57%, to $4.1 million from $9.5 million for the same period in 2006. The decrease is primarily
attributed to the decrease in compensation for certain strategic initiatives, including acquiring
the services of the Companys Chief Executive Officer, which occurred during the three months ended
March 31, 2006. This decrease is partially offset by increases professional fees, recruiting fees
and salaries associated with building and enhancing our business.
The decrease in general and administrative expenses for the six months ended June 30, 2007 was
offset by the increases in the following areas for the three months ended June 30, 2007 compared to
the same period in 2006:
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An increase in general and administrative salaries of $94 thousand, or 78%, to
$214 thousand, from $120 thousand for the prior year. This increase is driven by our
increased staffing during 2006 and the second quarter 2007 as we build and enhance our
internal services and administrative and accounting functions. |
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An increase in recruiting fees of $268 thousand, to $282 thousand from $14
thousand for the prior year and an increase in stock compensation expense of $178
thousand, or 61%, to $470 thousand from $292 thousand or the prior year. These increases
are driven by the increased hiring during the second quarter 2007. |
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An increase in professional fees expense of approximately $325 thousand, or 239%,
to $464 thousand, from $136 thousand for the prior year. This increase is primarily
attributable an increase in technology consulting of $369 thousand, an increase in
accounting fees of $209 thousand and an increase in legal fees of $139 thousand compared
the prior year. These increases were required in order to enhance and our technology
infrastructure and improve our accounting and legal compliance and corporate governance. |
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An increase in travel and entertainment of $117 thousand, or 325%, to $153
thousand from $36 thousand for the prior year, an increase in dues and subscriptions of
$53 thousand, or 126%, to $95 thousand from $42 thousand for the prior year and an
increase in printing, postage and reproduction of $101 thousand, to $102 thousand from
$1 thousand for the prior year. These increases are mainly attributable to our overall
growth as we build and enhance our business. |
We currently believe that general and administrative expenses, excluding non-recurring
stock-based compensation charges, will increase in 2007 compared to 2006, as we continue to invest
in our infrastructure to support our continued business expansion.
Depreciation and Amortization. Depreciation and amortization expense increased $84 thousand,
or 420 %, to $104 thousand from $20 thousand for the three months ended June 30, 2007 and June 30,
2006, respectively. For the six months ended June 30, 2007, depreciation and amortization expense
increased $154 thousand, or 367%, to $196 thousand from $42 thousand for the same period in 2006.
This increase is attributable to the depreciation associated with recent capital purchases and
approximately $50 thousand in amortization expense, for the six months ended June 30, 2007, related
to corporate jet rights received as part of the agreement with Mexicans & Americans Thinking
Together.
16
We have purchased and expect to continue purchasing the capital equipment we need to sustain
and build our infrastructure as our user growth and product requirements expand. As a result, we
expect depreciation and amortization expense to increase in 2007 and beyond as we invest in capital
equipment related to our enterprise growth.
Other Income (Expense). Other income (expense) primarily consists of interest income offset by
interest expense. Other income for the three months ended June 30, 2007 increased $124 thousand, to
$132 thousand from $8 thousand for the three months ended June 30, 2006. For the six months ended
June 30, 2007, other income increased $295 thousand to $310 thousand from $15 thousand for the same
period in 2006. The increased income is mainly attributable to the additional interest earned on
cash and cash equivalents.
Liquidity and Capital Resources
As of June 30, 2007 and December 31, 2006:
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2007 |
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2006 |
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Cash and cash equivalents |
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$ |
9,348,490 |
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$ |
14,093,811 |
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Percentage of total assets |
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80 |
% |
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88 |
% |
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For the six months ended June 30, 2007 and 2006:
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2007 |
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2006 |
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Net cash used in operating activities |
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$ |
(5,046,813 |
) |
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$ |
(1,140,292 |
) |
Net cash used in investing activities |
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$ |
(610,340 |
) |
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$ |
(72,357 |
) |
Net cash provided by financing activities |
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$ |
913,150 |
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$ |
1,062,737 |
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We have substantial capital resource requirements and have generated significant losses
since our inception. At June 30, 2007, we had $9.3 million in cash and cash equivalents compared to
$14.1 million at December 31, 2006.
We invest excess cash predominately in marketable securities that are liquid. We also
invest excess cash to support our growing infrastructure needs and to expand our operations.
During the six months ended June 30, 2007, we obtained gross proceeds of $835 thousand from
the exercise of stock options. During the six months ended June 30, 2006, we obtained gross
proceeds of $1.1 million from the exercise of stock options and warrants.
Based on our cash balances of approximately $4.4 million as of November 12, 2007 and our
recurring negative operating cash flows, there is substantial doubt about our ability to continue
as a going concern for the next twelve months. However, we are actively pursuing financial
commitments from certain investors to provide additional funding to support the business. In
addition, we are exploring strategic alternatives to reduce the amount of cash required to
effectively operate the business and generate positive cash flows and profitability.
The accompanying consolidated financial statements, as restated, have been prepared assuming
that the Company will continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty.
Cash flow changes
Cash used in operating activities is driven by our net loss, adjusted for non-cash items.
Non-cash adjustments include depreciation, warrants issued for strategic initiatives, including an
executive acquisition, and other stock-based compensation expense. Net cash used in operations was
$5.0 million for the six months ended June 30, 2007 compared to $1.1 million for the same period in
2006. For the six months ended June 30, 2007, net cash used by operations consisted primarily of a
net loss of $6.9 million offset by non-cash expenses of $196 thousand in depreciation and
amortization plus $1.1 million related to the issuance of stock options to employees and common
stock to directors. Additionally, changes in working capital impacted the net cash used in
operating activities. These changes included an increase in accounts payable of $687 thousand and
other assets of $90 thousand offset by decreases in trade accounts receivable of $10 thousand,
other current assets of $96 thousand and accrued expenses of $155 thousand. Net cash used by
operations for the six months ended June 30, 2006 consisted of a net loss of $10.0 million offset
by non-cash expenses of $42 thousand in depreciation and amortization plus $7.4 million related to
the issuance of warrants for strategic initiatives, including an executive acquisition and $1.4
million related to the issuance of stock options and warrants for compensation. Changes in working
capital for the six months ended June 30, 2006 included decreases in accounts receivable of $36
thousand, accrued expenses of $61 thousand, other assets of $21 thousand and deferred revenue of $29 thousand offset by increases in accounts payable of
$106 thousand and other current assets of $9 thousand.
17
Net cash used in investing activities is primarily attributable to capital expenditures. Our
capital expenditures were $614 thousand for the six months ended June 30, 2007, compared to capital
expenditures of $72 thousand for the same period in 2006. The increase for the six months ended
June 30, 2007 was primarily a result of our purchase of certain hardware to support our expanding
operations.
Net cash provided by financing activities is driven by our financing activities related to
stock option and warrant exercises. Cash proceeds from the exercise of stock options and warrants
were $913 thousand for the six months ended June 30, 2007, compared to $1 million, for the same
period in 2006.
Capital expenditures
Capital expenditures have generally been comprised of purchases of computer hardware,
software, server equipment, furniture and fixtures. Capital expenditures were $614 thousand for the
six months ended June 30, 2007, compared to $72 thousand for the same period in 2006. Our capital
expenditures in 2007 are expected to increase compared to 2006 levels as we continue to invest in
the expansion of our product and services offerings. We anticipate that this increased level of
expenditure will continue in the future as business conditions merit.
Contractual Obligations and Commitments
On November 20, 2006, in connection with a financing transaction, the Company entered into a
Corporate Sponsorship and Management Services Agreement (the CSMSA) with an investor and a
foundation formed and controlled by the investor (the Organization) The CSMSA provides that the
Company will develop, operate and host the Organization website and provide to it all the services
necessary to conduct such operations. During the first three years of the term of the CSMSA, the
Organization will reimburse the Company for its costs and expenses in providing these services, not
to exceed $500 thousand per annum. The CSMSA further provides that the Company will pay the
Organization operating costs through October 2016 (including certain special event costs commencing
in year four), up to $1.2 million per annum, minus the Companys costs and expenses for providing
the services described above. Through the six months ended June 30, 2007, the net cash outflows
related to the CSMSA were $125 thousand.
Recent Acquisition
On February 7, 2007, the Company purchased certain assets of corazones.com. We acquired all
existing registered users, the domains corazones.com and corazonesdemexico.com, the existing
operating system including the interface, administrative and billing systems and the related logos
and trademarks of the associated properties.
Critical Accounting Policies, Judgments and Estimates
In preparing the financial statements in accordance with accounting principles generally
accepted in the United States of America, management must often make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at
the date of the financial statements and during the reporting period. Some of the judgments can be
subjective and complex, and actual results could differ from those estimates.
An accounting policy is considered to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the time the estimates
are made, and if different estimates that reasonably could have been used, or changes in the
accounting estimates that are reasonably likely to occur, could materially impact the consolidated
financial statements. We believe the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the condensed consolidated
financial statements.
Stock-Based Compensation Expense.
We account for stock-based compensation using the fair value method outlined by SFAS 123R.
Accordingly, we recognize stock-based compensation for the estimated fair value of employee stock
options on the date of grant and recognize compensation cost for those shares expected to vest over
the service period of the award. Prior to SFAS 123R adoption, we accounted for share-based payments
under APB 25 and accordingly, recognized stock-based compensation expense using the intrinsic value
method.
The fair values of share-based payments are estimated on the date of grant using the
Black-Scholes option pricing model that uses weighted average assumptions. Expected volatility is
based on historical volatility of the Companys common stock. The Company has elected to use the
simplified method described in Staff Accounting Bulletin 107, Share-Based Payment, to estimate the expected term of employee stock options. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant.
18
The assumptions used in calculating the fair value of stock-based awards represent our best
estimates, but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. See Note 3 Stock Option
Plans and Note 4 Restatement of Interim Financial Information for additional information.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, which clarifies the definition of fair value,
establishes guidelines for measuring fair value, and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value measurements and eliminates
inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be
effective for us on January 1, 2008. The Company is currently evaluating the impact of adopting
SFAS 157 but does not believe that the adoption of SFAS 157 will have a material impact on our
financial position, cash flows, or results of operations.
In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income
tax positions. This Interpretation requires that the Company recognize in its financial statements
the impact of a tax position if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The Company adopted FIN 48 on January 1, 2007. The
adoption of FIN 48 did not have a material effect on the Companys consolidated financial position,
cash flows, and results of operations.
Forward-looking Statements
This Quarterly Report on Form 10-QSB includes forward-looking statements, as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of historical facts,
included or incorporated in this Form 10-QSB could be deemed forward-looking statements,
particularly statements about our plans, strategies and prospects under the heading Managements
Discussion and Analysis or Plan of Operation. Forward-looking statements are often characterized
by the use of words such as believes, estimates, expects, projects, may, will,
intends, plans, or anticipates, or by discussions of strategy, plans or intentions. All
forward-looking statements in this Form 10-QSB are made based on our current expectations and
estimates, and involve risks, uncertainties and other factors that could cause results or events to
differ materially from those expressed in forward-looking statements.
Among the factors that could affect our results and cause them to materially differ from
those contained in the forward-looking statements include:
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our ongoing operating losses; |
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the possibility of liability for information displayed or accessed via our
website and for other commerce related activities;
· competition in the operation of our website and in the provision of our
information retrieval services; |
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the ability to protect our intellectual property rights; |
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the ability to retain our executive officers and senior management; |
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the ability to raise additional capital; |
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changing laws, rules, and regulations; |
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potential liability for breaches of security on the Internet; |
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dependence on third party databases and computer systems; |
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competition from traditional media companies; and |
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new technologies that could block our ability to advertise. |
Additional factors that could affect our future results or events are described from time to
time in our Securities and Exchange Commission reports. In particular, see the description of risks
and uncertainties that is set forth in our Forms 10-KSB and 10-KSB/A for the fiscal year ended
December 31, 2006, filed on April 17, 2007, and May 4, 2007, respectively, as well as other similar
disclosures in subsequently filed reports. Readers are cautioned not to place undue reliance on
forward-looking statements. We assume no obligation to update such information.
19
You should carefully consider the risks and uncertainties stated above and other information
in this Form 10-QSB and subsequent reports filed with or furnished to the Securities and Exchange
Commission before making any investment decision with respect to our securities. If any of the
risks or uncertainties stated above actually occurs or continues, our business, financial condition
or operating results could be materially adversely affected, the trading prices of our securities
could decline, and you could lose all or part of your investment. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in their entirety by
this cautionary statement.
Item 3. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in reports filed under the Exchange
Act is recorded, processed, summarized, and reported within the specified time periods and
accumulated and communicated to the Companys management, including its principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Companys management, under the supervision and with the participation of its Chief
Executive Officer and its Chief Financial Officer, evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange
Act) as of the end of the period covered by this report. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that, as of that date, the Companys
disclosure controls and procedures required by paragraph (b) of 13a-15 or 15d-15 were not effective
at the reasonable assurance level as a result of certain weaknesses in the Companys internal
control over financial reporting, which the Company views as an integral part of its disclosure
controls and procedures.
Remediation of Certain Weaknesses and Changes in Internal Controls
As discussed in the Companys Annual Report on Form 10-KSB for the year ended December 31,
2006, during the financial reporting process for the fiscal year end December 31, 2006, certain
weaknesses in the Companys internal control over financial reporting were identified, including
inadequate documentation of policies, procedures, and internal controls; weaknesses in information
technology controls and procedures; a lack of sufficient accounting personnel and expertise to
address the Companys expanding and increasingly complex financial reporting needs; and incorrect
accounting treatment of certain expenses and equity issuances.
The Company is addressing these identified weaknesses by, among other things, conducting a
search for additional and more experienced accounting and finance staff to bolster the Companys
internal capabilities and expertise; recently hiring a Chief Technology Officer and outside
consultant to address information technology controls and procedures; increased oversight of the
Companys operations in Mexico; improving the Companys technology related to its business and
operations; and undertaking to systemically resolve such weaknesses in consultation with its
independent auditor.
Through the period ended June 30, 2007, management augmented its internal accounting resources
by using external resources in connection with its review and completion of the financial reporting
process. Management believes that there are no material inaccuracies or omissions of material fact
and, to the best of its knowledge, believes that the consolidated financial statements for the
quarter ended June 30, 2007, fairly present in all material respects the financial condition and
results of operations for the Company in conformity with accounting principles generally accepted
in the United States of America.
As part of the Companys on-going efforts to address the weaknesses discussed above, the
Company has hired a new Controller and an outside consultant in August 2007 to assist with the
financial review and reporting processes, document policies and procedures, and implement a
remediation plan to address the internal control weaknesses.
Certain of the personnel changes described above occurred during the fourth quarter of 2006.
Other than as described above, there have not been any other changes in the Companys internal
control over financial reporting during the quarter ended June 30, 2007, which have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
20
Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. The Companys management,
including its Chief Executive Officer and its Chief Financial Officer, do not expect that the
Companys disclosure controls will prevent or detect all errors and all fraud. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with associated policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
21
QUEPASA CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits
See Exhibit Index
22
QUEPASA CORPORATION AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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Quepasa Corporation
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November 16, 2007 |
By: |
/s/ John C. Abbott
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Name: |
John C. Abbott |
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Title: |
Chairman and Chief Executive Officer
(Principal Executive Officer) |
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November 16, 2007 |
By: |
/s/ Michael D. Matte
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|
|
|
Name: |
Michael D. Matte |
|
|
|
Title: |
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer) |
|
|
23
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.3*
|
|
Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended |
|
|
|
31.4*
|
|
Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended |
|
|
|
32.3**
|
|
Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1850, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
32.4**
|
|
Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1850, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
filed herewith |
|
** |
|
furnished herewith |
24