Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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 March 31, 2008
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 of Incorporation)
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(I.R.S. Employer Identification No.) |
224 Datura Street, Suite 1100
West Palm Beach, Florida 33401
(Address of Principal Executive Office)
(561) 491-4181
(Registrants telephone number, including area code)
7550 East Redfield Road, Suite A
Scottsdale, Arizona 85260
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the Act). o Yes þ No
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Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. |
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Class
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Shares Outstanding as of May 8, 2008 |
Common Stock, $.001 par value per share
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12,648,836 |
QUEPASA CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
9,074,037 |
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$ |
3,673,281 |
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Accounts receivable, net of allowance of $18,000 and $15,000, respectively |
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11,066 |
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38,306 |
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Other current assets |
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127,446 |
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146,876 |
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Total current assets |
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9,212,549 |
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3,858,463 |
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Property and equipment, net |
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944,979 |
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1,023,041 |
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Jet rights, net |
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885,712 |
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Note Receivable |
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300,000 |
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Other assets |
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132,907 |
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133,692 |
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Total assets |
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$ |
10,590,435 |
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$ |
5,900,908 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
794,096 |
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$ |
887,598 |
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Accrued expenses |
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232,850 |
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306,130 |
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Unearned grant income |
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59,902 |
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65,917 |
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Current portion of long-term debt |
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1,950,303 |
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1,668,808 |
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Total current liabilities |
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3,037,151 |
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2,928,453 |
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Long-term debt |
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5,417,759 |
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5,526,506 |
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Notes payable, net of unamortized discount of $2,432,493 |
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4,624,744 |
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Total liabilities |
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13,079,654 |
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8,454,959 |
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COMMITMENTS AND CONTINGENCIES (see Note 7) |
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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, $.001 par value; authorized - 50,000,000 shares; 12,643,261
shares issued and outstanding at March 31, 2008 and 12,284,511 shares
issued and outstanding at December 31, 2007 |
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12,643 |
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12,285 |
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Additional paid-in capital |
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142,243,746 |
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138,880,462 |
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Accumulated deficit |
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(144,753,146 |
) |
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(141,452,663 |
) |
Accumulated other comprehensive income |
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7,538 |
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5,865 |
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Total stockholders equity |
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(2,489,219 |
) |
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(2,554,051 |
) |
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Total liabilities and stockholders equity |
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$ |
10,590,435 |
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$ |
5,900,908 |
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See notes to unaudited condensed consolidated financial statements.
1
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
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For the Three Months Ended March 31, |
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2008 |
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2007 |
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REVENUES |
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$ |
6,863 |
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$ |
52,482 |
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OPERATING COSTS AND EXPENSES: |
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Sales and marketing |
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80,623 |
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469,316 |
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Product and content development |
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548,714 |
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972,740 |
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General and administrative |
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941,665 |
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1,585,138 |
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Stock based compensation expense |
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1,396,821 |
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314,790 |
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Depreciation and amortization |
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108,415 |
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92,603 |
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TOTAL OPERATING COSTS AND EXPENSES |
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3,076,238 |
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3,434,587 |
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LOSS FROM OPERATIONS |
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(3,069,375 |
) |
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(3,382,105 |
) |
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OTHER INCOME (EXPENSE): |
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Interest income |
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50,579 |
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164,386 |
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Interest expense |
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(289,082 |
) |
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Other income |
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7,395 |
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12,708 |
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TOTAL OTHER INCOME (EXPENSE) |
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(231,108 |
) |
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177,094 |
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LOSS BEFORE INCOME TAXES |
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(3,300,483 |
) |
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(3,205,011 |
) |
Income taxes |
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NET LOSS |
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$ |
(3,300,483 |
) |
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$ |
(3,205,011 |
) |
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Foreign currency translation adjustment |
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1,673 |
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8,563 |
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COMPREHENSIVE LOSS |
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$ |
(3,298,810 |
) |
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$ |
(3,196,448 |
) |
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NET LOSS PER COMMON SHARE, BASIC AND DILUTED |
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$ |
(0.26 |
) |
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$ |
(0.26 |
) |
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WEIGHTED AVERAGE NUMBER OF SHARES |
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OUTSTANDING, BASIC AND DILUTED |
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12,477,636 |
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12,139,971 |
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See notes to unaudited condensed consolidated financial statements.
2
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders Equity (Deficit)
For the Three Months Ended March 31, 2008
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Total |
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Preferred Stock |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income |
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Equity (Deficit) |
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BalanceDecember 31,
2007 |
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$ |
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12,284,511 |
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$ |
12,285 |
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$ |
138,880,462 |
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$ |
(141,452,663 |
) |
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$ |
5,865 |
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$ |
(2,554,051 |
) |
Issuance of stock options
for compensation |
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1,130,285 |
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1,130,285 |
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Re-pricing of warrants |
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1,605,382 |
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1,605,382 |
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Issuance of common
stock for professional services |
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50,000 |
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50 |
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218,750 |
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218,800 |
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Issuance of common
stock to directors for compensation |
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8,750 |
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8 |
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31,667 |
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31,675 |
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Exercise of stock options |
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300,000 |
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300 |
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|
377,200 |
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|
377,500 |
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Foreign currency
translation adjustment |
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1,673 |
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|
1,673 |
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Net loss |
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(3,300,483 |
) |
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(3,300,483 |
) |
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BalanceMarch 31,
2008 |
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$ |
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12,643,261 |
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$ |
12,643 |
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|
$ |
142,243,746 |
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$ |
(144,753,146 |
) |
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$ |
7,538 |
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$ |
(2,489,219 |
) |
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See notes to unaudited condensed consolidated financial statements.
3
QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Operating activities: |
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Net loss |
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$ |
(3,300,483 |
) |
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$ |
(3,205,011 |
) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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108,415 |
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|
92,603 |
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Issuance of stock options and warrants for compensation |
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1,130,285 |
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|
314,790 |
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Issuance of common stock to directors for compensation |
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31,675 |
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Issuance of common stock and stock options for professional services |
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218,800 |
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Grant income |
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(6,015 |
) |
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(12,708 |
) |
Bad debt expense |
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5,968 |
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Non-cash interest related to corporate sponsorship agreement |
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191,253 |
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Non-cash interest related to note payable agreements |
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57,237 |
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Amortization of debt issuance costs |
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52,692 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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21,272 |
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|
32,489 |
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Other current assets and other assets |
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41,330 |
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|
102,769 |
|
Accounts payable and accrued expenses |
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(166,782 |
) |
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|
439,568 |
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Net cash used in operating activities |
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(1,614,353 |
) |
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(2,235,500 |
) |
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Investing activities: |
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Purchase of property and equipment |
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(23,583 |
) |
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(253,039 |
) |
Advance to BRC / La Alianza |
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(300,000 |
) |
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|
|
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Net cash used in investing activities |
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|
(323,583 |
) |
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|
(253,039 |
) |
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Financing activities: |
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Proceeds from exercise of stock options and warrants |
|
|
377,500 |
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|
890,650 |
|
Net proceeds from issuance of notes payable |
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|
6,959,519 |
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Net cash provided by financing activities |
|
|
7,337,019 |
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|
890,650 |
|
|
|
|
|
|
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|
Effect of foreign currency exchange rate on cash |
|
|
1,673 |
|
|
|
9,788 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
5,400,756 |
|
|
|
(1,588,101 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,673,281 |
|
|
|
14,093,811 |
|
|
|
|
|
|
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|
Cash and cash equivalents at end of period |
|
|
9,074,037 |
|
|
|
12,505,710 |
|
|
|
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid for interest |
|
$ |
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|
$ |
|
|
|
|
|
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|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
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. In 2007, the Company transitioned from being a bilingual search engine into a
Hispanic social network. With the evolution of the Companys Quepasa.com website into a
Hispanic portal and social network, the future revenue will be predominately display
advertising. The Company re-launched its Quepasa.com website on February 6, 2008 in beta
mode, to be solely a Hispanic social network with content provided by the user
community. The Quepasa.com community provides users with access to an expansive,
bilingual menu of resources that promote social interaction, information sharing, and
other topics of importance to Hispanic users. We offer online marketing capabilities
which enable marketers to display their advertisements in different formats and in
different locations on our website. We work with our advertisers to maximize the
effectiveness of their campaigns by optimizing advertisement formats and placement on
the website. The Quepasa.com web site is operated and managed by the Companys
wholly-owned Mexico-based subsidiary, Quepasa.com de Mexico.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC) for interim financial information and with the instructions to Form 10-Q.
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 three months ended March 31, 2008
are not necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2008. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and
related notes included in the Companys 2007 Annual Report filed with the SEC on Form 10-KSB
on March 31, 2008.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Quepasa.com de Mexico. All
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts in the unaudited 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.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash and cash equivalents. The Company
continually monitors its positions with, and the credit quality of, the financial
institutions it invests with.
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 are 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.
5
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:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Stock options |
|
|
4,834,819 |
|
|
|
1,187,700 |
|
Warrants |
|
|
4,432,500 |
|
|
|
4,432,500 |
|
|
|
|
|
|
|
|
Total |
|
|
9,267,319 |
|
|
|
5,620,200 |
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, ''Fair Value Measurements. This
statement clarifies the definition of fair value of assets and liabilities, establishes a
framework for measuring fair value of assets and liabilities and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. However, the FASB deferred the effective date of SFAS No. 157 until the fiscal
years beginning after November 15, 2008 as it relates to the fair value measurement
requirements for nonfinancial assets and liabilities that are initially measured at fair
value, but not measured at fair value in subsequent periods. These nonfinancial assets
include goodwill and other indefinite-lived intangible assets which are included within
other assets. In accordance with SFAS No. 157, the Company has adopted the provisions of
SFAS No. 157 with respect to financial assets and liabilities effective as of January 1,
2008 and its adoption did not have a material impact on its results of operations or
financial condition. The Company is assessing the impact of SFAS No. 157 for nonfinancial
assets and liabilities and expects that this adoption will not have a material impact on its
results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS
159), which is effective for fiscal years beginning after November 15, 2007. SFAS 159
permits an entity to choose to measure many financial instruments and certain other items at
fair value at specified election dates. Subsequent unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings. The adoption of
SFAS 159 did not have a material impact on the Companys consolidated financial position and
results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations
(SFAS No. 141 (R)). SFAS No. 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business combinations.
SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the acquisition date as the date that
the acquirer achieves control and requires the acquirer to recognize the assets acquired,
liabilities assumed and any non-controlling interest at their fair values as of the
acquisition date. SFAS 141(R) also requires that acquisition-related costs be recognized
separately from the acquisition. SFAS 141(R) is effective for the Company for fiscal 2010.
The Company is currently assessing the impact of SFAS 141(R) on its consolidated financial
position and results of operations.
In December 2007, the FASB issued Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (SFAS No. 160). The
objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of
the financial information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 applies
to all entities that prepare consolidated financial statements, except not-for-profit
organizations. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51s consolidation procedures for consistency
with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008 (that is,
January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited.
The effective date of SFAS No. 160 is the same as that of the related Statement 141(R).
SFAS No. 160 will be effective for the Companys fiscal 2010. SFAS No. 160 shall be applied
prospectively as of the beginning of the fiscal year in which SFAS No. 160 is initially
applied, except for the presentation and disclosure requirements. The presentation and
disclosure requirements shall be applied retrospectively for all periods presented. The
Company is currently assessing the impact of SFAS 160 on its consolidated financial position
and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS No. 161). SFAS No. 161 amends and expands the disclosure
requirement for FASB Statement No. 133, Derivative Instruments and Hedging Activities
(SFAS No. 133). It requires enhanced disclosure about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative
instruments and related hedge items affect an entitys financial position, financial
performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1,
2009. The Company is currently assessing the impact of SFAS 160 on its consolidated
financial position and results of operations.
6
Note 2Property and Equipment
Property and equipment consist of the following at March 31, 2008:
|
|
|
|
|
Software |
|
$ |
489,449 |
|
Computer equipment |
|
|
1,414,336 |
|
Vehicles |
|
|
21,101 |
|
Office furniture and equipment |
|
|
212,247 |
|
Other equipment |
|
|
11,032 |
|
|
|
|
|
|
|
|
2,148,165 |
|
Less accumulated depreciation |
|
|
(1,203,186 |
) |
|
|
|
|
Property and equipmentnet |
|
$ |
944,979 |
|
|
|
|
|
Depreciation expense was $101,645 and $67,418 for the three months ended March 31, 2008
and 2007, respectively.
Note 3Jet Rights
In October 2006, as part of a financing transaction to raise capital, Mexicans &
Americans Trading Together, Inc. (MATT Inc.) agreed to provide the Company with the use of
a corporate jet for up to 25 hours per year through October 2016. The Company recognized the
fair value of the jet rights of $1,007,445 as an asset and an increase to additional paid-in
capital.
On January 25, 2008, under the provisions of a Note Purchase Agreement between the
Company and MATT Inc., these jet rights were terminated. See Note 6 below.
Note 4Note Receivable
On January 9, 2008, the Company advanced $300,000 and received a $300,000 Multiple
Advance Promissory Note (the BRC Note) from BRC Group, LLC (BRC). BRC owns La Alianza de
Futbol Hispano (La Alianza), an organization involved in the support and development of
amateur Hispanic soccer in the United States. The Company and BRC agreed to the terms of the
BRC Note with the understanding that the Company and BRC would work towards finalizing an
agreement, which would provide for, among other things, the Company becoming the official
social networking sponsor for La Alianza.
On March 27, 2008, the Company entered into a Loan Agreement with BRC for a maximum
amount of $600,000. Among other things, pursuant to the terms of the Loan Agreement: (i) the
$300,000 advanced by the Company pursuant to the BRC Note becomes advancement under the
terms of the Loan Agreement; (ii) the Company agreed to advance BRC an additional $50,000 on
April 1, 2008; and (iii) the Company will advance BRC an additional $250,000 on September 1,
2008. BRC executed a promissory note on March 27, 2008, in favor of the Company and agreed
to repay all loans made by the Company under the Loan Agreement by January 8, 2011.
Also on March 27, 2008, and in connection with the Loan Agreement, the Company entered
into an Equity Interests Purchase Warrant, a Right of Purchase and Right of First Refusal
Agreement, and a Website Development and Hosting Agreement with BRC. Pursuant to the terms
and conditions of these agreements the Company will: (i) become an official sponsor of the
2008 La Alianza soccer tournament; (ii) retain the online rights to the La Alianza soccer
tournament for a period of three years; (iii) host and develop the La Alianza website; (iv)
build the La Alianza community within the Quepasa.com website; and (v) share equally with
BRC in the advertising revenues generated from the La Alianza website.
On April 1, 2008, the Company advanced $50,000 to BRC under the terms of the Loan
Agreement.
On April 15, 2008, the Company received notification from BRC that they were in the
process of securing additional funding from another source. As a result, the Company and
BRC entered into negotiations to amend the Loan Agreement. Pursuant to the terms of the amendment, upon securing additional funding, BRC would not
require the additional $250,000 advance scheduled for September 1, 2008 under the terms of
the Loan Agreement. As of the date of this filing, the Company and BRC have not finalized
the amendment to the Loan Agreement.
7
Note 5Long-term Debt
Corporate Sponsorship and Management Services Agreement
On November 20, 2006, in connection with a financing transaction, the Company entered
into Corporate Sponsorship and Management Services Agreement (the CSMSA) with MATT Inc.
and Mexicans & Americans Thinking Together Foundation, Inc. (the Organization). The
Company is in the process of terminating the CMSA. See Note 10 below. The CSMSA provides
that the Company will develop, operate and host the Organizations 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 $500,000 per annum. The CSMSA further provides that
the Company will pay the Organizations operating costs through October 2016 (including
certain special event costs commencing in year four), up to a cap of $1,200,000 per annum
minus the Companys costs and expenses for providing the services described above. The
Organizations obligations to pay any costs and expenses due to the Company are guaranteed
by MATT Inc. See Common Stock section in Note 8.
The Company has established a reasonable estimate of the long-term debt based on the
present value calculation of the expected payout of $1,200,000 per year, or $300,000 per
quarter, through October 2016, discounted at a 12% annual rate, which is based on available
borrowing rates. The following table summarizes the long-term debt calculation as of March
31, 2008 by year:
|
|
|
|
|
|
|
Present Value of |
|
Year Ending December 31: |
|
Expected Payments |
|
Unpaid 2007 Obligations |
|
$ |
520,225 |
|
2008 |
|
|
1,155,535 |
|
2009 |
|
|
1,051,117 |
|
2010 |
|
|
933,903 |
|
2011 |
|
|
829,761 |
|
2012 |
|
|
737,232 |
|
2013 |
|
|
655,021 |
|
2014 |
|
|
581,978 |
|
2015 |
|
|
517,080 |
|
2016 |
|
|
386,210 |
|
|
|
|
|
Total Corporate Sponsorship Liability |
|
|
7,368,062 |
|
Less: Current Portion of Debt |
|
|
(1,950,303 |
) |
|
|
|
|
Long-term Corporate Sponsorship Liability |
|
$ |
5,417,759 |
|
|
|
|
|
Note 6Notes Payable
On January 25, 2008, the Company and MATT Inc. entered into a Note Purchase Agreement
(the MATT Agreement). Pursuant to the terms of the MATT Agreement: (i) MATT Inc. invested $5,000,000 in Quepasa and Quepasa issued MATT Inc. a subordinated promissory note due October 16, 2016 with 4.46%
interest per annum (the MATT Note); (ii) the exercise price of MATT Inc.s outstanding
Series 1 Warrant to purchase 1,000,000 shares of the Companys common stock was reduced from
$12.50 per share to $2.75 per share; (iii) the exercise price of MATT Inc.s outstanding
Series 2 Warrant to purchase 1,000,000 shares of the Companys common stock was reduced from
$15.00 per share to $2.75 per share; and (iv) the Amended and Restated Support Agreement
between the Company and MATT Inc. was terminated, which terminates MATT Inc.s obligation to
provide the Company with the use of a corporate jet for up to 25 hours per year through
October 2016. See Note 3 above. Debt issuance costs of $24,580 related to this transaction
have been capitalized within the Other Assets section of the balance sheet and will be
amortized to interest expense over the life of the note.
On January 25, 2008, the Company and Richard L. Scott Investments, LLC (RSI) entered
into a Note Purchase Agreement (the RSI Agreement). Pursuant to the terms of the RSI
Agreement: (i) RSI invested $2,000,000 in Quepasa and Quepasa issued RSI a subordinated promissory note due
March 21, 2016 with 4.46% interest per annum (the RSI Note);
(ii) the exercise price of RSIs outstanding Series 2 Warrant to purchase 500,000
shares of the Companys common stock was reduced from $4.00 per share to $2.75 per share;
and (iii) the exercise price of RSIs outstanding Series 3 Warrant to purchase 500,000
shares of the Companys common stock was reduced from $7.00 per share to $2.75 per share.
Debt issuance costs of $15,901 related to this transaction have been capitalized within the
Other Assets section of the balance sheet and will be amortized to interest expense over the
life of the note.
8
Note Purchase Agreements consist of the following at March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATT |
|
|
RSI |
|
|
Total |
|
Notes Payable, face amount |
|
$ |
5,000,000 |
|
|
$ |
2,000,000 |
|
|
$ |
7,000,000 |
|
Discounts on Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation of Warrants |
|
|
(1,341,692 |
) |
|
|
(263,690 |
) |
|
|
(1,605,382 |
) |
Termination of Jet Rights |
|
|
(878,942 |
) |
|
|
|
|
|
|
(878,942 |
) |
Accumulated Amortization |
|
|
45,987 |
|
|
|
5,844 |
|
|
|
51,831 |
|
|
|
|
|
|
|
|
|
|
|
Total Discounts |
|
|
(2,174,647 |
) |
|
|
(257,846 |
) |
|
|
(2,432,493 |
) |
Accrued Interest |
|
|
40,883 |
|
|
|
16,354 |
|
|
|
57,237 |
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, net |
|
$ |
2,866,236 |
|
|
$ |
1,758,508 |
|
|
$ |
4,624,744 |
|
|
|
|
|
|
|
|
|
|
|
Note 7Commitments and Contingencies
Operating Leases
On March 20, 2008, the Company terminated its future lease obligations of $344,495,
relating to one of its operating leases for office space in Scottsdale, Arizona. Under the
terms of the Lease Termination Agreement, the Company paid $64,261 to the Lessor and
forfeited the security deposit in the amount of $44,703.
The Company leases its facilities under three non-cancelable operating leases which expire
in 2008 and 2010. Future minimum lease payments under these leases as of March 31, 2008 are
as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
93,025 |
|
2009 |
|
|
54,832 |
|
2010 |
|
|
13,856 |
|
|
|
|
|
|
|
$ |
161,713 |
|
|
|
|
|
Litigation
From time to time, we are party to certain legal proceedings that arise in the ordinary
course and are incidental to our business. There are currently no such pending proceedings to
which we are a party that our management believes 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 our
consolidated financial position, liquidity or results of operations in any future reporting
periods.
Note 8Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), using the
modified-prospective transition method. Since all share-based payments made prior to January
1, 2006 were fully vested, compensation cost recognized during the three months ended March
31, 2008 and 2007 represents the compensation cost for all share-based payments granted
subsequent to January 1, 2006 based upon the grant-date fair value using the Black-Scholes
option pricing model.
The fair values of share-based payments are estimated on the date of grant using the
Black-Scholes option pricing model, based on weighted average assumptions. Expected
volatility is based on historical volatility of the Companys common stock. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation
expense is recognized on a straight-line basis over the requisite service period of the
award.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 110. This guidance allows companies, in certain
circumstances, to utilize a simplified method in determining the expected term of stock
option grants when calculating the compensation expense to be recorded under SFAS 123(R),
Share-Based Payment. The simplified method can be used after December 31, 2007 only if a
companys stock option exercise experience does not provide a reasonable basis upon which to
estimate the expected option term. Through 2007, we used the simplified method to determine
the expected option term, based upon the vesting and original contractual terms of the
option. On January 1, 2008, we continued to use the simplified method to determine the
expected option term since the Companys stock option exercise experience does not provide a
reasonable basis upon which to estimate the expected option term.
9
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.
Stock Option Plans
1998 Stock Option Plan
A summary of employee stock option activity under the 1998 Stock Option Plan during the
three months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted- |
|
|
|
Stock |
|
|
Average |
|
Options |
|
Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2007
(1) |
|
|
814,506 |
|
|
$ |
2.76 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(300,000 |
) |
|
$ |
1.26 |
|
Forfeited or expired |
|
|
(413,506 |
) |
|
$ |
3.72 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 (2) |
|
|
101,000 |
|
|
$ |
3.27 |
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 (2) |
|
|
97,000 |
|
|
$ |
3.10 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes stock options to purchase 105,000 shares of common
stock at a weighted average exercise price of $1.73 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. |
In September 2006, the Board of Directors approved, subject to stockholder approval,
the 2006 Stock Incentive Plan (See 2006 Stock Incentive Plan section below). On June 27,
2007, the stockholders approved the 2006 Stock Incentive Plan. As a result, no new awards
will be available for issuance under the 1998 Plan, effective September 2006.
2006 Stock Incentive Plan
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 March 31, 2008, there are 166,456 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. See Note 10 below.
A summary of employee stock option activity under the 2006 Stock Incentive Plan during
the three months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted- |
|
|
|
Stock |
|
|
Average |
|
Options |
|
Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2007
(1) |
|
|
3,600,319 |
|
|
$ |
3.57 |
|
Granted |
|
|
1,175,000 |
|
|
$ |
2.49 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(142,500 |
) |
|
$ |
10.00 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 (1) |
|
|
4,632,819 |
|
|
$ |
3.10 |
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 (2) |
|
|
71,750 |
|
|
$ |
8.04 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes stock options to purchase 1,000 shares of common stock
at a weighted average exercise price of $10.00 per share being
held by a consultant. |
|
(2) |
|
Excludes stock options to purchase 500 shares of common stock
at a weighted average price of $10.00 per share being held by a
consultant. |
10
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 |
|
|
|
March 31, |
|
| |
2008 |
|
|
2007 |
|
Risk-free interest rate: |
|
|
2.8 |
% |
|
|
n/a |
|
Expected term: |
| |
6 Years |
| |
|
n/a |
|
Expected dividend yield: |
|
|
0 |
% |
|
|
n/a |
|
Expected volatility: |
|
|
151 |
% |
|
|
n/a |
|
The Company recognized stock-based compensation expense for the issuance of options of
$1,130,285 and $314,790 for the three months ended March 31, 2008 and 2007, respectively.
As of March 31, 2008, there was $11,226,332 in total unrecognized compensation cost,
which is expected to be recognized over a weighted average period of 2.6 years.
Unrestricted Shares
During
the three months ended March 31, 2008, the Company issued 58,750 shares of
unrestricted common stock to consultants and its non-employee directors under the 2006 Plan.
The shares are fully vested. The fair value of the unrestricted shares is determined based
on the closing price of the Companys stock on the date of issuance. The Company recognized
stock-based compensation expense of $250,475 for the unrestricted shares issued during the
three months ended March 31, 2008.
Restricted Shares
On January 18, 2008, the Board of Directors granted 25,800 shares of restricted common
stock to the Companys non-employee directors for compensation during 2008 under the 2006
Plan. The restricted shares vest monthly on the last day of the month through December 31,
2008. Restricted shares activity during the three months ended March 31, 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Share Price |
|
Unvested at January 1, 2008 |
|
|
0 |
|
|
|
n/a |
|
Granted |
|
|
25,800 |
|
|
$ |
2.49 |
|
Vested during period |
|
|
(6,450 |
) |
|
$ |
2.49 |
|
Cancelled during period |
|
|
0 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
Unvested at March 31, 2008 |
|
|
19,350 |
|
|
$ |
2.49 |
|
|
|
|
|
|
|
|
The fair value of the restricted shares is based on the closing price of the Companys
common stock on the date of the grant. The Company recognized stock-based compensation
expense of $16,061 for the restricted shares that vested during the three months ended March
31, 2008. As of March 31, 2008, there was $48,181 in total unrecognized stock -based
compensation expense related to non-vested restricted share grants, which is expected to be
recognized over the last nine months of 2008.
Note 9Related Party Transactions
Alonso Ancira serves on the Companys Board of Directors as a non-employee
director. Mr. Ancira also serves on the Board of Directors of the Organization and is
the Chairman of the Board of Directors of MATT Inc. The Company has participated in
several significant transactions with MATT Inc., see Note 3 Jet Rights, Note 5 -
Long-term debt, and Note 6 Notes Payable. MATT Inc. is also the Companys largest
shareholder.
11
Note 10Subsequent Events
On April 4, 2008, the staff of the Nasdaq Stock Market sent the Company a deficiency
letter because we were not in compliance with the Nasdaq listing requirements. From April
7th through April 23rd, the price of our common stock closed at a
level so that we met the listing requirements. On April 24th, our stock price
closed at a price which caused us to not meet Nasdaqs minimum of $35 million market value
for listed common stock. The Nasdaq Rules require our common stock to trade above the
threshold of $2.77 per share. For us to again fail to comply with the $35 million threshold,
our common stock must trade below $2.77 for 10 consecutive business days. On April 28, 2008,
the price closed at $2.85.
In the event of any future declines in our common stock price, we have entered into a
Term Sheet with the Organization which will nullify the CSMSA, and we will issue the
Organization $2,500,000 of senior preferred stock. We are currently negotiating a definitive
Agreement. Once consummated, we will also meet the minimum stockholders equity required by
Nasdaq. The following description will no longer apply once the CSMSA terminates. The CSMSA
provides that we will develop, operate and host the Organizations website and provide all
the services necessary to conduct such operations. During the first three years of the term
of the CSMSA, the Organization will reimburse us for our costs and expenses in providing
these services, not to exceed $500,000 per year. The CSMSA further provides that we will pay
the Organizations operating costs through October 2016, up to $1,200,000 per year minus our
costs and expenses for providing the services described above.
In April 2008, our Board of Directors approved a resolution to increase the 2006 Plan
by 2,000,000 shares. The proposal will be considered by our shareholders at the 2008 Annual
Meeting scheduled for June 27, 2008.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operation
You should read the following discussion in conjunction with our condensed consolidated
financial statements, which are included in Item 1 of this Form 10-Q.
Company Overview
In 2007, Quepasa transitioned from being a bilingual search engine into a bilingual
portal and Hispanic social network. With the evolution of the site into a Hispanic portal
and social network, the products and services provided to businesses transitioned to
predominately display advertising. In December 2006, the portal service of Quepasa was
discontinued.
Highlights for the three months ended March 31, 2008 included:
|
|
|
We launched our new website in beta mode on February 6, 2008, which marked
our transformation to an Hispanic social network; |
|
|
|
|
We elected Jeffrey Valdez as Chairman of our Board of Directors in January
2008 and at the same time entered into a Consulting Agreement with him. Mr.
Valdez is a leading Hispanic-American television and motion picture figure who
founded SlTV, the first English language cable network aimed at the Hispanic
market. Mr. Valdez is devoting substantial time working with our management in
developing content for our website. |
Quepasa re-launched the site on February 6, 2008, to be solely a Hispanic social
network with content provided by the user community. Our community provides access to an
expansive, bilingual menu of resources that promote social interaction, information sharing,
and other topics of importance to Hispanic users. We offer online marketing capabilities
which enable marketers to display their advertisements in different formats and in different
locations on our website. We work with our advertisers to maximize the effectiveness of
their campaigns by optimizing advertisement formats and placement on the website. We also
use our targeting capabilities to help advertisers reach their desired audiences by placing
contextually relevant advertisements on our pages.
We seek to create innovative and high quality Internet services for users and to
provide efficient and effective marketing services for businesses to reach these users. We
focus on increasing our user base and enhancing the user experience on our website to
broaden the value of our user base to advertisers and to increase the revenue from these
advertisers. We believe that we can increase our user base by offering compelling Internet
services and effectively integrating community, personalization, and content to create a
powerful user experience. These user relationships and the social community enable us to
leverage our offered forms of online advertising as well as premium services for users.
While many of our services are free to our users, we intend to generate revenue by
providing marketing services and advertising opportunities to businesses and by establishing
paying relationships with our users for premium services and products. All of our offerings
are currently available in both English and Spanish.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been prepared in
accordance with Generally Accepted Accounting Principles. The preparation of these
condensed consolidated financial statements requires us to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these 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
estimate is made, and if different estimates that reasonably could have been used, or
changes in the accounting estimate that are reasonably likely to occur, could materially
impact the consolidated financial statements. We believe that the following critical
accounting policies reflect the more significant estimates and assumptions used in the
preparation of the consolidated financial statements.
Management has discussed the development and selection of these critical accounting
estimates with the Audit Committee of our Board of Directors. In addition, there are other
items within our financial statements that require estimation, but are not deemed critical
as defined above. Changes in estimates used in these and other items could have a material
impact on our financial statements.
13
Stock-Based Compensation Expense
See Note 8 Stock-Based Compensation to our condensed consolidated financial
statements included in Item 1 of this Form 10-Q for discussion of stock-based compensation
expense.
Contingencies
The Company accrues for contingent obligations, including estimated management support
agreements and legal costs, when the obligation is probable and the amount can be reasonably
estimated. As facts concerning contingencies become known we reassess our position and make
appropriate adjustments to the financial statements. Estimates that are particularly
sensitive to future changes include those related to tax, legal, and other regulatory
matters that are subject to change as events evolve and as additional information becomes
available during the administration and litigation process.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this
method, deferred income taxes are determined based on the differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated financial
statements which will result in taxable or deductible amounts in future years and are
measured using the currently enacted tax rates and laws. A valuation allowance is provided
to reduce net deferred tax assets to the amount that, based on available evidence, is more
likely than not to be realized.
In July 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 upon audit, based on the technical merits of the position. The provisions of FIN
48 are effective for the Company on January 1, 2007, with the cumulative effect of the
change in accounting principle, if any, recorded as an adjustment to opening accumulated
deficit. The adoption of FIN 48 did not have a material effect on the Companys consolidated
financial position, cash flows, and results of operations.
Recent Accounting Pronouncements
See Note 1 Description of Business and Summary of Significant Accounting Policies to
our condensed consolidated financial statements included in Item 1 of this Form 10-Q for
discussion of recent accounting pronouncements.
Results of Operations
Revenue Sources
During the three months ended March 31, 2008 and 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.
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: Subscription sales related to the internet dating service
Corazones. We recognize revenue from subscription sales as services are delivered. In
February of 2008, this service ceased charging for subscriptions. Revenue will be derived
in the future from advertising sales
Operating Expenses
Our principal operating expenses are divided into the following categories:
|
|
|
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. |
14
|
|
|
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. |
|
|
|
|
Stock Based Compensation Expenses: Stock based compensation is a non-cash
expense that consists primarily of compensation paid for employees, directors, and
consultants by the issuance of stock options or common stock. Expense is
calculated based upon the grant-date fair value using the Black-Scholes option
pricing model recognized on a straight-line basis over the vesting term of the
award. |
|
|
|
|
Depreciation and Amortization Expenses: Our depreciation and amortization are
non-cash expenses which have consisted primarily of depreciation related to our
property and equipment and the amortization pertaining to jet rights acquired in
2006 and disposed in 2008. |
|
|
|
|
Other Income (Expense): Other income (expense) consists primarily of interest
earned, interest expense and earned grant income. We have invested our cash in AAA
rated, fully liquid instruments. Interest expense relates to our Corporate
Sponsorship Agreement and Note Purchase Agreements discussed in notes 5 and 6.
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. |
Comparison of the three months ended March 31, 2008 with the three months ended March 31,
2007
The following table sets forth a modified version of our Condensed Consolidated
Statements of Operations and Comprehensive Loss that is used in the following discussions of
our results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
Change ($) |
|
|
Change (%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
6,863 |
|
|
$ |
52,482 |
|
|
$ |
(45,619 |
) |
|
|
-87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH-BASED OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
80,623 |
|
|
|
469,316 |
|
|
|
(388,693 |
) |
|
|
-83 |
% |
Product and content development |
|
|
548,714 |
|
|
|
972,740 |
|
|
|
(424,026 |
) |
|
|
-44 |
% |
General and administrative |
|
|
941,665 |
|
|
|
1,585,138 |
|
|
|
(643,473 |
) |
|
|
-41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash-based operating expenses |
|
|
1,571,002 |
|
|
|
3,027,194 |
|
|
|
(1,456,192 |
) |
|
|
-48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH BURN |
|
|
(1,564,139 |
) |
|
|
(2,974,712 |
) |
|
|
1,410,573 |
|
|
|
-47 |
% |
Net Cash Monthly Burn Rate |
|
|
(521,380 |
) |
|
|
(991,571 |
) |
|
|
470,191 |
|
|
|
-47 |
% |
|
NON-CASH OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
1,396,821 |
|
|
|
314,790 |
|
|
|
1,082,031 |
|
|
|
344 |
% |
Depreciation and amortization |
|
|
108,415 |
|
|
|
92,603 |
|
|
|
15,812 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Cash Operating Expenses |
|
|
1,505,236 |
|
|
|
407,393 |
|
|
|
1,097,843 |
|
|
|
269 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(3,069,375 |
) |
|
|
(3,382,105 |
) |
|
|
312,730 |
|
|
|
-9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
50,579 |
|
|
|
164,386 |
|
|
|
(113,807 |
) |
|
|
-69 |
% |
Interest expense |
|
|
(289,082 |
) |
|
|
|
|
|
|
(289,082 |
) |
|
|
-100 |
% |
Other income |
|
|
7,395 |
|
|
|
12,708 |
|
|
|
(5,313 |
) |
|
|
-42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE) |
|
|
(231,108 |
) |
|
|
177,094 |
|
|
|
(408,202 |
) |
|
|
-231 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(3,300,483 |
) |
|
$ |
(3,205,011 |
) |
|
$ |
(95,472 |
) |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our results of operations for the three months ended March 31, 2008 and 2007 were
characterized by expenses that significantly exceeded revenues during the periods. We
reported a net loss of $3,300,483 for the three months ended March 31, 2008, compared to a
net loss of $3,205,011 for the three months ended March 31, 2007.
15
Revenues
Our revenues were $6,863 for the three months ended March 31, 2008, a decrease of 87%
compared to the first quarter of 2007. In September 2007, we launched a new beta version of
our website, which experienced technical difficulties and performance issues that adversely
affected the amount of traffic visiting our website. In late October 2007, a new senior
management team was put into place and immediately began to address the performance issues
with the website. The bulk of the banner advertising campaigns were discontinued in the
fourth quarter of 2007, and efforts to generate additional banner advertising campaigns were
temporarily put on hold while emphasis was placed on enhancing the functionality and the
content of our website. In February 2008, we re-launched our website in beta mode. We are
hopeful that website traffic will increase in the second and third quarters of 2008. We
believe there will be a direct correlation between website traffic and our ability to
increase revenue.
Operating Costs and Expenses
Sales and Marketing: Sales and marketing expenses decreased $388,693, or 83%, to
$80,623 for the three months ended March 31, 2008. The decrease is primarily attributed to
the discontinuance of advertising efforts in the first quarter of 2008, which resulted in
savings of approximately $390,000 versus the first quarter of 2007. In addition, we closed
the New York sales office and reduced our sales force in November 2007, which resulted in a
decrease of approximately $44,000 versus the first quarter of 2007. These savings were
partially offset by an increase of $38,000 associated with a Mexican sales office that was
opened in May 2007 and, subsequently, closed in March 2008 and an increase of $7,000 for
other sales and marketing expenses.
Product and Content Development: Product and content development expenses decreased
$424,026, or 44%, to $548,714 for the three months ended March 31, 2008. This decrease is
attributable to a focused effort to reduce costs. During the three months ended March 31,
2008, we had decreases in technology consulting fees of $370,000, content fees of $107,000,
and other professional fees of $50,000, partially offset by an increase in salaries and
associated payroll costs of $102,000 for our product development and technology personnel,
primarily within Quepasa.com de Mexico, which provides substantially all of our design,
translation services, and website management and development services.
General and Administrative: General and administrative expenses decreased $643,473, or
41%, to $941,665, for the three months ended March 31, 2008. The significant changes
consisted of:
|
|
|
a decrease in professional fees expense of $349,000, made up of decreases in
legal fees of $186,000 and accounting fees of $163,000, due to unusually high
activity in 2007; |
|
|
|
|
a decrease in recruiting fees of $147,000, due to reduced hiring during 2008; |
|
|
|
|
a decrease in salaries and related payroll costs of $93,000, due to a reduction
in personnel in our Scottsdale headquarters during the fourth quarter of 2007; and |
|
|
|
|
a decrease in travel and entertainment of $71,000, a decrease in licenses and
fees of $45,000, a decrease in dues and subscriptions of $33,000, and a decrease in
printing and reproduction of $32,000, attributable to a focused effort to reduce
costs; |
|
|
|
|
these decreases were partially offset by a one-time charge of $129,000 for the
termination of the operating lease for our Scottsdale, AZ headquarters. |
Stock
Based Compensation: Stock based compensation expense increased
$1,082,031, or
344%, to $1,396,821 for the three months ended March 31, 2008. This increase is primarily
attributable to stock options issued to the new senior management team hired during the
fourth quarter of 2007 and the first quarter of 2008.
Depreciation and Amortization: Depreciation and amortization expense increased
$15,812, or 17%, to $108,415 for the three months ended March 31, 2008. This increase is
attributable to the depreciation associated with capital purchases from 2007.
Other Income (Expense): Other income (expense) primarily consists of interest expense
offset by interest income. Other income for the three months ended March 31, 2008 decreased
$408,202, to other expense of $231,108 from $177,094 of other income for the three months
ended March 31, 2007. The change is mainly attributable to $289,000 of interest expense
associated with the Note Purchase Agreements entered into in 2008, see note 6 of the
condensed consolidated financial statements, and a decrease of $114,000 of interest income
associated with lower average cash balances during the first quarter of 2008 versus the
first quarter of 2007.
16
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net cash used in operating activities |
|
$ |
(1,614,353 |
) |
|
$ |
(2,235,500 |
) |
Net cash used in investing activities |
|
$ |
(323,583 |
) |
|
$ |
(253,039 |
) |
Net cash provided by financing activities |
|
$ |
7,337,019 |
|
|
$ |
890,650 |
|
Cash used in operating activities for the three months ended March 31, 2008 is driven
by our net loss, adjusted for non-cash items. Non-cash adjustments include depreciation and
amortization, the issuance of stock options and common stock for compensation, interest
associated with long-term debt. Net cash used in operations was $1,614,353 for the three
months ended March 31, 2008 compared to $2,235,500 for the first three months of 2007. For
the three months ended March 31, 2008, net cash used by operations consisted primarily of a
net loss of $3,300,483 offset by non-cash expenses of $108,415 in depreciation and
amortization, $248,490 in non-cash interest, $52,692 in amortization of discounts on notes
payable and debt issuance costs and $1,380,760 related to the issuance of stock options,
warrants, and common stock for compensation and professional services. Additionally, changes
in working capital impacted the net cash used in operating activities. These changes
included a decrease in accounts payable and accrued expenses of $166,782, offset by
decreases in trade accounts receivable of $21,272 and other current assets and other assets
of $41,330. Net cash used by operations for the three months ended March 31, 2007 consisted
of a net loss of $3,205,011 offset by non-cash expenses of $92,603 in depreciation and
amortization and $314,790 related to the issuance of stock options and warrants for
compensation. Changes in working capital for the three months ended March 31, 2007 included
decreases in other current assets and other assets of $102,769 and trade accounts receivable
of $32,489 and an increase of $439,568 in accounts payable and accrued expenses.
Net cash used in investing activities for the three months ended March 31, 2008 is
primarily attributable to Investment in BRC/La Alianza of $300,000, see note 4 of the
condensed consolidated financial statements. Our capital expenditures were $23,583 for the
three months ended March 31, 2008, compared to capital expenditures of $253,039 for the same
period in 2007.
Net cash provided by financing activities for the three months ended March 31, 2008
came from net proceeds of $6,959,519 from our borrowing in January 2008. See note 6 of the
condensed consolidated financial statements. Cash proceeds from the exercise of stock
options and warrants was $377,500 for the three months ended March 31, 2008, compared to
$890,650 for the same period in 2007.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash and cash equivalents |
|
$ |
9,074,037 |
|
|
$ |
3,673,281 |
|
Total assets |
|
$ |
10,590,435 |
|
|
$ |
5,900,908 |
|
|
|
|
|
|
|
|
|
|
Percentage of total assets |
|
|
86 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
We invest excess cash predominately in liquid marketable securities to support our
growing infrastructure needs for operational expansion.
We have substantial capital resource requirements and have generated significant
losses since inception. At March 31, 2008, we had $9,074,037 in cash and cash
equivalents compared to $3,673,281 at December 31, 2007, resulting in a net increase in
cash and cash equivalents of 5,400,756 for the first quarter of 2008.
The increase in cash for 2008 was primarily attributed to the issuance of
subordinated notes payable in the amount of $7,000,000 in January, 2008, partially
offset by cash-based operating expenses of $1,571,002 during the first quarter of 2008.
In October 2007, a new senior management team was put into place. Along with
addressing the website performance issues, the management team focused their attention
on reducing costs while maintaining the efforts to improve the performance of our
websites. In November 2007, the management team terminated the majority of the
consulting arrangements, closed the sales office in New York, and significantly
reduced the headcount at the corporate headquarters in Scottsdale. Based on the
reductions initiated in November 2007, the net cash burn rate for the first quarter
dropped to $521,380 per month, which included one-time charges of $129,000 associated
with the termination of the lease for our Scottsdale headquarters. We expect a net cash
burn rate of approximately $425,000 per month for the remainder of 2008, excluding any
promotional activities.
17
During the first quarter of 2008, we obtained proceeds of $377,500 from the
exercise of common stock options and warrants compared to $890,650 from the exercise of
stock options and warrants during the first quarter of 2007.
Based on the reduction of the net cash burn rate, we believe that our current cash
balances are sufficient to finance our current level of operations through the next 12
months. We have budgeted additional capital expenditures of approximately $500,000 for
the remainder of 2008 and are currently negotiating alternative financing arrangements
as we continue to invest in the expansion of our product and services offerings.
Forward-Looking Statements
The statements in this Report relating to the opportunities presented by being a bilingual
portal and Hispanic social network, our agreement with BRC, issues relating to our Nasdaq
listing and common stock price, proposed agreement with the Organization, proposed increase in
shares under the 2006 Plan, our ability to create innovative and high quality Internet services
and increase our user base, anticipated increase in revenue from website traffic, our intention
to generate revenue through marketing services, and anticipated future cash flows are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Additionally, words such as expects, anticipates, intends, believes, will and
similar words are used to identify forward-looking statements.
The results anticipated by any or all of these forward-looking statements might not
occur. Important factors, uncertainties and risks that may cause actual results to differ
materially from these forward-looking statements include delays in product development,
changes in social network needs, internal issues with regard to the Organization and issues
which generally affect public trading markets. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as the result of new information,
future events or otherwise. For more information regarding some of the ongoing risks and
uncertainties of our business, see the risk factors contained in Quepasas Form 10-KSB for
the year ended December 31, 2007.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable for smaller reporting companies.
Item 4T. 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
Securities Exchange Act of 1934 (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 Principal
Executive Officer and its Principal 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 Principal Executive Officer and Principal Financial Officer concluded that
the Companys disclosure controls and procedures were adequate as of March 31, 2008 to
provide reasonable assurance in the Companys financial reporting.
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, 2007, filed with the SEC on March 31, 2008, during the financial reporting
process for the fiscal year end December 31, 2007, 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
believes that the primary cause of those control issues stemmed from the lack of accounting
personnel and expertise.
18
In addition to the new Chief Financial Officer hired in October 2007, the Company hired
a new Vice President of Finance and replaced the Controller during the first quarter of
2008. As a result of these new hires, the Company believes that the lack of sufficient
accounting personnel and expertise has been addressed. Additionally, in January 2008, the
Company hired a Chief Technology Officer to help address the information technology control
issues. During the remainder of 2008, the new financial management team will continue to
address and improve the identified weaknesses in the Companys internal controls.
Management believes that there are no material inaccuracies or omissions of material
fact and, to the best of its knowledge, believes that the condensed consolidated financial
statements for the quarter ended March 31, 2008, 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.
Other than as described above, there have not been any other changes in the Companys
internal control over financial reporting during the quarter ended March 31, 2008, which
have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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 Principal Executive Officer and its Principal 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.
19
QUEPASA CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are party to certain legal proceedings that arise in the ordinary
course and are incidental to our business. There are currently no such pending proceedings
to which we are a party that our management believes 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 our consolidated financial position, liquidity or results of operations in any
future reporting periods.
Item 1A. Risk Factors
Not applicable for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2008, we sold securities without registration
under the Securities Act of 1933 in reliance upon exemption provided
in Section 4(2) and
Rule 506 thereunder as described below:
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No. of |
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Name of Class |
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Date Issued |
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Securities |
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|
Reason for Issuance |
Holders of
Subordinated
Promissory Notes
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January 25, 2008
|
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$ |
7,000,000 |
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Notes issued
pursuant to the terms
of two Note
Purchase Agreements |
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Holders of Warrants
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January 25, 2008
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3,000,000 |
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Warrants issued to
purchase common
stock at an
exercise price of
$2.75 per share. These warrants replaced previously issued warrants
with higher exercise prices. |
Item 3. Defaults upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
See Exhibit Index
20
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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May 12, 2008 |
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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May 12, 2008 |
By: |
/s/ Michael D. Matte
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Name: |
Michael D. Matte |
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Title: |
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer) |
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21
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
3.1
|
|
Certificates of Restated Articles of Incorporation (1) |
3.2
|
|
Amended and Restated Bylaws (2) |
10.1
|
|
Amendment to the Employment Agreement with John C. Abbott dated March 27, 2008 (3) |
10.2
|
|
Amendment to the Employment Agreement with Michael D. Matte dated March 27, 2008 (3) |
10.3
|
|
Note Purchase Agreement dated January 25, 2008 by and between Quepasa Corporation and
Mexicans & Americans Trading Together, Inc. (4) |
10.4
|
|
Note Purchase Agreement dated January 25, 2008 by and between Quepasa Corporation and Richard
L. Scott Investments, LLC (4) |
10.5
|
|
Amendment No. 1 to Series 1 Common Stock Purchase Warrant dated January 25, 2008 by and
between Quepasa Corporation and Mexicans & Americans Trading Together, Inc. (4) |
10.6
|
|
Amendment No. 1 to Series 2 Common Stock Purchase Warrant dated January 25, 2008 by and
between Quepasa Corporation and Mexicans & Americans Trading Together, Inc. (4) |
10.7
|
|
Amendment No. 1 to Series 2 Common Stock Purchase Warrant dated January 25, 2008 by and
between Quepasa Corporation and Richard L. Scott Investments, LLC (4) |
10.8
|
|
Amendment No. 1 to Series 3 Common Stock Purchase Warrant dated January 25, 2008 by and
between Quepasa Corporation and Richard L. Scott Investments, LLC (4) |
10.9
|
|
Subordinated Promissory Note dated January 25, 2008 by and between Quepasa Corporation and
Mexicans & Americans Trading Together, Inc. (4) |
10.10
|
|
Subordinated Promissory Note dated January 25, 2008 by and between Quepasa Corporation and
Richard L. Scott Investments, LLC (4) |
10.11*
|
|
Consulting Agreement with Jeffrey Valdez dated October 24, 2007 (5) |
10.12
|
|
Loan Agreement dated March 27, 2008 by and between Quepasa Corporation and BRC Group, LLC. (3) |
10.13
|
|
Right of First Refusal dated March 27, 2008 by and between Quepasa Corporation and BRC Group,
LLC. (3) |
10.14
|
|
Webpage Development and Hosting Agreement dated March 27, 2008 by and between Quepasa
Corporation and BRC Group, LLC. (3) |
10.15
|
|
Promissory Note dated March 27, 2008 by BRC Group, LLC. (3) |
10.16
|
|
Equity Interests Purchase Warrant dated March 27, 2008 by and between Quepasa Corporation and
BRC Group, LLC. (3) |
10.17
|
|
Lease Termination Agreement dated March 10, 2008 by and between Quepasa Corporation and
Airpark Billorado, LLC (3) |
31.1*
|
|
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended |
31.2*
|
|
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended |
32.1**
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2**
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
(1) |
|
Incorporated by reference from the Registrants Quarterly Report on Form 10-QSB as filed with the SEC on August 15, 2007. |
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(2) |
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Incorporated by reference from the Registrants Current Report on Form 8-K as filed with the SEC on July 3, 2007. |
|
(3) |
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Incorporated by reference from the Registrants Annual Report on Form 10-KSB as filed with the SEC on March 31, 2008. |
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(4) |
|
Incorporated by reference from the Registrants Current Report on Form 8-K as filed with the SEC on January 30, 2008. |
|
(5) |
|
This replaces the form Agreement filed with the Registrants Annual Report on Form 10-KSB as filed with the SEC on March 31, 2008, which contained an incorrect
version of the Agreement. The Agreement was approved by the Board of Directors of the Company on January 18, 2008. |
Copies of any of the exhibits referred to above will be furnished at no cost to stockholders who
make a written request therefore to Michael D. Matte, Quepasa Corporation, 224 Datura Street,
Suite 1100, West Palm Beach, FL 33401.
22