<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] 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: 0-25565
QUEPASA.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0879433
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE ARIZONA CENTER, 400 E. VAN BUREN 85004
4TH FLOOR, PHOENIX, AZ (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 602-716-0100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
<S> <C> <C>
NONE. NONE.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
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. Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock as of May
12, 2000 was approximately 18,833,305 shares.
================================================================================
<PAGE> 2
QUEPASA.COM, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000, (unaudited) and December 31, 1999............3
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2000, (unaudited) and the Three Months Ended
March 31, 1999 (unaudited)...........................................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (unaudited)..................................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Risk Factors............................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................24
Item 6. Exhibits and Reports on Form 8-K......................................................................24
Signatures.........................................................................................................25
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 5,111,885 $ 6,961,592
Trading securities..................................... 17,345,392 22,237,656
Accounts receivable (net of allowance for doubtful
accounts of $6,638 and $4,813, respectively)........ 416,920 297,170
Forgivable loans....................................... 276,667 368,042
Prepaid expenses....................................... 6,513,301 5,761,494
Other current assets................................... 6,715,890 --
------------ -----------
Total current assets........................... 36,380,055 35,625,954
Property and equipment, net.............................. 2,219,857 2,051,103
Goodwill, net ........................................... 19,947,364 --
Other assets............................................. 985,680 153,743
------------ ------------
Total assets............................................. $ 59,532,956 $ 37,830,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 4,571,197 $ 2,775,347
Accrued liabilities.................................... 647,518 3,023,984
Interest payable....................................... 21,970 --
Deferred revenue....................................... 97,182 85,417
------------ -----------
Total current liabilities...................... 5,337,867 5,884,748
Long-term notes payable.................................. 2,149,054 --
Redeemable common stock.................................. 2,000,000 2,000,000
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, no par
value, -- none issued or outstanding................... -- --
Common stock, authorized 50,000,000 shares, $0.001 par
value; issued and outstanding 17,742,790 shares and
14,536,058 shares, respectively........................ 17,743 14,536
Additional paid-in capital............................... 101,146,683 70,709,010
Deferred advertising services............................ (4,658,640) (5,000,000)
Accumulated deficit...................................... (46,459,751) (35,777,494)
------------ ------------
Total stockholders' equity..................... 50,046,035 29,946,052
------------ ------------
Total liabilities and stockholders' equity .............. $ 59,532,956 $ 37,830,800
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ -----------
<S> <C> <C>
Gross revenue................................... $ 921,246 $ --
Less commissions................................ (64,661) --
------------ -----------
Net revenue..................................... 856,585 --
Operating expenses:
Product and content development expenses..... 1,720,420 186,691
Advertising and marketing expenses........... 7,328,222 2,062,607
General and administrative expenses.......... 1,693,515 1,429,299
Amortization of goodwill..................... 1,079,391 --
------------ -----------
Total operating expenses.............. 11,821,548 3,678,597
------------ -----------
Loss from operations............................ (10,964,963) (3,678,597)
Other income (expense):
Interest expense.............................. (31,358) (20,000)
Interest income and other..................... 433,213 15,378
Unrealized loss on trading securities......... (119,149) --
------------ -----------
Other income (expenses), net.................... 282,706 (4,622)
------------ -----------
Net loss........................................ $(10,682,257) $(3,683,219)
============ ===========
Net loss per share, basic and diluted........... $ (.68) $ (.41)
============ ===========
Weighted average number of shares
outstanding, basic and diluted.................. 15,607,188 9,075,833
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
QUEPASA.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(10,682,257) $(3,683,219)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................. 2,275,402 28,694
Stock based compensation ....................... 20,546 479,000
Unrealized gain or loss on trading
securities .................................... 119,149 --
Short-term gains or losses on trading
securities .................................... (2,820) --
Increase (decrease) in cash resulting
from changes in assets and liabilities:
Sale of trading securities, net .......... 4,775,935 --
Accounts receivable .......................... (119,750) --
Prepaid expenses ............................. (1,093,807) 456,714
Other assets ................................. (6,710,890) (51,192)
Accounts payable ............................. 1,692,311 317,214
Accrued liabilities .......................... (2,357,396) 95,142
Deferred revenue ............................. 11,765 --
------------ -----------
Net cash used in operating activities ..... (12,071,812) (2,357,647)
------------ -----------
Cash flows from investing activities:
Forgivable loans .................................. (82,000) (35,165)
Cash paid for acquisitions ........................ (238,793) --
Cash received in acquisition of eTrato ............ 578,730 --
Purchase of fixed assets .......................... (161,805) (510,301)
------------ -----------
Net cash (used in) provided by
investing activities .................... 96,132 (545,466)
------------ -----------
Cash flows from financing activities:
Stock subscription receivable ..................... -- 125,000
Net proceeds from issuance of stock ............... 10,000,000 --
Proceeds from the exercise of stock options ....... 347,302 --
Proceeds from draws on line of credit ............. 12,286 2,000,000
Payment on note payable ........................... (233,615) --
Accrued commissions ............................... -- (191,144)
Stock subscription ................................ -- (337,500)
Deferred initial public offering costs ............ -- (342,441)
------------ -----------
Net cash provided by financing
activities .............................. 10,125,973 1,253,915
------------ -----------
Net decrease in cash and cash equivalents ........... (1,849,707) (1,649,198)
Cash and cash equivalents, beginning of period ...... 6,961,592 2,199,172
------------ -----------
Cash and cash equivalents, end of period ............ $ 5,111,885 $ 549,974
============ ===========
Interest paid ....................................... $ 12,286 --
============ ===========
</TABLE>
Supplemental disclosure of non-cash operating, financing and investing
activities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 2000 1999
----------- --------
<S> <C> <C>
Barter transactions...................... $ 304,000 --
=========== ========
Notes payable assumed in acquisitions............... $ 2,370,383 --
=========== ========
Issuance of stock in acquisitions....................... $20,073,032 --
=========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
QUEPASA.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(1) THE COMPANY
Quepasa.com, inc. (the Company), a Nevada Corporation, was incorporated in
June 1997. The Company is a Hispanic Internet portal and community. Quepasa.com
offers a number of services such as a search engine, Spanish-language news
feeds, free Web pages, worldwide weather information, chat, games, maps, message
boards and free e-mail. The Company's portal draws viewers to their Web site by
providing a one-stop destination for identifying, selecting and accessing
resources, services, content and information on the Web. The Company is targeted
to provide users with information and interactive content centered on the
Spanish language.
The Company has not had any significant revenue and there is no assurance
that the Company will generate significant revenue or earn profits in the
future.
(2) BASIS OF PRESENTATION
Our accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. In our opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and results
of operations for the periods presented. Our results of operations for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. Our Condensed Consolidated Balance Sheet as of December 31, 1999
was derived from our audited financial statements as of that date but does not
include all the information and footnotes required by generally accepted
accounting principles. We suggest that these condensed consolidated financial
statements be read in conjunction with the audited financial statements included
in our Annual Report on Form 10-K, for the year ended December 31, 1999.
(3) SIGNIFICANT TRANSACTIONS
On January 26, 2000 we acquired credito.com, an online credit and personal
finance company targeted to the U.S. Hispanic population and available in both
Spanish and English, for 681,818 shares of common stock and warrants to purchase
681,818 shares of common stock at an exercise price of $11 per share. The
acquisition was accounted for using the purchase method of accounting. The
Company recorded $7.8 million of goodwill in relation to this purchase, which is
being amortized over a period of 3 years.
On January 28, 2000 we acquired eTrato.com, an online trading community
developed especially for the Spanish language or bilingual Internet user for
1,363,363 shares of the Company's common stock, half of which are held in escrow
and are to be released to the seller upon attainment of agreed upon targets and
a $1.3 million promissory note (Note 5). The acquisition was accounted for using
the purchase method of accounting. The Company recorded $10.1 million in
goodwill in relation to this purchase, which is being amortized over a period of
3 years.
On March 9, 2000, we acquired RealEstateEspanol.com, a real estate services
site providing the U.S. Hispanic community with bilingual home buying services,
for 335,925 shares of the Company's common stock. An additional 248,834 shares
are held in escrow and are to be issued to the seller upon attainment of agreed
upon targets. The acquisition was accounted for using the purchase method of
accounting. The Company recorded $3.2 million of goodwill in relation to this
purchase, which is being amortized over a period of 3 years.
On March 30, 2000, Gateway, Inc. invested $10 million in exchange for 7.6%
of quepasa.com's outstanding stock. Quepasa also committed itself to use a
substantial portion of the proceeds of Gateway's investment to further its
community and educational initiative program, which includes distributing
computers purchased from Gateway accompanied with Spanish language technical
support, providing Internet access, and training for quepasa's subscribers. The
Company purchased $6.7 million of computers pursuant to this agreement which are
included in other current assets as of March 31, 2000. The Company will partner
with Gateway in joint marketing and promotional programs targeting the U.S.
Hispanic community.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Uses of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial statement
amounts to conform to current year presentation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable, cash and
investments. The Company maintains ongoing credit evaluations of its customers
and generally does not require collateral. The Company provides reserves for
potential credit losses and such losses have not exceeded management
expectations. Periodically during the year the Company maintains cash and
investments in financial institutions in excess of the amounts insured by the
federal government.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid debt
instruments with original maturities of three months or less.
6
<PAGE> 7
Trading Securities
Trading securities at March 31, 2000 consist of corporate debt securities.
The Company classifies its trading securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at market value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Realized gains and losses
for trading securities are included in earnings and are derived using the
specific identification method for determining the cost of securities. All
securities held at March 31, 2000 are categorized as trading.
Revenue Recognition
The Company's revenues are derived principally from the sales of banner
advertisements and sponsorships. The Company sells banner advertising primarily
on a cost-per-thousand impressions, or "CPM" basis, under which advertisers and
advertising agencies receive a guaranteed number of "impressions," or number of
times that an advertisement appears in pages viewed by users of the Company's
Web site, for a fixed fee. The Company's contracts with advertisers and
advertising agencies for these types of contracts cover periods ranging from one
to twelve months. Advertising revenues are recognized ratably based on the
number of impressions displayed, provided that the Company has no obligations
remaining at the end of a period and collection of the resulting receivable is
probable. Company obligations typically include guarantees of a minimum number
of impressions. To the extent that minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. Payments received from advertisers
prior to displaying their advertisements on the Company's Web site are recorded
as deferred revenue.
The Company also derives revenues from the sale of sponsorships for certain
areas or an exclusivity for certain areas within our Web site. These
sponsorships are for periods up to one year. The Company recognizes revenue
during the initial setup, if required under the unique terms of each sponsorship
agreement (e.g. co-branded Web site), to the extent that actual costs are
incurred. The balance of the sponsorship is recognized ratably over the period
of time of the related agreement. Payments received from sponsors prior to
displaying their advertisements on the Company's Web site are recorded as
deferred revenue.
The Company in the ordinary course of business enters into reciprocal
service arrangements whereby the Company provides advertising service to third
parties in exchange for advertising services in other media. Revenues and
expenses from these agreements are recorded at the fair value of services
provided or received; whichever is more determinable in the circumstances. The
fair value represents market prices negotiated on an arms' length basis. Revenue
from reciprocal service arrangements is recognized as income when advertisements
are delivered on the Company's Web site. Expense from reciprocal service
arrangements is recognized when the Company's advertisements are run in other
media, which are typically in the same period when the reciprocal service
revenue is recognized. Related expenses are classified as advertising and
marketing expenses in the accompanying statements of operations. During the
three months ended March 31, 2000 and 1999 revenues attributable to reciprocal
services totaled approximately $304,000 and $0, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of the assets, which range from two to five years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease term or the
estimated useful lives of the related improvements. Expenditures for repairs and
maintenance are charged to operations as incurred and improvements which extend
the useful lives of the assets are capitalized.
Product and Content Development
Costs incurred in the classification and organization of listings within the
Company's Web site and the development of new products and enhancements to
existing products are charged to expense as incurred. Material software
development costs incurred during the application development stage are
capitalized. Based upon the Company's product development process, and the
constant modification of the Company's Web site, costs incurred by the Company
during the application development stage have been insignificant.
7
<PAGE> 8
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value of the assets.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which
principally include cash and cash equivalents, trading securities, accounts
receivable, forgiveable loans, accounts payable, and accrued liabilities
approximates fair market value because of the short term nature of the
instruments. The fair market value of the Company's debt instruments are based
on the amount of future cash flows associated with a cash instrument using the
Company's borrowing rate.
The terms of the Company's note payable approximates the terms in the
marketplace at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
Stock-based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants as if the
fair-value-based method as defined in SFAS No. 123 had been applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (Model), for purposes of valuing its stock option grants.
The Model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, it
requires the input of highly subjective assumptions, including the expected
stock price volatility, expected dividend yields, the risk free interest rate,
and the expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the value determined by the Model is not necessarily
indicative of the ultimate value of the granted options.
Net Loss Per Share
Basic loss per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Stock options and warrants are
excluded because they are anti-dilutive.
8
<PAGE> 9
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs". The Company recognizes the
advertising expense in a manner consistent with how the related advertising is
displayed or broadcast. Advertising production costs are expensed as incurred.
Segment Reporting
The Company utilizes the management approach in designating business
segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The Company's one segment
provides Internet Portal and On-Line Community services in both Spanish and
English to the Hispanic market. The Company's initial focus is on the U.S.
Hispanic market, with substantially all of the Company's assets in and revenues
originating from the United States. With the exception of Star Travel,
Net2Phone, News Surfer and Zona Financiera, representing 27%, 15%, 11%, and 10%
of gross revenue respectively, no other single advertiser utilizing banner ads
or sponsorship agreements amounted to or exceeded 10% of total gross revenue.
Sponsor revenue is recognized ratably over the term of the agreement.
(5) NOTES PAYABLE
A summary of notes payable at March 31, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Unsecured note payable with interest at
6.35% due on February 28, 2002, paid
May 8, 2000 $1,250,000 --
Note payable with interest at prime +2%
due on December 31, 2001 secured by
tangible and intangible assets, paid
May 8, 2000 899,054 --
---------- ------------
Total long-term notes payable $2,149,054 --
========== ============
</TABLE>
(6) COMMITMENTS
Advertising Contracts
In April 1999, the Company entered into an agreement with Telemundo Network
Group LLC (Telemundo). A director of the Company serves as the Chief Operating
Officer of Telemundo. Under this agreement, we issued Telemundo 600,000 shares
of our common stock and warrants to purchase 1,000,000 shares of our common
stock exercisable up to and including June 25, 2001 at $14.40 per share. In
exchange, we received a $5.0 million advertising credit on the Telemundo
television network at the rate of $1.0 million for each of the next five years.
This agreement also provides that we will collaborate regarding online content
development, co-branded marketing promotions and other complementary aspects of
our businesses. As of March 31, 2000, the Company's unused advertising credit
amounted to $4.7 million.
In March 1999, the Company entered into a sponsorship agreement with the
Arizona Diamondbacks. A director of the Company serves as the Arizona
Diamondbacks' Chief Executive Officer and General Manager. Under this agreement,
the Company will receive English and Spanish television and radio broadcast
time, ballpark signage, and Internet and print promotions for the 2000 season
for a sponsorship fee of $1.5 million which is payable during 2000. The $1.5
million sponsorship fee is recognized as expense ratably over the 2000 baseball
season. The Company paid $500,000 and recognized $216,000 in expense for the
period ended March 31, 2000.
9
<PAGE> 10
The Company is obligated to pay $2.0 million in 2000 under an agreement with
Estefan Enterprises, Inc. (Estefan). In addition, if the closing price of the
Company's common stock on September 1, 2000 is less than $12.75 per share,
Estefan will have the option to return 156,863 shares of the Company's common
stock (issued to Estefan in September, 1999) to the Company in exchange for $2.0
million cash. As of March 31, 2000, the Company has paid $1.5 million of the
year 2000 obligation.
Internet Access Agreement
On December 14, 1999, the Company entered into a one-year agreement with
NetZero, Inc. (NetZero), where they will provide free internet access along with
our content to the U.S. Hispanic market. According to the terms of this
agreement, we are obligated to pay a fee for their subscribers who access our
Web site. This fee ranges from $.10 to $.15 per user session (user session
fees). We are also committed to spend at least $1 million for the production and
distribution of CD's containing the customized NetZero service. In the event we
have paid an aggregate of $6 million for user session fees we are obligated to
spend an additional $1 million for CD's.
(7) CONTINGENCIES
Legal Proceedings
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business. The Company believes that the outcome
of all such pending legal proceedings to which it is a party will not in the
aggregate have a material adverse effect on the Company's business or financial
condition.
(8) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted loss
per share follows for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- ---------
<S> <C> <C>
Loss available to common stockholders $(10,682,257) $(3,683,219)
Basic EPS-weighted average shares
Outstanding........................ 15,607,188 9,075,833
============ ===========
Basic and diluted loss per share..... $ (.68) $ (.41)
============ ===========
Stock options not included in diluted
EPS since antidilutive............... 6,561,359 1,463,000
============ -----------
</TABLE>
10
<PAGE> 11
(9) SUBSEQUENT EVENTS
On May 9, 2000 the Company announced that it would be reducing its
workforce by approximately one third over the next 60 days as part of
management's effort to further enhance the Company's competitive position and
utilize its assets more efficiently. The Company will record the costs
associated with the workforce reduction in its second fiscal quarter.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - RISK FACTORS
This Quarterly Report on Form 10-Q and the information incorporated by
reference may include "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. In particular, we
direct your attention to Item 1., Financial Statements, Item 2., Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors and Item 3, Quantitative and Qualitative Disclosures about Market Risk.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are forward-
looking statements. These statements can sometimes be identified by our use of
forward-looking words such as "may," "believe," "plan," "will," "anticipate,"
"estimate," "expect," "intend" and other phrases of similar meaning. Known and
unknown risks, uncertainties and other factors could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions.
Although we believe that our expectations expressed in these forward-looking
statements are reasonable, we cannot promise that our expectations will turn out
to be correct. Our actual results could be materially different from our
expectations, including the following:
- we may lose members or fail to grow our member base;
- we may not successfully integrate new members or assets obtained through
acquisitions;
- we may fail to compete with existing and new competitors;
- we may not be able to sustain our current growth;
- we may not adequately respond to technological developments impacting the
Internet;
- we may fail to identify and correct problems associated with system
migration and
- we may not be able to find needed financing.
This list is intended to identify some of the principal factors that could
cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in our business, and should be read in conjunction with the more
detailed cautionary statements included in this Quarterly Report on Form 10-Q
under the caption "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors", "Item 3, Quantitative and
Qualitative Disclosures about Market Risk" and our other SEC filings and our
press releases.
The following discussion of our financial condition and results of
operations for the three months ended March 31, 2000 and 1999 should be read in
conjunction with our financial statements, the notes related thereto, and the
other financial data included elsewhere in this Form 10-Q.
OVERVIEW
We commenced operations on June 25, 1997. The operations for the period June
25, 1997 through May 1998 were limited to organizing quepasa.com, raising
operating capital, hiring initial employees and drafting a business plan. From
May 1998 to present, we were engaged primarily in content development and
acquisition. In May 1999, we launched our first media-based branding and
advertising campaign in the United States. Significant revenues did not commence
until the fourth quarter of 1999. For these reasons, we believe that
period-to-period comparisons of our operating results are not meaningful and the
results for any period should not be relied upon as an indication of future
performance. We currently expect to continue investing in marketing and
advertising and content development. As a result of these factors, we expect to
continue to incur significant losses on a quarterly and annual basis for the
foreseeable future.
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THE QUEPASA.COM COMMUNITY
Quepasa.com is a Bilingual (Spanish/English) Internet portal and online
community launched in November of 1998, focused initially on the U.S. Hispanic
market. We provide users with information and interactive content centered
around the Spanish language. Because the language preference of many
acculturated U.S. Hispanics is English, we also offer our users the ability to
access information and services in the English language. We draw viewers to our
Web site by providing a one-stop destination for identifying, selecting and
accessing resources, services, content and information on the Web. Our online
community includes a search engine, free e-mail, Spanish and English-language
news feeds, chat rooms, message boards, auction and e-commerce sites. We
anticipate that our principal source of revenue will be fees paid by third
parties for advertising their products and services on our Web site, sponsorship
revenue for specific areas within our Web site, auction revenue from our recent
acquisition of eTrato.com, e-commerce revenues from our recent acquisitions of
credito.com and realestateespanol.com and through other acquisitions and
partnerships.
The quepasa.com Web site currently offers a number of categories of topical
interest, including the following:
Noticias (News)
Etretenimiento (Entertainment)
Salud (Health)
Mundo Latino (Latino World)
Recetario (Recipe Box)
Compras (Shopping)
Negocios y Finanzas (Business & Finance)
Deportes (Sports)
Computadoras y Tecnologia (Science & Technology)
Empleo (Employment)
Educacion (Education)
Temas de Sociedad (People & Society)
Subastas (Auctions)
Search Engine. The quepasa.com search engine helps users find information on
the Web by searching through quepasa.com's index of Web documents. Our search
technology is provided by Inktomi which enables us to provide customers with a
variety of online search services.
Free E-Mail, Chat and Message Board Features. quepasa.com offers free e-mail
and free Web community services that consist of chat services and message
boards. These features enable users to discuss topics of mutual interest by
participating in ongoing discussions or by creating their own topics for
discussion.
24 Hour Real-time News, Weather, Maps and Games. quepasa.com offers
worldwide news coverage from Associated Press, Reuters and Hispanic Business
Magazine including worldwide editorialized, topical news covering areas of
special interest to Hispanic users (in Spanish and English), as well as a
Spanish and English-language news feed that we format and edit internally to
provide broad coverage of news that is of special interest to Hispanic users.
Our users are also able to search a database of archived news stories over the
prior 30-day period. Through an agreement with WeatherLabs, we offer worldwide
weather information, including real time weather reports and forecasts, for
5,000 U.S. and 2,400 international cities. We were the first to offer maps and
door-to-door driving directions in both Spanish and English in connection with a
partnership with MapQuest Global Corporation and a bilingual "yellow-pages"
directory through a partnership with MapQuest.com Inc. We also offer several
internally developed games on our Web site for free.
Other Services. We will offer our members unified messaging, PC-to-phone and
calling card services as part of an agreement with Net2Phone. Through an
agreement with GlobalEnglish Corporation we offer English language online
learning to our members and through an agreement with X:Drive, we offer free
Internet hard drive space.
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On-line Auctions
Our goal is to become the most popular auction community for Hispanic
Internet users. On January 28, 2000 we acquired eTrato.com, an online trading
community developed especially for the Spanish language or bilingual Internet
user for 681,818 shares of the Company's common stock. Our acquisition of
eTrato.com will enable us to move toward this goal. eTrato.com is an online,
auction community that:
- facilitates transactions from consumer-to-consumer, business-to-consumer
and business-to-business;
- links Hispanic buyers and sellers of goods and services;
- aids transactions with online tools for payment and fulfillment and
- provides a secure and easy to understand environment for conducting
e-business.
Members of the eTrato.com community can list products or services in the
site's online auction or classifieds section in Spanish, English or both. If
users request, eTrato.com will translate to either language, for a small fee.
Some of the features of the site include escrow payment services, customs and
shipping estimates and options, currency conversion tools, chat and discussion
forums, a trading resource center and directory, advanced auction functions such
as image hosting, user ratings and bulk item uploading and specialized
business-to-business areas with sealed bid and reverse auction formats.
eTrato.com will also have live online customer service in order to help users
have a positive first experience. We expect online auction revenue from the
following sources:
- revenue splits on the sale of value-added trading services (e.g. escrow
and freight forwarding);
- premium service fees and premium listing upgrades providing the seller
with more prominent ad space
- the auctioning of our own products through the site;
- fees paid by third parties for advertising their products and services on
the site; and
- translation services.
It is estimated that the volume of auction-based or market-priced Internet
commerce transactions is close to $4 billion, or 10% of total Internet trading
today. Projections are for this number to grow to nearly $129 billion and 29% of
the market by the year 2002. We are unaware of any companies which have
successfully targeted the Spanish-language segment of this market. While the
online trading market and in particular the auction market is very competitive,
we believe that eTrato.com's Spanish/English language advantage represents an
attractive alternative for Hispanic users.
On-line Financing and Real Estate Services
On January 28, 2000 we acquired credito.com, an online credit and personal
finance company targeted to the U.S. Hispanic population and available in both
Spanish and English for 681,818 shares of common stock and warrants to purchase
681,818 shares of common stock at an exercise price of $11 per share.
Credito.com, will provide our members with information, interactive tools and
resources to help them build and manage their credit needs and will provide a
secure and easy process to apply for a wide variety of credit products and
services. The site will also provide lenders with the opportunity to communicate
with credit educated customers using its consumer profiling and marketing
technologies. We will offer our members the ability to apply for mortgage loans,
credit cards, auto finance loans, home equity loans and student loans.
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On March 9, 2000, we acquired RealEstateEspanol.com, a real estate services
site providing the Hispanic-American community with bilingual home buying
services for 335,925 shares of the Company's common stock. RealEstateEspanol.com
has been designated the official internet site of the National Association of
Hispanic Real Estate Professionals (NAHREP). Quepasa.com members will be able to
search for a real estate agent, access school information, take virtual tours,
apply for a mortgage, and view homes for sale among the more than 800,000 online
listings provided through a partnership with homeseekers.com.
RESULTS OF OPERATIONS
Introduction
The Company derives its net revenues from three principal sources:
advertising on our Website; sales of sponsorships for different areas within our
Website; and e-commerce related revenue. The Company's principle expenses are:
Product and Content Development; Marketing and Advertising; General and
Administrative expense; and Amortization of Goodwill.
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1999
Our results of operations for the three months ended March 31, 2000 were
characterized by increased expenses that more than offset revenue growth during
the period. We reported a net loss of $10.7 million for the three months ended
March 31, 2000, compared to a net loss of $3.7 million for the three months
ended March 31, 1999. During the three months ended March 31, 2000, we have
continued to enter into strategic partnerships, develop our content and
capitalize on our branding efforts and newly created sales force. As a result of
our marketing initiatives, including the Net Zero partnership, our number of
registered users increased 67% to approximately 350,000 as of March 31, 2000
from 210,000 as of December 31, 1999. Our monthly impressions increased 144%
during the three months ended March 31, 2000 to 58.7 million from 24.1 million
as of December 31, 1999.
Net Revenues
Net Revenue increased 100% to $857,000 for the three months ended March 31,
2000 from zero for the three months ended March 31, 1999. We launched our Web
site in the fourth quarter 1998 and first generated revenue during the second
quarter 1999. During the three months ended March 31, 2000, revenue was
principally derived from two sources: 1) banner advertising arrangements under
which we receive revenue based on cost per thousand ad impressions (CPM) and on
cost per clicks and 2) sponsor agreements which allow advertisers to sponsor an
area or receive exclusivity on an area within our Web site. Approximately, 65%
of the gross revenue was generated from banner advertising and 35% was generated
from sponsorship agreements. With the exception of Star Travel, Net2Phone, News
Surfer.com and Zona Financiera, representing 27%, 15%, 11% and 10% of gross
revenue respectively, no other single advertiser utilizing banner ads or
sponsorship agreements amounted to or exceeded 10% of total gross revenue.
Sponsor revenues are recognized ratably over the term of the agreement. During
the three months ended March 31, 2000, we recognized $304,000 of barter revenue
which is included in the amounts noted above.
Operating Expenses
Product and Content Development Expenses. Our product and content
development expenses increased 822% to $1.7 million for the three months ended
March 31, 2000 from $187,000 for the three months ended March 31, 1999. The
period-to-period increase was principally attributable to:
- an increase in personnel costs relating to the development of content
and technological support to $839,000 for the three months ended March
31, 2000 from $68,000 for the three months ended March 31, 1999;
- an increase in expenses for telecommunications links to $143,000 for the
three months ended March 31, 2000 from $119,000 for the three months
ended March 31, 1999;
- an increase in third-party content and development expenses to $579,000
for the three months ended March 31, 2000 from zero for the three months
ended March 31, 1999.
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Advertising and Marketing Expenses. Our marketing and sales expenses
increased 255% to $7.3 million for the three months ended March 31, 2000 from
$2.1 million for the three months ended March 31, 1999. This increase was
principally attributable to:
- an increase in marketing and sales personnel costs to $598,000 for
the three months ended March 31, 2000 from $30,000 for the three
months ended March 31, 1999;
- an increase in the amortization of advertising agreements amounting
to $1.5 million for the three months ended March 31, 2000 from
$423,000 for the three months ended March 31, 1999;
- an increase in advertising expenditures amounting to $2.8 million
expended on the maintenance of brand awareness for the three months
ended March 31, 2000 from $1.2 million for the three months ended
March 31, 1999 and
- the initial expenditures related to the Net Zero campaign amounting
to $2.0 million, comprised of $1.2 million in production expenses
and $750,000 for CD distribution and other related expenses.
General and Administrative Expenses. Our general and administrative expenses
increased 18% to $1.7 million for the three months year ended March 31, 2000
from $1.4 million for the three months ended March 31, 1999. This increase was
principally attributable to an increase in professional fees to $407,000, in
depreciation and rent to $312,000 and an increase in other office and related
expenses to $490,000 for the three months ended March 31, 2000 from $150,000,
$77,000 and $123,000 for the three months ended March 31, 1999. These increases
were partially offset by a 96% decrease in stock based compensation to $21,000
for the three months ended March 31, 2000 compared to $479,000 for the three
months ended March 31, 1999. Stock Based compensation for the three months ended
March 31, 2000 is comprised of expense recognized in accordance with APB Opinion
No. 25, for various employee stock options vesting over time. The expense
recognized for the three months ended March 31, 1999 consisted primarily of
employee stock options vesting immediately.
Amortization of Goodwill. During the three months ended March 31, 2000, the
Company completed the acquisition of eTrato.com, credito.com and
RealEstateEspanol.com. These three acquisitions were accounted for using the
purchase method of accounting. The Company recorded approximately $21 million of
goodwill in relation to these acquisitions, amortized over a period of three
years. Amortization of goodwill amounted to $1.1 million for the three months
ended March 31, 2000.
Other Income (Expense). Other income (expense), which primarily consists of
interest income, unrealized gains or losses and short-term gains or losses on
trading securities, offset by interest expense increased 6,217% to $283,000 for
the three months ended March 31, 2000 from $(4,600) for the three months ended
March 31, 1999. This change resulted primarily from interest income and
short-term gains on trading securities purchased with the remaining proceeds of
the June 1999 initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
We have substantial liquidity and capital resource requirements, but limited
sources of liquidity and capital resources. We have generated net losses and
negative cash flows from our inception and anticipate that we will experience
substantial and increasing net losses and negative cash flows for at least the
next several years. As we implement our strategy and seek to take advantage of
our market opportunity, we anticipate that our liquidity and capital resource
requirements will increase significantly.
From our inception to date, we have relied principally upon equity
investments to support the development of our business. We expect to continue to
rely mainly on further equity offerings to provide financing.
As of March 31, 2000, we had $5.1 million in cash and cash equivalents and
$17.3 million in short-term investments. These resources are principally the
remaining funds generated from our June 24, 1999 Initial Public Offering, which
raised approximately $42.4 million, net of offering costs and an additional $6.3
million, net of offering costs, from the exercise in July 1999 of an option
granted to our underwriters to cover overallotments from the IPO. In March 2000,
Gateway purchased a 7.6% equity stake in the Company for $10 million.
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Net cash used in operating activities was $12.1 million for the three months
ended March 31, 2000 and $2.4 million for the three months ended March 31, 1999.
Net cash used by operations for the three months ended March 31, 2000 consisted
of a net loss of $10.7 million, $4.8 million net proceeds from the sale of
trading securities, an increase in prepaid expenses of $1.2 million, an increase
in other assets of $6.7 million and a decrease in accrued liabilities of $2.4
million offset by non-cash expenses for the depreciation of fixed assets and
amortization of $2.3 million, and an increase in accounts payable of $1.7
million. Net cash used in operations for the three months ended March 31, 1999
primarily resulted from a $3.7 million loss and an increase in prepaid
advertising of $1.1 million offset by a decrease in deposits receivable of $1.5
million and a $479,000 non-cash expense for stock based compensation.
Net cash provided by (used in) investing activities amounted to $96,000 for
the three months ended March 31, 2000 and ($545,000) for the three months ended
March 31, 1999. The increase is attributed to $579,000 in net cash obtained from
newly acquired subsidiaries, partially offset by $162,000 of fixed asset
purchases and $239,000 expended for deferred acquisition costs.
Net cash provided by financing activities was $10.1 million for the three
months ended March 31, 2000 and $1.3 million for the three months ended March
31, 1999. The increase is primarily attributed to the proceeds received from
Gateway's $10 million purchase of a 7.6% equity stake in the Company and
$347,000 from the exercise of stock options, partially offset by the $234,000
payment of a note payable assumed in the acquisition of RealEstateEspanol.com.
On March 30, 2000, Gateway, ranked number one in 1999 in U.S. consumer PC
revenue, invested $10 million in exchange for 7.6% of quepasa.com's outstanding
stock. Quepasa also committed itself to use a substantial portion of the
proceeds of Gateway's investment to further its community and educational
initiative program, which will include distributing computers purchased from
Gateway accompanied with Spanish language technical support, providing Internet
access, and training for quepasa's subscribers. The Company will partner with
Gateway in joint marketing and promotional programs targeting the U.S. Hispanic
community.
Currently, we have commitments under non-cancelable operating leases for
office facilities and equipment requiring payments of $258,000 for the remainder
of 2000. We paid $1.5 million in the three months ended March 31, 2000 and are
obligated to pay an additional $500,000 in 2000 under an agreement with Estefan
Enterprises, Inc. In addition, if the closing price of our common stock on
September 1, 2000 is less than $12.75 per share Estefan Enterprises will have
the option to return 156,863 shares of our common stock (issued to Estefan
Enterprises in September, 1999) to us in exchange for $2.0 million cash. We are
required to pay $188,000 for the remainder of 2000, pursuant to the terms of our
search technology licensing agreement with Inktomi which extends through
September 2001. The Inktomi agreement may require additional payments based upon
the level of use; however, we believe the additional payments, if any, will not
be material. Including the Inktomi agreement, we are obligated to pay
approximately $1.2 million for the remainder of 2000 for technology and content
used on our Web site portal furnished by service providers such as Reuters,
Zacks, Associated Press, STATS, Inc., EFE News Services. We are required to pay
$1.5 million under our sponsorship agreement with the Arizona Diamondbacks for
the 2000 baseball season. In addition, under a one-year agreement with NetZero,
Inc. (NetZero), they will provide free internet access along with our content to
the U.S. Hispanic market and we are obligated to pay a fee for their subscribers
who accessed our Web site. This fee ranges from $.10 to $.15 per user session
(user session fees), however, we have made an advance payment to Net Zero of $1
million and are required to maintain this advance payment deposit amount at
least equal to 125% of the prior month amount due for the user session fees. We
are also committed to spend at least $1 million for the production and
distribution of CD's containing the customized NetZero service. In the event we
have paid an aggregated of $6 million for user session fees we are obligated to
spend an additional $1 million for CD's. We are also obligated under an
agreement with a company owned by a former Director to provide advertising and
marketing advisory services through July 2000. The total remaining commitment
under this agreement is $160,000 in 2000. We recognize the expense related to
advertising, content and technology agreements in a manner consistent with the
timing of the services provided for under the terms of the respective
agreements. Generally, the services are received evenly over the terms of the
agreements.
We expect to continue to incur costs, particularly sales, marketing and
advertising costs, product content and development costs, general and
administrative costs and technology and equipment purchase costs during the
second, third and fourth quarters of 2000 in order to execute our strategic
objectives. We expect to expend the largest portion of our existing capital on
sales, marketing and advertising expenses and product content and development
costs and do not expect sufficient revenue to be realized to offset these costs.
We believe that our cash on hand, along with our planned cost cutting measures,
will be sufficient to meet our working capital and capital expenditure needs
through the second quarter of 2001, however, we believe it will be necessary for
us to raise additional capital to ensure our continued operations beyond the
second quarter of 2001. In the event we are not able to raise capital our
ability to continue operations will be severely impacted and could include a
significant reduction in our advertising spending, a reduction in our personnel
and other spending cuts which could have an adverse effect on the Company. On
May 9, 2000 we announced that we would be reducing our workforce by
approximately one third over the next 60 days as part of management's effort to
utilize its assets more efficiently. The Company will record the costs
associated with the workforce reduction in the second fiscal quarter. There can
be no assurance that we will be successful in raising the necessary funds or
that these funds will be on terms which are beneficial to us.
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SYSTEM ISSUES
We have successfully completed our migration from a Windows NT-based
platform to a Sun Solaris-based platform in March of 2000. We depend on the
delivery of information over the Internet, a medium that depends on information
contained primarily in electronic format, in databases and computer systems
maintained by third parties and us. A disruption of third-party systems or our
systems interacting with these third party systems could prevent us from
delivering search results or other services in a timely manner, which could
materially adversely affect our business and results of operations.
RISK FACTORS
You should carefully consider the risks described below.
Our Operating History is Extremely Limited
We were incorporated in June 1997 and have generated no significant revenue
to date. Accordingly, we have no operating history upon which an investor can
evaluate us, and our prospects are subject to the risks and uncertainties
encountered by companies that are in the early stages of operation and
particularly companies which operate in the new and rapidly evolving Internet
market.
These risks include, among others, our ability to:
- expand the contents and services on our Web site;
- maintain and increase levels of traffic on our Web site;
- increase awareness of our quepasa.com brand;
- attract advertisers and sponsors to our Web site;
- generate significant revenues from e-commerce;
- respond effectively to competitive pressure;
- maintain our current, and develop new, strategic relationships;
- recruit and retain personnel, including sales, content and technology
personnel;
- anticipate and adapt to developing markets;
- upgrade and develop our systems and infrastructure;
- respond to any failure of our network and to handle efficiently our Web
traffic; and
- manage our rapidly expanding operations.
If we are unsuccessful in addressing these and other risks, our business,
financial condition and results of operations will be materially and adversely
affected.
We Expect Future Losses and Will Need More Capital
We have never been profitable. As of March 31, 2000, we had an accumulated
deficit of approximately $46.5 million. Our limited operating history and the
uncertainty of the Internet market in which we operate our business make any
prediction of our future results of operations difficult or impossible. We
expect to make significant expenditures in marketing and advertising and content
development. We also expect our expenses to increase from the acquisitions of
eTrato.com, credito.com and realestateespanol.com. We do not expect that our
revenue will cover our expenses in the foreseeable future. As a result, we will
continue to incur significant
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losses and will need to raise additional capital. We cannot assure that we will
be able to raise additional capital and we do not know what the terms of such
capital raising would be. Any future sale of our equity securities would dilute
the ownership and control of our stockholders.
We Are Subject to Risks Associated With Acquisitions
In the first quarter of 2000, we acquired the stock of three companies. As
part of our long-term business strategy, we continually evaluate strategic
acquisitions of businesses. Acquisitions often involve a number of special
risks, including the following:
- we may experience difficulty integrating acquired operations and
personnel;
- we may be unable to retain acquired subscribers;
- the acquisition may disrupt our ongoing business;
- we may not be able to successfully incorporate acquired technology and
rights into our offerings and maintain uniform standards, controls,
procedures, and policies;
- the businesses we acquire may fail to achieve the revenues and earnings
we anticipated;
- we may ultimately be liable for contingent and other liabilities, not
previously disclosed to us, of the companies that we acquire; and
- our resources may be diverted in asserting and defending our legal
rights.
We may not successfully overcome problems encountered in connection with our
recent and potential future acquisitions. In addition, an acquisition could
materially adversely affect our operating results by:
- causing us to incur additional debt;
- forcing us to accelerate amortization of expenses related to goodwill
and other intangible assets;
- diluting our stockholders' ownership interest.
We Will Be Unable to Generate Sufficient Revenue if Our Target Audience Does Not
Accept Our Products and Services
We have been promoting our site for less than one year and we cannot give
assurances that the Spanish-speaking population will accept our products and
services or that we will attract repeat users to our Web site. Because the
market for our products and services is new and evolving, it is difficult to
predict the future growth rate, if any, and the size of the market we have
targeted. If the market develops more slowly than we expect or becomes saturated
with competitors, or if our products and services are not accepted by the
market, we will be unable to generate enough revenue to offset our expenses and
to earn profits.
Our Inability to Maintain the quepasa.com Brand Will Significantly Reduce Our
Revenue
We believe that maintaining the quepasa.com brand is of critical importance
to our efforts to attract and expand our user base and our advertising,
sponsorships and e-commerce revenues. We also believe that brand recognition
will become more important due to the increasing number of Internet sites.
Promotion and enhancement of the quepasa.com brand will depend largely on our
success in providing high quality products and services and Web site content
that is of interest to the worldwide Spanish-speaking population. We cannot
assure that success. Failure to develop brand loyalty among our users could
result in our being unable to generate enough revenue to offset our expenses and
to earn profits.
We Will be Adversely Affected if the Internet Does Not Become a More Widely
Accepted as a Medium for Advertising and E-commerce
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We will need revenue from the sale of advertisements and sponsorships on our
Web pages and from e-commerce transactions to offset expenses. At the present
time, Web advertisers generally enter into only short-term advertising
contracts. Because Web site advertising is a new phenomenon, few advertisers
have significant experience with the Web as an advertising medium. Consequently,
many advertisers have not devoted a substantial portion of their advertising
expenditures to Web-based advertising, and may not find Web-based advertising to
be effective for promoting their products and services as compared to
traditional print and broadcast media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and we can give no assurance that such
standards will be developed or adopted sufficiently to sustain Web-based
advertising as a significant advertising medium. We cannot give assurances that
banner advertising, the predominant revenue producing mode of advertising
currently used on the Web, will be accepted as an effective advertising medium
or that we can effectively transition to any other forms of Web-based
advertising, should they develop. Software programs are available that limit or
remove advertisements from an Internet user's desktop. This software, if
generally adopted by users, may materially and adversely affect Web-based
advertising.
Our Web Site Operations Could Be Impaired if We Lose the Services of Third Party
Technology and Content Providers
Our business depends upon third parties, including providers of technology,
infrastructure, content and features.
We supplement our Web site directory listings with Web search results
provided by Inktomi under a non-exclusive agreement. We depend upon Inktomi for
ongoing maintenance and technical support to ensure accurate and rapid
presentation of search results to users of our Web site. Termination of our
relationship with Inktomi or Inktomi's failure to renew our agreement upon
expiration could result in substantial additional costs to us in developing or
replacing technology. We also rely on GTE for our Internet and Critical Path for
our e-mail connections. Any interruption in the Internet access provided by GTE
or any other provider of access could disrupt our Web site operations and impair
relations with our users.
We license content, including technology and related databases, from third
parties for portions of our quepasa.com Web site, including news from Associated
Press, Reuters, Hispanic Business and EFE News Services, weather from
WeatherLabs, stock quotes and other stock information from Zacks Investment
Research and sports scores and statistics from STATS, Inc. Any errors, delays or
failures experienced in connection with these third party technologies and
services could have a negative effect on our relationship with users of our Web
site, could materially and adversely affect our brand and our business and could
subject us to liability to third parties for business negligence such as
defamation or libel.
System Failure Could Disrupt Our Web Site Operations
The continued and uninterrupted performance of our hardware and software is
critical to our reputation and our success in attracting traffic to our Web
site. Users of our site and our services, such as our e-mail services, may
become dissatisfied by system failures that may limit our Web site services.
Sustained or repeated system failures could significantly reduce the traffic on
our Web site and may impair our reputation and brand name. Our operations depend
on our ability to protect our computer systems from damage from fire, power
loss, water damage, telecommunications failures, vandalism and other malicious
acts, and similar unexpected adverse events.
The number of pages of information transmitted over our network, commonly
referred to as "page views," has continued to increase over time. We are
actively trying to increase our level of page views. As a result, our network
must accommodate a high volume of traffic, often at unexpected times. We have
experienced periodic capacity constraints in terms of our ability to serve our
increasing user volumes. In addition, we have had reliability problems with two
of our internally developed applications, chat and e-mail, and as a result we
are currently outsourcing these two applications. We are in the process of
improving our network infrastructure to ensure that we will be able to handle
future increases in traffic. We have migrated our platform and our applications
to a Unix platform using Sun Microsystems servers. Any break in the continuous
operations of our network could have a material adverse effect on our operating
expenses, our brand and our business.
We may, from time to time, experience interruptions due to several factors
including hardware failures, unsolicited bulk e-mail and operating system
failures. Because our revenues depend on the number of users of our network, we
will be adversely affected if we experience frequent or long system delays or
interruptions. If delays or interruptions continue to occur our users could
perceive our network as being unreliable, traffic on our Web site could
deteriorate and our brand could be adversely affected. Any failure on our part
to minimize or prevent capacity constraints or system interruptions could have
an adverse effect on our brand and our business.
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<PAGE> 21
We may not carry enough business interruption insurance to compensate for
losses that may occur as a result of any of these adverse events. We also depend
upon Internet browsers and Internet service providers that provide users with
access to the Internet and our Web site. Users may experience difficulties due
to system failures unrelated to our systems. Any disruption in Internet access
by Internet service providers and other third party access providers, or any
failure of such providers to handle higher volumes of user traffic, could
disrupt our Web site operations and impair relations with our users.
Our Management is Inexperienced and May Not Be Able to Manage Our Growth
Several executive officers and members of our board of directors joined us
in 1999, our management team has worked together for less than a year and none
of our executive officers has extensive experience managing a rapidly growing
business enterprise. Any growth we experience will place a significant strain on
our management and financial resources. Any inability of our management to
manage growth effectively could increase our operating expenses, impair our
marketing efforts and limit the development of our Web site.
Growth of Our Web Site May Be Limited by Governmental Regulations
Government regulation has not materially restricted use of the Internet in
our markets to date. However, the legal and regulatory environment pertaining to
the Internet remains relatively undeveloped and may change. New laws and
regulations could be adopted, and existing laws and regulations could be applied
to the Internet and, in particular, to e-commerce. New laws and regulations may
be adopted with respect to the Internet covering, among other things, sales and
other taxes, user privacy, pricing controls, characteristics and quality of
products and services, consumer protection, cross-border commerce, libel and
defamation, intellectual property matters and other claims based on the nature
and content of Internet materials. Any laws or regulations adopted in the future
affecting the Internet could subject us to substantial liability. Such laws or
regulations could also adversely affect the growth of the Internet generally,
and decrease the acceptance of the Internet as a communications and commercial
medium. In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure. Areas with high Internet use relative to the
existing telecommunications structure have experienced interruptions in phone
service leading local telephone carriers to petition regulators to govern
Internet service providers and impose access fees on them. Such regulations, if
adopted in the United States or other places, could increase significantly the
costs of communicating over the Internet, which could in turn decrease the
demand for our products and services. The adoption of various proposals to
impose additional taxes on the sale of goods and services through the Internet
could also reduce the demand for Web-based commerce.
We May Face Liability for Information Content and Commerce-Related Activities
Because materials may be downloaded by the services that we operate or
facilitate and the materials may subsequently be distributed to others, we could
face claims for errors, defamation, negligence, or copyright or trademark
infringement based on the nature and content of such materials. We could also be
exposed to liability because of the listings that we select and make available
through our Web site, or through content and materials posted by users in chat
room and message board services that we provide. We could face personal injury
or other product liability claims arising from the use of products sold through
our Web site. We offer e-mail services, which expose us to potential liabilities
or claims resulting from unsolicited e-mail, lost or misdirected messages,
illegal or fraudulent use of e-mail or interruptions or delays in e-mail
service. Even to the extent that claims made against us do not result in
liability, we may incur substantial costs in investigating and defending such
claims.
Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liabilities that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our financial condition. In addition, the increased
attention focused on liability issues as a result of these lawsuits and
legislative proposals could impact the overall growth of Internet use.
Concerns About Security of E-Commerce Transactions and Confidentiality of
Information on the Internet May Reduce the Use of Our Web Site and Impede Our
Growth
A significant barrier to e-commerce and confidential communications over the
Internet has been the need for security. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur significant costs
to protect against the threat of security breaches or to alleviate problems
caused by these breaches. Unauthorized persons could attempt to penetrate our
network security. If successful, they could misappropriate proprietary
information or cause interruptions in our services. As a result, we
21
<PAGE> 22
may be required to expend capital and resources to protect against or to
alleviate these problems. Security breaches could have a material adverse effect
on our business, financial condition and results of operations.
Competition For Internet Users May Limit Traffic On, and the Value of Our Web
Site
The market for Internet products and services and the market for Internet
advertising and electronic commerce arrangements are extremely competitive, and
we expect that competition will continue to intensify. There are many companies
that provide Web sites and online destinations targeted to Spanish-language
Internet users. Competition for visitors, advertisers and e-commerce partners is
intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in our market. We believe that the
principal competitive factors in these markets are name recognition,
distribution arrangements, functionality, performance, ease of use, the number
of services and features provided and the quality of support. Our primary
competitors are other companies providing portal or other online services,
especially to Spanish-language Internet users such as StarMedia, Terra Network,
El Sitio, Yahoo! Espanol, America Online Latin America, Yupi, Prodigy and
Microsoft networks in Latin America, Mexico and Spain. Most of our competitors,
as well as a number of potential new competitors, have significantly greater
financial, technical and marketing resources than we do. Our competitors may
offer Internet products and services that are superior to ours or that achieve
greater market acceptance. There can be no assurance that competition will not
limit traffic on, and the value of, our Web site.
Technological Changes Could Impair Our Ability to Compete and Subject Us to
Significant Expenditures
The market for Internet products and services is characterized by rapid
technological developments, frequent new product and service introductions and
evolving industry standards. The emerging character of these products and
services and their rapid evolution will require that we continually improve the
performance, features and reliability of our Internet content, particularly in
response to competitive offerings. There can be no assurance that we will be
successful in responding quickly, cost effectively and sufficiently to these
developments. In addition, the widespread adoption of new Internet technologies
or standards could require substantial expenditures by us to modify or adapt our
Web site and services and could fundamentally affect the character, viability
and frequency of Web-based advertising, either of which could have a material
adverse effect on our business. In addition, new Internet services or
enhancements offered by us may contain design flaws or other defects that could
require costly modifications or result in a loss of consumer confidence.
Our Stock Price is Highly Volatile
In the past, our common stock has traded at volatile prices. We believe that
the market prices will continue to be subject to significant fluctuations due to
various factors and events that may or may not be related to our performance. If
the market value of our common stock decreased substantially, we could be
delisted from the Nasdaq National Market. Consequently, you could find it
difficult or impossible to sell your stock or to determine the value of your
stock.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations, which have particularly affected the market
prices of the stocks of Internet-sector companies and which may be unrelated to
the operating performance of such companies. Furthermore, our operating results
and prospects from time to time may be below the expectations of public market
analysts and investors. Any such event could result in a material decline in the
price of your stock.
We Have No Intention to Pay Dividends
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.
Future Sales of our Common Stock or Shares Issuable upon Exercise of Stock
Options Could Adversely Affect our Stock Price and Our Ability to Raise Funds in
New Stock Offerings
As of the date of this filing, we have 18,833,305 shares of common stock
outstanding. Sale of substantial amounts of common stock, or the perception that
sales could occur, could reduce the market price of the common stock. Currently,
there are outstanding stock options or common stock purchase warrants to acquire
6,512,109 of common stock at exercise prices ranging from $1 to $19.80 per
share, including 2,565,313 common stock purchase warrants subject to demand and
piggy-back registration rights.
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<PAGE> 23
EMPLOYEES
As of March 31, 2000, we had 104 employees, including our five executive
officers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have any derivative financial instruments as of March 31, 2000.
Our interest income is sensitive to changes in the general level of interest
rates. In this regard, changes in interest rates can affect the interest earned
on our cash equivalents. To mitigate the impact of fluctuations in interest
rates, we generally enter into fixed rate investing arrangements. As a result,
we believe that the market risk arising from holdings of our financial
instruments is not material. We do not believe that we are exposed to any
significant market risk for market rate changes to our notes payable.
23
<PAGE> 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 2000 the Company announced that it would be reducing its
workforce by approximately one third over the next 60 days as part of
management's effort to further enhance the Company's competitive position and
utilize its assets more efficiently. The Company will record the costs
associated with the workforce reduction in its second fiscal quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report on Form 10-Q.
b. Reports on Form 8-K:
(1) On January 21, 2000, the Company filed a report on Form 8-K
announcing that it had replaced Deloitte & Touche LLP with KPMG
LLP as its independent accountants.
(2) On January 28, 2000, the Company filed a report on Form 8-K
announcing the closing of its acquisition of credito.com, Inc.
(3) On February 11, 2000, the Company filed a report on Form 8-K
announcing the closing of its acquisition of eTrato.com, Inc.
(4) On March 17, 2000, the Company filed a report on Form 8-K
announcing the closing of its acquisition of
RealEstateEspanol.com, Inc.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Phoenix, state of Arizona, on May 15, 2000.
quepasa.com, inc.
By: /s/ GARY L. TRUJILLO
--------------------------------------
Name: Gary L. Trujillo
Title: President, Chief Executive Officer
and Chairman of the Board of
Directors (Principal Executive
Officer)
By: /s/ JUAN C. GALAN
--------------------------------------
Name: Juan C. Galan
Title: Chief Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ---------------------------------
<S> <C>
20.1 News Release dated May 9, 2000
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 20.1
Quepasa.com Announces Cost Reduction Program To
Enhance Competitive Position; To Reduce Workforce by
Approximately One Third
PHOENIX--(BUSINESS WIRE)--May 9, 2000--Quepasa.com (Nasdaq:
PASA), the premier online community for U.S. Hispanics, today
announced that the Company will be reducing its workforce by
approximately one third over the next 60 days as part of
management's effort to further enhance the Company's
competitive position.
The announcement comes after the Company announced record
first quarter results. During the first quarter impressions
on the quepasa.com Web site grew by 144% over the fourth
quarter 1999, reaching 58.7 million, registered users
increased by 67% over the fourth quarter 1999 to 350,000 and
revenue grew by 104%.
"After spending a significant amount of effort and capital to
build a strong market presence, we are now focusing on
enhancing our competitive position through more efficient
asset utilization," said Gary L. Trujillo, Chairman and CEO
of quepasa.com. "Over the balance of the year we will
continue to evaluate staffing levels as we explore further
opportunities. We have expended significant effort in
creating the initial infrastructure for our Web site,
building the quepasa.com brand and achieving top-of-mind
awareness in the Hispanic community. Now as we go forward,
quepasa.com will continue to invest its significant cash
balance in executing our business plan. In additional,
through our previously announced partnerships, we are growing
quepasa.com's brand awareness and increasing our registered
users and impressions by offering the U.S. Hispanic community
free Internet access and increased access to computers."
The Company will take a one time, non-material restructuring
charge associated with the workforce reduction in its second
fiscal quarter, ending June 30, 2000.
About quepasa.com:
Quepasa.com provides the rapidly growing U.S. Hispanic market
with information and interactive content available in both
Spanish and English. The site was founded in 1998 and
includes a search engine, free e-mail, Spanish-language news
feeds, worldwide weather information, chat rooms, games, maps
and message boards. Quepasa.com has entered into strategic
alliances with leading providers of media, content and
technology including: NetZero, Inc.; Reuters NewMedia, Inc.;
Associated Press; Agencia EFE; Hispanic Business Magazine;
AutoNation, Inc.; Net2Phone, Inc.; X:drive; Telemundo Network
Group; Internet Wire, Inc.; WeatherLabs, Inc.; e-lingo;
WorldGate Communications, Inc.; Inktomi; Salud.com;
Egreetings Network, CriticalPath and GTE Internetworking.
The statements in this press release regarding future
performance and growth are forward-looking statements that
are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially. Factors
that could cause or contribute to such differences include,
but are not limited to those set forth in quepasa.com's
documents filed the Securities and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-30-2000
<CASH> 5,111,885
<SECURITIES> 17,345,392
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,380,055
<PP&E> 2,810,268
<DEPRECIATION> 590,411
<TOTAL-ASSETS> 59,532,956
<CURRENT-LIABILITIES> 5,337,867
<BONDS> 0
0
0
<COMMON> 17,743
<OTHER-SE> 50,046,035
<TOTAL-LIABILITY-AND-EQUITY> 59,532,956
<SALES> 856,585
<TOTAL-REVENUES> 856,585
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,821,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,358
<INCOME-PRETAX> (10,682,257)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,682,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,682,257)
<EPS-BASIC> (.68)
<EPS-DILUTED> (.68)
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