<PAGE> 1
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 JUNE 30, 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:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE. NONE.
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
August 14, 2000 was approximately 18,693,942 shares.
<PAGE> 2
QUEPASA.COM, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and December 31, 1999............................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2000, and 1999 (unaudited)
and the Six Months Ended June 30, 2000 and 1999 (unaudited).. 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 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..................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 22
Item 6. Exhibits and Reports on Form 8-K............................... 22
Signatures.............................................................. 23
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUEPASA.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 3,924,134 $ 6,961,592
Trading securities .................................. 10,044,184 22,237,656
Accounts receivable (net of allowance for doubtful
accounts of $191,308 and $6,638, respectively) .. 362,261 297,170
Forgivable loans .................................... 93,167 368,042
Prepaid expenses .................................... 2,096,481 5,761,494
Other current assets ................................ 6,721,890 --
------------- -------------
Total current assets ........................ 23,242,117 35,625,954
Property and equipment, net ........................... 2,015,191 2,051,103
Goodwill, net ......................................... 18,195,137 --
Other assets .......................................... 968,993 153,743
------------- -------------
Total assets .......................................... $ 44,421,438 $ 37,830,800
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................... $ 1,616,541 $ 2,775,347
Accrued liabilities ................................. 388,417 3,023,984
Deferred revenue .................................... 15,417 85,417
------------- -------------
Total current liabilities 2,020,375 5,884,748
Redeemable common stock -- 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 18,850,805 shares
and 14,536,058 shares, respectively ................ 17,763 14,536
Additional paid-in capital ............................ 101,187,708 70,709,010
Deferred advertising services ......................... (4,629,230) (5,000,000)
Accumulated deficit ................................... (54,175,178) (35,777,494)
------------- -------------
Total stockholders' equity .................. 42,401,063 29,946,052
------------- -------------
Total liabilities and stockholders' equity ............ $ 44,421,438 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue .................................. $ 1,266,514 $ 16,562 $ 2,187,760 $ 16,562
Less commissions ............................... (74,873) (8,119) (139,534) (8,119)
------------ ------------ ------------ ------------
Net revenue .................................... 1,191,641 8,443 2,048,226 8,443
Operating expenses:
Product and content development ............. 1,777,581 278,872 3,498,001 465,563
Advertising and marketing ................... 4,106,660 3,062,841 11,434,882 5,125,448
General and administrative .................. 1,701,486 6,320,117 3,395,001 7,749,416
Amortization of goodwill .................... 1,752,228 -- 2,831,619 --
------------ ------------ ------------ ------------
Total operating expenses ............. 9,337,955 9,661,830 21,159,503 13,340,427
------------ ------------ ------------ ------------
Loss from operations ........................... (8,146,314) (9,653,387) (19,111,277) (13,331,984)
Other income (expense):
Interest expense ............................. (19,889) (113,122) (51,247) (133,122)
Interest income and other .................... 468,736 2,568 899,129 17,946
Short-term gain on trading securities ........ -- -- 2,820 --
Unrealized gain (loss) on trading securities (17,960) 1,053 (137,109) 1,053
------------ ------------ ------------ ------------
Other income (expenses), net ................... 430,887 (109,501) 713,593 (114,123)
------------ ------------ ------------ ------------
Net loss ....................................... $ (7,715,427) $ (9,762,888) $(18,397,684) $(13,446,107)
============ ============ ============ ============
Net loss per share, basic and diluted .......... $ (.43) $ (.98) $ (1.10) $ (1.42)
============ ============ ============ ============
Weighted average number of shares
outstanding, basic and diluted ................. 17,751,592 9,920,338 16,679,390 9,500,419
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
QUEPASA.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $(18,397,684) $(13,446,107)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......................... 4,520,053 60,924
Stock based compensation ............................... 41,092 4,864,270
Consulting services received in
exchange for stock ................................. -- 550,000
Unrealized (gain) loss on trading
securities ......................................... 137,109 (1,053)
Short-term (gain) loss on trading
securities ......................................... (2,820) --
Increase (decrease) in cash resulting
from changes in assets and liabilities:
Sale (purchase) of trading securities, net ........... 12,059,183 (27,495,988)
Accounts receivable .................................. (65,091) --
Prepaid expenses ..................................... 823,013 (996,383)
Other assets ......................................... (6,716,890) 1,505,132
Accounts payable ..................................... (762,345) 942,033
Accrued liabilities .................................. (2,638,467) 4,844
Amortization of deferred advertising credit .......... 29,410 --
Deferred revenue ..................................... (70,000) --
------------ ------------
Net cash used in operating activities ............. (11,043,437) (34,012,328)
------------ ------------
Cash flows from investing activities:
Forgivable loans .......................................... (87,000) (25,997)
Cash paid for acquisitions ................................ (238,793) --
Cash received in acquisition of eTrato .................... 578,730 --
Purchase of fixed assets .................................. (244,376) (543,991)
------------ ------------
Net cash (used in) provided by investing activities 8,561 (569,988)
------------ ------------
Cash flows from financing activities:
Stock subscription receivable ............................. -- 125,000
Net proceeds from issuance of stock ....................... 10,000,000 42,368,300
Proceeds from the exercise of stock options ............... 367,801 --
Proceeds from draws on line of credit ..................... 12,286
Issuance (payment) of notes payable ....................... (2,382,669) 2,245,081
Accrued commissions ....................................... -- (215,233)
Stock subscription ........................................ -- (337,500)
------------ ------------
Net cash provided by financing activities ......... 7,997,418 44,185,648
------------ ------------
Net increase (decrease) in cash and cash equivalents ........ (3,037,458) 9,603,332
Cash and cash equivalents, beginning of period .............. 6,961,592 2,199,172
------------ ------------
Cash and cash equivalents, end of period .................... $ 3,924,134 $ 11,802,504
============ ============
Supplemental Statement of Cash Flows Information:
Interest paid ............................................... $ 32,175 $ 133,122
============ ============
Barter transactions ......................................... $ 1,168,209 $ --
============ ============
Notes payable assumed in acquisitions ....................... $ 2,370,383 $ --
============ ============
Stock issued for advertising credits ........................ $ -- $ 5,687,500
============ ============
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
JUNE 30, 2000 AND 1999
(1) THE COMPANY
Quepasa.com, inc. (the Company), a Nevada Corporation, was incorporated in
June 1997. The Company is a Bilingual Hispanic Internet portal and on-line
community. Quepasa.com offers a number of services in both Spanish and English
such as a search engine, news feeds, 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.
To date the Company's expenses have significantly exceeded revenue and there
is no assurance that the Company will 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 Sheets 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, 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. The acquisition was accounted for using the
purchase method of accounting. The Company recorded $10.1 million in goodwill,
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, 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 June 30, 2000. The Company will partner
with Gateway in joint marketing and promotional programs targeting the U.S.
Hispanic community.
6
<PAGE> 7
In September 1999, the Company entered into an agreement with Estefan
Enterprises, Inc. whereby Gloria Estefan would act as spokesperson for the
Company through December 31, 2000 and the Company would sponsor her United
States 2000 concert tour. Ms. Estefan's tour was subsequently postponed, and
consequently the original terms of the spokesperson agreement have been
renegotiated. The revised spokesperson agreement calls for the return of the
156,863 shares of redeemable common stock to the Company, cancellation of the
put option for those shares and cancelation of the final installment.
The Company obtained the right of first refusal for the sponsorship of Ms.
Estefan's next United States and Latin America tours. As of March 31, 2000,
amounts related to this contract were recorded as prepaid advertising and
redeemable common stock and were being amortized over the term of the contract.
As of June 30, 2000, the prepaid advertising relating to the Estefan agreement
has been fully amortized and the issuance of the 156,863 shares of redeemable
common stock has been reversed. The Company recognized $1.1 million and $2.3
million of amortization in relation to the Estefan agreement during the three
and six months ended June 30, 2000, respectively.
On May 9, 2000 the Company announced that it would reduce its workforce by
approximately one third as part of management's effort to further enhance the
Company's competitive position and utilize its assets more efficiently. Our
workforce was 104 as of March 31, 2000 and has been reduced to 72 as of June 30,
2000.
During the three months ended June 30, 2000 the Company announced it had
retained Friedman, Billings, Ramsey & Company to explore alternatives including
strategic alliances, significant equity investments in the Company or a merger
or the sale of the Company or significant portions of its business.
(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.
Securities
The Company classifies its 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
securities at June 30, 2000 and December 31, 1999 consist of corporate debt
securities.
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
<PAGE> 8
identification method for determining the cost of securities. All securities
held at June 30, 2000 and December 31, 1999 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. 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 June 30, 2000 and 1999 revenues attributable to reciprocal
services totaled approximately $864,000 and $0, respectively. During the six
months ended June 30, 2000 and 1999 revenues attributable to reciprocal services
totaled approximately $1.2 million 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.
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.
8
<PAGE> 9
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 exceeds 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, forgivable 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.
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 net loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss 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.
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 Folgers, representing
34% of gross revenue for the three months ended June 30, 2000, and Folgers, Star
Travel and NewsSurfer.com representing 22%, 12% and 10%, respectively, for the
six months ended June 30, 2000, no other single advertiser utilizing banner ads
or sponsorship agreements
9
<PAGE> 10
amounted to or exceeded 10% of total gross revenue. Sponsor revenue is
recognized ratably over the term of the agreement.
(5) 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.
As of June 30, 2000, the Company's unused advertising credit
amounted to $4.6 million.
The Company has a sponsorship agreement with the Arizona Diamondbacks major
league baseball team. A director of the Company serves as the Arizona
Diamondbacks' Chief Executive Officer and General Manager. Under this agreement,
the Company receives English and Spanish television and radio broadcast time,
ballpark signage, and Internet and print promotions for an annual sponsorship
fee of $1.5 million which is payable during each season. The $1.5 million annual
sponsorship fee is recognized as expense ratably over the baseball season. The
Company recognized $649,000 and $865,000 in expense related to this agreement
during the three and six months ended June 30, 2000, respectively.
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. We also committed
to spend at least $1 million for the production and distribution of CD's
containing the customized NetZero service. This commitment was fulfilled in the
first quarter of 2000.
(6) 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, based on advice
of legal counsel, 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.
(7) LOSS PER SHARE
The following table sets forth a summary of the reconciliation from basic
loss per share to diluted loss per share for the three and six months ended June
30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss available to common stockholders $ (7,715,427) $ (9,762,888) $(18,397,684) $(13,446,107)
------------ ------------ ------------ ------------
Basic EPS-weighted average shares
outstanding ......................... 17,751,592 9,920,338 16,679,390 9,500,419
============ ============ ============ ============
Basic and diluted loss per share ...... $ (.43) $ (.98) $ (1.10) $ (1.42)
============ ============ ============ ============
Stock options not included in diluted
EPS since antidilutive .............. 6,218,439 3,148,000 6,218,439 3,148,000
============ ============ ============ ============
</TABLE>
SUBSEQUENT EVENTS
In July 2000 the Company re-negotiated its spokesperson agreement with
Estefan Enterprises. See "Significant Transactions" (Note 3) for more detail.
10
<PAGE> 11
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 not be able to enter into a strategic alliance, obtain a
significant equity investment in the Company or arrange a merger or sale
of the Company;
- 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 June 30, 2000 and 1999 and the six months
ended June 30, 2000 and 1999 should be read in conjunction with our condensed
consolidated financial statements, the notes related thereto, and the other
financial data included elsewhere in this Form 10-Q.
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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.
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, in both Spanish and English, a search engine, free e-mail,
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, 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. 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.
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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. The Company has entered into a partnership with
Insight Guides, providing quepasa.com users with online resources to learn more
about the rich U.S. Latino ethnic heritage. Quepasa.com members will have online
access, in both English and Spanish, to Insight Guide's unique historical,
cultural and travel related content for many Latin American destinations. The
Company has also entered into a revenue generating alliance with StarTravel
Group, who operates a full service travel portal, StarTravel.com. Through this
agreement quepasa.com users will be able to access StarTravel.com in both
English and Spanish. StarTravel.com is an e-commerce Internet travel portal
specializing in the delivery of travel services to the U.S. Hispanic and Latin
American online markets. During the three months ended June 30, 2000,
quepasa.com also announced a partnership with Telemundo Network Group and the
Los Angeles Police Department. Through this agreement, the Company will feature
content dedicated to creating awareness among the Latino community and to
solving crime.
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 has 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
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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.
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.
RealEstateEspanol.com's functionality has been incorporated into the quepasa.com
site and once fully developed will allow members 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; and Amortization of Goodwill.
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999 and the Six Months Ended June 30, 2000 Compared to the Six Months Ended
June 30, 1999
Our results of operations for the three and six months ended June 30, 2000
and 1999 were characterized by increased expenses that more than offset revenue
growth during these periods. We reported a net loss of $7.7 million for the
three months ended June 30, 2000, compared to a net loss of $9.8 million for the
three months June 30, 1999 and reported a net loss of $18.4 million for the six
months ended June 30, 2000, compared to a net loss of $13.4 million for the six
months ended June 30, 1999. During the three and six months ended June 30, 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 31% to approximately 460,000 as of June 30, 2000 from
350,000 as of March 31, 2000. Approximately 35% of total user sessions during
the three months ended June 30, 2000 originated from the quepasa.com/NetZero
co-branded service. Advertising impressions increased 184% during the three
months ended June 30, 2000 to 167.0 million from 58.7 million for the three
months ended March 31, 2000.
Net Revenues
Net Revenue increased 14,900% to $1.2 million for the three months ended
June 30, 2000 from $8,000 for the three months ended June 30, 1999. For the six
months ended June 30, 2000, net revenues increased 24,900% to $2.0 million from
$8,000 for the six months ended June 30, 1999. We launched our Web site in the
fourth quarter 1998 and first generated revenue during the second quarter 1999.
During the six months ended June 30, 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. For the three and six months ended
June 30, 2000, approximately, 87% and 77% of the gross revenue was generated
from banner advertising and 13% and 22% was generated from sponsorship
agreements. With the exception of Folgers, representing 34% of gross revenue for
the three months ended June 30, 2000 and Folgers, Star Travel and NewsSurfer.com
representing 22%, 12% and 10%, respectively, for the six months ended June 30,
2000, 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 and six
months ended June 30, 2000, we recognized $864,000 and $1.2 million of barter
revenue respectively, which is included in the amounts noted above.
Operating Expenses
Product and Content Development Expenses. Our product and content development
expenses increased 545% to $1.8 million for the three months ended June 30, 2000
from $279,000 for the three months ended June 30, 1999. For the six months ended
June 30, 2000, Product and Content Development Expenses increased 651% to $3.5
million from $466,000 for the six months ended June 30, 1999. For the three and
six months ended June 30, 2000 and 1999, the period-to-period increase was
principally attributable to an
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increase in personnel costs relating to the development of content and
technological support, an increase in expenses for telecommunications links, and
an increase in third-party content and development expenses.
Advertising and Marketing Expenses. Our advertising and marketing expenses
increased 32% to $4.1 million for the three months ended June 30, 2000 from $3.1
million for the three months ended June 30, 1999. For the six months ended June
30, 2000, Advertising and Marketing Expenses increased 124% to $11.4 million
from $5.1 million for the six months ended June 30, 1999. For the three and six
months ended June 30, 2000 and 1999, the period-to-period increase was
principally attributable to an increase in marketing and sales personnel costs,
an increase in the amortization of advertising agreements and the initial
expenditures related to the Net Zero campaign comprised of production expenses,
CD distribution and other related expenses. The three month period-to-period
increase was partially offset by a decrease in advertising expenditures.
General and Administrative Expenses. Our general and administrative expenses
decreased 73% to $1.7 million for the three months ended June 30, 2000 from $6.3
million for the three months ended June 30, 1999. For the six months ended June
30, 2000, General and Administrative Expense decreased 56% to $3.4 million from
$7.7 million for the six months ended June 30, 1999. For the three and six
months ended June 30, 2000, the period-to-period decrease was principally
attributable to a decrease in stock based compensation partly offset by
increases in professional fees, depreciation and rent, and an increase in other
office and related expenses. Stock Based compensation for the three and six
months ended June 30, 2000 and 1999 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 and six months ended June 30,
1999 consisted primarily of employee stock options which vested immediately.
Amortization of Goodwill. During the six months ended June 30, 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, which is being amortized over a
period of three years. Amortization of goodwill amounted to $1.8 and $2.8
million for the three and six months ended June 30, 2000.
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 492% to $431,000 for the three months
ended June 30, 2000 from ($110,000) for the three months ended June 30, 1999.
For the six months ended June 30, 2000, other income (expense) increased 726% to
$714,000 from ($114,000) million for the six months ended June 30, 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.
On May 9, 2000 the Company announced that it would reduce its workforce by
approximately one third as part of management's effort to further enhance the
Company's competitive position and utilize its assets more efficiently. Our
workforce was 104 as of March 31, 2000 and has been reduced to 72 as of the end
of June 30, 2000.
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 have retained the
investment banking firm of Friedman, Billings, Ramsey & Co., Inc. to explore
alternatives including strategic alliances, significant equity investments in
the Company or a merger or the sale of the Company or significant portions of
its business.
As of June 30, 2000, we had $3.9 million in cash and cash equivalents and
$10.0 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.
Net cash used in operating activities was $11.0 million for the six months
ended June 30, 2000 and $34.0 million for the six months ended June 30, 1999.
The decrease in net cash used by operations for the six months ended June 30,
2000 was primarily due to
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the sale of trading securities, an increase in other assets principally due to
the purchase of computers pursuant to the Gateway agreement, an increase in
depreciation and amortization, and a decrease in stock based compensation.
Net cash provided by (used in) investing activities amounted to $9,000 for
the six months ended June 30, 2000 and ($570,000) for the six months ended June
30, 1999. The increase is primarily attributed to net cash obtained from newly
acquired subsidiaries.
Net cash provided by financing activities was $8.0 million for the six
months ended June 30, 2000 and $44.2 million for the six months ended June 30,
1999. The decrease is primarily attributed to the proceeds generated from our
June 24, 1999 Initial Public Offering, which raised approximately $42.4 million,
net of offering costs. During the six months ended June 30, 2000, Gateway
purchased a 7.6% equity stake in the Company which was partially offset by the
repayment of long-term notes payable and accrued interest.
Currently, we have commitments under non-cancelable operating leases for
office facilities and equipment requiring payments of $177,000 for the remainder
of 2000. We paid $1.5 million in the six months ended June 30, 2000 under our
spokesperson agreement with Gloria Estefan. Under the terms of the revised
spokesperson agreement we are no longer obligated to pay the final installment
called for in the original agreement and Estefan has agreed to return the
156,863 shares of our common stock (issued in September, 1999) and the
$2 million put option originally linked to these shares has been cancelled.
We are required to pay $125,000 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 $619,000 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 an
annual fee of $1.5 million under our sponsorship agreement with the Arizona
Diamondbacks for the 2000 baseball season. In addition, 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. We
also committed to spend at least $1 million for the production and distribution
of CD's containing the customized NetZero service. This commitment was fulfilled
in the first quarter of 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
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 the Company announced that it would reduce its workforce by
approximately one third as part of management's effort to further enhance the
Company's competitive position and utilize its assets more efficiently. Our
workforce was 104 as of March 31, 2000 and has been reduced to 72 as of June 30,
2000. 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.
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.
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ACCOUNTING MATTERS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective June 1, 2000
and is not expected to have a material effect on the Company.
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:
- enter into a strategic alliance, obtain a significant equity investment
in the Company or arrange a merger or sale of the Company;
- 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.
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We Expect Future Losses and Will Need More Capital
We have never been profitable. As of June 30, 2000, we had an accumulated
deficit of approximately $54.2 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 losses and will need to raise additional capital.
In addition, because we have generated negligible revenue and have incurred
significant operating losses to date we have reduced our workforce by
approximately one third in order to utilize our limited capital and assets more
efficiently. As a result of the reduction in our workforce, our ability to
execute our business plan and our business may be materially and adversely
affected. Further, in the event we fail to generate improved revenue in the near
future, we may be required to further reduce our workforce, curtail our
operations and 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.
If We Fail to Consummate a Strategic Business Transaction, our Business and our
Continued Viability May Be Adversely Affected
We have retained the investment banking firm of Friedman, Billings, Ramsey &
Co., Inc. to consider strategic business alternatives in an effort to further
enhance our competitive position and maximize shareholder value. Friedman,
Billings, Ramsey & Co., has been authorized to consider a number of strategic
alternatives including strategic alliances, significant equity investments in
our company, and a merger or the sale of our company or significant portions of
our business. There is no assurance that any transaction will be consummated or
that any transaction that is approved and consummated will effectively enhance
our competitive position or maximize shareholder value. If we are unable to
consummate an acceptable strategic business transaction, our business and our
continued viability may be materially and adversely affected.
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 and
- diluting our stockholders' ownership interest.
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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 two years 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 Medium for Advertising and E-commerce
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, 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
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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. 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.
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, and none of our executive officers has extensive experience managing a
rapidly growing business enterprise prior to joining the Company. 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
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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 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 and it closed
below $1.00 on several days during the month of August. We believe that the
market price of our common stock will continue to be subject to significant
fluctuations due to various factors and events that may be unrelated to our
performance. If the market value of our common stock continues to close below
$1.00, 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
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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 18,693,942 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
3,619,676 of common stock at exercise prices ranging from $1 to $16.65 per
share, including 2,565,313 common stock purchase warrants subject to demand and
piggy-back registration rights.
EMPLOYEES
As of June 30, 2000, we had 72 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 June 30, 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company from time to time is involved in various legal proceedings
incidental to the conduct of its business. The Company believes, based on advice
of legal counsel, 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.
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 April 14, 2000, the Company filed a report on Form 8-K announcing
that it sold 1,428,571 shares of its common stock to Gateway
Companies, Inc. ("Gateway") for $10,000,000 and that it purchased
Gateway branded personal computers for $6,710,890 from Gateway.
(2) On April 14, 2000, the Company filed an amended report on Form 8-K
(initially filed on February 11, 2000) announcing the Company's
acquisition of eTrato.com, inc. and to provide financial statements
and pro forma financial information regarding the acquisition.
(3) On June 14, 2000, the Company filed a report on Form 8-K announcing
that it retained the investment banking firm of Friedman, Billings,
Ramsey & Co., Inc. to consider strategic business alternatives in an
effort to further enhance the Company's competitive position and
maximize shareholder value.
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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 August 14, 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
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
27.1 Financial Data Schedule
24
