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QUEPASA CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion in conjunction with our audited
historical consolidated financial statements, which are included elsewhere in
this Form 10-K. Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that reflect our
plans, estimates, and beliefs. Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed elsewhere in this
report, particularly in "Risk Factors," located under Item 1A.
30
--------------------------------------------------------------------------------Company Overview
Our mission is to be the best place to meet new people. We develop mobile and
internet platforms to make meeting people fun through social games and apps. Our
social graph is not the people you know but the people you want to know. We
believe the ubiquity of the smart phone and emergence of social networks will
fundamentally transform how people discover one another and make relationships
in a mobile-first world.
Highlights for 2011 included:
· As of December 31, 2011 registered users increased to 78.1 million, up from
the 27.3 million reported at the end of the fourth quarter of 2010.
· Page views totaled 5.43 billion in the fourth quarter of 2011, up from the 521
million page views in the same period of 2010. Sequentially, page views were
up in the fourth quarter of 2011 from the 580 million in the third quarter of
2011.
· Visits totaled 192.5 million in the fourth quarter of 2011, up from the 63.6
million visits in the same period of 2010. Visits were up sequentially from
the 30.2 million in the third quarter of 2011.
· Quepasa completed its merger with myYearbook, creating the public market
leader for social discovery.
· Quepasa acquired Brazilian Social Game Development Studio XtFt Games (now
known as Quepasa Games).
Trends in Our Metrics
We measure site, application and game activity in terms of monthly active users
(MAUs), visits and page views. We define an MAU as a registered user of one of
our platforms who logged in and visited our websites or mobile applications
within the last month of measurement. A visit represents the number of times
that an MAU came to the site for a distinct session over the measurement
period. A pageview is page than an MAU views during a visit. As of December 31,
2011, we had 5.9 million MAUs, an increase of 103% from December 31, 2010. We
experienced growth from the acquisition of myYearbook in November 2011 and
across different geographies, with users in Brazil and India representing a key
source of growth on the Quepasa Games.
We define a mobile MAU as a user who accessed our sites by a mobile app or by
mobile-optimized versions of our website whether on a mobile phone or tablet
such as the iPad, during the period of measurement. We had more than 1.4 million
mobile MAUs in December 2011. Our mobile MAU growth was also driven by product
enhancements across several mobile platforms. For example, we improved our
product offering on feature phones and we launched the myYearbook app for the
iPad in December 2011. Improving our mobile products and increasing mobile
usage of Facebook are key priorities that we believe are critical to help us
maintain and grow our user base and engagement over the long term. We expect
global consumers will continue to increase the amount of time they spend and the
information they share and consume through mobile devices. myYearbook surpassed
50% of its traffic accessing on mobile devices, and launched the tablet
application myYearbook for iPad, which is now available in the iTunes App Store.
We do not currently display ads to users who access our site via mobile apps. To
the extent that increasing usage through mobile apps or our mobile website
substitutes for the use of the website through personal computers where we do
show ads, the number of ads that we deliver to users and our revenue may be
negatively affected unless and until we include ads or sponsored stories on our
mobile apps and mobile website. We believe that people around the world will
continue to increase their use of site from mobile devices, and that some of
this mobile usage has been and will continue to be a substitute for use through
personal computers.
31--------------------------------------------------------------------------------Factors Affecting Our Performance
Growth trends in MAUs and mobile MAUs are critical variables that affect our
revenue and financial results by influencing the number of advertisements we are
able to show, the value of those ads, the volume of payments transactions, as
well as our expenses and capital expenditures.
In addition, changes in user engagement patterns also affect our revenue and
financial performance. We believe that overall engagement as measured by the
percentage of users who create content (such as wall posts, messages, or photos)
or generate feedback has remained stable or increased as our user base has
grown. Moreover, the average amount of content and feedback created by each user
has continued to increase over time.
Our revenue trends are also affected by advertisement inventory management
changes affecting the number, size, or prominence of advertisements we display.
We make ongoing product changes intended to enhance the user experience. In
2011, we continued to make significant investments in our technical
infrastructure to ensure that our growing user base can access the site rapidly
and reliably.
At the end of 2011, we had 202 full-time employees, an increase of 126 from the
year prior. Our employee headcount has increased significantly and we expect
this growth to continue for the foreseeable future. We have also made and intend
to make acquisitions with the primary objective of adding software engineers,
product designers, and other personnel with certain technology expertise.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP"). The
consolidated financial statements include our accounts and the accounts of our
wholly-owned subsidiaries, Quepasa.com de Mexico, Quepasa Serviços em Solucoes
de Publicidade E Tecnologia Ltda (inactive), Quepasa Games S/S Ltda (from March
2, 2011), and Insider Guides, Inc. (formerly known as IG Acquisition Company
from November 10, 2011). All intercompany accounts and transactions have been
eliminated in consolidation. The preparation of these consolidated financial
statements requires us to make estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Most significant
estimates in the accompanying consolidated financial statements include the
estimated lives and playing periods that we use for games revenue recognition,
the allowance on accounts receivable, valuation of notes receivable, valuation
of deferred tax assets, valuation of the discount on notes payable, valuation of
equity instruments granted for services, valuation of re-pricing of warrants,
valuation of assets acquired and liabilities assumed in business combinations,
evaluating goodwill and long-lived assets for impairment and the measurement and
accrual of restructuring costs. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the
consolidated financial statements.
Management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board. In addition, there
are other items within our consolidated financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates
used in these and other items could have a material impact on our consolidated
financial statements.
32--------------------------------------------------------------------------------Accounts Receivable Allowances
We maintain an allowance for potential credit losses based on historical
experience and other information available to management. The fees associated
with display advertising are often based on "impressions," which are created
when the ad is viewed. The amount of impressions often differs between tracking
systems, resulting in discounts on some payments. We maintain an allowance for
potential discounts based on historical experience and other information
available to management.
Goodwill
Goodwill is subject to impairment tests on an annual basis or more frequently if
facts and circumstances warrant such a review. Goodwill is evaluated using
specific methods, including potentially, a discounted cash flows method to
determine the fair value of a reporting unit and comparison of the carrying
value of goodwill to its implied fair value. The analysis necessarily involves
significant management judgment to evaluate the capacity of an acquired business
to perform within projections. If the carrying amount of a reporting unit
exceeds its fair value, determined by conducting a valuation, then the goodwill
impairment test is performed to measure the amount of the impairment loss, if
any. Management performs a qualitative assessment of goodwill to determine if it
is more likely than not that the fair value of a reporting unit is less than its
carrying value including goodwill. In the event facts and circumstances indicate
the carrying value of goodwill is impaired, the goodwill carrying value will be
reduced to its implied fair value through a charge to operating expenses.
Contingencies
We accrue for contingent obligations, including legal costs and restructuring
costs, when the obligation is probable and the amount can be reasonably
estimated. As facts concerning contingencies become known we reassess our
position and make appropriate adjustments to the financial statements. Estimates
that are particularly sensitive to future changes include those related to tax,
legal, and other regulatory matters that are subject to change as events evolve
and additional information becomes available.
Income Taxes
We use the asset and liability method to account for income taxes. Under this
method, deferred income taxes are determined based on the differences between
the tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements which will result in taxable or deductible
amounts in future years and are measured using the currently enacted tax rates
and laws. A valuation allowance is provided to reduce net deferred tax assets to
the amount that, based on available evidence, is more likely than not to be
realized.
Stock-Based Compensation
We follow the fair value recognition provisions of ASC 718, "Compensation -
Stock Compensation". The fair values of share-based payments are estimated on
the date of grant using the Black-Scholes option pricing model, based on
weighted average assumptions. Expected volatility is based on historical
volatility of our common stock. We have elected to use the simplified method
described in GAAP to estimate the expected term of employee stock options. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant. Compensation expense is recognized on a straight-line basis over the
requisite service period of the award.
The assumptions used in calculating the fair value of stock-based awards
represent our best estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if factors change and
we use different assumptions, our stock-based compensation expense could be
materially different in the future.
Revenue Sources and Recognition
During the years ended December 31, 2011 and 2010, our revenue was generated
from six principal sources: revenue earned from the sale of DSM campaigns,
website development services, and advertising on our websites, games, virtual
currency and royalty revenue.
DSM Revenues: We recognize DSM revenues over the period of the contest or as the
services are provided. Approximately 35% and 74% of our revenue came from DSM
campaigns both during the years ended December 30, 2011 and 2010, respectively.
Website Development Revenue: We recognize website development revenues as the
service is provided. Approximately 1% and 20% of our revenue came from website
development during the year ended December 31, 2011 and 2010, respectively.
Advertising Revenue: Advertising and custom sponsorship revenues consist
primarily of advertising fees earned from the display of advertisements and
click-throughs on text based links on our websites myYearbook.com and
Quepasa.com. Revenue from online advertising is recognized as impressions are
delivered. An impression is delivered when an advertisement appears on pages
viewed by members of the Company's websites. Revenue from the display of
click-throughs on text based links is recognized as click-throughs occur.
Consistent with GAAP, we recognize advertising revenue from customers that are
advertising networks on a net basis, while advertising revenues earned directly
from advertisers are recognized on a gross basis. Sponsorship revenue is
recognized over the time period in which the sponsorship on the website
occurs. Approximately 46% and 4% of our revenue came from display advertising
during the year ended December 31, 2011 and 2010, respectively.
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Game Revenue: Game revenue is recognized when persuasive evidence of an
arrangement exists, the sales price is fixed or determinable, collectability is
reasonable assured, and the service has been rendered. For the purpose of
determining when the service has been provided to the player, we determine an
implied obligation exists to the paying player to continue displaying the
purchased virtual items within the online game of a paying player over their
estimated life. The virtual goods are categorized as either consumable or
durable. Consumable goods represent goods that are consumed immediately by a
specific player action and have no residual value. Revenue from consumable goods
is recognized at the time of sale. Durable goods add to the player's game
environment over the playing period. Durable items, that otherwise do not have a
limitation on repeated use, are recorded as deferred revenue at time of sale and
recognized as revenue ratably over the estimated average playing period of a
paying player. For these items, the Company considers the average playing period
that the paying players typically play the game, currently to be 18 months. If
we do not have the ability to differentiate revenue attributable to durable
virtual goods from the consumable virtual goods for the specific game, we
recognize revenue on the sale of the virtual goods for the game ratably over the
estimated average playing period that paying players typically play the game.
Any adjustments arising from changes in the average playing period would be
applied prospectively on the basis that such changes are caused by new
information indicating a change in the game player behavior patterns.
As the Company controls the game process and acts as a principal in the
transaction, revenue for internally developed games is recognized on a gross
basis from sales proceeds reported by pay aggregators which are net of payment
rejections, charge-backs and reversals. The related games costs including the
website hosting fees, advertising, marketing, administration and payment service
fees, and foreign taxes are recorded as cost of sales. The revenue from third
party developed games is recorded net of revenue sharing payments and costs to
the third party as the Company is considered to be acting as an agent in these
transactions. Approximately 9% of our revenue came from games during the year
ended December 31, 2011. No significant game revenue was generated during the
year ended December 31, 2010.
Virtual Currency: Revenue is earned from virtual currency monetization products
sold to our website users. These products include Lunch Money, credits on
myYearbook, and "VIP" subscriptions and revenue is recognized as the products
are consumed.
The Company also earns advertisement products revenue from currency engagement
actions (i.e. sponsored engagement advertisements) by users on all of our
platforms, including cost-per-action (CPA) currency incented promotions and
sales on our proprietary cross-platform currency monetization product, "Social
Theater". When a user performs an action, the user earns virtual currency from
us and the Company earns product revenue. Social Theater is a video advertising
platform in which users of social games across leading social networks,
including Facebook, watch videos and perform other actions to earn virtual
currency. An advertiser uses Social Theater to distribute its video advertising
to millions of targeted individuals. In order to promote the advertising and
drive views, virtual currency is awarded to the viewer for viewing the
advertisement to completion. Social Theater can also be used by advertisers to
drive "Likes" and "shares" on Facebook and other social platforms. Social
Theater is distributed primarily across platforms outside of Quepasa and
myYearbook, including Facebook, through partnerships with companies such as
Trialpay. Where Social Theater is distributed outside of our owned and operated
properties and mobile applications we pay a distribution fee. When we run
Social Theater campaigns within our owned platforms, we retain 100% of the
revenue. The Company controls and develops the Social Theater product and CPA
promotions and acts as a principal in these transactions and recognizes the
related revenue on a gross basis when collections are reasonable assured and
upon delivery of the virtual currency to the users' account. Approximately 9% of
our revenue came from virtual currency revenues during the year ended December
31, 2011. No significant virtual currency revenue was generated during the year
ended December 31, 2010.
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Royalty Revenue: Royalty revenue is generated as a percentage of product sales
from certain partnership arrangements. We recognize royalty revenues on a net
basis, as reported to us by third parties. Less than one percent of our revenue
came from royalty revenues during the years ended December 31, 2011 and 2010.
Operating Expenses
Our principal operating expenses are divided into the following categories:
• Sales and Marketing Expenses: Our sales and marketing expenses consist
primarily of salaries, benefits, and share-based compensation for our
employees engaged in sales, sales support, and marketing.
• Product Development and Content Expenses: Our product development and content
expenses including costs incurred in the classification and organization of
listings within our websites, including salaries, benefits, and share-based
compensation for our employees, utility charges, occupancy and support for our
offsite technology infrastructure, bandwith and content delivery fees, and
internet game development and maintenance costs, are charged to expense as
incurred.
• Games expense: Our Games expenses represent the direct expenses for hosting,
marketing, site fees, reporting and foreign taxes.
• General and Administrative Expenses: Our general and administrative expenses
consist primarily of salaries, benefits, and share-based compensation for our
executives as well as our finance, legal, human resources, and other
administrative employees. In addition our general and administrative expenses
include outside consulting, legal and accounting services, and facilities and
other supporting overhead costs.
• Depreciation and Amortization Expenses: Our depreciation and amortization are
non-cash expenses which have consisted primarily of depreciation and
amortization related to our property and equipment, and intangible
assets. Currently the majority of our depreciation and amortization expense is
attributable to tangible and intangible assets associated with the
acquisitions of myYearbook and Quepasa Games.
• Acquisition and Restructuring Costs: Acquisition and restructuring costs,
include costs incurred related to the business acquisitions made by the
Company and costs incurred in conjunction with the restructuring of the
Company's business processes. Acquisition costs include the fees for broker
commissions, investment banking, legal, accounting and other professional
services, proxy, printing and filing costs, and travel costs incurred by the
Company during the acquisition process. Restructuring costs include employee
termination and relocation costs recorded as incurred, and exit costs for the
office closures.
• Loss on Impairment of goodwill: In the event facts and circumstances indicate
the carrying value of goodwill is impaired, the goodwill carrying value will
be reduced to its implied fair value through a charge to loss on impairment of
goodwill expense.
• Other Income (Expense): Other income (expense) consists primarily of interest
earned, interest expense and earned grant income. We have invested our cash in
AAA rated, fully liquid instruments. Interest income relates to our Notes
Receivable discussed in Note 3 of our Consolidated Financial Statements and
our cash balances. Interest expense relates to our Loan and Notes Payable
discussed in Note 7 of our Consolidated Financial Statements. Earned grant
income represents the amortized portion of a cash grant received from the
Mexican government for approved capital expenditures. The grant is being
recognized on a straight-line basis over the useful lives of the purchased
assets.
35--------------------------------------------------------------------------------Comparison of the year ended December 31, 2011 with the year ended December 31,
2010
The following table sets forth a modified version of our Consolidated Statements
of Operations and Comprehensive Loss that is used in the following discussions
of our results of operations:
For the the years ended December 31,
2011 2010 Change ($) Change (%)
REVENUES $ 11,850,852 $ 6,054,141 $ 5,796,711 96 %
OPERATING EXPENSES
Sales and marketing 1,885,998 891,980 994,018 111 %
Product development and content 9,525,068 4,774,694 4,750,374 99 %
Games expenses 1,553,450 - 1,553,450
General and administrative 6,599,020 6,123,083 475,937 8 %
Depreciation and amortization 1,097,867 319,779 778,088 243 %
Acquisition and restructuring costs 1,948,432 - 1,948,432
Loss on impairment of goodwill 1,409,127 - 1,409,127
Operating Expenses 24,018,962 12,109,536 11,909,426 98 %
LOSS FROM OPERATIONS (12,168,110 ) (6,055,395 ) (6,112,715 ) 101 %
OTHER INCOME (EXPENSE):
Interest income 57,265 6,229 51,036 819 %
Interest expense (657,184 ) (603,609 ) (53,575 ) -100 %
Other income 2,211 2,125 86 4 %
TOTAL OTHER INCOME (EXPENSE) (597,708 ) (595,255 ) (2,453 ) 0 %
NET LOSS $ (12,765,818 ) $ (6,650,650 ) $ (6,115,168 ) 92 %
Revenues
Our revenues were $11,850,852 for the year ended December 31, 2011, an increase
of $5,796,711 or 96% compared to $6,054,141 for the same period in 2010. The
increase in revenues for 2011 is primarily the result of approximately $5.7
million and $1.1 million, respectively, of revenue from Insider Guides doing
business as myYearbook ("myYearbook") which was acquired by merger on November
10, 2011, and Quepasa Games acquired on March 2, 2011. Offsetting these revenues
was a decrease in DSM and website designs revenues associated with DSM campaigns
of $1.4 million. We earned approximately $4.2 and $3.7 million of DSM revenue
and $120,000 and $1.2 million of website development revenue for the years ended
December 31, 2011 and 2010, respectively, from AHMSA, which owns MATT, Inc. We
earned $0 and $800,000 of DSM revenue for the years ended December 31, 2011 and
2010, respectively, from the Company's largest shareholder, MATT Inc., without
commission or fees.
Operating Costs and Expenses
Sales and Marketing: Sales and marketing expenses increased $994,018, or 111%,
to $1,885,998 for the year ended December 31, 2011 from $891,980 in 2010. The
increases are primarily a result of the inclusion of the approximately $874, 000
of myYearbook sales and marketing related costs from the date of the
acquisition. The acquisition of myYearbook brought 23 person full-time sales and
sales support staff located primarily in the New York and New Hope offices.
Product Development and Content: Product development and content expenses
increased $4,750,374, or 99%, to $9,525,068 for the year ended December 31, 2011
from $4,774,694 in 2010. myYearbook operating costs accounted for $2.4 million
or 50% of the increase and Quepasa Games costs accounted for $1.4 million or 29%
of the increase. The balance of the increases relates primarily to salary and
related costs for increased development engineering heads and additional cost of
website hosting. The acquisition of myYearbook brought 73 person full-time
development staff located primarily in the New Hope office.
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--------------------------------------------------------------------------------Games Expenses: For the year ended December 31, 2011 games expense was
$1,553,450. The expense reflects the direct cost for website hosting fees,
advertising, marketing, administrative and payment service fees and foreign
taxes for the game since the launch of Wonderful City Rio, in April of
2011. There was no games expense in 2010.
General and Administrative: General and administrative expenses increased
$475,937, or 8%, to $6,599,020 for the year ended December 31, 2011 from
$6,123,083 for the same period in 2010. The increase in expense is primarily due
to the inclusion of the results of myYearbook of approximately $722,000 from the
acquisition date through December 31, 2011. Additional increases in salary,
bonus and stock compensation of approximately $630,000, bad debt write-off of
approximately $293,000. Offsetting these expenses was a decrease of $1.9 million
in stock based compensation due to fully vesting of options during 2010.
Stock Based Compensation: Stock based compensation expense, which is included in
the other operating expense categories as discussed above, decreased $1,516,830
to $4,348,139 for the year ended December 31, 2011 from $5,864,969 in
2010. Stock based compensation expense represented 18% and 48% of operating
expenses for the year ended December 31, 2011 and 2010, respectively. As of
December 31, 2011, there was $16,463,999 in total unrecognized compensation
cost, which is expected to be recognized over a period of approximately three
years.
For the years ended
December 31,
2011 2010 Changes ($)
Sales and marketing 567,380 412,183 155,197
Product and content development 1,077,863 918,844 159,019
General and administrative 2,702,896 4,533,942 (1,831,046 )
Total Stock Based Compensation 4,348,139 5,864,969 (1,516,830 )
Stock Based Compensation is composed of the following:
For the years ended
December 31,
2011 2010
Vesting of Stock Option 4,169,236 5,574,536
Vesting of Warrants 178,903 116,286
Re-pricing of warrants - 147,813
Issuance of common stock for professional services - 26,334
Total Stock Based Compensation 4,348,139 5,864,969
The amortization of prepaid expenses includes compensation for professional
services in which the professionals vested in stock options prior to the
performance of services. The amount of compensation is amortized over the
lengths of the contracts.
Depreciation and amortization expense: Depreciation and amortization expense for
the year-ended December 31, 2011 increase by $778,088 or 243%. The increase is
primarily due to the depreciation and amortization of tangible and intangible
assets associated with the acquisition of myYearbook and Quepasa Games.
Acquisition and Restructuring Costs: For the year ended December 31, 2011
acquisition and restructurings costs were $1,948,432. The Company incurred
approximately $368,000 of broker commissions, legal and professional fees and
travel costs during the acquisition of Quepasa Games. The Company incurred
approximately $1.2 million of investment banking, legal and professional fees,
proxy printing and filing fees and travel costs during the acquisition of
Insider Guides, Inc. Restructuring costs include contractual employee severance
costs of approximately $221,000, approximately $97,000 of remaining lease
and contract obligations for the closure of Los Angeles office, and $33,000 of
related travel costs. No acquisition and restructuring costs were incurred
during the year ended December 31, 2010.
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Loss on Impairment of Goodwill: A valuation of the Quepasa Games was performed
and a $2.5 million fair value was determined. A comparison of the Company's
approximately $3.8 million carrying value of the Quepasa Games and the $2.4
million implied value of goodwill resulted in a loss on impairment of
approximately $1.4 million. The translated value of goodwill for Quepasa Games
will vary at each reporting period due to changes in the foreign exchange rates.
Liquidity and Capital Resources
For the years ended
December 31,
2011 2010
Net cash used in operating activities (7,742,348 ) (709,801 )
Net cash used in investing activities (11,730,774 ) (759,626 )
Net cash provided by financing activities 14,213,742 13,988,528
(5,259,380 ) 12,519,101
Net cash used in operations was $7,742,348 for the year ended December 31, 2011
compared to $709,801 for 2010. For the year ended December 31, 2011, net cash
used by operations consisted primarily of a net loss of $12,765,818, offset by
non-cash expenses of $1,409,127 loss on impairment of goodwill, $1,097,867 of
depreciation and amortization expense, $4,169,236 related to stock based
compensation for the vesting of stock options and $178,903 for vesting of
warrants, $291,405 in amortization of discounts on notes payable and debt
issuance costs, $272,614 net write off of the Hollywood Creation note
receivable, related accrued interest, and allowance adjustments. Additionally,
changes in working capital impacted the net cash used in operating
activities. These changes included increases in accounts receivable of
$1,868,568, in prepaid expenses, other current assets and other assets of
$234,003 and decreases in accounts payable and accrued expenses of $559,264
offset by an increase in deferred revenue of $268,317. For the year ended
December 31, 2010, net cash used by operations consisted primarily of a net loss
of $6,650,650, offset by non-cash expenses of $319,779 in depreciation and
amortization expenses and $5,574,536 related to stock based compensation for the
vesting of stock options and $26,334 for issuance of common stock for
professional services, $147,813 for re-pricing of warrants and $116,286 for
issuance of warrants, and $291,409 in amortization of discounts on notes payable
and debt issuance costs,. Additionally, changes in working capital impacted the
net cash used in operating activities. These changes included increases in
accounts receivable of $1,027,714 and in restricted cash of $275,000, offset by
an increase in in accounts payable and accrued expenses of $715,150 and a
$76,231 decrease in prepaid expenses, other current assets and other assets.
Net cash used in investing activities in the year ended December 31, 2011 of
$11,730,774, was primarily attributable to net payments made for the
acquisitions of Insider Guides, Inc. of $10,684,025 and $500,000 for Quepasa
Games, capital expenditures of $587,335 primarily for computer servers to
increase capacity, improve performance, provide redundant backup for content, a
$40,000 loan disbursement to Hollywood Creations, offset by $80,604 of loan
receivable payments received from BRC. Net cash used in investing activities in
the year ended December 31, 2010 of $759,626, was primarily attributable capital
expenditures of $542,959 primarily for computer servers to increase capacity,
improve performance and provide redundant backup for content and we made a
$216,617 loan disbursement to Hollywood Creations.
There was $14,213,742 provided by financing activities for the year ended
December 31, 2011, $10,000,000 was attributable to proceeds from the issuance of
convertible preferred stock and $2,557,000 from the issuance of common stock,
$2,026,153 from the exercise of stock options and offset by $219,411 of debt
payments and $150,000 dividend payments on preferred stock. In December 2010, we
completed a private offering of 1,753,329 shares of our common stock for cash
proceeds of $12,632,357, net of offering costs. Cash proceeds from the exercise
of stock options were $1,356,171 for the year ended December 31, 2010.
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December 31, December 31,
2011 2010
Cash and cash equivalents $ 8,271,787 $ 13,546,572
Total assets $ 106,804,696 $ 16,452,789
Percentage of total assets 8 % 82 %
Our cash balances are kept liquid to support our growing infrastructure needs
for operational expansion. The majority of our cash is concentrated in two large
financial institutions, Comerica and JP Morgan Chase.
Quepasa had a positive working capital of $13,338,860 and 14,618,305 at December
31, 2011 and 2010 respectively, which consisted primarily of trade receivables
and cash.
Non-GAAP - Financial Measures
The following discussion and analysis includes both financial measures in
accordance with GAAP, as well as non-GAAP financial measures. Generally, a
non-GAAP financial measure is a numerical measure of a company's performance,
financial position or cash flows that either excludes or includes amounts that
are not normally included or excluded in the most directly comparable measure
calculated and presented in accordance with GAAP. These non-GAAP financial
measures should be viewed as supplemental to, and should not be considered as
alternatives to net income, operating income, cash flow from operating
activities, liquidity or any other financial measures. They may not be
indicative of the historical operating results of the Company nor is it intended
to be predictive of potential future results. Investors should not consider
these non-GAAP financial measures in isolation or as substitutes for performance
measures calculated in accordance with GAAP.
We believe that both management and shareholders benefit from referring to the
following non-GAAP financial measures in planning, forecasting and analyzing
future periods. Our management uses these non-GAAP financial measures in
evaluating its financial and operational decision making and as a means to
evaluate period-to-period comparison. Our management uses and relies on the
following non-GAAP financial measures:
EBITDA - Our management believes period-to-period comparisons of EBITDA helps
identify additional trends in our financial results that may not be shown solely
by period-to-period comparisons of income or loss, or income or loss from
operations. Our management recognizes that EBITDA has inherent limitations
because of the excluded items, particularly those items that are recurring in
nature.
Adjusted EBITDA - Our management believes Adjusted EBITDA is an important
measure of our operating performance because it allows management, investors and
analysts to evaluate and assess our core operating results from period to period
after removing the impact of changes to our capitalization structure,
acquisition related costs, and other items of a non-operational nature that
affect comparability. Our management recognizes that Adjusted EBITDA has
inherent limitations because of the excluded items, particularly those items
that are recurring in nature.
Bookings - Our management uses bookings to evaluate the results of our
operations, generate future operating plans and assess the performances of our
social games business. Our management recognizes that Bookings has inherent
limitations because it does not reflect our receipt of payment from subscribers.
Non-Cash Earn (Burn) - Our management believes that net cash earn (burn) rate
provides meaningful information about our ability to meet our working capital
needs.
We have included reconciliations of our non-GAAP financial measures to the most
comparable financial measure calculated in accordance with GAAP. We believe
that providing the non-GAAP financial measures, together with reconciliations to
GAAP, helps investors make comparisons between the Company and other
companies. In making any comparisons to other companies, investors need to be
aware that companies use different non-GAAP measures to evaluate their financial
performance. Investors should pay close attention to the specific definition
being used and to the reconciliation between such measure and the corresponding
GAAP measure provided by each company under applicable SEC rules.
39
--------------------------------------------------------------------------------EBITDA and Adjusted EBITDA - Non-GAAP
The Company defines EBITDA as earnings (or loss) before interest expense, income
taxes, depreciation and amortization, and amortization of non-cash stock-based
compensation. The Company excludes stock-based compensation because it is
non-cash in nature. The Company defines adjusted EBITDA as EBITDA excluding
non-recurring acquisition and restructuring expenses and the goodwill impairment
charge. The following table presents a reconciliation of EBITDA and Adjusted
EBITDA to Net Income (loss), a GAAP financial measure:
For the the years ended December 31,
2011 2010
Net Loss Allocable to Common Shareholders $ (12,806,523 ) $ (6,762,150 )
Interest Expense 657,184 603,609
Depreciation and amortization 1,097,867 319,779
Stock based compensation expense 4,348,139 5,864,969
EBITDA (Loss) (6,703,333 ) 26,207
Loss on Impairment of goodwill 1,409,127 -
Acquisition and restructuring 1,948,432 -
Adjusted EBITDA (Loss) $ (3,345,774 ) $ 26,207
Bookings - Non-GAAP
The Company defines bookings as the total amount of revenue from the sale of
virtual goods in our online games that would have been recognized in a period if
we recognized all revenue immediately at the time of sale. We record the sale of
durable virtual goods as deferred revenue and then recognize revenue over the
estimated average life of the purchased virtual goods or as virtual goods are
consumed. Bookings are calculated as revenue recognized in the period plus the
change in deferred revenue during the period. For additional discussion of the
estimated average life of virtual goods, see Note 1 to our Consolidated
Financial Statements - "Revenue Recognition Games". The following table presents
a reconciliation of bookings, a non-GAAP financial measure to Revenue, a GAAP
financial measure:
For the the year ended
Reconciliation of Revenue to Bookings: December 31, 2011
Games Revenue $ 1,181,095
Change in deferred revenue 268,317
Bookings $ 1,449,412
40--------------------------------------------------------------------------------Net Cash Earn (Burn) - Non-GAAP
The Company defines net cash earn (burn) as loss from operations plus non-cash
operating expenses including stock based compensation expenses, depreciation,
amortization and other non-cash charges. The following table is a reconciliation
of our non-GAAP financial measure to Loss From Operations:
For the the years ended December 31,
2011 2010
LOSS FROM OPERATIONS (12,168,110 ) (6,055,395 )
NON CASH OPERATING EXPENSES
Loss on impairment of goodwill 1,409,127 -
Stock based compensation expense 4,348,139 5,864,969
Depreciation and amortization 1,097,867 319,779
TOTAL NON CASH OPERATING EXPENSES 6,855,133 6,184,748
NET CASH EARN (BURN) (5,312,977 ) 129,353
NET MONTHLY CASH EARN (BURN) RATE (442,748 ) 10,779
We have budgeted capital expenditures of $3,500,000 for 2012, which will allow
us to continue to grow the business given our member growth, by increasing
capacity, improving performance and providing redundant backup for content. The
severance costs of payments, requiring future service were measured at December
31, 2011 totaling approximately $550,000 and employee relocation expenses will
be during 2012.
As of the date of the filing of this report, we have approximately $7 million in
cash and $8 million in accounts receivable. Management believes that we have
sufficient working capital to operate beyond the next 12 months.
Cautionary Note Forward-Looking Statements
This report includes forward-looking statements including statements regarding:
? establishing ourselves as the leading global brand for
meeting new people,
? our ability to optimize the opportunity for meeting new
people online,
being well positioned to capitalize on global trends
? toward greater consumption of social media via
smartphones and making our mobile application available
in Spanish and Portuguese in 2012,
? potential for significant leverage from our U.S. mobile
audience and Latin American user base,
our beliefs regarding myYearbook's web and mobile
? products potential growth in Latin American markets and
establishing the foundation for growth in markets outside
of the Americas,
? our beliefs regarding our products and services and our
ability to leverage the growth of social media,
? our expectations from our budgeted capital expenditures,
and
? our beliefs regarding our liquidity and working capital.
All statements other than statements of historical facts contained in this
report, including statements regarding our future financial position, liquidity,
business strategy and plans and objectives of management for future operations,
are forward-looking statements. The words "believe," "may," "estimate,"
"continue," "anticipate," "intend," "should," "plan," "could," "target,"
"potential," "is likely," "will," "expect" and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs.
The results anticipated by any or all of these forward-looking statements might
not occur. Important factors, uncertainties and risks that may cause actual
results to differ materially from these forward-looking statements are contained
in the "Risk Factors" under Item 1A. of this report. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as the
result of new information, future events or otherwise. For more information
regarding some of the ongoing risks and uncertainties of our business, see the
Risk Factors and our other filings with the SEC.
41
--------------------------------------------------------------------------------Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements included in this report for
discussion of recent accounting pronouncements.
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