Quepasa Cp (QPSA) - Description of business

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Company Description
Historical Background We are a Nevada corporation, initially formed in June 1997 as a media company focused on the national and international Hispanic marketplace. Since 1998 we have operated a bilingual (Spanish/English) Internet portal and online community primarily aimed at the United States Hispanic market, and have spent over $50 million developing our brand. Our Quepasa.com Web site provides users with information and content centered around the Spanish language and Hispanic culture. Quepasa also offers performance based marketing capabilities in addition to traditional portal services including e-mail and news in Spanish and English. The Quepasa.com Web site is operated and managed by our wholly-owned Sonora, Mexico-based subsidiary, Quepasa.com de Mexico, S.A. de C.V. We completed an initial public offering of our securities in June 1999, raising approximately $55 million, having previously completed a number of private placements of our securities. Using the public proceeds, we rapidly expanded our operations in the latter part of 1999 through the first half of 2000. From the second half of 2000 through the first half of 2002, we reduced the products and content we offered in order to conserve our cash. In the first quarter of 2001, we sold all of our internal computer and server equipment and outsourced the hosting and administration of the Quepasa.com Web site. At the end of 2000 and during part of 2001, we ceased marketing our Web site, terminated most of our co-branding and marketing arrangements with content providers and significantly reduced the services and content we provide in order to conserve our capital while we considered the sale or restructuring of our business. In the spring of 2002, our original founder acquired control of our Company and in the fall of 2002, we reorganized our Web site operations under our wholly-owned Mexican subsidiary and relocated our facilities for web site operations to Sonora, Mexico. We currently manage the Quepasa.com Web site from a 3,200 square foot office facility where we employ approximately 31 individuals. Our performance based marketing capabilities include paid search solutions which are designed to enable Internet users to locate information, merchants, services and products. We offer paid search and directory services through our Web site, Quepasa.com. Partner versions of our search services are generally offered on a private-label basis. We believe we are among the first technology companies to develop, deploy and promote performance based online marketing solutions for the Spanish language market. We are also developing information retrieval and management software technology products, which we intend to provide to a diverse clientele within the information technology sector emphasizing publishers of interactive, online content offerings, certain specialized online communities, online virtual product exchanges and online advertisers that target Spanish speaking users. We are a publicly traded company listed on the Electronic Bulletin Board under the symbol “QPSA.” On March 10, 2006 the closing price of our Common Stock was $3.30 per share. We file periodic reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”) and our reports may be accessed on the SEC’s Edgar system at the SEC’s Web site, www.sec.gov . Performance Based Marketing Although businesses have many online advertising options, we believe that only limited opportunities are available to effectively reach the rapidly growing Hispanic online population. We believe that the traditional advertising agency approach to Hispanic marketing is too slow and costly to effectively reach this population in light of rapidly evolving online marketing trends. We believe we are among the first technology companies to develop, deploy and promote cost effective, performance based online marketing solutions for the Spanish language market. Our performance-based advertising services are provided to online advertisers, including pay-per-click and banner placement services. Through our pay-per-click services, advertisers place campaigns within our directory in categories that are relevant to their product or service, which are then marketed to our consumers. In many instances, our staff proactively manages the translation of these advertising campaigns from English to Spanish, as well as the intricacies and ongoing maintenance of the bilingual campaigns. We believe we are the only search engine marketer to currently provide bilingulal search, directory and campaign management solutions with a specific focus on the Hispanic internet user. We deliver search results from our own proprietary technology, as well as the aggregation of results from leading search engines on a contractual basis. We offer search services through our own Web site, as well as through the Web sites of distribution partners. The majority of our revenue growth in 2004 has been generated through the addition of such new partnerships. Additionally, we continually evaluate opportunities to evolve existing technologies and business models, and we regularly review possible acquisitions and strategic relationships. Quepasa.com We have invested over $50 million in the development and promotion of the Quepasa.com Web site, including (i) retaining the services of Gloria Estefan for the year 2000 to be our Web site and corporate spokeswoman, and (ii) developing and maintaining marketing relationships through the year 2000 with two major computer manufacturers. Partly as a result of our promotion, in 2000 the Quepasa.com Web site was one of the most recognized online brand names to the Hispanic population. We have reactivated the Web site, after temporarily shutting it down in 2001 and 2002, because we continue to believe in the power of the Quepasa brand and the relevance of the statistical information set forth below. Hispanic population growth and concentration. According to the U.S. Census Bureau and published sources, the Hispanic population: •   Was estimated to be 39.9 million or 13.7% of the total U.S. population in 2003, an increase of approximately 78% from 22.4 million or 9% of the total U.S. population in 1990. •   The U. S. Hispanic population is expected to grow to 102.6 million or 24% of the total U.S. population by 2050. This increase of 62.7 million between 2000 and 2050 represents a projected percentage increase of 157%. •   Is relatively young, with almost 86% of U.S. Hispanics under 49, compared to less than 74% of non-Hispanics, and with a median age of 26, compared to 33 for the rest of the population. We believe the relative youth of the Hispanic population will furnish growth opportunities for products and services that appeal to a younger market, such as that found on the Internet. In addition, 70% of all U.S. Hispanics live in 12 metropolitan areas, which makes U.S. Hispanics an attractive demographic group for advertisers, enabling them to deliver messages cost effectively to a highly targeted audience. Hispanics on the Internet Hispanics (according to eMarketer) represented 7.6 percent of all U.S. Internet users in 2004, totaling over 13.3 million Hispanic Internet users in the United States. The United States is the fifth largest Spanish-speaking country in the world. Nearly half of all Hispanic adults access the Internet on a regular basis, according to The Media Audit, a report which tracks national surveys. Also, 51 percent of Hispanics who consult the Internet frequently report household income of $50,000 or more, compared to only 44.9 percent who are users who report household income of $50,000 or more. Increasing Hispanic purchasing power. Total U.S. Hispanic purchasing power: •   Hispanic purchasing power has surged to nearly $700 billion and is projected to reach as much as $1 trillion by 2010, according to estimates by HispanTelligence(R), based on analysis of U.S. Bureau of Economic Analysis figures. •   HispanTelligence(R) estimates current Hispanic purchasing power is 8.5% of total U.S. purchasing power, but will reach 11% by 2010, when taking into account factors such as the narrowing Hispanic vs. overall U.S. income gap and the increase in the number of Hispanic households with earned income. Continuing use of the Spanish-language by U.S. Hispanics. According to published sources, approximately 90% of U.S. Hispanic adults speak Spanish at home. Moreover, U.S. Hispanics are expected to continue to speak Spanish because: •   Approximately two-thirds of U.S. Hispanic adults were born outside the U.S.; •   Hispanic immigration into the U.S. is continuing; •   Hispanics generally seek to preserve their cultural identity; and •   Population concentration encourages communication in Spanish. Increasing adaptation of performance-based advertising and search marketing •   Record advertising revenue. Online advertising sales totaled $2.7 billion in the fourth quarter of 2004, the highest revenue quarter reported to date, according to the Interactive Advertising Bureau (“IAB”) and PricewaterhouseCoopers. That was an increase of 24% over the fourth quarter of 2003. The Internet Ad Revenue Report also estimates that revenue for the full-year 2004 totaled just under $9.6 billion – a 32% increase over full-year 2003 ($7.3 billion) •   Growth of performance-based advertising and search marketing. U.S. Bancorp Piper Jafray estimates that the global market for performance-based advertising and search marketing, such as pay-per click listings and paid inclusion, will grow at a compounded annual growth rate of 38% from approximately $1.4 billion in 2002 to approximately $7 billion in 2007. •   Large number of ses operating online. According to International Data Corporation (IDC), by the end of 2007, 77% of the 8.5 million ses in the United States (defined as firms with under 100 employees that are not based at home) will have Web sites, compared to 62% of the 8 million ses in 2003. •   Growth of electronic commerce. Forrester Research forecasts that electronic commerce activity in the United States, fueled by a steady stream of new online shoppers and new product category sales, will grow at a compounded annual growth rate of 19% over the next five years to nearly $230 billion in 2008 (representing 10% of total retail sales in the United States). The Quepasa.com Community Our strategy has been to establish our Quepasa.com Web site as a bilingual (Spanish/English) Internet portal and online community, offering our content and search solutions to Hispanic Internet users primarily in the U.S. In November 1998, we launched the Quepasa.com Web site which allowed individuals to quickly access content and features which appeal to Hispanic Internet users. Although our content is directed toward Spanish-speaking users, to better serve the U.S. Hispanic population, Quepasa.com is also offered in English. Retrieval Capacity and Performance Based Marketing Capabilities We offer performance based marketing capabilities that consist of internet and categorized directory search. By offering performance based marketing capabilities, we believe we can attract advertisers who desire to sell their product or service to the U.S. Hispanic internet user. Using performance based marketing software which we have developed, when queried, our search engine will display a selection of Web sites related to that query. Our advertisers will be able to determine where in our search results their Web site link will appear for any given query through our proprietary ranking algorithms. In order to generate significant revenue, we must continue to evolve our information retrieval and management software infrastructure and then direct our marketing to customers who provide information retrieval capabilities to their end-users. Competition The market for Internet products, services, advertising and commerce is intensely competitive, and we expect that competition will continue to intensify. We believe that the principal competitive factors in these markets are name recognition, distribution arrangements, functionality, performance, ease of use, the number of value-added services and features, and quality of support. Our primary competitors for the Quepasa.com Web site are other companies providing portal and online community services, especially to the Spanish-language Internet users, such as Yahoo!Español, America Online Latin America and Terra.com. In addition, a number of companies offering Internet products and services, including our direct competitors, recently began integrating multiple features within the products and services they offer to users. Integration of Internet products and services is occurring through development of competing products and through acquisitions of, or entering into joint ventures and/or licensing arrangements involving other, Internet companies and our competitors. Many large media companies have developed or are developing Internet navigation services to become “gateway” sites for Web users. As these companies develop such portal or community sites, we could lose a substantial portion of our user traffic. Further, entities that sponsor or maintain high-traffic Web sites or that provide an initial point of entry for Internet viewers, such as the Regional Bell Operating Companies or Internet service providers, such as Microsoft and America Online, currently offer and can be expected to consider further development, acquisition or licensing of Internet search and navigation functions. These functions may be competitive with those that we offer. Most of our existing competitors, as well as new competitors such as Spanish-language media companies, other portals, communities and Internet industry consolidators, have significantly greater financial, technical and marketing resources than we do. Many of our competitors offer Internet products and services that are superior to ours and achieve greater market acceptance. There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse affect on our business. Employees As of December 31, 2005, we employed approximately 31 individuals in Sonora, Mexico and 14 individuals, including our executive officers, in the U.S. No employees are represented by a labor union and we have not experienced any work stoppages since our inception in June 1997. Risk Factors Investors should consider the following risks before investing in our securities. We Have Incurred Ongoing Operating Losses. For the years ended December 31, 2005 and 2004, we incurred losses of $2,958,885 and $3,217,249, respectively. We are Generating Negligible Revenue and Expect Future Losses. Our revenue for the years ended December 31, 2005 and December 31, 2004 was $765,492 and $465,481, respectively. As a result, we incurred losses and experienced negative operating cash flow. As of December 31, 2005, we had an accumulated deficit of approximately $114.5 million, $111.5 million of which was incurred through December 31, 2004. We continue to generate only negligible revenue and there can be no assurance that our revenue will improve in the future. As a result of our negligible revenue, we expect to continue to report losses in the near future. 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. 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 expect to 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 affect on our financial condition, results of operations and liquidity. 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. There Are Regulatory Risks Associated with the Operation of Our Quepasa.com Web site in Mexico. We are subject to regulations imposed by the government of Mexico in connection with the operation of our Quepasa.com Web site from Sonora, Mexico. These regulations are expensive and time consuming with which to comply, and future regulations could have a material adverse affect on our business. There Can be no Assurance That Our Information Retrieval Services Will Generate Revenue. We have completed the core development of our information retrieval services, but we have not generated material amounts of revenue to date from such services. Revenue from our information retrieval and management software technology is expected to result primarily from the number of end-user data retrieval requests processed by our software. Revenue from our services is highly dependent upon the willingness of customers to use the retrieval and related services we provide, the ability of our customers to attract end-users to their online services, the volume of end-user inquiries that are processed by our retrieval software, and the ability of customers to generate revenue from traffic through their Web site retrieval request pages. Our future customers (if any) may also use competing query and directory services to operate in combination with our services, which will reduce the number of queries available for us to service and may erode revenue growth opportunities. In order for us to generate revenue from our information retrieval and software business, we will need to attract customers, develop and deliver new retrieval services, products and features to future customers and establish strategic relationships with our customers. The Information Retrieval Services Business is a New and Untested Business Model for Us Which May Not be Profitable. The information retrieval services business is based on a new and untested business model. Our failure to complete our development and to market our services successfully could significantly affect our ability to succeed. If we cannot achieve profitability from our operating activities, we may not be able to meet our: capital expenditure requirements; debt service obligations; or working capital needs. Our profitability will depend primarily upon our ability to offer competitively priced information retrieval services on a timely basis. There is Competition in the Operation of Our Web site. Our Quepasa.com Web site competes with a number of other Spanish speaking Web sites, including Web sites offered by large multinational Internet companies such as Yahoo. Moreover, we will compete with a number of companies that provide information retrieval services, most of which have operated retrieval services in the market for a longer period, are better known, have greater financial resources, have established marketing relationships with leading online services and advertisers and have secured greater presence in distribution channels. The Legal Environment in Which We Operate is Uncertain and Claims Against Us Could Cause Our Business to Suffer. Our information retrieval services make copies of material available on the Internet and other networks and offer this material to end-users. This creates the potential for claims to be made against us (either directly or through contractual indemnification provisions with customers) for defamation, negligence, copyright or trademark infringement, personal injury, invasion of privacy or under other legal theories based on the nature, content, copying, dissemination, collection or use of these materials. It is also possible that if any information provided through our retrieval services contains errors, third parties could make claims against us for losses incurred in reliance on this information. Although we expect to carry general liability insurance, our insurance may not cover potential claims of this type or be inadequate to protect us from all liability that may be imposed. There are Risks Associated With Providing Internet Information Retrieval Services. We are required to provide information retrieval services in accordance with certain specifications as to the functionality and performance of the information retrieval results, the size of the Internet database maintained, the frequency of refreshing the retrieval query database, reliability of the service and retrieval response speeds. Our failure to perform in accordance with these specifications could result in the cancellation of customer contracts. We expect we will be required to expand the capacity of our existing Tempe, Arizona data center or add additional data center space to adequately provide service. These activities require highly specialized personnel and involve many difficult installation, tuning and optimization tasks, and will require us to expend substantial financial and management resources. We could experience difficulties and delays in expanding and stabilizing the cluster of workstations in our existing data center. As a result, there can be no assurance that we will be able to expand our infrastructure to meet any increased customer demand on a timely basis. We house our data centers at hosting facilities operated by independent third parties who take certain precautions to protect our equipment against damage from fire, earthquakes, floods, power and telecommunications failures, sabotage, intentional acts of vandalism and similar events. Despite such precautions, the occurrence of a natural disaster, terrorist activities or other unanticipated problems at our current and future data centers could result in interruptions in the search services provided by us. Such interruptions could result in reductions in, or terminations of, service provided to our customers, which could have a material adverse affect on our business, financial condition and results of operations. We Rely on Our Intellectual Property Rights and May be Limited by the Intellectual Property Rights of Others. Our success and ability to compete are substantially dependent upon internally developed software technology which we are developing in connection with the Quepasa.com Web site and our search retrieval services. While we rely on copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Moreover, we may be unable to develop the performance based marketing portion of our search and retrieval business in the manner we seek due to the existence of certain patents which have been applied for by or issued to others who offer such search results to advertisers. Risks Associated With New Versions of Software and New Products; Rapid Technological Change. The markets for our Quepasa.com Web site and our retrieval services are characterized by rapid technological change, frequent new product introductions, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by developing and introducing, on a timely basis, enhancements to the software we use to operate our Web site and control our retrieval inquiries. There can be no assurance that we will be successful in developing and marketing enhancements to our software that respond to technological change, evolving industry standards or customer requirements. If We Fail to Develop or Maintain an Effective System of Internal Controls, We May Not be Able to Accurately Report Our Financial Results or Prevent Financial Fraud. As a Result, Current and Potential Stockholders Could Lose Confidence in Our Financial Reporting, Which Would Harm Our Business and the Trading Price of Our Common Stock. If we cannot provide reliable financial reports or prevent financial fraud, our reputation and operating results would be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, our independent auditors have recently noted in a letter to management certain suggestions regarding our internal controls and operations. According to the letter, we currently do not have a sufficient amount or type of staff in the financial, accounting and external reporting areas. We currently are seeking to hire appropriate staff as soon as practicable, and we intend to add further to our financial and reporting staff in order to meet our public reporting responsibilities, but doing so may take longer than we expect. Some of the other suggestions for improvement in our accounting and financial reporting functions relate to reconciliation of our accounts; proof of internal review and approval of accounting items; documentation of key accounting assumptions, estimates and/or conclusions; and documentation of accounting policies and procedures. We currently are taking steps to address these suggestions, but we may be hampered in this regard by our current level of staffing and our current accounting system. We cannot be certain that our efforts to improve our internal controls will be successful or that we will be able to maintain adequate controls over our financial processes and reporting in the future. Any failure to develop or maintain effective controls, or difficulties encountered in the effective improvement of our internal controls, could harm our operating results, cause us to fail to meet our reporting obligations, or cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock. If our internal controls are deemed inadequate, or if other unforeseen events occur, our external auditors could resign, leading to a delay in the preparation of our financial statements and an increase in our audit fees. If we were required to obtain new external auditors, those auditors could require a lengthy period to become familiar with our operations. The process of retaining new external auditors could also limit our access to the capital markets for an extended period of time. We Depend on Our Executive Officers and Senior Management. We depend upon the continued contributions of our executive officers and senior management. We have employment agreements with these individuals, but we do not carry key person life insurance on any of their lives, except Mr. Peterson’s. We Have a Limited Number of Traffic Partners. We derive a significant portion of our revenue from a limited number of traffic partners, and the loss of their business could have a material adverse effect on our results of operations. We May Need Additional Capital, The Receipt of Which is Uncertain We may need to raise additional funds through debt or equity financing in order to remain in business or to expand our operations. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we will not be able to maintain our operations, and our business, operating results and financial condition could be materially adversely affected. Our Stock Price is Highly Volatile. In the past, our common stock price has been highly volatile. We believe that our market price will continue to be subject to significant fluctuations due to various factors and events that may or may not be related to our performance. Our common stock trades on the Over-the-Counter Electronic Bulletin Board which makes it more difficult for investors to buy or sell our common stock.

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