Meet Group Inc (MEET)

[Solumex]

From SA: Management's Discussion and Analysis of Financial Condition and Results of Operations

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Read the article here on SA http://seekingalpha.com/news-article/1068150-item-2-management-s-discussion-and-analysis-of-financial-condition-and-results-of-operations

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You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements, which are included in Item 1 of this Form 10-Q.


Company Overview

Quepasa Corporation (NYSE Amex: QPSA) owns and operates Quepasa.com, the only
known publicly-traded social network and gaming platform for the Latino
community. We attract Latin audiences worldwide by taking the best of the social
web and delivering it in the form of a fun, interactive and distinctly Latin
online experience.

Highlights of the first quarter of 2011 included:


Quepasa Corporate
Beginning with the opening of the market on Friday, January 21, 2011, Quepasa's
common stock commenced trading on the NYSE Amex under the symbol "QPSA."

Mr. Lars Fuhrken-Batista was appointed a director of Quepasa. Mr. Batista, a
Brazilian native, brings to Quepasa a wealth of relevant experience in gaming
and a broad base of experience in the developing Brazilian Internet market ?
areas key to Quepasa's strategic direction.

Mr. Michael Nicklas, a leading investor and advisor to emerging technology
companies in Latin America, was appointed as a company advisor. Mr. Nicklas is
widely regarded as one of the leading early-stage investors focused on the
emerging Internet market in Brazil. For the last three years, he has helped
develop and invested in a portfolio of companies across the region focused on
social media, ecommerce and web publishing.

DSM


Quepasa DSM, our distributed social media advertising platform, reported record
engagement results for its Ley de Fomento al Primer Empleo campaign. The social
media marketing campaign raised awareness across multiple social networks by
targeting the Mexican youth regarding a proposed law designed to create
employment opportunities for their age demographic. The goal of the campaign was
to invite participants to learn about the proposed law and then engage them to
virtually vote for and share their support for the law's objectives across the
social web. Quepasa ran this campaign for 30 days and was able to generate then
record results with more than eight million total views, votes and shares across
a targeted base of 30 million Internet users in Mexico.

In addition to the Ley de Fomento al Primer Empleo campaign, during the first
quarter of 2011, we ran campaigns for reseller partner Sony Picture Television
Ad Sales Latin America, as well as the El Trabajo de Tus Suenos, "Dream Job"
campaign.

Quepasa Games

March 2, 2011, we acquired XtFt Games S/S Ltda, the owner of substantially all
the assets and business of TechFront Desenvolvimento de Software S/S Ltda, a
social game development studio based in Curitiba, Brazil. Founded in 2006 as a
developer of multiplatform console, Web and mobile games, TechFront began
developing social games for the Orkut platform in 2010 in partnership with
various international publishers.


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As part of the Company's acquisition, XtFt transitioned from a work-for-hire
business model to publishing its own social game IP. Quepasa Games initiated
development of its Wonderful City social game, with expected release on
Quepasa.com, Orkut and Facebook in the second quarter of 2011.

Critical Accounting Policies, Judgments and Estimates


Our discussion and analysis of our consolidated 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 preparation of these consolidated financial statements requires us
to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the
consolidated financial statements.

Management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board. 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.

Stock-Based Compensation Expense


Effective January 1, 2006, the Company adopted the fair value recognition
provisions of ASC 718, "Compensation - Stock Compensation" using the
modified-prospective transition method. Since all share-based payments made
prior to January 1, 2006 were fully vested, compensation cost recognized during
the three months ended March 31, 2011 and 2010 represents the compensation cost
for all share-based payments granted subsequent to January 1, 2006 based upon
the grant-date fair value using the Black-Scholes option pricing model.

The fair values of share-based payments are estimated on the date of grant using
the Black-Scholes option pricing model, based on weighted average
assumptions. Expected volatility is based on historical volatility of the
Company's common stock. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant. Compensation expense is recognized on a
straight-line basis over the requisite service period of the award.

In December 2007, the Securities and Exchange Commission ("SEC") issued guidance
which allows companies, in certain circumstances, to utilize a simplified method
in determining the expected term of stock option grants when calculating the
compensation expense to be recorded under GAAP for employee stock options. The
simplified method can be used after December 31, 2007 only if a company's stock
option exercise experience does not provide a reasonable basis upon which to
estimate the expected option term. Through 2009 and 2010, we continued to use
the simplified method to determine the expected option term since the Company's
stock option exercise experience does not provide a reasonable basis upon which
to estimate the expected option term.

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.


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--------------------------------------------------------------------------------Contingencies


The Company accrues for contingent obligations, including estimated management
support agreements and legal costs, when the obligation is probable and the
amount can be reasonably estimated. As facts concerning contingencies become
known we reassess our position and make appropriate adjustments to the financial
statements. Estimates that are particularly sensitive to future changes include
those related to tax, legal, and other regulatory matters that are subject to
change as events evolve and additional information becomes available.

Income Taxes


The Company uses the asset and liability method to account for income
taxes. Under this method, deferred income taxes are determined based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the consolidated financial statements which will result in taxable or
deductible amounts in future years and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided to reduce net deferred tax
assets to the amount that, based on available evidence, is more likely than not
to be realized.

Results of Operations

Revenue Sources

During the three months ended March 31, 2011, our revenue was generated from
four principal sources: revenue earned from the sale of DSM campaigns, website
development services, display advertising on our website and royalty revenue.

· DSM Revenues: We recognize DSM revenues over the period of the contest or as

the service is provided. Approximately 92% and 76% of our revenue came from

DSM campaigns in the three months ended March 31, 2011 and 2010, respectively.

· Website Development Revenue: We recognize website development revenues as the

service is provided. Approximately 3% and 0% of our revenue came from website

development in the three months ended March 31, 2011 and 2010, respectively.

· Display Advertising Revenue: Display advertising revenue is generated when an

advertiser purchases a placement within our quepasa.com website. We recognize

revenue related to display advertising upon delivery. 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. Approximately 3% and 76% of our revenue came from

display advertising in the three months ended March 31, 2011 and 2010,
respectively.


· Royalty Revenue: We recognize royalty revenues on a net basis, as reported to

us by third parties. Approximately 1% and 0% of our revenue came from

royalties in the three months ended March 31, 2011 and 2010, respectively.




Operating Expenses

Our principal operating expenses are divided into the following categories:

" Product Development and Content Expenses: Product development and content

expenses consist of personnel costs associated with the development, testing

and upgrading of our website and systems, content fees, and purchases of
specific technology, particularly software and hardware related to our
infrastructure upgrade.


" Sales and Marketing Expenses: Sales and marketing expenses consist primarily

of salaries and expenses of marketing and sales personnel, and other
marketing-related expenses including our mass media-based branding and
advertising.


" General and Administrative Expenses: General and administrative expenses

consist primarily of costs related to corporate personnel, occupancy costs,

general operating costs and corporate professional fees, such as legal and

accounting fees.


" Depreciation and Amortization Expenses: Our depreciation and amortization are

non-cash expenses which have consisted primarily of depreciation related to

our property and equipment.




22--------------------------------------------------------------------------------" Other Income (Expense): Other income (expense) consists primarily of interest

earned, interest expense and earned grant income. We have invested our cash in

AAA rated, fully liquid instruments. Interest expense relates to our Note

Payable. Earned grant income represents the amortized portion of a cash grant

received in 2006 from the Mexican government for approved capital

expenditures. The grant is being recognized on a straight-line basis over the

useful lives of the purchased assets.


Comparison of the three months ended March 31, 2011 with the three months ended

March 31, 2010



The following table sets forth a modified version of our unaudited Condensed
Consolidated Statements of Operations and Comprehensive Loss that is used in the
following discussions of our results of operations:

For the the three months ended March 31,
2011 2010 Change ($) Change (%)

REVENUES $ 2,243,564 $ 321,970 $ 1,921,594 597 %

OPERATING EXPENSES
Sales and marketing 322,052 173,696 148,356 85 %
Product development and content 1,707,464 863,677 843,787 98 %
General and administrative 1,433,884 1,695,193 (261,309 ) -15 %
Depreciation and amortization 136,460 107,660 28,800 27 %
Operating Expenses 3,599,860 2,840,226 759,634 27 %

LOSS FROM OPERATIONS (1,356,296 ) (2,518,256 ) 1,161,960 -46 %

OTHER INCOME (EXPENSE):
Interest income 16,560 345 16,215 4700 %
Interest expense (149,986 ) (149,904 ) (82 ) -100 %
Other income 596 525 71 14 %
TOTAL OTHER INCOME (EXPENSE) (132,830 ) (149,034 ) 16,204 -11 %

NET LOSS $ (1,489,126 ) $ (2,667,290 ) $ 1,178,164 -44 %



Revenues

Our revenues were $2,243,564 for the three months ended March 31, 2011, an
increase of $1,921,594 or 597% compared to $321,970 for the same period in
2010. This increase is primarily attributable to $2,056,667 in DSM revenue and
$70,000 in website development revenue earned in the quarter ended March 31,
2011. Launched in December 2009, our DSM contest platform is a tool that allows
advertisers and brands to deliver their brand message through a viral contest
engine that is shared and spread by the users across the most popular social
media sites. We believe this is a highly effective ad product that allows brands
to market their products to the broader Latino demographic, without requiring
the advertiser to have to decide how to allocate its budget amongst numerous
websites. With Quepasa DSM, brands can target Latinos across all social media
properties, leveraging the user's use of viral widgets and sharing tools to
spread the brand message. $250,000 of DSM revenue for the three months ended
March 31, 2010 was earned from MATT Inc., the Company's largest shareholder, on
behalf of the Municipality of Ixtapa in Mexico, without commission or
fees. $2,016,667 of DSM revenue and $70,000 of Website Development revenue for
the three months ended March 31, 2011 was received from AHMSA, which owns MATT,
Inc..

In February 2008, we re-launched our website. Website traffic has increased
significantly since the re-launch. The website had 51,168,527 unique visitors in
the first quarter of 2011 and 7,928,589 in the first quarter of 2010, a 545%
increase. We believe there will be a direct correlation between website traffic
and our ability to increase revenue.

As part of our website development strategy, we have focused on establishing a
platform for sustained, viral growth-based on (i) simple user registration and
invitation process; (ii) effective email deliverability; and (iii) a simplified
way to navigate the site through an enhanced user interface. In June 2008, we
redesigned the sign-up and invitation pages of our site, resulting in
approximately a 50% increase in the number of new users who invited friends and
contacts to join Quepasa.com. In addition, we have substantially reduced the
number of Quepasa.com invitation emails that fail to reach recipients' email
inboxes. Improved deliverability, together with the redesign of our sign-up and
invitation steps and a more robust user experience, has resulted in meaningful
gains in the number new registered users and site traffic.


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As we increased traffic through the improvements outlined in the above
paragraph, we began focusing on revenue generation. This led to the DSM
campaigns together with the website development revenue. By the fall of 2010, we
saw social game revenue as an important future revenue source as social gaming
experienced explosive growth both on Facebook and on other competitive websites
in Latin America. As a result, we commenced a search to acquire our own social
gaming company. This culminated in our acquisition of XtFt.

Operating Expenses


Sales and Marketing: Sales and marketing expenses increased $148,356, or 85%, to
$322,052 for the three months ended March 31, 2011 from $173,696 in 2010. The
increase is primarily attributed to an increase in stock based compensation of
$71,211 attributable to increased head count and an increase in salaries of
$68,600 due to the addition of a salesperson and two marketing staff in the
quarter ended March 31, 2011.

Product Development and Content: Product development and content expenses
increased $843,787, or 98%, to $1,707,464 for the three months ended March 31,
2011 from $863,677 in 2010. During the three months ended March 31, 2011, we had
an increase in content expense for DSM campaigns of $660,000 primarily
consisting of media buys; increases in U.S. salaries of $52,000 attributable to
increased head count, an increase in salaries and associated payroll costs of
$48,400 due to salary increases and staff additions to our product development
and technology personnel within Quepasa.com de Mexico, which provides
substantially all of our design, translation services, and website management
and development services; increases in salaries and associated payroll costs of
$129,400 due to salary increases and staff additions to our games development
and technology personnel within XtFt, which, provides substantially all of our
game design services, and an increase of $23,800 for software
accreditations. These increases were partially offset by decreases of $87,900 in
direct advertising content costs and contest prizes from the quarter ended March
31, 2010.

General and Administrative: General and administrative expenses decreased $261,309, or 15%, to $1,432,075 for the three months ended March 31, 2011 from $1,695,193 for the same period in 2010. The significant changes consisted of:

" a decrease in stock based compensation of $809,647 due the full vesting of

general and administrative employee stock options during 2010; is partially

offset by:



" an increase in brokerage commissions of $300,000 incurred in the XtFt
acquisition;


" an increase in legal and accounting expenses of $108,000 due to costs incurred

in the XtFt acquisition and the other contract negotiations;



" an increase in dues and subscriptions of $36,000;



" and an increase in travel expenses of $53,000.





Stock Based Compensation: Stock based compensation expense, which is included in
the other operating expense categories as discussed above, decreased $734,546 to
$873,234 for the three months ended March 31, 2011 from $1,607,780 in 2010. The
Stock based compensation expense represented 27% and 57% of operating expenses
for the three months ended March 31, 2011 and 2010, respectively. At March 31,
2011, we had $6,673,861 of unrecognized stock based compensation expense, most
of which we expect to recognize over the next twelve quarters.

For the three months ended March 31,
2011 2010
Sales and marketing $ 142,071 $ 70,860

Product and content development 188,619 184,728

General and administrative 542,544 1,352,192

Total Stock Based Compensation $ 873,234 $ 1,607,780





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--------------------------------------------------------------------------------Stock Based Compensation expense is composed of the following:

2011 2010
Vesting of stock options $ 694,331 $ 1,433,633
Vesting of warrants $ 178,903
Re-pricing of warrants - 147,813
Issuance of common stock for professional services - 26,334

Total Stock Based Compensation $ 873,234 $ 1,607,780

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 being amortized over the lengths of the contracts.


Depreciation and Amortization: Depreciation and amortization expense increased
$28,800, or 27%, to $136,460 for the three months ended March 31, 2011 from
$107,660 in 2010. This increase is attributable to amortization of contracts and
depreciation of assets from the XtFt acquisition, partially offset by a decrease
in depreciation due the completed depreciation on older assets.

Other Income (Expense): Other expense decreased $16,204 to $132,830 for the three months ended March 31, 2011 from $149,904 in 2010. The decrease is primarily attributable to an increase of $16,215 in interest income earned on the Company's cash and cash equivalents.

Liquidity and Capital Resources


For the Three Months Ended
March 31,
2011 2010
Net cash used in operating activities $ (1,590,222 ) $ (550,504 )
Net cash used in investing activities $ (611,205 ) $ (98,163 )
Net cash provided by financing activities $ 995,501 $ 260,000



Net cash used in operations was $1,590,222 for the three months ended March 31,
2011 compared to $550,504 for 2010. For the three months ended March 31, 2011,
net cash used by operations consisted primarily of a net loss of $1,489,126,
offset by non-cash expenses of $136,460 in depreciation and amortization,
$694,331 related to stock based compensation for the vesting of stock options
and $ 178,903 for vesting of warrants, and $71,854 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 $1,176,867 and net decrease in
accounts payable and accrued expenses of $17,087, offset by decreases in other
current assets and other assets of $19,028. For the three months ended March 31,
2010, net cash used by operations consisted primarily of a net loss of
$2,667,290, offset by non-cash expenses of $107,660 in depreciation and
amortization, $71,854 in amortization of discounts on notes payable and debt
issuance costs, $1,433,633 related to stock based compensation for the vesting
of stock options, and 147,813 related to repricing warrants. Additionally,
changes in working capital impacted the net cash used in operating
activities. These changes included a decrease in other current assets and other
assets of $47,182, an increase in accounts payable and accrued expenses of
$29,723, and an increase in deferred revenue of $250,000.

Net cash used in investing activities in the three months ended March 31, 2011
of $611,205 was primarily attributable to capital expenditures of $71,205
primarily for computer equipment to increase capacity, improve performance and
provide redundant backup for content, $40,000 loan disbursement to Hollywood
Creations, see Note 2 of the condensed consolidated financial statements, and
the $500,000 loan related to the acquisition of XtFt. Our capital expenditures
were $98,163 for the three months ended March 31, 2010.


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There was $995,501 provided by financing activities for the three months ended
March 31, 2011, attributable to proceeds from the exercise of stock options and
warrants. There was $260,000 provided by financing activities for the three
months ended March 31, 2010, attributable to proceeds from the exercise of stock
options.

March 31, December 31,
2011 2010Cash and cash equivalents $ 12,334,602 $ 13,546,572 Total assets

$ 21,017,166 $ 16,452,789
Percentage of total assets 59 % 82 %



Our cash balances are kept liquid to support our growing infrastructure needs
for operational expansion. The majority of our cash is concentrated in one large
financial institution, JP Morgan Chase.

Quepasa had positive working capital of $14,344,883 and $14,618,305 at March 31, 2011 and December 31, 2010, respectively, consisting primarily of cash.

Net Cash Earn (Burn) - Non-GAAP


Net cash earn (burn) is a non-GAAP financial measure that may be considered in
addition to results prepared in accordance with GAAP. 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. We define "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. This non-GAAP measure should not be considered a substitute for, or
superior to, GAAP results. Our management uses this non-GAAP financial measure
in evaluating its financial and operational decision making and as a means to
evaluate period-to-period comparison. We believe that both management and
shareholders benefit from referring to non-GAAP financial measures such as net
cash earn (burn) in planning, forecasting and analyzing future
periods. Additionally, net cash earn (burn) rate provides meaningful information
about our ability to meet our working capital needs. Net cash earn (burn), as
presented below, may not be comparable to similarly titled measures reported by
other companies since not all companies necessarily calculate net cash earn
(burn) in an identical manner and, therefore, it is not necessarily an accurate
measure of comparison between companies. The following table is a reconciliation
of our non-GAAP financial measure to loss from operations.

For the the three months ended March 31,
2011 2010

LOSS FROM OPERATIONS (1,356,296 ) (2,518,256 )

NON CASH OPERATING EXPENSES
Stock based compensation expense 873,234 1,607,780

Depreciation and amortization 136,460 107,660

TOTAL NON CASH OPERATING EXPENSES 1,009,694 1,715,440


NET CASH EARN (BURN) (346,602 ) (802,816 )
NET MONTHLY CASH EARN (BURN) RATE (115,534 ) (267,605 )




While we previously expected to have no net cash burn in 2011, the net cash burn
occurred solely related to the XtFt acquisition and the ongoing game development
costs.


26--------------------------------------------------------------------------------We have budgeted capital expenditures of $500,000 for 2011, 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.


As of the date of the filing of this report, we have approximately $12.3 million
in cash and $2.5 million in accounts receivable. Management believes that we
have sufficient working capital to operate beyond the next 12 months.

New Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements included in this report for discussion of recent accounting pronouncements.

Cautionary Note Regarding Forward Looking Statements

This report includes forward-looking statements including statements regarding:

? The growth of our business,
? Expected release of Wonderful City,
? Expectations regarding our net cash earn (burn) rate,
? Belief regarding our working capital being sufficient to operate
our business beyond 12 months,
? Our final release of Wonderful City,
? Capital expenditures, and
? Our liquidity.



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.

Important factors that could cause actual results to differ from those in the
forward-looking statements include unanticipated software problems which delay
or impede the launch of Wonderful City and catastrophic failure to our servers
requiring material unanticipated capital expenditures. Further information on
our risk factors is contained in our filings with the SEC, including our Form
10-K for the year ended December 31, 2010. Any forward-looking statement made by
us in this report speaks only as of the date on which it is made. Factors or
events that could cause our actual results to differ may emerge from time to
time, and it is not possible for us to predict all of them. We undertake no
obligation to publicly update any forward-looking statement, whether as a result
of new information, future developments or otherwise, except as may be required
by law.


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