How Quepasa Corporation Lost 50% Of Its Market Cap In A Little Over A Month (QPSA)

Once high-flying Quepasa Corporation QPSA, which runs a social networking site focused on the Hispanic community, has been decimated over the last month, losing 50% of its market cap between January 27 and March 4. Prior to that, however, QPSA's market cap had doubled in almost as short of a period. The initial move higher in the stock coincided with the hype surrounding the LinkedIn IPO as well as the ever increasing private market value of Facebook.

Quepasa Corporation is an online social community which is focused on the Hispanic community. The site is available in Spanish, English, and Portuguese. The majority of Quepasa's membership base consists of Hispanics in the United States, Mexico, and Brazil in addition to other Latin American countries.

When the stock was trading at around $14.60, Tim Sykes, the penny stock guru, wrote a scathing article outlining the companies sketchy related party transactions, which accounted for almost all of Quepasa's revenue. In hindsight, it appears that not only was Sykes right, but his arguments likely played a part in cratering the stock. QPSA shares fell from around $14 to $7.26 in the course of one month.

One of the Directors of QPSA is Alonso Ancira who is also Chairman of the Board of Altos Hornos de Mexico, or AHMSA, which is a the largest steel mining corporation in Mexico. In 2006, that company had revenue of $23 billion and reported net income of $2.3 billion. In addition, Mr. Ancira is also the Chairman of Mexicans & Americans Trading Together, Inc., also known as MATT, which is a wholly owned subsidiary of AHMSA.

According to Skyes, in April 2010, Ancira, AHMSA and MATT controlled around 40% of Quepasa. When one peruses the revenue growth of QPSA, it is tremendously impressive. The company went from $540,000 to $6.05 million in revenue between 2009 and 2010. Upon further review of the company's SEC filings, however, it is revealed that “Substantially all of our revenue has been generated from or arranged by AHMSA and MATT Inc., which are companies affiliated with Mr. Alonso Ancira, a director of Quepasa.”

What happened was Ancira arranged a related-party deal between AHMSA, MATT and Quepasa (QPSA) to develop websites and environment and legislative campaigns for the company. These deals account for the company's entire revenue stream in 2010, and they are essentially just transfers between companies controlled by Mr. Ancira.

The SEC filings state the following: "We received from Altos Hornos de Mexico, S.A.B. de C.V., or AHMSA, which owns Mexicans and Americans Trading Together, Inc., or MATT Inc., a $3.5 million contract to develop a website and a series of environmental campaigns using our DSM Technology and a $3.0 million contract to develop a website and a legislative campaign using our DSM technology. These contracts are the ones described in the first bullet point above and the next bullet point below."

Once these related party transactions became widely understood, the stock began to plummet. It does not appear that Quepasa has much of a business at all, from a financial perspective, when these related party contracts are removed from the analysis. The stock is likely significantly overvalued, even at today's prices.

The story, however, gets even more interesting when you find out who used to be a major investor in Quepasa, and likely profited handsomely from the company's rising stock price over the years. As recently as last Fall, Rick Scott, the current governor of Florida, controlled 13.8% of QPSA stock, or around 2 million shares. He began investing in the company in 2006, although given the company's financials it is hard to fathom why. It is unclear if Scott is still an investor in the company, as his name nor the name of any partnership linked to him, shows up in the major holders list. It has been reported that Scott turned over his investments to a blind trust, over which he does not exert any control.

"Mr. Scott will move his money into a blind trust and will remove himself from the decision-making when it comes to his investments," Scott spokesman Brian Burgess told WESH, though he admitted that he couldn't guarantee that the new fund wouldn't continue to invest in QuePasa or Playboy, for that matter.

If Mr. Scott has divested of his QPSA shares, his timing may have been impeccable, but other less sophisticated investors, who thought they might have the opportunity to cash in on the Facebook phenomenon through QPSA, are likely going to be burned badly. This story, once again, should stress the importance of due diligence, especially as it relates to the murky world of small and micro-cap stocks.