UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





ý
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934 For the
quarterly period ended March 31, 2010
 OR
 o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the
transition period from ________________ to
________________





Commission
file number:  001-33105




Quepasa
      Corporation(Exact name of
      registrant as specified in its charter)




Nevada
              
              86-0879433(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)
  324
      Datura Street, Ste. 114
                West
      Palm Beach, FL
              
              33401(Address
      of principal executive offices)
              
              (Zip
      Code)





Registrant's
telephone number: (561) 366-1249













Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ                              No  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o                                No  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large accelerated
      filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
            o(Do not check if
      a smaller reporting company)
            Smaller reporting
      company
            þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
oNo  þ





Class
            
            Outstanding
      at May 13, 2010Common
      Stock, $0.001 par value per share
            
            12,960,211 shares







QUEPASA
CORPORATION AND SUBSIDIARY





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1
            Financial
      Statements
            
            
            1Balance
      Sheets as of March 31, 2010 (Unaudited) and December 31,
    2009
            
            
            1Statements
      of Operations and Comprehensive Income (Loss) for the Three months Ended
      March 31, 2010 and 2009  (Unaudited)
            
            
            2Statement
      of Changes in Stockholders’ Equity (Deficit) for the Three months Ended
      March 31, 2010 (Unaudited)
            
            
            3Statements
      of Cash Flows for the Three months Ended March 31, 2010 and
      2009  (Unaudited)
            
            
            4Notes
      to Unaudited Condensed Consolidated Financial Statements
            
            
            5Item
      2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            15Item
      3
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            
            23Item
      4
            Controls
      and Procedures
            
            
            23Item
      4T
            Controls
      and Procedures
            
            
            23PART
      II. OTHER INFORMATIONItem
      1
            Legal
      Proceedings
            
            
            24Item
      1A
            Risk
      Factors
            
            
            24Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            
            24Item
      3
            Defaults
      Upon Senior Securities
            
            
            25Item
      4
            (Removed
      and Reserved)
            
            
            25Item
      5
            Other
      Information
            
            
            25Item
      6
            Exhibits
            
            
            25SIGNATURES
            
            
            26INDEX
      TO EXHIBITS
            
            
            26





PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





QUEPASA
CORPORATION AND SUBSIDIARY


Condensed
Consolidated Balance Sheets


March
      31,
              
              
              December
      31,2010
              
              
              2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              639,186
              
              
              $
              1,028,267Accounts
      receivable, net of allowance of $37,000 and $37,000,
      respectively
              
              
              308,346
              
              
              
              310,781Other
      current assets
              
              
              141,659
              
              
              
              190,513Total
      current assets
              
              
              1,089,191
              
              
              
              1,529,561Property
      and equipment, net
              
              
              413,051
              
              
              
              422,548Note
      receivable
              
              
              250,000
              
              
              
              250,000Other
      assets
              
              
              48,779
              
              
              
              48,282Total
      assets
              
              $
              1,801,021
              
              
              $
              2,250,391LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)CURRENT
      LIABILITIES:Accounts
      payable
              
              $
              67,051
              
              
              $
              118,001Accrued
      expenses
              
              
              182,911
              
              
              
              180,288Deferred
      revenue
              
              
              250,000
              
              
              
              -Accrued
      dividends
              
              
              195,125
              
              
              
              167,250Unearned
      grant income
              
              
              13,962
              
              
              
              13,810Total
      current liabilities
              
              
              709,049
              
              
              
              479,349Notes
      payable, net of unamortized discount of $1,859,206 and $1,929,885,
      respectively
              
              
              5,822,431
              
              
              
              5,673,702Total
      liabilities
              
              
              6,531,480
              
              
              
              6,153,051COMMITMENTS
      AND CONTINGENCIES (see Note 5)STOCKHOLDERS’
      EQUITY (DEFICIT):Preferred
      stock, $.001 par value; authorized - 5,000,000 shares; 25,000
      sharesissued
      and outstanding at March 31, 2010
              
              
              25
              
              
              
              25Common
      stock, $.001 par value; authorized - 50,000,000 shares;
      12,949,711shares
      issued and outstanding at March 31, 2010 and 12,743,111 shares issued and
      outstanding at December 31, 2009
              
              
              12,950
              
              
              
              12,743Additional
      paid-in capital
              
              
              157,292,939
              
              
              
              155,425,366Accumulated
      deficit
              
              
              (162,029,904
              )
              
              
              (159,334,739
              )Accumulated
      other comprehensive income (loss)
              
              
              (6,469
              )
              
              
              (6,055
              )Total
      stockholders’ equity (deficit)
              
              
              (4,730,459
              )
              
              
              (3,902,660
              )Total
      liabilities and stockholders’ equity (deficit)
              
              $
              1,801,021
              
              
              $
              2,250,391





See notes
to unaudited condensed consolidated financial statements.





1


QUEPASA
CORPORATION AND SUBSIDIARY Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)




For
      the Three Months EndedMarch 31,2010
              
              
              
              2009REVENUES
              
              $
              321,970
              
              
              $
              69,159OPERATING
      COSTS AND EXPENSES:Sales
      and marketing
              
              
              173,696
              
              
              
              119,239Product
      development and content
              
              
              763,499
              
              
              
              758,723General
      and administrative
              
              
              1,795,371
              
              
              
              1,480,526Depreciation
      and amortization
              
              
              107,660
              
              
              
              131,240TOTAL
      OPERATING COSTS AND EXPENSES
              
              
              2,840,226
              
              
              
              2,489,728LOSS
      FROM OPERATIONS
              
              
              (2,518,256
              )
              
              
              (2,420,569
              )OTHER
      INCOME (EXPENSE):Interest
      income
              
              
              345
              
              
              
              11,234Interest
      expense
              
              
              (149,904
              )
              
              
              (149,904
              )Other
      income
              
              
              525
              
              
              
              5,439TOTAL
      OTHER INCOME (EXPENSE)
              
              
              (149,034
              )
              
              
              (133,231
              )LOSS
      BEFORE INCOME TAXES
              
              
              (2,667,290
              )
              
              
              (2,553,800
              )Income
      taxes
              
              
              -
              
              
              
              -NET
      LOSS
              
              $
              (2,667,290
              )
              
              $
              (2,553,800
              )Preferred
      stock dividends
              
              
              (27,875
              )
              
              
              (27,875
              )NET
      LOSS ALLOCABLE TO COMMON SHAREHOLDERS
              
              $
              (2,695,165
              )
              
              $
              (2,581,675
              )NET
      LOSS PER COMMON SHARE ALLOCABLE TOCOMMON
      SHAREHOLDERS, BASIC AND DILUTED
              
              $
              (0.21
              )
              
              $
              (0.20
              )WEIGHTED
      AVERAGE NUMBER OF SHARESOUTSTANDING,
      BASIC AND DILUTED:
              
              
              12,797,725
              
              
              
              12,715,411NET
      LOSS
              
              $
              (2,667,290
              )
              
              $
              (2,553,800
              )Foreign
      currency translation adjustment
              
              
              (414
              )
              
              
              (1,256
              )COMPREHENSIVE
      LOSS
              
              $
              (2,667,704
              )
              
              $
              (2,555,056
              )





See notes
to unaudited condensed consolidated financial statements.




2


QUEPASA
CORPORATION AND SUBSIDIARY


Condensed
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)


For
the Three Months Ended March 31, 2010


(Unaudited)




AccumulatedAdditional
                
                
                
                
                
                Other
                
                
                TotalPreferred
      Stock
                
                
                Common
      Stock
                
                
                Paid-in
                
                
                Accumulated
                
                
                Comprehensive
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                Income
      (Loss)
                
                
                Equity
      (Deficit)Balance—December 31,2009
                
                
                25,000
                
                
                $
                25
                
                
                
                12,743,111
                
                
                $
                12,743
                
                
                $
                155,425,366
                
                
                $
                (159,334,739
                )
                
                $
                (6,055
                )
                
                $
                (3,902,660
                )Vesting
      of stock optionsfor
      compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,433,633
                
                
                
                
                
                
                
                
                
                
                
                1,433,633Re-pricing
      of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                147,813
                
                
                
                
                
                
                
                
                
                
                
                147,813Exercise
      of stock options
                
                
                
                
                
                
                
                
                
                
                200,000
                
                
                
                200
                
                
                
                259,800
                
                
                
                
                
                
                
                
                
                
                
                260,000Issuance
      of common stockfor
      professional services
                
                
                
                
                
                
                
                
                
                
                6,600
                
                
                
                7
                
                
                
                26,327
                
                
                
                
                
                
                
                
                
                
                
                26,334Preferred
      stock dividends
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (27,875
                )
                
                
                
                
                
                
                (27,875
                )Foreign
      currencytranslation
      adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (414
                )
                
                
                (414
                )Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,667,290
                )
                
                
                
                
                
                
                (2,667,290
                )Balance—March
      31,2010
                
                
                25,000
                
                
                $
                25
                
                
                
                12,949,711
                
                
                $
                12,950
                
                
                $
                157,292,939
                
                
                $
                (162,029,904
                )
                
                $
                (6,469
                )
                
                $
                (4,730,459
                )


See notes
to unaudited condensed consolidated financial statements.




3




QUEPASA
CORPORATION AND SUBSIDIARY


Condensed
Consolidated Statements of Cash Flows


(Unaudited)




For
      the Three Months EndedMarch 31,2010
              
              
              2009Cash
      flows from operating activities:Net
      loss
              
              $
              (2,667,290
              )
              
              $
              (2,553,800
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              107,660
              
              
              
              131,240Repricing
      of warrants
              
              
              147,813
              
              
              
              -Vesting
      of stock options for compensation
              
              
              1,433,633
              
              
              
              1,216,559Issuance/
      (cancellation) of common stock and stock options for professional
      services
              
              
              26,334
              
              
              
              (20,471
              )Loss
      / (Gain) on disposal of property and equipment
              
              
              -
              
              
              
              4,334Grant
      income
              
              
              152
              
              
              
              (6,763
              )Bad
      debt expense
              
              
              160
              
              
              
              10,649Non-cash
      interest related to notes receivable
              
              
              -
              
              
              
              (8,247
              )Non-cash
      interest related to notes payable
              
              
              78,050
              
              
              
              78,050Amortization
      of discounts on notes payable and debt issuance costs
              
              
              71,854
              
              
              
              71,854Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              2,275
              
              
              
              (42,656
              )Other
      current assets and other assets
              
              
              47,182
              
              
              
              123,723Accounts
      payable and accrued expenses
              
              
              (48,327
              )
              
              
              (77,589
              )Deferred
      revenue
              
              
              250,000
              
              
              
              -Net
      cash used in operating activities
              
              
              (550,504
              )
              
              
              (1,073,117
              )Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (98,163
              )
              
              
              -Net
      cash used in investing activities
              
              
              (98,163
              )
              
              
              -Cash
      flows from financing activities:Proceeds
      from exercise of stock options and warrants
              
              
              260,000
              
              
              
              -Net
      cash provided by financing activities
              
              
              260,000
              
              
              
              -Effect
      of foreign currency exchange rate on cash
              
              
              (414
              )
              
              
              (1,256
              )Net
      decrease in cash and cash equivalents
              
              
              (389,081
              )
              
              
              (1,074,373
              )Cash
      and cash equivalents at beginning of period
              
              
              1,028,267
              
              
              
              4,932,629Cash
      and cash equivalents at end of period
              
              $
              639,186
              
              
              $
              3,858,256Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -Supplemental
      Disclosure of Non-Cash Investing and Financing Activities:Reduction
      in exercise prices of outstanding warrants recorded as additional paid-in
      capital
              
              $
              -
              
              
              $
              1,605,382Preferred
      stock dividends accrued and charged to accumulated deficit
              
              $
              27,875
              
              
              $
              27,875






4


QUEPASA
CORPORATION AND SUBSIDIARY





Notes
to Unaudited Condensed Consolidated Financial Statements





Note 1—Description of Business and
Summary of Significant Accounting Policies





Quepasa
Corporation, a Nevada corporation (the “Company”), was incorporated in June
1997.  In 2007, the Company transitioned from being a bilingual search
engine into a Latino social network.  With the evolution of the
Company’s Quepasa.com website into a Latino social network, the future revenue
will come predominantly from display advertising and the company’s new DSM
contest platform.  The Company re-launched its Quepasa.com website on
February 6, 2008, to be solely a Latino social network with content provided by
the user community.  The Quepasa.com community provides users with
access to an expansive, multilingual menu of resources that promote social
interaction, information sharing, and other topics of interest to
users.  We offer online marketing capabilities, which enable marketers
to display their advertisements in different formats and in different locations
on our website.  We work with our advertisers to maximize the
effectiveness of their campaigns by optimizing advertisement formats and
placement on the website.  The Quepasa.com website is operated and
managed by the Company’s wholly owned Mexico-based subsidiary, Quepasa.com de
Mexico.





Interim
Financial Information





The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial information and with the
instructions to Form 10-Q.  Accordingly, they do not include all of
the information required to be included in a complete set of consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America.  In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.  Operating results for the
three months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31,
2010.  The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s 2009 Annual Report filed
with the SEC on Form 10-K on March 5, 2010.





Basis
of Presentation and Going Concern





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the Company’s continuation as a going
concern.  Since inception, the Company has reported net losses and
operating activities have used cash, and the Company has a stockholders’ deficit
at December 31, 2009.  These factors raise substantial doubt about the
Company’s ability to continue as a going concern.  The Company
reported a net loss of approximately $2.7 million for the three months ended
March 31, 2010, and operating activities used cash of approximately $551,000
during the three months ended March 31, 2010 and as of March 31, 2010, the
Company had a stockholders’ deficit of $4.7 million and accumulated losses from
inception of $162.0 million.




The
Company’s Board of Directors and Chief Executive Officer continue to be actively
involved in discussions and negotiations with investors.  Management
does not believe the Company has sufficient working capital to operate beyond
December 31, 2010 with the current working capital on hand.  With our
net cash burn rate, this forecast assumes that we collect approximately $300,000
in accounts receivables during 2010.  We expect that the $3.5 million
contract we recently announced will supply us working capital to remain
operational through 2010.  Our management has considered completing a
financing through the sale of equity or debt securities.  To remain
operational through December 31, 2011, we will need to raise at least $2,000,000
in net proceeds.  The current global recession and volatility of the
financial markets could significantly impact our debt or equity.  Assuming
we raise the necessary capital through the sale of equity or equity equivalents
and we generate the full $3.5 million in revenue, we expect that we will have
adequate working capital through 2011.  However, any equity financing
may be very dilutive to our existing shareholders.




At March
31, 2010, the Company had cash and cash equivalents of approximately $639,000
and working capital of approximately $380,000, compared to cash and cash
equivalents of approximately $1.0 million and a working capital of $1.1 million
at December 31, 2009.  At March 31, 2010, the Company had total
stockholders’ deficit of $4.7 million as compared with total stockholders’
deficit of $3.9 million at December 31, 2009.  The Company’s financial
position and condition has deteriorated from December 31, 2009 to March 31, 2010
and the Company does not have sufficient cash to meets it needs for the next
twelve months.  There is no assurance that continued financing
proceeds will be obtained in sufficient amounts necessary to meet the Company's
needs.  In view of these matters, continuation as a going concern is
dependent upon the Company's ability to meet its financing requirements, raise
additional capital, and the future success of its operations.  The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the possible inability of the Company to continue as a going
concern.




5




Principles
of Consolidation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Quepasa.com de
Mexico.  All intercompany accounts and transactions have been
eliminated in consolidation.





Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates 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.  Actual results could differ
from those estimates.  Most significant estimates in the accompanying
consolidated financial statements include the allowance on accounts receivable,
valuation of the discount on notes payable, valuation of equity instruments
granted for services and valuation of repricing of warrants.




Cash
and Cash Equivalents





The
Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash and cash equivalents.  The
Company continually monitors its positions with, and the credit quality of, the
financial institutions it invests with.





Cash and
cash equivalents are maintained at financial institutions and, at times,
balances may exceed federally insured limits.  The Company has never
experienced any losses related to these balances.  Such amounts on
deposit in excess of federally insured limits at March 31, 2010 approximated
$400,000.




Fair
Value of Financial Instruments





We
measure our financial assets and liabilities in accordance with generally
accepted accounting principles. For certain of our financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, the carrying amounts approximate fair value due to their
short maturities. Amounts recorded for notes payable, net of discount, also
approximate fair value because current interest rates available to us for debt
with similar terms and maturities are substantially the same.




Fair
Value Measurements





Effective
January 1, 2008, we adopted accounting guidance for financial assets and
liabilities. The adoption did not have a material impact on our results of
operations, financial position or liquidity. This standard defines fair value,
provides guidance for measuring fair value and requires certain disclosures.
This standard does not require any new fair value measurements, but rather
applies to all other accounting pronouncements that require or permit fair value
measurements. This guidance does not apply to measurements related to
share-based payments. This guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance utilizes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The following is a brief description
of those three levels:





Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.


Level
2: Inputs other than quoted prices that are observable, either directly or
indirectly. These include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities
in markets that are not active.


Level
3: Unobservable inputs in which little or no market data exists, therefore
developed using estimates and assumptions developed by us, which reflect those
that a market participant would use.




6




Net
Loss Per Share





Net loss
per share is computed by dividing net loss attributable to common stockholders
by the weighted average number of shares of common stock outstanding during the
applicable period.  Diluted loss per share is determined in the same
manner as basic loss per share, except that the number of shares is increased to
include potentially dilutive securities using the treasury stock
method.  Since the Company incurred a net loss in all periods
presented, all potentially dilutive securities were excluded from the
computation of diluted loss per share since the effect of including them is
anti-dilutive.





The
following table summarizes the number of dilutive securities outstanding for
each of the periods presented, but not included in the calculation of diluted
loss per share:




March
      31,2010
              
              
              2009Stock
      options
              
              
              7,372,822
              
              
              
              6,723,020Warrants
              
              
              4,200,000
              
              
              
              4,432,500Total
              
              
              11,572,822
              
              
              
              11,155,520


Significant
Customers and Concentration of Credit Risk




Duringthe first quarter of 2010, one customer comprised 78% of total
revenues.During the first
quarter of 2009, one customer comprised 26% of total
revenues.




One
customer comprised 87% of total accounts receivable as of March 31, 2010. One
customer comprised 86% of total accounts receivable as of December 31,
2009.




Recent
Accounting Pronouncements





Effective
for all interim and annual periods ending after September 15, 2009, the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) became the sole authoritative source for Generally Accepted Accounting
Principles (GAAP) in the United States of America and superceded all previous
Level a – d sources of US GAAP.





The
following discusses non-authoritative accounting standards adopted by various
bodies that have been incorporated into the authoritative FASB
Codification:





In May
2009, the FASB issued guidance on subsequent events.  This guidance
does not result in significant changes in the subsequent events that an entity
reports in its financial statements.  The guidance requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued.  This
guidance was effective for the Company in the second quarter of 2009, and the
required disclosure has been included in the consolidated financial
statements.  The adoption of this guidance did not have a significant
impact on the Company’s consolidated financial statements.





On
January 1, 2009, the Company adopted new guidance and as a result evaluates its
options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under GAAP.  The result of this accounting treatment is that the
fair value of the derivative is marked-to-market each balance sheet date and
recorded as a liability.  In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as Other income (expense).  Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity.  Equity instruments
that are initially classified as equity that become subject to reclassification
under GAAP are reclassified to liability at the fair value of the instrument on
the reclassification date.  The adoption of this guidance has not had
a material impact on the Company’s consolidated financial position and results
of operations.




7




Note 2—Property and
Equipment





Property
and equipment consist of the following:




March
      31,2010
              
              
              December
      31,2009Computer
      equipment
              
              $
              1,900,650
              
              
              $
              1,796,197Vehicles
              
              
              18,211
              
              
              
              17,340Office
      furniture and equipment
              
              
              126,042
              
              
              
              123,256Other
      equipment
              
              
              9,520
              
              
              
              9,0652,054,423
              
              
              
              1,945,858Less
      accumulated depreciation
              
              
              (1,641,372
              )
              
              
              (1,523,310
              )Property
      and equipment—net
              
              $
              413,051
              
              
              $
              422,548


Depreciation
expense was $107,660 and $131,240 for the three months ended March 31, 2010 and
2009, respectively.





Note 3—Note
Receivable





On March
27, 2008, the Company entered into a Loan Agreement with BRC Group, LLC (“BRC”)
for a maximum amount of $600,000.




A dispute
arose and on April 6, 2009, BRC filed a complaint in the U.S. District Court for
the Northern District of California.  The Company filed an Answer with
counterclaims alleging a default by BRC and to accelerate the note.




In
February 2010, the Company entered into a settlement agreement (the
“Settlement”) with BRC effective as of September 22, 2009.  Under
the Settlement, BRC’s indebtedness to the Company was reduced from $350,000 to
$250,000, evidenced by a new promissory note (the “Note”) dated
September 22, 2009.  The Note contains a repayment term of 18
months commencing June 1, 2011, bearing interest at the rate of 4% per
annum, such interest to begin accruing February 1, 2011.  As
collateral for the Note, BRC issued the Company a warrant (the “Warrant”)
permitting the Company to receive up to a 30% membership interest in BRC upon
default.  If BRC defaults under the Note and the Warrant is exercised,
BRC shall have 90 days to repurchase the membership interest for the balance of
the remaining principal and interest to date.




As a
result of the Settlement, the Company recognized a loss of $100,000 in the Other
Income (Expense) line of the Statement of Operations and Comprehensive Income
(Loss) for the third quarter of 2009.  As a result of the change in
the prior note from non-interest bearing to an interest bearing note, the
Company wrote off a discount of $52,602, which had been calculated using a
12.75% imputed interest rate, with an equal value assigned to Warrant Rights,
included in the Other Assets line of the balance sheet.




As a
result of the Settlement and the Note, BRC and the Company agreed to a mutual
release of the current litigation between the parties by filing a dismissal of
the litigation with prejudice.  Furthermore, BRC and the Company
agreed to terminate all prior agreements between each other entered into before
September 22, 2009, along with all duties rights and obligations
thereunder.




Note 4—Notes
Payable





On
January 25, 2008, the Company and MATT Inc. entered into a Note Purchase
Agreement (the “MATT Agreement”).  Pursuant to the terms of the MATT
Agreement: (i)  MATT Inc. invested $5,000,000 in Quepasa and Quepasa
issued MATT Inc. a subordinated promissory note due October 16, 2016 with 4.46%
interest per annum (the “MATT Note”); (ii) the exercise price of MATT Inc.’s
outstanding Series 1 Warrant to purchase 1,000,000 shares of the Company’s
common stock was reduced from $12.50 per share to $2.75 per share; (iii) the
exercise price of MATT Inc.’s outstanding Series 2 Warrant to purchase 1,000,000
shares of the Company’s common stock was reduced from $15.00 per share to $2.75
per share; and (iv) the Amended and Restated Support Agreement between the
Company and MATT Inc. was terminated, which terminates MATT Inc.’s obligation to
provide the Company with the use of a corporate jet for up to 25 hours per year
through October 2016.  Debt issuance costs of $24,580 related to this
transaction have been capitalized within the Other Assets section of the balance
sheet and will be amortized to interest expense over the life of the
note.  The balance of deferred debt issuance costs was $18,441
included on the balance sheet in Other Assets at March 31, 2010.





On
January 25, 2008, the Company and Richard L. Scott Investments, LLC (“RSI”)
entered into a Note Purchase Agreement (the “RSI
Agreement”).  Pursuant to the terms of the RSI Agreement:
(i)  RSI invested $2,000,000 in Quepasa and Quepasa issued RSI a
subordinated promissory note due March 21, 2016 with 4.46% interest per annum
(the “RSI Note”); (ii) the exercise price of RSI’s outstanding Series 2 Warrant
to purchase 500,000 shares of the Company’s common stock was reduced from $4.00
per share to $2.75 per share; and (iii) the exercise price of RSI’s outstanding
Series 3 Warrant to purchase 500,000 shares of the Company’s common stock was
reduced from $7.00 per share to $2.75 per share.  Debt issuance costs
of $15,901 related to this transaction have been capitalized within the Other
Assets section of the balance sheet and will be amortized to interest expense
over the life of the note.  The balance of deferred debt issuance
costs was $11,651 included on the balance sheet in Other Assets at March 31,
2010.





Notes
payable consist of the following at March 31, 2010:




8


MATT
              
              
              RSI
              
              
              TotalNotes
      Payable, face amount
              
              $
              5,000,000
              
              
              $
              2,000,000
              
              
              $
              7,000,000Discounts
      on Notes:Revaluation
      of Warrants
              
              
              (1,341,692
              )
              
              
              (263,690
              )
              
              
              (1,605,382
              )Termination
      of Jet Rights
              
              
              (878,942
              )
              
              
              -
              
              
              
              (878,942
              )Accumulated
      Amortization
              
              
              554,635
              
              
              
              70,483
              
              
              
              625,118Total
      Discounts
              
              
              (1,665,999
              )
              
              
              (193,207
              )
              
              
              (1,859,206
              )Accrued
      Interest
              
              
              486,883
              
              
              
              194,754
              
              
              
              681,637Notes
      Payable, net
              
              $
              3,820,884
              
              
              $
              2,001,547
              
              
              $
              5,822,431


Note 5—Commitments and
Contingencies





Operating
Leases





The
Company leases its facilities under two non-cancelable operating leases, which
expire in 2011 and 2012.  Future minimum lease payments under these
leases as of March 31, 2010 are as follows:




Remainder
      of 2010
              
              $
              84,0062011
              
              
              98,0302012
              
              
              70,028$
              252,064


Litigation





On
November 16, 2009, the Company entered an agreement with the Investor Relations
Group (“IRG”) to provide investor relations and public relations
services.  For services rendered from November 15, 2009 through
February 15, 2010, IRG would receive 100,000 three-year warrants to purchase
common stock at $1.50 vesting February 15, 2010 if the Company completed a
securities offering at $2.50 per share or greater.  Since no
securities offering took place, the warrants did not vest.  On March
1, 2010, IRG filed a complaint in the New York Supreme Court, County of New York
alleging damages in excess of $300,000 plus interest from February 15,
2010.  The complaint alleges trade and also alleges the plaintiff is
entitled to the reasonable value of the services.  The Company intends
to contest the allegations since they are baseless.





From time
to time, we are party to certain legal proceedings that arise in the ordinary
course and are incidental to our business.  Other than the action
described above, there are currently no such pending proceedings to which we are
a party that our management believes will have a material adverse effect on the
Company’s consolidated financial position or results of
operations.  However, future events or circumstances, currently
unknown to management, will determine whether the resolution of pending or
threatened litigation or claims will ultimately have a material effect on our
consolidated financial position, liquidity or results of operations in any
future reporting periods.





9





Note 6—Series A Preferred
Stock





On June
30, 2008, the Company entered into the Transaction with the Organization
terminating the Corporate Sponsorship and Management Services Agreement (the
“CSMSA”).  In consideration for the Transaction, the Company issued
the Organization 25,000 shares of Preferred Stock, par value $0.001, with a
liquidation preference of $2,500,000.  The Company also provided the
Organization with piggyback registration rights for the shares of common stock
acquired by the Organization upon conversion of the Preferred
Stock.  The Preferred Stock may be converted (i) upon election of the
Company; (ii) upon liquidation; or (iii) upon election of the Organization after
one year.  The Preferred Stock may be converted at the Stated Value of
$100.00 per share for a similar value of Common Stock at Fair Market Value, with
no fractional shares.  Dividends on the Preferred Stock accrue from
the date of issuance at the rate per annum of 4.46% on the Stated Value and are
cumulative.  Dividends are payable in a lump sum at liquidation or
conversion.  Accrued dividends were $195,125 at March 31,
2010.




Note 7—Stock-Based
Compensation





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
GAAP, 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, 2010 and
2009 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 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.  During 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.





Stock
Option Plans





1998
Stock Option Plan




In
October 1998, the Company stockholders adopted and later amended the 1998 Stock
Option Plan (the “1998 Plan”), which provides for the granting of options to
employees, officers, directors and consultants.  The 1998 Plan permits
the granting of incentive stock options meeting the requirements of
Section 422A of the Internal Revenue Code as well as non-qualified stock
options.  The Company reserved 6,000,000 shares of common stock to be
granted under the 1998 Plan.  Incentive stock options are issuable
only to employees, while non-qualified options may be issued to non-employee
directors, consultants and others, as well as to employees.




Stock
options granted pursuant to the 1998 Plan may not have an option price that is
less than the fair market value of the Company’s common stock on the date of
grant.  Incentive stock options granted to significant stockholders
must have an exercise price of not less than 110% of the fair market value of
the Company’s common stock on the date of grant.  Generally, options
granted under the 1998 Plan vest ratably over a three-year service period and
expire ten years from the date of the grant (or 90 days after the termination of
employment).  The Board of Directors of the Company may modify the
exercise price, vesting term and expiration date of the individual grants at
their discretion.




The fair
values of share-based payments are estimated on the date of grant using a
Black-Scholes option-pricing model that uses the weighted average assumptions
noted in the following table.  Expected volatility is based on
historical volatility of the Company’s common stock.  The Company has
elected to use the simplified method described in Staff Accounting Bulletin 107,
“Share-Based Payment,”
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.





A summary
of stock option activity under the 1998 Stock Option Plan during the three
months ended March 31, 2010 is as follows:




WeightedAverageNumber of
              
              
              Weighted-
              
              
              Remaining
              
              
              AggregateStock
              
              
              Average
              
              
              Contractual
              
              
              IntrinsicOptions
              
              Options
              
              
              Exercise Price
              
              
              Life
              
              
              ValueOutstanding at December 31, 2009
      (1)
              
              
              105,000
              
              
              $
              1.48Granted
              
              
              -
              
              
              $
              -Exercised
              
              
              (100,000
              )
              
              $
              1.50Forfeited or expired
              
              
              -
              
              
              $
              -Outstanding at March 31,
      2010
              
              
              5,000
              
              
              $
              1.00
              
              
              
              6.2
              
              
              $
              13,750Exercisable at March 31,
      2010
              
              
              5,000
              
              
              $
              1.00
              
              
              
              6.2
              
              
              $
              13,750


____________




(1)
            Includes
      100,000 outstanding and exercisable options to purchase common stock at a
      weighted average exercise price of $1.50 per share being held by
      consultants.




In
September 2006, the Board of Directors approved the 2006 Stock Incentive Plan
(See 2006 Stock Incentive Plan section below).  On June 27, 2007, the
stockholders approved the 2006 Stock Incentive Plan.  As a result, no
new awards will be available for issuance under the 1998 Plan, effective
September 2006.  The total intrinsic value of options exercised during
the first quarter of 2010 and 2009 was $215,125 and $0,
respectively.








2006
Stock Incentive Plan





On June
27, 2007, the stockholders approved the 2006 Stock Incentive Plan (the “2006
Plan”), providing for the issuance of up to 3,700,000 shares of common stock
plus an additional number of shares of common stock equal to the number of
shares previously granted under the 1998 Stock Option Plan that either
terminate, expire, or lapse after the date of the Board of Directors’ approval
of the 2006 Plan.





In April
2008, our Board of Directors approved and on June 27, 2008, the stockholders
approved an amendment to the 2006 Plan to authorize the issuance of an
additional 2,000,000 shares of common stock.  In November 2009, our
Board of Directors approved an amendment to the 2006 Plan to authorize the
issuance of an additional 2,000,000 shares of common stock.  As of
March 31, 2010, there were 1,800,816 shares of common stock available for grant
under the 2006 Plan.  Pursuant to the terms of the 2006 Plan, eligible
individuals may be granted incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, or stock grant awards.





A summary
of stock option activity under the 2006 Stock Incentive Plan during the three
months ended March 31, 2010 is as follows:


WeightedAverageNumber
      of
                
                
                Weighted-
                
                
                Remaining
                
                
                AggregateStock
                
                
                Average
                
                
                Contractual
                
                
                IntrinsicOptions
                
                Options
                
                
                Exercise
      Price
                
                
                Life
                
                
                ValueOutstanding
      at December 31, 2009 (1) (2)
                
                
                6,765,187
                
                
                $
                1.18Granted
                
                
                254,597
                
                
                $
                3.07Exercised
                
                
                (90,000
                )
                
                $
                1.00Forfeited
      or expired
                
                
                (5,000
                )
                
                $
                10.00Outstanding
      at March 31, 2010 (3)
                
                
                6,924,784
                
                
                $
                1.24
                
                
                
                7.9
                
                
                $
                17,409,737Exercisable
      at March 31, 2010 (4)
                
                
                4,817,879
                
                
                $
                1.18
                
                
                
                7.7
                
                
                $
                12,472,849
 _______________




(1)
            Includes
      516,000 outstanding options to purchase common stock at a weighted average
      exercise price of $2.03 per share being held by
    consultants.


(2)
            Includes
      1,649,000 performance-based options, of which 1,007,040 have been
      expensed.


(3)
            Includes
      481,097 outstanding options to purchase common stock at a weighted average
      exercise price of $2.11 per share being held by
    consultants.


(4)
            Includes
      311,930 exercisable options to purchase common stock at a weighted average
      exercise price of $2.33 per share being held by
    consultants.




10




The
weighted-average grant date fair value of options granted during the first
quarter of 2010 and 2009 was $3.07 and $1.67, respectively.  The total
intrinsic value of options exercised during the first quarter of 2010 and 2009
was $253,000 and $0, respectively.  The fair value of each stock
option is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:


For
      the Three Months EndedMarch
      31,2010
              
              
              2009Risk-free
      interest rate:
              
              
              2.62%
              
              
              
              1.70%Expected
      term:
              
              5.7
      Years
              
              
              6
      YearsExpected
      dividend yield:
              
              
              -
              
              
              
              -Expected
      volatility:
              
              
              93%
              
              
              
              142%


Non-Plan
Options





The Board
of Directors has approved issuance of some stock options outside of either of
the stock incentive plans.  A summary of Non-Plan option activity
during the three months ended March 31, 2010, is as follows:




WeightedAverageNumber
      of
              
              
              Weighted-
              
              
              Remaining
              
              
              AggregateStock
              
              
              Average
              
              
              Contractual
              
              
              IntrinsicOptions
              
              Options
              
              
              Exercise
      Price
              
              
              Life
              
              
              ValueOutstanding
      at December 31, 2009 (1)
              
              
              463,038
              
              
              $
              1.39Granted
              
              
              -
              
              
              $
              -Exercised
      (2)
              
              
              (10,000
              )
              
              $
              2.00Forfeited
      or expired (3)
              
              
              (10,000
              )
              
              $
              3.00Outstanding
      at March 31, 2010
              
              
              443,038
              
              
              $
              1.34
              
              
              
              0.6
              
              
              $
              1,067,722Exercisable
      at March 31, 2010
              
              
              184,599
              
              
              $
              1.34
              
              
              
              0.4
              
              
              $
              444,884
 ____________




(1)
            Includes
      20,000 outstanding options to purchase common stock at a weighted average
      exercise price of $2.50 per share being held by
    consultants.


(2)
            Includes
      10,000 options to purchase common stock at a weighted average exercise
      price of $2.00 per share being held by
  consultants.


(3)
            Includes
      10,000 options to purchase common stock at a weighted average exercise
      price of $3.00 per share being held by
  consultants.





There
were no options granted during the first quarter of 2010 and
2009.  The total intrinsic value of options exercised during the first
quarter of 2010 and 2009 was $17,200 and $0, respectively.




11




On July
8, 2009, the board of directors authorized an option exchange of 5,751,937
existing stock options to a new exercise price of $1.00 per share in order to
provide incentive for certain key employees.  Some of the exchanged options
were granted to the Company’s named executive officers including: 2,268,466 to
John Abbott, Chief Executive Officer, 1,826,971 to Michael Matte, the Chief
Financial Officer and 732,500 to Louis Bardov, the Chief Technology
Officer.  The financial impact of this transaction was an increase of
$1,052,010 in stock based compensation to be amortized over the remaining life
of the options.  The option exchange was subject to meeting
performance standards set by the Company’s Chief Executive Officer, which have
now been met.





The
Company recognized stock-based compensation expense for the vesting of options
of $1,433,633 and $1,216,559 for the three months ended March 31, 2010 and 2009,
respectively.





As of
March 31, 2010, there was $4,244,476 in total unrecognized compensation cost,
which is expected to be recognized over a weighted average period of 1.0
years.





Restricted
Shares





Restricted
shares activity during the three months ended March 31, 2010 was as
follows:




Weighted-AverageShares
              
              
              Share
      PriceUnvested
      at January 1, 2010
              
              
              -
              
              
              $
              -Granted
              
              
              6,600
              
              
              $
              3.99Vested
      during period
              
              
              (6,600
              )
              
              $
              3.99Cancelled
      during period
              
              
              -
              
              
              $
              -Unvested
      at March 31, 2010
              
              
              -
              
              
              $
              -


The fair
value of the restricted shares is based on the closing price of the Company’s
common stock on the date of the grant.  The Company recognized $26,334
in stock-based compensation expense for restricted shares that were issued
during the three months ended March 31, 2010.  As of March 31, 2010,
there was no unrecognized stock -based compensation expense related to
non-vested restricted share grants.








Note
8—Warrants




In March 2006, the
Company issued warrants to purchase 200,000 shares of common stock at an
exercise price of $3.55 per share as compensation to its Chief Executive
Officer.  These warrants are still outstanding on March 31, 2010 and
expire in March 2016.  The fair value of these warrants of
$667,581 was determined using the Black-Scholes option-pricing model with the
assumptions listed below and recognized in general and administrative expenses
on the accompanying statements of operations.




Risk-free
      interest rate:
            
            
            4.68
            %Expected
      term:
            
            5
      yearsExpected
      dividend yield:
            
            
            0.00
            %Expected
      volatility:
            
            
            163.73
            %




During
March 2006, the Company issued three series (Series 1, 2 and 3) of warrants
to purchase 1,000,000 shares of common stock each at exercise prices of $2.87,
$4.00, and $7.00 as compensation for certain strategic initiatives, including
acquiring the services of the Company’s Chief Executive Officer.  The
Series 1 warrant was exercised in 2006. 50% (1,000,000) of the remaining
warrants were owned by RSI.  On January 25, 2008, the Company and RSI
entered into a Note Purchase Agreement (the “RSI
Agreement”).  Pursuant to the terms of the RSI Agreement the exercise
price of RSI’s outstanding warrants were reduced to $2.75 per
share.  The warrant re-pricing resulted in a discount on the Note
Payable of $263,690, to be amortized over the life of the note, see Note
4.  The Series 2 and Series 3 warrants were still outstanding at March
31, 2010 and expire in March 2016.  The fair value of the warrant
re-pricing was determined by comparing the fair value of the modified warrant
with the fair value of the unmodified warrant on the modification date and
recording any excess as a discount on the note.  The fair value of the
modified warrants was calculated using the Black-Scholes option pricing model
with the following assumptions:




12




Risk-free
      interest rate:
            
            
            2.81
            %Expected
      term:
            
            4.08
      yearsExpected
      dividend yield:
            
            
            —Expected
      volatility:
            
            
            105.68
            %







On
February 19, 2010, the Company reduced the exercise price of the remaining
1,000,000 outstanding warrants to $3.55 per share.  The warrant
re-pricing resulted in a $147,813 of stock compensation expense recognized in
general and administrative expenses on the accompanying statement of
operations.  The Series 2 and Series 3 warrants were still outstanding
at March 31, 2010 and expire in March 2016.  The fair value of
the warrant re-pricing was determined by comparing the fair value of the
modified warrant with the fair value of the unmodified warrant on the
modification date and recording any excess as a discount on the
note.  The fair value of the modified warrants was calculated using
the Black-Scholes option-pricing model with the following
assumptions:




Risk-free
      interest rate:
            
            
            3.24
            %Expected
      term:
            
            6.08
      yearsExpected
      dividend yield:
            
            
            —Expected
      volatility:
            
            
            105.68
            %




In
October 2006, the Company issued two series of warrants to purchase
1,000,000 shares of common stock each at exercise prices of $12.50 and $15.00
per share to MATT Inc. in connection with the issuance of common
stock.  On January 25, 2008, the Company and MATT Inc. entered into a
Note Purchase Agreement (the “MATT Agreement”).  Pursuant to the terms
of the MATT Agreement the exercise price of MATT Inc.’s outstanding warrants
were reduced to $2.75 per share.  The warrant re-pricing resulted in a
discount on the Note Payable of $1,341,692, to be amortized over the life of the
note, see Note 6 above.  These warrants expire in October 2016
and were still outstanding as of March 31, 2010.  The fair value of
the warrant re-pricing was determined by comparing the fair value of the
modified warrant with the fair value of the unmodified warrant on the
modification date and recording any excess as a discount on the
note.  The fair value of the modified warrants was calculated using
the Black-Scholes option-pricing model as appropriately discounted for these
noncompensatory warrants using the method described by GAAP with the following
assumptions:




Risk-free
      interest rate:
            
            
            2.81
            %Expected
      term:
            
            4.36
      yearsExpected
      dividend yield:
            
            
            —Expected
      volatility:
            
            
            103.55
            %





A summary
of warrant activity for the three months ended March 31, 2010 is as
follows:





Outstanding
      at December 31, 2009
            
            
            4,200,000Issued
            
            
            —Exercised
            
            
            —Expired
            
            
            —Outstanding
      at March 31, 2010
            
            
            4,200,000





Note 9—Related Party
Transactions





Alonso
Ancira serves on the Company’s Board of Directors as a non-employee
director.  Mr. Ancira also serves on the Board of Directors of the
Organization and is the Chairman of the Board of Directors of MATT Inc. The
Company has participated in several significant transactions with MATT Inc. and
the Organization; Note 4 - Notes Payable, Note 6 – Preferred Stock, and Note 8 –
Warrants.  The $250,000 in DSM revenue for the first three months of
2010 was received from MATT Inc. on behalf of the Municipality of Acapulco in
Mexico without commission or fees.  The $250,000 in Deferred Revenue
as of March 31, 2010 was received from MATT Inc. on behalf of the Municipality
of Ixtapa in Mexico without commission or fees.  MATT Inc. is also the
Company’s largest shareholder.  These relationships do not qualify as
related parties for accounting purposes under GAAP.




13




Note
10—Subsequent Events





Management
evaluated all activity of the Company through the issue date of the Company’s
consolidated financial statements and concluded that no subsequent events have
occurred that would require recognition in the consolidated financial statements
other than as follows.





On April
22, 2010, we received from AHMSA, which owns MATT Inc., a $3.5 million 12-month
contract to develop a series of environmental campaigns using our DSM Technology
(see Note 9).





14


ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


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





With the
evolution of our website into a social network, we expect future revenues will
come from predominately our DSM contest platform, display advertising and
revenue generated from social gaming.





Highlights
for the first quarter of 2010 included:





·
            Quepasa
      DSM – Launched in December 2009, this is a new 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.  In the first
      quarter of 2010, we generated $250,000 in DSM
  revenue.


·
            We
      partnered with Moblyng & Viximo to offer a portfolio of social games
      to the website and members’ mobile
phones.


·
            A new
      community was launched devoted to the Ultimate Fighting Championship
      (“UFC”).  The community features a UFC themed
      contest.





Critical
Accounting Policies, Judgments and Estimates





Our
discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with Generally Accepted Accounting
Principles.  The preparation of these condensed 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 critical accounting policies
discussed below 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 of Directors.  In
addition, there are other items within our 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
financial statements.





Stock-Based
Compensation Expense





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
GAAP, 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 years ended December 31, 2010 and 2009
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.




15




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.





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, 2010, our revenue was generated from two
principal sources: revenue earned from the sale of banner advertising on our
website and DSM sales.





Banner Advertising Revenue:Banner advertising revenue is generated when an advertiser purchases a
banner placement within our quepasa.com website.  We recognize revenue
related to banner advertisements upon delivery.  Approximately 22% of
our revenue came from banner advertising.





DSM Revenues: We recognize
DSM revenues over the period of the contest or other
service.  Approximately 78% of our revenue came from DSM.





16





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 and the amortization pertaining to jet rights acquired in 2006
      and disposed in 2008.





•
            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 Purchase Agreements.  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.


17


Comparison of the three months ended
March 31, 2010 with the three months ended March 31, 2009





The
following table sets forth a modified version of our 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 31,2010
              
              
              2009
              
              
              Change
      ($)
              
              
              Change
      (%)REVENUES
              
              $
              321,970
              
              
              $
              69,159
              
              
              $
              252,811
              
              
              
              366
              %OPERATING EXPENSESSales
      and marketing
              
              
              173,696
              
              
              
              119,239
              
              
              
              54,457
              
              
              
              46
              %Product
      development and content
              
              
              763,499
              
              
              
              758,723
              
              
              
              4,776
              
              
              
              1
              %General
      and administrative
              
              
              1,795,371
              
              
              
              1,480,526
              
              
              
              314,845
              
              
              
              21
              %Depreciation
      and amortization
              
              
              107,660
              
              
              
              131,240
              
              
              
              (23,580
              )
              
              
              -18
              %Operating
      Expenses
              
              
              2,840,226
              
              
              
              2,489,728
              
              
              
              350,498
              
              
              
              14
              %LOSS
      FROM OPERATIONS
              
              
              (2,518,256
              )
              
              
              (2,420,569
              )
              
              
              (97,687
              )
              
              
              4
              %OTHER
      INCOME (EXPENSE):Interest
      income
              
              
              345
              
              
              
              11,234
              
              
              
              (10,889
              )
              
              
              -97
              %Interest
      expense
              
              
              (149,904
              )
              
              
              (149,904
              )
              
              
              -
              
              
              
              -100
              %Other
      income
              
              
              525
              
              
              
              5,439
              
              
              
              (4,914
              )
              
              
              -90
              %TOTAL
      OTHER INCOME (EXPENSE)
              
              
              (149,034
              )
              
              
              (133,231
              )
              
              
              (15,803
              )
              
              
              12
              %NET
      LOSS
              
              $
              (2,667,290
              )
              
              $
              (2,553,800
              )
              
              $
              (113,490
              )
              
              
              4
              %




Revenues





Our
revenues were $321,970 for the three months ended March 31, 2010, an increase of
$252,811 or 366% compared to $69,159 for the same period in
2009.  This increase is primarily attributable to $250,000 in DSM
revenue earned in the quarter ended March 31, 2010.  Launched in
December 2009, our DSM contest platform is a new 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.  The $250,000 in DSM
revenue for the first three months of 2010 was received from MATT Inc., the
Company’s largest shareholder, on behalf of the Municipality of Acapulco in
Mexico without commission or fees (see Note 9).





We expect
our revenues will continue to increase in 2010 as a result of the $3.5 million
contract with AHMSA to develop a series of environmental campaigns using our DSM
Technology.





In
February 2008, we re-launched our website.  Website traffic has
increased significantly since the re-launch.  The site had 4,840,928
unique visitors in the first quarter of 2009 and 7,928,589 in 2010, a 64%
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 home page for our members.  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, with the help of a third-party consultant,
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, has resulted in meaningful
gains in the number new registered users and site traffic.




18


Operating
Costs and Expenses





Sales and Marketing:Sales
and marketing expenses increased $54,457, or 46%, to $173,696 for the three
months ended March 31, 2010 from $119,239 in 2009.  The increase is
primarily attributed to an increase in stock based compensation of $31,000 and
an increase in salaries of $18,000 due to the addition of a salesperson in
Mexico City.





Product Development and Content:Product development and content expenses increased $4,776, or 1%, to
$763,499 for the three months ended March 31, 2010 from $758,723 in
2009.  During the three months ended March 31, 2010, we had increases
in consulting U.S. salaries of $47,000 and an increase in salaries and
associated payroll costs of $33,000 due to the change in exchange rates for our
product development and technology personnel within Quepasa.com de Mexico,
which, under the direction of our U.S.-based Chief Technology Officer, provides
substantially all of our design, translation services, and website management
and development services.  These decreases were offset by a decrease
of $41,000 in content expense for the site and a decrease in stock based
compensation of $40,000.





General and Administrative:General and administrative expenses increased $314,845, or 21%, to
$1,795,371 for the three months ended March 31, 2010 from $1,480,526 for the
same period in 2009.  The increase consisted primarily of an increase
in stock based compensation of $306,000.





Stock Based Compensation:Stock based compensation expense, which is included in the other
operating expense categories as discussed above, increased $297,611 to
$1,607,780 for the three months ended March 31, 2010 from $1,310,169 in
2009.  This increase is attributable to the July 2009 stock option
exchange (Note 7) and the re-pricing of warrants (Note 8).  Stock
based compensation expense represented 57% and 53% of operating expenses for the
quarters ended March 31, 2010 and 2009, respectively.  At March 31,
2010, we had $4,244,476 of unrecognized stock based compensation expense, most
of which we expect to recognize over the next four quarters.




For
      the three months ended March 31,2010
              
              
              2009Sales
      and marketing
              
              
              70,860
              
              
              
              39,598Product
      and content development
              
              
              184,728
              
              
              
              224,435General
      and administrative
              
              
              1,352,192
              
              
              
              1,046,136Total
      Stock Based Compensation
              
              
              1,607,780
              
              
              
              1,310,169


Stock
Based Compensationexpense is composed of
the following:




For
      the three months ended
                March
      31,2010
              
              
              2009Vesting
      of stock options
              
              $
              1,433,633
              
              
              $
              1,216,558Re-pricing
      of warrants
              
              
              147,813
              
              
              
              -Issuance
      (cancellation) of common stock for professional services
              
              
              26,334
              
              
              
              (20,471
              )Amortization
      of prepaid expenses
              
              
              -
              
              
              
              114,082Total
      Stock Based Compensation
              
              $
              1,607,780
              
              
              $
              1,310,169


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 decreased $23,580, or 18%, to
$107,660 for the three months ended March 31, 2010 from $131,240 in
2009.  This decrease is attributable to completed depreciation on
older assets.




19




Other Income (Expense): Other
expense decreased $15,803 to $149,034 for the three months ended March 31, 2010
from $133,231 in 2009.  The decrease is primarily attributable to a
reduction of $11,000 in interest income as a result of the settlement of the
note receivable discussed in Note 3 of the consolidated financial
statements





Liquidity
and Capital Resources





For
      the Three Months Ended
              March
      31,2010
            
            
            2009Net
      cash used in operating activities
            
            $
            (550,504
            )
            
            $
            (1,073,117
            )Net
      cash used in investing activities
            
            $
            (98,163
            )
            
            $
            -Net
      cash provided by financing activities
            
            $
            260,000
            
            
            $
            -





Cash used
in operating activities for the three months ended March 31, 2010 is driven by
our net loss, adjusted for non-cash items.  Non-cash adjustments
include depreciation and amortization, stock based compensation for the vesting
of stock options and issuance of common stock for compensation, and interest
accrual and amortization of discounts associated with long-term
debt.  Net cash used in operations was $550,504 for the three months
ended March 31, 2010 compared to $1,073,117 for 2009.  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, $78,050 in non-cash interest, $71,854 in
amortization of discounts on notes payable and debt issuance costs, and
$1,433,633 related to stock based compensation for the vesting of stock
options.  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 and an increase in deferred
revenue of $250,000, offset by a decrease in accounts payable and accrued
expenses of $48,327.  Net cash used by operations for the three months
ended March 31, 2009 consisted of a net loss of $2,553,800 offset by non-cash
expenses of $131,240 in depreciation and amortization and $1,216,559 related to
the vesting of stock options for compensation.  Changes in working
capital for the three months ended March 31, 2009 included a decrease of $77,589
in accounts payable and accrued expenses and increase in accounts receivable of
$42,656, offset by decreases in other current assets and other assets of
$123,723.





There was
$98,163 used in investing activities for the three months ended March 31, 2010,
attributable to capital expenditures.  There was no cash used in
investing activities for the three months ended March 31, 2009.





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.  There was no net cash used in financing activities for the
three months ended March 31, 2009.




March 31,
              
              
              December 31,2010
              
              
              2009Cash
      and cash equivalents
              
              $
              639,186
              
              
              $
              1,028,267Total
      assets
              
              $
              1,801,021
              
              
              $
              2,250,391Percentage
      of total assets
              
              
              35
              %
              
              
              46
              %


We invest
excess cash predominately in liquid marketable securities to support our growing
infrastructure needs for operational expansion.  The majority of our
cash is concentrated in one large financial institution, JP Morgan
Chase.





We have
substantial capital resource requirements and have generated significant losses
since inception.  At March 31, 2010, we had $639,186 in cash and cash
equivalents compared to $1,028,267 at December 31, 2009, resulting in a net
decrease in cash and cash equivalents of $389,081 for 2010.





The
decrease in cash for the first quarter of 2010 was primarily attributed to cash
used in operating activities of $550,504 for the period.





During
the first quarter of 2010, we obtained proceeds from the exercise of common
stock options and warrants of $260,000.  There were no proceeds from
the exercise of stock options and warrants during the first quarter of
2009.





20




Net
Cash Burn – Non-GAAP




Net cash
burn is a non-GAAP financial measure that may be considered n 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 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 burn in planning, forecasting and analyzing future
periods.  Additionally, net cash burn rate provides meaningful
information about our ability to meet our working capital needs.  Net
cash burn, as presented below, may not be comparable to similarly titled
measures reported by other companies since not all companies necessarily
calculate net cash 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 three months endedMarch 31,2010
              
              
              2009LOSS
      FROM OPERATIONS
              
              
              (2,518,256
              )
              
              
              (2,420,569
              )NON
      CASH OPERATING EXPENSESStock
      based compensation expense
              
              
              1,607,780
              
              
              
              1,310,169Depreciation
      and amortization
              
              
              107,660
              
              
              
              131,240TOTAL
      NON CASH OPERATING EXPENSES
              
              
              1,715,440
              
              
              
              1,441,409NET
      CASH BURN
              
              
              (802,816
              )
              
              
              (979,160
              )NET
      MONTHLY CASH BURN RATE
              
              
              (267,605
              )
              
              
              (326,387
              )


We expect
a net cash burn rate of approximately $100,000 per month for 2010, excluding any
promotional activities and growth of advertising revenues.





We have
budgeted capital expenditures of $415,000 for 2010, which will allow us to
continue to grow the business given our member growth and allow us to run DSM
campaigns.





As of the
date of the filing of this report, we had $86,179 in cash and $622,771 in
accounts receivable and the $1.1 million owed to us under the $3.5 million
dollar contract discussed in Note 10.  Management does not believe
that we have sufficient working capital to operate beyond December 31,
2010.  With our net cash burn rate, this forecast assumes that we
collect approximately $1.7 million in receivables during 2010.  Our
management has considered completing a financing through the sale of equity or
debt securities.  We expect that the revenue we receive from the $3.5
million contract will supply us with working capital to remain operational
through 2010.  Nonetheless, we intend to raise at least $2,000,000 in
net proceeds to provide a cushion of working capital.  The current
global recession and volatility of the financial markets could significantly
impact our debt or equity.  Assuming we raise the necessary capital through
the sale of equity or equity equivalents and we generate the full $3.5 million
in revenues, we expect that we will have adequate working capital through
2011.  However, any equity financing may be very dilutive to our
existing shareholders.





New
Accounting Pronouncements





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





Cautionary
Note Regarding Forward Looking Statements




This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 including expectations that revenues
will come from predominately our DSM contest platform, display advertising and
social gaming, belief that there will be a direct correlation between website
traffic and our ability to increase revenue, expected cash burn rate, continued
growth of our business, expectations regarding working capital and receipt of
revenues from the $3.5 million contract.  Forward-looking statements
can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,”
“believes,” “estimates,” “expects” and similar references to future
periods.




21





Forward-looking
statements are based on our current expectations and assumptions regarding our
business, the economy and other future conditions.  Because
forward-looking statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to
predict.  Our actual results may differ materially from those
contemplated by the forward-looking statements.  We caution you
therefore against relying on any of these forward-looking
statements.  They are neither statements of historical fact nor
guarantees or assurances of future performance.  Important factors
that could cause actual results to differ materially from those in the
forward-looking statements include changes in the public’s approach to social
networking needs, competition, our ability to continue to enrich our website to
attract users and unanticipated failure to reach our users.





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, 2009.  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.


22


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK


Not
applicable to smaller reporting companies





ITEM 4. CONTROLS AND
PROCEDURES


Not
applicable to smaller reporting companies





ITEM 4T. CONTROLS AND
PROCEDURES


Evaluation of Disclosure
Controls and Procedures.  Our management carried out an
evaluation, with the participation of our Principal Executive Officer and
Principal Financial Officer, required by Rule 13a-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange
Act.  Based on that evaluation, our Principal Executive Officer
and Principal Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified under SEC rules and forms and is
accumulated and communicated to our management, including our Principal
Executive Officer and Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.





Changes in Internal Control
Over Financial Reporting.  There were no changes in our
internal control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.








Limitations
on the Effectiveness of Controls





A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be
met.  The Company’s management, including its Principal Executive
Officer and its Principal Financial Officer, do not expect that the Company’s
disclosure controls will prevent or detect all errors and all
fraud.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.  Controls can
also be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls.  The design
of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.  Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with
associated policies or procedures.  Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.





23


QUEPASA
CORPORATION AND SUBSIDIARY





PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS


On March
2, 2010, the Investor Relations Group, Inc. filed a suit in the New York County
Supreme Court, State of New York, Case No. 10102623, seeking in excess of
$300,000 of damages together with interest.  The Complaint consists of
two counts; one for fraud and one for the reasonable value of the services
rendered by the Plaintiff.  The Plaintiff alleges that on November 16,
2009 it entered into a written agreement through which the Plaintiff agreed to
provide investor relations and public relation services in exchange for 100,000
of our warrants exercisable at $1.50 per share.  The warrants would
not vest unless by February 15, 2010 we had completed a securities offering at
no less than $2.50 per share.  The Complaint alleges that we
represented that present investors had committed to purchase shares at $2.50 per
share by February 15, 2010 but we were seeking additional investors at a higher
valuation.  We did not complete a securities
offering.  Plaintiff alleges that during the brief period of time it
provided services that were worth in excess of $300,000.





From time
to time, we are party to certain legal proceedings that arise in the ordinary
course and are incidental to our business.  Other than above, there
are currently no such pending proceedings to which we are a party that our
management believes will have a material adverse effect on the Company’s
consolidated financial position or results of operations.  However,
future events or circumstances, currently unknown to management, will determine
whether the resolution of pending or threatened litigation or claims will
ultimately have a material effect on our consolidated financial position,
liquidity or results of operations in any future reporting periods.





ITEM 1A. RISK
FACTORS


Not
applicable to smaller reporting companies.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS


In
addition to those unregistered securities previously disclosed in reports filed
with the SEC, we have sold securities without registration under the Securities
Act of 1933 in reliance upon an exemption provided by
Section 4(2) as described below.





Name
      or Class of Investor
            Date
      Sold
            No. of
      Securities
            ConsiderationInvestor
      relations
            February
      19, 2010
            16,600
      shares of common stock
            Investor
      Relation ServicesInvestor
            February
      19, 2010
            1,000,000
      warrants exercisable at $3.55 per share
            Reduction
      of exercise price of outstanding warrantsEmployee
            March
      8, 2010
            15,000
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.00 per
shareEmployee
            March
      8, 2010
            25,000
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.00 per
shareConsultant
            March
      12, 2010
            10,000
      shares of common stock
            Exercise
      of stock options at an exercise price of $2.00 per
shareEmployee
            March
      16, 2010
            50,000
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.00 per
shareConsultant
            March
      25, 2010
            37,500
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.50 per
shareConsultant
            March
      30, 2010
            50,000
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.50 per
shareConsultant
            March
      31, 2010
            12,500
      shares of common stock
            Exercise
      of stock options at an exercise price of $1.50 per
  share





24





ITEM
3. DEFAULTS UPON SENIOR SECURITIES


None





ITEM
4. (REMOVED AND RESERVED)


ITEM
5. OTHER INFORMATION


None





ITEM
6. EXHIBITS


See
Exhibit Index


25


QUEPASA
CORPORATION AND SUBSIDIARY





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.





Quepasa
      CorporationMay
      17, 2010
            
            /s/ John
      AbbottJohn
      AbbottChief
      Executive Officer
              (Principal
      Executive Officer)May
      17, 2010
            
            /s/ Michael
      MatteMichael
      MatteChief
      Financial Officer
              (Principal
      Financial Officer)





26


EXHIBIT
INDEX




Exhibit
            
            
            
            Incorporated
      by Reference
            
            Filed
      or FurnishedNo.
            
            Exhibit
      Description
            
            Form
            
            Date
            
            Number
            
            Herewith3.1
            
            Certificate
      of Restated Articles of Incorporation
            
            10-QSB
            
            8/15/07
            
            3.13.2
            
            Certificate
      of Designation
            
            10-Q
            
            7/25/08
            
            3.23.3
            
            Amended
      and Restated Bylaws
            
            8-K
            
            7/3/07
            
            3.33.4
            
            Amendment
      to the Amended and Restated Bylaws
            
            8-K
            
            5/14/10
            
            3.131.1
            
            Certification
      of Principal Executive Officer (Section 302)
            
            
            
            
            
            
            
            Filed31.2
            
            Certification
      of Principal Financial Officer (Section 302)
            
            
            
            
            
            
            
            Filed32.1
            
            Certification
      of Principal Executive Officer and Principal Financial Officer
      (Section 906)
            
            
            
            
            
            
            
            Furnished





Copies of
any of the exhibits referred to above will be furnished at no cost to
stockholders who make a written request therefore to Michael Matte, Quepasa
Corporation, 324 Datura Street, Suite 114, West Palm Beach, FL
33401.








27