##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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
  
 NEVADA
    
    86-0879433(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 224 Datura Street, Suite 1100
West Palm Beach, Florida 33401
 (561) 491-4181
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ
  Class
    
    Shares Outstanding as of July 21, 2008Common Stock, $.001 par value per share
    
    12,653,661




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##### 



QUEPASA CORPORATION AND SUBSIDIARIES
 INDEX
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1 Condensed Consolidated Financial Statements
    
    
    3Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    4Statement of Changes in Stockholders Equity (Deficit) for the Six Months Ended June 30, 2008 (Unaudited)
    
    
    5Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    18Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4T Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    28Item 1 Legal Proceedings
    
    
    28Item 1A Risk Factors
    
    
    28Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3 Defaults Upon Senior Securities
    
    
    28Item 4 Submissions of Matters to a Vote of Security Holders
    
    
    28Item 5 Other Information
    
    
    29Item 6 Exhibits
    
    
    29SIGNATURES
    
    
    30INDEX TO EXHIBITS
    
    
    31Exhibit 3.2Exhibit 10.18Exhibit 10.19Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 
 QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,811,995
    
    
    $
    3,673,281Accounts receivable, net of allowance of $18,000 and $15,000, respectively
    
    
    21,913
    
    
    
    38,306Other current assets
    
    
    86,879
    
    
    
    146,876Total current assets
    
    
    7,920,787
    
    
    
    3,858,463Property and equipment, net
    
    
    812,178
    
    
    
    1,023,041Jet rights, net
    
    
    
    
    
    
    885,712Note receivable, $350,000 face amount, non-interest bearing, due January 8,
2011 (less unamortized discount of $91,524 based on imputed interest
rate of 12.75%)
    
    
    258,476
    
    
    
    Other assets
    
    
    243,045
    
    
    
    133,692Total assets
    
    $
    9,234,486
    
    
    $
    5,900,908LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    751,638
    
    
    $
    887,598Accrued expenses
    
    
    265,989
    
    
    
    306,130Unearned grant income
    
    
    54,659
    
    
    
    65,917Current portion of long-term debt
    
    
    
    
    
    
    1,668,808Total current liabilities
    
    
    1,072,286
    
    
    
    2,928,453Long-term debt
    
    
    
    
    
    
    5,526,506Notes payable, net of unamortized discount of $2,361,027
    
    
    4,774,259
    
    
    
    Total liabilities
    
    
    5,846,545
    
    
    
    8,454,959COMMITMENTS AND CONTINGENCIES (see Note 7)STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $.001 par value; authorized - 5,000,000 shares; 25,000 shares
issued and outstanding at June 30, 2008
    
    
    25
    
    
    
    Common stock, $.001 par value; authorized - 50,000,000 shares; 12,648,836
shares issued and outstanding at June 30, 2008 and 12,284,511 shares issued and outstanding
at December 31, 2007
    
    
    12,649
    
    
    
    12,285Additional paid-in capital
    
    
    145,906,974
    
    
    
    138,880,462Accumulated deficit
    
    
    (142,541,117
    )
    
    
    (141,452,663
    )Accumulated other comprehensive income
    
    
    9,410
    
    
    
    5,865Total stockholders equity (deficit)
    
    
    3,387,941
    
    
    
    (2,554,051
    )Total liabilities and stockholders equity (deficit)
    
    $
    9,234,486
    
    
    $
    5,900,908
   3




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##### Table of Contents



QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES
    
    $
    24,774
    
    
    $
    73,260
    
    
    $
    31,637
    
    
    $
    125,742OPERATING COSTS AND EXPENSES:Sales and marketing
    
    
    55,049
    
    
    
    292,788
    
    
    
    135,672
    
    
    
    762,104Product and content development
    
    
    703,585
    
    
    
    1,070,313
    
    
    
    1,252,299
    
    
    
    2,043,053General and administrative
    
    
    509,019
    
    
    
    1,621,452
    
    
    
    1,450,684
    
    
    
    3,206,590Stock based compensation
    
    
    1,165,437
    
    
    
    788,795
    
    
    
    2,562,258
    
    
    
    1,103,585Depreciation and amortization
    
    
    113,008
    
    
    
    103,658
    
    
    
    221,423
    
    
    
    196,261TOTAL OPERATING COSTS AND EXPENSES
    
    
    2,546,098
    
    
    
    3,877,006
    
    
    
    5,622,336
    
    
    
    7,311,593LOSS FROM OPERATIONS
    
    
    (2,521,324
    )
    
    
    (3,803,746
    )
    
    
    (5,590,699
    )
    
    
    (7,185,851
    )OTHER INCOME (EXPENSE):Interest income
    
    
    46,925
    
    
    
    127,438
    
    
    
    97,504
    
    
    
    291,824Interest expense
    
    
    (338,731
    )
    
    
    
    
    
    
    (627,813
    )
    
    
    Gain (Loss) on disposal
    
    
    (42,977
    )
    
    
    3,449
    
    
    
    (42,977
    )
    
    
    3,449Gain on extinguishment of debt
    
    
    5,056,052
    
    
    
    
    
    
    
    5,056,052
    
    
    
    Other income
    
    
    12,084
    
    
    
    1,529
    
    
    
    19,479
    
    
    
    14,237TOTAL OTHER INCOME (EXPENSE)
    
    
    4,733,353
    
    
    
    132,416
    
    
    
    4,502,245
    
    
    
    309,510INCOME (LOSS) BEFORE INCOME TAXES
    
    
    2,212,029
    
    
    
    (3,671,330
    )
    
    
    (1,088,454
    )
    
    
    (6,876,341
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    2,212,029
    
    
    $
    (3,671,330
    )
    
    $
    (1,088,454
    )
    
    $
    (6,876,341
    )Foreign currency translation adjustment
    
    
    1,872
    
    
    
    (8,527
    )
    
    
    3,545
    
    
    
    36COMPREHENSIVE INCOME (LOSS)
    
    $
    2,213,901
    
    
    $
    (3,679,857
    )
    
    $
    (1,084,909
    )
    
    $
    (6,876,305
    )BASIC INCOME (LOSS) PER COMMON SHARE
    
    $
    0.17
    
    
    $
    (0.30
    )
    
    $
    (0.09
    )
    
    $
    (0.56
    )DILUTED INCOME (LOSS) PER COMMON SHARE
    
    $
    0.17
    
    
    $
    (0.30
    )
    
    $
    (0.09
    )
    
    $
    (0.56
    )WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:BASIC
    
    
    12,647,733
    
    
    
    12,238,879
    
    
    
    12,563,155
    
    
    
    12,189,975DILUTED
    
    
    12,712,193
    
    
    
    12,238,879
    
    
    
    12,563,155
    
    
    
    12,189,975
   4




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QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders Equity (Deficit)
For the Six Months Ended June 30, 2008
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Equity (Deficit)BalanceDecember 31, 2007
    
    
    
    
    
    $
    
    
    
    
    12,284,511
    
    
    $
    12,285
    
    
    $
    138,880,462
    
    
    $
    (141,452,663
    )
    
    $
    5,865
    
    
    $
    (2,554,051
    )Issuance of stock options for compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,279,662
    
    
    
    
    
    
    
    
    
    
    
    2,279,662Re-pricing of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,605,382
    
    
    
    
    
    
    
    
    
    
    
    1,605,382Issuance of common stock for professional services
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    50
    
    
    
    218,750
    
    
    
    
    
    
    
    
    
    
    
    218,800Issuance of common stock to directors for compensation
    
    
    
    
    
    
    
    
    
    
    14,325
    
    
    
    14
    
    
    
    45,543
    
    
    
    
    
    
    
    
    
    
    
    45,557Issuance of preferred stock
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    2,499,975
    
    
    
    
    
    
    
    
    
    
    
    2,500,000Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    300
    
    
    
    377,200
    
    
    
    
    
    
    
    
    
    
    
    377,500Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,545
    
    
    
    3,545Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,088,454
    )
    
    
    
    
    
    
    (1,088,454
    )BalanceJune 30, 2008
    
    
    25,000
    
    
    $
    25
    
    
    
    12,648,836
    
    
    $
    12,649
    
    
    $
    145,906,974
    
    
    $
    (142,541,117
    )
    
    $
    9,410
    
    
    $
    3,387,941
   5




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##### Table of Contents



QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 For the Six Months EndedJune 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (1,088,454
    )
    
    $
    (6,876,341
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    221,423
    
    
    
    196,261Gain on extinguishment of debt
    
    
    (5,056,052
    )
    
    
    Issuance of stock options and warrants for compensation
    
    
    2,279,662
    
    
    
    912,097Issuance of common stock to directors for compensation
    
    
    45,557
    
    
    
    191,488Issuance of common stock and stock options for professional services
    
    
    218,800
    
    
    
    Grant income
    
    
    (11,258
    )
    
    
    (14,146
    )Loss/ (Gain) on sale of property and equipment
    
    
    42,977
    
    
    
    (3,449
    )Bad debt expense
    
    
    13,819
    
    
    
    Non-cash interest related to note receivable
    
    
    (13,229
    )Non-cash interest related to corporate sponsorship agreement
    
    
    379,243
    
    
    
    Non-cash interest related to note payable agreements
    
    
    135,287
    
    
    
    Amortization of discounts on notes payable and debt issuance costs
    
    
    125,344
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    2,574
    
    
    
    9,785Other current assets and other assets
    
    
    75,325
    
    
    
    5,763Accounts payable and accrued expenses
    
    
    (176,101
    )
    
    
    531,729Net cash used in operating activities
    
    
    (2,805,083
    )
    
    
    (5,046,813
    )Investing activities:Proceeds from sale of property and equipment
    
    
    10,601
    
    
    
    3,449Purchase of property and equipment
    
    
    (57,368
    )
    
    
    (613,789
    )Advance to BRC / La Alianza
    
    
    (350,000
    )
    
    
    Net cash used in investing activities
    
    
    (396,767
    )
    
    
    (610,340
    )Financing activities:Proceeds from exercise of stock options and warrants
    
    
    377,500
    
    
    
    913,150Proceeds from issuance of notes payable
    
    
    7,000,000
    
    
    
    Debt issuance costs associated with issuance of notes payable
    
    
    (40,481
    )Net cash provided by financing activities
    
    
    7,337,019
    
    
    
    913,150Effect of foreign currency exchange rate on cash
    
    
    3,545
    
    
    
    (1,318
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,138,714
    
    
    
    (4,745,321
    )Cash and cash equivalents at beginning of period
    
    
    3,673,281
    
    
    
    14,093,811Cash and cash equivalents at end of period
    
    
    7,811,995
    
    
    
    9,348,490Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    
    
    
    $
    Supplemental Disclosure of Non-Cash Investing and Financing Activities:On January 25, 2008, the exercise prices of outstanding warrants were reduced as part
of the issuance of $7,000,000 in notes payable, resulting in a
$1,605,382 discount recorded against the note, and a corresponding increase
in additional paid-in capital. See Note 6 below.On June 30, 2008, 25,000 preferred shares were exchanged for $7,556,052 in long-term
debt, resulting in a $25 increase in preferred stock and a $2,499,975 increase in
additional paid-in capital. See Note 5 and Note 8 below.
   6




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##### Table of Contents



QUEPASA CORPORATION AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 Note 1Description of Business and Summary of Significant Accounting Policies
  Interim Financial Information
  Principles of Consolidation
  Reclassifications
  Cash and Cash Equivalents
  Basic and Diluted Income (Loss) Per Common Share
   7




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##### Table of Contents



For the Three Months Ended June 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Per Share
    
    
    
    
    
    
    Average
    
    
    Per ShareNet Income
    
    
    Shares
    
    
    Amount
    
    
    Net Loss
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    2,212,029
    
    
    
    12,647,733
    
    
    $
    0.17
    
    
    $
    (3,671,330
    )
    
    
    12,238,879
    
    
    $
    (0.30
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    43,609
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    12,049
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    8,802
    
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per share
    
    $
    2,212,029
    
    
    
    12,712,193
    
    
    $
    0.17
    
    
    $
    (3,671,330
    )
    
    
    12,238,879
    
    
    $
    (0.30
    )
 For the Six Months Ended June 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Per Share
    
    
    
    
    
    
    Average
    
    
    Per ShareNet Loss
    
    
    Shares
    
    
    Amount
    
    
    Net Loss
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    (1,088,454
    )
    
    
    12,563,155
    
    
    $
    (0.09
    )
    
    $
    (6,876,341
    )
    
    
    12,189,975
    
    
    $
    (0.56
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per share
    
    $
    (1,088,454
    )
    
    
    12,563,155
    
    
    $
    (0.09
    )
    
    $
    (6,876,341
    )
    
    
    12,189,975
    
    
    $
    (0.56
    )
  8




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##### Table of Contents



For the Three Months EndedJune 30,
    
    
    For the Six Months EndedJune 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    
    4,797,319
    
    
    
    1,498,200
    
    
    
    4,897,319
    
    
    
    1,498,200Warrants
    
    
    4,432,500
    
    
    
    4,432,500
    
    
    
    4,432,500
    
    
    
    4,432,500Totals
    
    
    9,229,819
    
    
    
    5,930,700
    
    
    
    9,329,819
    
    
    
    5,930,700
 Recent Accounting Pronouncements
   Business Combinations
 Non-controlling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51
  9




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##### Table of Contents



Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).
  Note 2Property and Equipment
  June 30, 2008
    
    
    December 31, 2007Software
    
    $
    489,449
    
    
    $
    489,449Computer equipment
    
    
    1,446,217
    
    
    
    1,390,059Vehicles
    
    
    21,927
    
    
    
    20,697Office furniture and equipment
    
    
    138,582
    
    
    
    214,526Other equipment
    
    
    11,463
    
    
    
    10,8212,107,638
    
    
    
    2,125,552Less accumulated depreciation
    
    
    (1,295,460
    )
    
    
    (1,102,511
    )Property and equipmentnet
    
    $
    812,178
    
    
    $
    1,023,041
  10




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##### Table of Contents



Note 3Jet Rights
   Note 4Note Receivable
         11




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##### Table of Contents



Note 5Long-term Debt
 Corporate Sponsorship and Management Services Agreement
     Note 6Notes Payable
    12




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##### Table of Contents



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
    
    
    109,395
    
    
    
    13,902
    
    
    
    123,297Total Discounts
    
    
    (2,111,239
    )
    
    
    (249,788
    )
    
    
    (2,361,027
    )Accrued Interest
    
    
    96,633
    
    
    
    38,653
    
    
    
    135,286Notes Payable, net
    
    $
    2,985,394
    
    
    $
    1,788,865
    
    
    $
    4,774,259
 Note 7Commitments and Contingencies
 Operating Leases
   Remainder of 2008
    
    $
    44,2712009
    
    
    54,8322010
    
    
    13,856$
    112,959
 Litigation
  Note 8Series A Preferred Stock
  Note 9Stock-Based Compensation
 Share-Based Payment
  13




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##### Table of Contents



Share-Based Payment
  Stock Option Plans
 1998 Stock Option Plan
  Number of
    
    
    Weighted-Stock
    
    
    AverageOptions
    
    Options
    
    
    Exercise PriceOutstanding at December 31, 2007 (1)
    
    
    814,506
    
    
    $
    2.76Granted
    
    
    
    
    
    
    Exercised
    
    
    (300,000
    )
    
    $
    1.26Forfeited or expired
    
    
    (414,506
    )
    
    $
    3.73Outstanding at June 30, 2008 (2)
    
    
    100,000
    
    
    $
    3.23Exercisable at June 30, 2008 (2)
    
    
    98,000
    
    
    $
    3.14
 
 (1)
    
    Excludes stock options to purchase 105,000 shares of common stock at a weighted average
exercise price of $1.73 per share being held by consultants.(2)
    
    Excludes stock options to purchase 100,000 shares of common stock at a weighted average price
of $1.50 per share being held by a consultant.  2006 Stock Incentive Plan
   14




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##### Table of Contents



Number of
    
    
    Weighted-Stock
    
    
    AverageOptions
    
    Options
    
    
    Exercise PriceOutstanding at December 31, 2007 (1)
    
    
    3,600,319
    
    
    $
    3.57Granted (2)
    
    
    1,190,000
    
    
    $
    2.49Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (144,000
    )
    
    $
    10.00Outstanding at June 30, 2008 (3)
    
    
    4,646,319
    
    
    $
    3.09Exercisable at June 30, 2008 (4)
    
    
    89,000
    
    
    $
    6.84
 
 (1)
    
    Excludes stock options to purchase 1,000 shares of common stock at a weighted average price
of $10.00 per share being held by a consultant.(2)
    
    Excludes stock options to purchase 50,000 shares of common stock at a weighted average
exercise price of $2.57 per share being held by a consultant.(3)
    
    Excludes stock options to purchase 51,000 shares of common stock at a weighted average
exercise price of $2.72 per share being held by a consultant.(4)
    
    Excludes stock options to purchase 500 shares of common stock at a weighted average exercise
price of $10.00 per share being held by a consultant.  For the Six Months EndedJune 30,2008
    
    2007Risk-free interest rate:
    
    
    2.9
    %
    
    
    5.0
    %Expected term:
    
    6 Years
    
    5 YearsExpected dividend yield:
    
    
    0
    %
    
    
    0
    %Expected volatility:
    
    
    151
    %
    
    
    156
    %
   Unrestricted Shares
   15




---



##### Table of Contents



Restricted Shares
  Weighted-AverageShares
    
    
    Share PriceUnvested at January 1, 2008
    
    
    0
    
    
    
    n/aGranted
    
    
    25,800
    
    
    $
    2.49Vested during period
    
    
    (12,900
    )
    
    $
    2.49Cancelled during period
    
    
    0
    
    
    
    n/aUnvested at June 30, 2008
    
    
    12,900
    
    
    $
    2.49
  Note 10Warrant Re-pricing
  Risk-free interest rate:
    
    
    2.81
    %Expected term:
    
    4.36 yearsExpected dividend yield:
    
    
    0.00Expected volatility:
    
    
    103.55
    %
  Risk-free interest rate:
    
    
    2.81
    %Expected term:
    
    4.08 yearsExpected dividend yield:
    
    
    0.00Expected volatility:
    
    
    105.68
    %
 Note 11Related Party Transactions
   16




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##### Table of Contents



Note 12Subsequent Events
    17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
 You should read the following discussion in conjunction with our condensed consolidated
financial statements, which are included in Item 1 of this Form 10-Q .
 Company Overview
   
    
    In late January 2008, we borrowed $7,000,000, including $5,000,000 from a company
controlled by one of our non-employee directors. The notes are due in 2016;
    
    On February 6, 2008, we re-launched our website in beta mode as a Hispanic social
network; and
    
    On June 30, 2008, we terminated the CSMSA issuing the Organization $2,500,000 of
Preferred Stock and recorded a one-time non-cash gain of $5,056,052 based upon the
difference between the value of the liabilities we eliminated and the value of the
Preferred Stock.
 Critical Accounting Policies, Judgments and Estimates
    Stock-Based Compensation Expense
  Contingencies
   18




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##### Table of Contents



Income Taxes
  Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
 Recent Accounting Pronouncements
  Results of Operations
 Revenue Sources
  Banner Advertising Revenue:
 Subscription Sales:
 Operating Expenses
  
    
    Product and Content Development Expenses:Product and content development 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.
    
    Stock Based Compensation Expenses:Stock based compensation is a non-cash expense that
consists primarily of compensation paid for employees, directors, and consultants by the
issuance of stock options or common stock. Expense is calculated based upon the grant-date
fair value using the Black-Scholes option pricing model recognized on a straight-line basis
over the vesting term of the award.
  19




---



##### Table of Contents




    
    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 Corporate Sponsorship Agreement and Note
Purchase Agreements discussed in notes 5 and 6. 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. In the three months ended June 30, 2008, we recognized a one-time
non-cash gain resulting from termination of the CSMSA.
  20




---



##### Table of Contents



Comparison of the three months ended June 30, 2008 with the three months ended June 30, 2007
  For the three months ended June 30,2008
    
    
    2007
    
    
    Change ($)
    
    
    Change (%)REVENUES
    
    $
    24,774
    
    
    $
    73,260
    
    
    $
    (48,486
    )
    
    
    -66
    %CASH-BASED OPERATING EXPENSESSales and marketing
    
    
    55,049
    
    
    
    292,788
    
    
    
    (237,739
    )
    
    
    -81
    %Product and content development
    
    
    703,585
    
    
    
    1,070,313
    
    
    
    (366,728
    )
    
    
    -34
    %General and administrative
    
    
    509,019
    
    
    
    1,621,452
    
    
    
    (1,112,433
    )
    
    
    -69
    %Total cash-based operating expenses
    
    
    1,267,653
    
    
    
    2,984,553
    
    
    
    (1,716,900
    )
    
    
    -58
    %NET CASH BURN
    
    
    (1,242,879
    )
    
    
    (2,911,293
    )
    
    
    1,668,414
    
    
    
    -57
    %Net Cash Monthly Burn Rate
    
    
    (414,293
    )
    
    
    (970,431
    )
    
    
    556,138
    
    
    
    -57
    %NON-CASH OPERATING EXPENSESStock based compensation expense
    
    
    1,165,437
    
    
    
    788,795
    
    
    
    376,642
    
    
    
    48
    %Depreciation and amortization
    
    
    113,008
    
    
    
    103,658
    
    
    
    9,350
    
    
    
    9
    %Total Non-Cash Operating Expenses
    
    
    1,278,445
    
    
    
    892,453
    
    
    
    385,992
    
    
    
    43
    %LOSS FROM OPERATIONS
    
    
    (2,521,324
    )
    
    
    (3,803,746
    )
    
    
    1,282,422
    
    
    
    -34
    %OTHER INCOME (EXPENSE):Interest income
    
    
    46,925
    
    
    
    127,438
    
    
    
    (80,513
    )
    
    
    -63
    %Interest expense
    
    
    (338,731
    )
    
    
    
    
    
    
    (338,731
    )
    
    
    -100
    %Gain/ (Loss) on disposal
    
    
    (42,977
    )
    
    
    3,449
    
    
    
    (46,426
    )
    
    
    -1346
    %Gain on extinguishment of debt
    
    
    5,056,052
    
    
    
    
    
    
    
    5,056,052
    
    
    
    -100
    %Other income
    
    
    12,084
    
    
    
    1,529
    
    
    
    10,555
    
    
    
    690
    %TOTAL OTHER INCOME (EXPENSE)
    
    
    4,733,353
    
    
    
    132,416
    
    
    
    4,600,937
    
    
    
    3475
    %NET INCOME (LOSS)
    
    $
    2,212,029
    
    
    $
    (3,671,330
    )
    
    $
    5,883,359
    
    
    
    -160
    %
 Revenues
    21




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##### Table of Contents



Operating Costs and Expenses
 Sales and Marketing:
 Product and Content Development:
 General and Administrative:
 
    
    a decrease in professional fees of $482,000, made up of decreases in legal fees of
$120,000 and accounting fees of $227,000, due to unusually high activity in 2007, and a
settlement of $135,000 toward legal fees received during the second quarter of 2008;
    
    a decrease in recruiting fees of $288,000, due to reduced hiring during 2008;
    
    a decrease in travel related expenses of $103,000;
    
    a decrease in rent expenses of $83,000, due to the closing our Scottsdale, AZ
headquarters;
    
    a decrease in salaries and related payroll costs of $66,000, due to a reduction in
personnel in our Scottsdale headquarters during the fourth quarter of 2007; and
    
    a decrease in dues and subscriptions of $45,000, a decrease in printing and reproduction
of $42,000, and a decrease in office supplies and maintenance costs of $21,000 attributable
to a focused effort to reduce costs;
 Stock Based Compensation:
 Depreciation and Amortization:
 Other Income (Expense)
  22




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##### Table of Contents



Comparison of the six months ended June 30, 2008 with the six months ended June 30, 2007
  For the the six months ended June 30,2008
    
    
    2007
    
    
    Change ($)
    
    
    Change (%)REVENUES
    
    $
    31,637
    
    
    $
    125,742
    
    
    $
    (94,105
    )
    
    
    -75
    %CASH-BASED OPERATING EXPENSESSales and marketing
    
    
    135,672
    
    
    
    762,104
    
    
    
    (626,432
    )
    
    
    -82
    %Product and content development
    
    
    1,252,299
    
    
    
    2,043,053
    
    
    
    (790,754
    )
    
    
    -39
    %General and administrative
    
    
    1,450,684
    
    
    
    3,206,590
    
    
    
    (1,755,906
    )
    
    
    -55
    %Total cash-based operating expenses
    
    
    2,838,655
    
    
    
    6,011,747
    
    
    
    (3,173,092
    )
    
    
    -53
    %NET CASH BURN
    
    
    (2,807,018
    )
    
    
    (5,886,005
    )
    
    
    3,078,987
    
    
    
    -52
    %Net Cash Monthly Burn Rate
    
    
    (467,836
    )
    
    
    (981,001
    )
    
    
    513,165
    
    
    
    -52
    %NON-CASH OPERATING EXPENSESStock based compensation expense
    
    
    2,562,258
    
    
    
    1,103,585
    
    
    
    1,458,673
    
    
    
    132
    %Depreciation and amortization
    
    
    221,423
    
    
    
    196,261
    
    
    
    25,162
    
    
    
    13
    %Total Non-Cash Operating Expenses
    
    
    2,783,681
    
    
    
    1,299,846
    
    
    
    1,483,835
    
    
    
    114
    %LOSS FROM OPERATIONS
    
    
    (5,590,699
    )
    
    
    (7,185,851
    )
    
    
    1,595,152
    
    
    
    -22
    %OTHER INCOME (EXPENSE):Interest income
    
    
    97,504
    
    
    
    291,824
    
    
    
    (194,320
    )
    
    
    -67
    %Interest expense
    
    
    (627,813
    )
    
    
    
    
    
    
    (627,813
    )
    
    
    -100
    %Gain/ (Loss) on disposal
    
    
    (42,977
    )
    
    
    3,449
    
    
    
    (46,426
    )
    
    
    -1346
    %Gain on extinguishment of debt
    
    
    5,056,052
    
    
    
    
    
    
    
    5,056,052
    
    
    
    -100
    %Other income
    
    
    19,479
    
    
    
    14,237
    
    
    
    5,242
    
    
    
    37
    %TOTAL OTHER INCOME (EXPENSE)
    
    
    4,502,245
    
    
    
    309,510
    
    
    
    4,192,735
    
    
    
    1355
    %NET LOSS
    
    $
    (1,088,454
    )
    
    $
    (6,876,341
    )
    
    $
    5,787,887
    
    
    
    -84
    %
 Revenues
  Operating Costs and Expenses
 Sales and Marketing:
  23




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##### Table of Contents



Product and Content Development:
 General and Administrative:
 
    
    a decrease in professional fees expense of $831,000, made up of decreases in legal fees
of $306,000 and accounting fees of $389,000, due to unusually high activity in 2007, and a
settlement of $135,000 toward legal fees received during the second quarter of 2008;
    
    a decrease in recruiting fees of $435,000, due to reduced hiring during 2008;
    
    a decrease in salaries and related payroll costs of $127,000, due to a reduction in
personnel in our Scottsdale headquarters during the fourth quarter of 2007; and
    
    a decrease in travel related expenses of $175,000, a decrease in dues and subscriptions
of $77,000, a decrease in printing and reproduction of $73,000, a decrease in office
supplies and maintenance of $35,000, a decrease in licenses and fees of $28,000, a decrease
in insurance costs of $22,000, and a decrease in other general and administrative costs of
$34,000, attributable to a focused effort to reduce costs;
    
    a decrease in rent expense due to the closing of our Scottsdale, AZ headquarters of
$177,000, offset by a one-time lease termination charge of $129,000 in the first quarter of
2008, resulting in a net decrease of $48,000. .
 Stock Based Compensation:
 Depreciation and Amortization:
 Other Income (Expense)
 Liquidity and Capital Resources
 For the Six Months EndedJune 30,2008
    
    
    2007Net cash used in operating activities
    
    $
    (2,805,083
    )
    
    $
    (5,046,813
    )Net cash used in investing activities
    
    $
    (396,767
    )
    
    $
    (610,340
    )Net cash provided by financing activities
    
    $
    7,337,019
    
    
    $
    913,150
  24




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007Cash and cash equivalents
    
    $
    7,811,995
    
    
    $
    3,673,281Total assets
    
    $
    9,234,486
    
    
    $
    5,900,908Percentage of total assets
    
    
    85
    %
    
    
    62
    %
        25




---



##### Table of Contents



Forward Looking Statements
    26




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Not applicable for smaller reporting companies.
 
 Item 4T. Controls and Procedures
 Disclosure Controls and Procedures
   Remediation of Certain Weaknesses and Changes in Internal Controls
     Limitations on the Effectiveness of Controls
   27




---



##### Table of Contents



QUEPASA CORPORATION AND SUBSIDIARIES
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Not applicable for smaller reporting companies.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  No. ofName of Class
    
    Date Issued
    
    Securities
    
    
    Reason for IssuanceHolders of Subordinated Promissory Notes
    
    January 25, 2008
    
    $
    7,000,000
    
    
    Notes issued pursuant to the terms of two Note Purchase AgreementsHolders of Warrants
    
    January 25, 2008
    
    
    3,000,000
    
    
    Warrants issued to purchase common stock at an exercise price of $2.75 per share. These warrants replaced previously issued warrants with higher exercise prices.Purchaser of Preferred Stock
    
    June 30, 2008
    
    $
    2,500,000
    
    
    Termination of CSMSA.
 
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of the stockholders of the Company (the Annual Meeting) was held on June 27, 2008.(b)
    
    The following directors were elected at the Annual Meeting:
 
    
    Lionel Sosa
    
    Dr. Jill Syverson-Stork
    
    Jeffrey Valdez
  
    
    John C. Abbott
    
    Alonso Ancira
    
    Ernesto Cruz
    
    Malcolm Jozoff
  28




---



##### Table of Contents



(c)
    
    The results of the vote taken at the Annual Meeting by ballot and proxies as solicited by the
Company on behalf of the Board of Directors were as follows:
 (i)
    
    The results of the election of the nominees for our Board of Directors were as follows:
 Nominee
    
    For
    
    
    Against
    
    
    WithheldLionel Sosa
    
    
    6,636,094
    
    
    
    6,525
    
    
    
    5,950Dr. Jill Syverson-Stork
    
    
    6,636,694
    
    
    
    7,925
    
    
    
    3,950Jeffrey Valdez
    
    
    6,637,594
    
    
    
    4,925
    
    
    
    6,050
 (ii)
    
    Votes were taken on the following additional proposals, the results of which are tabulated in the table below:
 BrokerProposal
    
    For
    
    
    Against
    
    
    Abstain
    
    
    Non-VotesTo amend the
Companys 2006
Stock Incentive
Plan to authorize
the issuance of
additional
2,000,000 shares
under the Plan.
    
    
    4,195,381
    
    
    
    244,309
    
    
    
    3,900
    
    
    
    2,204,979To approve and
ratify the
appointment of
Berenfeld Spritzer
Shechter & Sheer
LLP as the
Companys
independent
registered public
accounting firm for
2008.
    
    
    6,643,284
    
    
    
    985
    
    
    
    4,300
    
    
    
    0
 
 Item 5. Other Information
  
 Item 6. Exhibits
   29




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##### Table of Contents



QUEPASA CORPORATION AND SUBSIDIARIES
 SIGNATURES
  Quepasa CorporationJuly 25, 2008
    By:
    /s/ John C. AbbottName:
    John C. AbbottTitle:
    Chairman and Chief Executive Officer(Principal Executive Officer) July 25, 2008
    By:
    /s/ Michael D. MatteName:
    Michael D. MatteTitle:
    Executive Vice President
and Chief Financial Officer(Principal Financial Officer)  30




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description of Exhibit3.1
    
    
    Certificates of Restated Articles of Incorporation (1)3.2
    *
    
    Certificate of Designation3.3
    
    
    Amended and Restated Bylaws (2)10.1
    
    
    Amendment to the Employment Agreement with John C. Abbott dated March 27, 2008 (3)10.2
    
    
    Amendment to the Employment Agreement with Michael D. Matte dated March 27, 2008 (3)10.3
    
    
    Note Purchase Agreement dated January 25, 2008 by and between Quepasa Corporation and Mexicans &
Americans Trading Together, Inc. (4)10.4
    
    
    Note Purchase Agreement dated January 25, 2008 by and between Quepasa Corporation and Richard L.
Scott Investments, LLC (4)10.5
    
    
    Amendment No. 1 to Series 1 Common Stock Purchase Warrant dated January 25, 2008 by and between
Quepasa Corporation and Mexicans & Americans Trading Together, Inc. (4)10.6
    
    
    Amendment No. 1 to Series 2 Common Stock Purchase Warrant dated January 25, 2008 by and between
Quepasa Corporation and Mexicans & Americans Trading Together, Inc. (4)10.7
    
    
    Amendment No. 1 to Series 2 Common Stock Purchase Warrant dated January 25, 2008 by and between
Quepasa Corporation and Richard L. Scott Investments, LLC (4)10.8
    
    
    Amendment No. 1 to Series 3 Common Stock Purchase Warrant dated January 25, 2008 by and between
Quepasa Corporation and Richard L. Scott Investments, LLC (4)10.9
    
    
    Subordinated Promissory Note dated January 25, 2008 by and between Quepasa Corporation and Mexicans &
Americans Trading Together, Inc. (4)10.10
    
    
    Subordinated Promissory Note dated January 25, 2008 by and between Quepasa Corporation and Richard L.
Scott Investments, LLC (4)10.11
    
    
    Consulting Agreement with Jeffrey Valdez dated October 24, 2007 (5)10.12
    
    
    Loan Agreement dated March 27, 2008 by and between Quepasa Corporation and BRC Group, LLC. (3)10.13
    
    
    Right of First Refusal dated March 27, 2008 by and between Quepasa Corporation and BRC Group, LLC. (3)10.14
    
    
    Webpage Development and Hosting Agreement dated March 27, 2008 by and between Quepasa Corporation and
BRC Group, LLC. (3)10.15
    
    
    Promissory Note dated March 27, 2008 by BRC Group, LLC. (3)10.16
    
    
    Equity Interests Purchase Warrant dated March 27, 2008 by and between Quepasa Corporation and BRC
Group, LLC. (3)10.17
    
    
    Lease Termination Agreement dated March 10, 2008 by and between Quepasa Corporation and Airpark
Billorado, LLC (3)10.18
    *
    
    Employment Agreement with Louis Bardov dated as of January 22, 200810.19
    *
    
    Termination Agreement with Mexicans & Americans Thinking Together Foundation, Inc. and Mexicans &
Americans Trading Together, Inc. dated June 30, 2008.
  31




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibit31.1
    *
    
    Certification of Principal Executive Officer (Section 302)31.2
    *
    
    Certification of Principal Financial Officer (Section 302)32.1
    **
    
    Certification of Principal Executive Officer (Section 906)32.2
    **
    
    Certification of Principal Financial Officer (Section 906)
 *
    
    Filed herewith**
    
    Furnished herewith(1)
    
    Incorporated by reference from the Registrants Quarterly Report on Form 10-QSB as filed with
the SEC on August 15, 2007.(2)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K as filed with the
SEC on July 3, 2007.(3)
    
    Incorporated by reference from the Registrants Annual Report on Form 10-KSB as filed with
the SEC on March 31, 2008.(4)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K as filed with the
SEC on January 30, 2008.(5)
    
    Incorporated by reference
from the Registrants Quarterly Report on Form 10-Q as
filed with the SEC on May 13, 2008.   32