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 March 31,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
(Exact name of registrant as specified in its charter)
   
NEVADA 86-0879433
(State of Incorporation) (I.R.S. Employer Identification No.)
224 Datura Street, Suite 1100
West Palm Beach, Florida 33401

(Address of Principal Executive Office)
(561) 491-4181
(Registrant’s telephone number, including area code)
7550 East Redfield Road, Suite A
Scottsdale, Arizona 85260

(Former name, former address and former fiscal year, if changed since last report)
 
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.þ Yeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
       
Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).o Yesþ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
   
Class
 Shares Outstanding as of May 8,July 21, 2008
Common Stock, $.001 par value per share 12,648,83612,653,661
 
 

 

 


 

QUEPASA CORPORATION AND SUBSIDIARIES
INDEX
     
  Page 
  3 
     
  3 
     
  13 
     
  24 
     
  35 
     
  46 
     
  57 
     
  1318 
     
  1827 
     
  1827 
     
  28 
     
  2028 
     
  2028 
     
  2028 
     
  2028 
     
  2028 
     
  2029 
     
  2029 
     
  2130 
     
  2231 
     
 Exhibit 10.113.2
Exhibit 10.18
Exhibit 10.19
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

2


PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
QUEPASA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
         
  March 31,  December 31, 
  2008  2007 
  (Unaudited)     
ASSETS
        
CURRENT ASSETS:        
Cash and cash equivalents $9,074,037  $3,673,281 
Accounts receivable, net of allowance of $18,000 and $15,000, respectively  11,066   38,306 
Other current assets  127,446   146,876 
       
Total current assets  9,212,549   3,858,463 
         
Property and equipment, net  944,979   1,023,041 
Jet rights, net     885,712 
Note Receivable  300,000    
Other assets  132,907   133,692 
       
Total assets $10,590,435  $5,900,908 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
CURRENT LIABILITIES:        
Accounts payable $794,096  $887,598 
Accrued expenses  232,850   306,130 
Unearned grant income  59,902   65,917 
Current portion of long-term debt  1,950,303   1,668,808 
       
Total current liabilities  3,037,151   2,928,453 
       
         
Long-term debt  5,417,759   5,526,506 
Notes payable, net of unamortized discount of $2,432,493  4,624,744    
       
Total liabilities  13,079,654   8,454,959 
       
         
COMMITMENTS AND CONTINGENCIES (see Note 7)        
         
STOCKHOLDERS’ EQUITY:        
Preferred stock, $.001 par value; authorized - 5,000,000 shares; none issued and outstanding      
Common stock, $.001 par value; authorized - 50,000,000 shares; 12,643,261 shares issued and outstanding at March 31, 2008 and 12,284,511 shares issued and outstanding at December 31, 2007  12,643   12,285 
Additional paid-in capital  142,243,746   138,880,462 
Accumulated deficit  (144,753,146)  (141,452,663)
Accumulated other comprehensive income  7,538   5,865 
       
Total stockholders’ equity  (2,489,219)  (2,554,051)
       
Total liabilities and stockholders’ equity $10,590,435  $5,900,908 
       
See notes to unaudited condensed consolidated financial statements.

1


QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
         
  For the Three Months Ended March 31, 
  2008  2007 
         
REVENUES $6,863  $52,482 
       
OPERATING COSTS AND EXPENSES:        
Sales and marketing  80,623   469,316 
Product and content development  548,714   972,740 
General and administrative  941,665   1,585,138 
Stock based compensation expense  1,396,821   314,790 
Depreciation and amortization  108,415   92,603 
       
TOTAL OPERATING COSTS AND EXPENSES  3,076,238   3,434,587 
       
LOSS FROM OPERATIONS  (3,069,375)  (3,382,105)
       
OTHER INCOME (EXPENSE):        
Interest income  50,579   164,386 
Interest expense  (289,082)   
Other income  7,395   12,708 
       
TOTAL OTHER INCOME (EXPENSE)  (231,108)  177,094 
       
LOSS BEFORE INCOME TAXES  (3,300,483)  (3,205,011)
Income taxes      
       
NET LOSS $(3,300,483) $(3,205,011)
       
Foreign currency translation adjustment  1,673   8,563 
       
COMPREHENSIVE LOSS $(3,298,810) $(3,196,448)
       
         
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $(0.26) $(0.26)
       
         
WEIGHTED AVERAGE NUMBER OF SHARES        
OUTSTANDING, BASIC AND DILUTED  12,477,636   12,139,971 
       
See notes to unaudited condensed consolidated financial statements.

2


QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended March 31, 2008
(Unaudited)
                                 
                          Accumulated    
                  Additional      Other  Total 
  Preferred 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                  1,130,285           1,130,285 
Re-pricing of warrants                  1,605,382           1,605,382 
Issuance of common stock for professional services          50,000   50   218,750           218,800 
Issuance of common stock to directors for compensation          8,750   8   31,667           31,675 
Exercise of stock options          300,000   300   377,200           377,500 
Foreign currency translation adjustment                          1,673   1,673 
Net loss                      (3,300,483)      (3,300,483)
                         
Balance—March 31, 2008    $   12,643,261  $12,643  $142,243,746  $(144,753,146) $7,538  $(2,489,219)
                         
         
  June 30,  December 31, 
  2008  2007 
  (Unaudited)    
ASSETS
        
CURRENT ASSETS: ��      
Cash and cash equivalents $7,811,995  $3,673,281 
Accounts receivable, net of allowance of $18,000 and $15,000, respectively  21,913   38,306 
Other current assets  86,879   146,876 
       
Total current assets  7,920,787   3,858,463 
         
Property and equipment, net  812,178   1,023,041 
Jet rights, net     885,712 
Note 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   133,692 
       
Total assets $9,234,486  $5,900,908 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
        
CURRENT LIABILITIES:        
Accounts payable $751,638  $887,598 
Accrued expenses  265,989   306,130 
Unearned grant income  54,659   65,917 
Current portion of long-term debt     1,668,808 
       
Total current liabilities  1,072,286   2,928,453 
       
         
Long-term debt     5,526,506 
Notes payable, net of unamortized discount of $2,361,027  4,774,259    
       
Total liabilities  5,846,545   8,454,959 
       
         
COMMITMENTS 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   12,285 
Additional paid-in capital  145,906,974   138,880,462 
Accumulated deficit  (142,541,117)  (141,452,663)
Accumulated other comprehensive income  9,410   5,865 
       
Total stockholders’ equity (deficit)  3,387,941   (2,554,051)
       
Total liabilities and stockholders’ equity (deficit) $9,234,486  $5,900,908 
       
See notes to unaudited condensed consolidated financial statements.

 

3


QUEPASA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Operations and Comprehensive Income (Loss)
(Unaudited)
         
  For the Three Months Ended 
  March 31, 
  2008  2007 
Operating activities:
        
Net loss $(3,300,483) $(3,205,011)
         
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  108,415   92,603 
Issuance of stock options and warrants for compensation  1,130,285   314,790 
Issuance of common stock to directors for compensation  31,675    
Issuance of common stock and stock options for professional services  218,800    
Grant income  (6,015)  (12,708)
Bad debt expense  5,968    
Non-cash interest related to corporate sponsorship agreement  191,253    
Non-cash interest related to note payable agreements  57,237    
Amortization of debt issuance costs  52,692    
Changes in operating assets and liabilities:        
Accounts receivable  21,272   32,489 
Other current assets and other assets  41,330   102,769 
Accounts payable and accrued expenses  (166,782)  439,568 
       
Net cash used in operating activities  (1,614,353)  (2,235,500)
       
Investing activities:
        
Purchase of property and equipment  (23,583)  (253,039)
Advance to BRC / La Alianza  (300,000)   
       
Net cash used in investing activities  (323,583)  (253,039)
       
Financing activities:
        
Proceeds from exercise of stock options and warrants  377,500   890,650 
Net proceeds from issuance of notes payable  6,959,519    
       
Net cash provided by financing activities  7,337,019   890,650 
       
Effect of foreign currency exchange rate on cash  1,673   9,788 
       
Net increase (decrease) in cash and cash equivalents  5,400,756   (1,588,101)
Cash and cash equivalents at beginning of period  3,673,281   14,093,811 
       
Cash and cash equivalents at end of period  9,074,037   12,505,710 
       
         
Supplemental Disclosure of Cash Flow Information:
        
Cash paid for interest $  $ 
       
Cash paid for income taxes $  $ 
       
                 
  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2008  2007  2008  2007 
                 
REVENUES $24,774  $73,260  $31,637  $125,742 
             
OPERATING COSTS AND EXPENSES:                
Sales and marketing  55,049   292,788   135,672   762,104 
Product and content development  703,585   1,070,313   1,252,299   2,043,053 
General and administrative  509,019   1,621,452   1,450,684   3,206,590 
Stock based compensation  1,165,437   788,795   2,562,258   1,103,585 
Depreciation and amortization  113,008   103,658   221,423   196,261 
             
TOTAL OPERATING COSTS AND EXPENSES  2,546,098   3,877,006   5,622,336   7,311,593 
             
LOSS 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   291,824 
Interest expense  (338,731)     (627,813)   
Gain (Loss) on disposal  (42,977)  3,449   (42,977)  3,449 
Gain on extinguishment of debt  5,056,052      5,056,052    
Other income  12,084   1,529   19,479   14,237 
             
TOTAL OTHER INCOME (EXPENSE)  4,733,353   132,416   4,502,245   309,510 
             
INCOME (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   36 
             
COMPREHENSIVE 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   12,189,975 
             
DILUTED  12,712,193   12,238,879   12,563,155   12,189,975 
             
See notes to unaudited condensed consolidated financial statements.

 

4


QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Six Months Ended June 30, 2008
(Unaudited)
                                 
                          Accumulated    
                  Additional      Other  Total 
  Preferred 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           2,279,662 
Re-pricing of warrants                  1,605,382           1,605,382 
Issuance of common stock for professional services          50,000   50   218,750           218,800 
Issuance of common stock to directors for compensation          14,325   14   45,543           45,557 
Issuance of preferred stock  25,000   25           2,499,975           2,500,000 
Exercise of stock options          300,000   300   377,200           377,500 
Foreign currency translation adjustment                          3,545   3,545 
Net 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 
                         
See notes to unaudited condensed consolidated financial statements.

5


QUEPASA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
         
  For the Six Months Ended 
  June 30, 
  2008  2007 
Operating 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   196,261 
Gain on extinguishment of debt  (5,056,052)   
Issuance of stock options and warrants for compensation  2,279,662   912,097 
Issuance of common stock to directors for compensation  45,557   191,488 
Issuance 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   9,785 
Other current assets and other assets  75,325   5,763 
Accounts payable and accrued expenses  (176,101)  531,729 
       
Net cash used in operating activities  (2,805,083)  (5,046,813)
       
Investing activities:
        
Proceeds from sale of property and equipment  10,601   3,449 
Purchase 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   913,150 
Proceeds 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   913,150 
       
Effect 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   14,093,811 
       
Cash and cash equivalents at end of period  7,811,995   9,348,490 
       
         
Supplemental 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.
See notes to unaudited condensed consolidated financial statements.

6


QUEPASA CORPORATION AND SUBSIDIARIES
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”), a Nevada corporation, was incorporated in June 1997. In 2007, the Company transitioned from being a bilingual search engine into a Hispanic social network. With the evolution of the Company’s Quepasa.com website into a Hispanic portal and social network, the future revenue will be predominatelypredominantly display advertising. The Company re-launched its Quepasa.com website on February 6, 2008 in beta mode, to be solely a Hispanic social network with content provided by the user community. The Quepasa.com community provides users with access to an expansive, bilingual menu of resources that promote social interaction, information sharing, and other topics of importance to Hispanic 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 web sitewebsite 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 accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31,June 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008. 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 2007 Annual Report filed with the SEC on Form 10-KSB on March 31, 2008.
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.
Reclassifications
Certain prior period amounts in the unaudited condensed consolidated statements of operations and comprehensive lossincome (loss) and condensed consolidated statements of cash flows have been reclassified to conform to the current period’s presentation.
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.
LossBasic and Diluted Income (Loss) Per Common Share
LossBasic income (loss) per share is computed by dividing net lossincome (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earningsincome (loss) per share areis determined in the same manner as basic earnings 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 sinceWhen the effect of including themthe outstanding equity securities is anti-dilutive.anti-dilutive, the securities are not included in the calculation of diluted income (loss) per common share.

 

57


The computation of basic and diluted income (loss) per common share is as follows:
                         
  For the Three Months Ended June 30, 
  2008  2007 
      Weighted          Weighted    
      Average  Per Share      Average  Per Share 
  Net Income  Shares  Amount  Net Loss  Shares  Amount 
                         
Basic 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  2007 
      Weighted          Weighted    
      Average  Per Share      Average  Per Share 
  Net Loss  Shares  Amount  Net Loss  Shares  Amount 
                         
Basic 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


The following table summarizes the number of dilutive securities outstanding for each of the periods presented, but not included in the calculation of diluted lossincome (loss) per share:
                        
 March 31,  For the Three Months Ended
June 30,
 For the Six Months Ended
June 30,
 
 2008 2007  2008 2007 2008 2007 
Stock options 4,834,819 1,187,700  4,797,319 1,498,200 4,897,319 1,498,200 
Warrants 4,432,500 4,432,500  4,432,500 4,432,500 4,432,500 4,432,500 
              
Total 9,267,319 5,620,200 
      
Totals
 9,229,819 5,930,700 9,329,819 5,930,700 
         
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, ''Fair‘‘Fair Value Measurements’’. This statement clarifies the definition of fair value of assets and liabilities, establishes a framework for measuring fair value of assets and liabilities and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, the FASB deferred the effective date of SFAS No. 157 until the fiscal years beginning after November 15, 2008 as it relates to the fair value measurement requirements for nonfinancial assets and liabilities that are initially measured at fair value, but not measured at fair value in subsequent periods. These nonfinancial assets include goodwill and other indefinite-lived intangible assets which are included within other assets. In accordance with SFAS No. 157, the Company has adopted the provisions of SFAS No. 157 with respect to financial assets and liabilities effective as of January 1, 2008 and its adoption did not have a material impact on its results of operations or financial condition. The Company is assessing the impact of SFAS No. 157 for nonfinancial assets and liabilities and expects that this adoption will not have a material impact on its results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS 159), which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“(“SFAS No. 141 (R)”). SFAS No. 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition. SFAS 141(R) is effective for the Company for fiscal 2010. The Company is currently assessing the impact of SFAS 141(R) on its consolidated financial position and results of operations.
In December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS No. 160”). The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of SFAS No. 160 is the same as that of the related Statement 141(R). SFAS No. 160 will be effective for the Company’s fiscal 2010. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently assessing the impact of SFAS 160 on its consolidated financial position and results of operations.

9


In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirement for FASB Statement No. 133, “Derivative Instruments and Hedging Activities” (“SFAS No. 133”). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 160 on its consolidated financial position and results of operations.

6

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.


In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. The adoption of FASB 163 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its consolidated financial position and results of operations.
Note 2—Property and Equipment
Property and equipment consist of the following at March 31, 2008:following:
        
     June 30, 2008 December 31, 2007 
Software $489,449  $489,449 $489,449 
Computer equipment 1,414,336  1,446,217 1,390,059 
Vehicles 21,101  21,927 20,697 
Office furniture and equipment 212,247  138,582 214,526 
Other equipment 11,032  11,463 10,821 
        
 2,148,165  2,107,638 2,125,552 
Less accumulated depreciation  (1,203,186)  (1,295,460)  (1,102,511)
        
Property and equipment—net $944,979  $812,178 $1,023,041 
        

10


Depreciation expense was $101,645$214,653 and $67,418$145,452 for the threesix months ended March 31,June 30, 2008 and 2007, respectively.
Note 3—Jet Rights
In October 2006, as part of a financing transaction to raise capital, Mexicans & Americans Trading Together, Inc. (“MATT Inc.”) agreed to provide the Company with the use of a corporate jet for up to 25 hours per year through October 2016. The Company recognized the fair value of the jet rights of $1,007,445 as an asset and an increase to additional paid-in capital.
On January 25, 2008, under the provisions of a Note Purchase Agreement between the Company and MATT Inc., these jet rights were terminated. See Note 6 below.
Note 4—Note Receivable
On January 9, 2008, the Company advanced $300,000 and received a $300,000 Multiple Advance Promissory Note (the “BRC Note”) from BRC Group, LLC (“BRC”). BRC owns La Alianza de Futbol Hispano (“La Alianza”), an organization involved in the support and development of amateur Hispanic soccer in the United States. The Company and BRC agreed to the terms of the BRC Note with the understanding that the Company and BRC would work towards finalizing an agreement, which would provide for, among other things, the Company becoming the official social networking sponsor for La Alianza.
On March 27, 2008, the Company entered into a Loan Agreement with BRC for a maximum amount of $600,000. Among other things, pursuant to the terms of the Loan Agreement: (i) the $300,000 advanced by the Company pursuant to the BRC Note becomes advancement under the terms of the Loan Agreement; (ii) the Company agreed to advance BRC an additional $50,000 on April 1, 2008; and (iii) the Company will advance BRC an additional $250,000 on September 1, 2008.
BRC executed a noninterest bearing promissory note on March 27, 2008, in favor of the Company and agreed to repay all loans made by the Company under the Loan Agreement by January 8, 2011. In exchange for the noninterest bearing promissory note, BRC granted the Company an Equity Interests Purchase Warrant and a Right of Purchase and Right of First Refusal Agreement (“Warrant Rights”).
Also on March 27, 2008, and in connection with the Loan Agreement, the Company entered into an Equity Interests Purchase Warrant, a Right of Purchase and Right of First Refusal Agreement, and a Website Development and Hosting Agreement with BRC. Pursuant to the terms and conditions of these agreementsthe agreement the Company will: (i) become an official sponsor of the 2008 La Alianza soccer tournament; (ii) retain the online rights to the La Alianza soccer tournament for a period of three years; (iii) host and develop the La Alianza website; (iv) build the La Alianza community within the Quepasa.com website; and (v) share equally with BRC in the advertising revenues generated from the La Alianza website.
On April 1, 2008, the Company advanced $50,000 to BRC under the terms of the Loan Agreement.
On April 15, 2008, the Company received notification from BRC that they were in the process of securing additional funding from another source. As a result, the Company and BRC entered into negotiations to amend the Loan Agreement. Pursuant to the terms of the amendment, upon securing additional funding, $50,000 of the total outstanding note shall become due immediately and the balance of the outstanding note shall be due and payable in full upon the first anniversary of securing the additional funding. In addition, BRC would not require the additional $250,000 advance scheduled for September 1, 2008 under the terms of the Loan Agreement. As of the date of this filing, the Company and BRC havehad not finalized the amendmentprocess of securing the additional funding.
As a result of the above transactions, the Company has recorded a discount to the Loan Agreement.$350,000 outstanding note receivable using a 12.75% imputed interest rate in the amount of $104,753 and assigned this value to the Warrant Rights, which is included in Other Assets line of the balance sheet. As of June 30, 2008, the Company has recorded $13,229 of interest income related to the amortization of the discount to the $350,000 outstanding note.

 

711


Note 5—Long-term Debt
Corporate Sponsorship and Management Services Agreement
On November 20, 2006, in connection with a financing transaction, the Company entered into Corporate Sponsorship and Management Services Agreement (the “CSMSA”) with MATT Inc. and Mexicans & Americans Thinking Together Foundation, Inc. (the “Organization”). The Company is in the process of terminating the CMSA. See Note 10 below. The CSMSA providesprovided that the Company will develop, operate and host the Organization’s website and provide to it all the services necessary to conduct such operations. During the first three years of the term of the CSMSA, the Organization willagreed to reimburse the Company for its costs and expenses in providing these services, not to exceed $500,000 per annum. The CSMSA further providesprovided that the Company will pay the Organization’s operating costs through October 2016 (including certain special event costs commencing in year four), up to a cap of $1,200,000 per annum minus the Company’s costs and expenses for providing the services described above. The Organization’s obligations to pay any costs and expenses due to the Company arewere guaranteed by MATT Inc. See Common Stock section in Note 8.
The Company has established a reasonable estimate of the long-term debt based on the present value calculation of the expected payout of $1,200,000 per year, or $300,000 per quarter, through October 2016, discounted at a 12% annual rate, which iswas based on available borrowing rates.
On June 30, 2008, the Company entered into a Termination Agreement (the “Transaction”) with the Organization terminating the CSMSA. In consideration for the Transaction, the Company issued 25,000 shares of Series A Convertible Preferred Stock with a liquidation preference of $2,500,000 (the “Preferred Stock”) to the Organization. The following table summarizesCompany 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 effect of the Transaction was to eliminate the Company’s current and future obligations for the Organization’s operating costs under the CSMSA for which the Company had recorded a reasonable estimate of $7,556,052 as of June 30, 2008. The Company recognized a gain on the extinguishment of the long-term debt calculationof $5,056,052, the difference between the value of the long-term liabilities and the value of preferred stock issued in exchange for the debt as of March 31, 2008 by year:
     
  Present Value of 
Year Ending December 31: Expected Payments 
Unpaid 2007 Obligations $520,225 
2008  1,155,535 
2009  1,051,117 
2010  933,903 
2011  829,761 
2012  737,232 
2013  655,021 
2014  581,978 
2015  517,080 
2016  386,210 
    
Total Corporate Sponsorship Liability  7,368,062 
Less: Current Portion of Debt  (1,950,303)
    
Long-term Corporate Sponsorship Liability
 $5,417,759 
    
June 30, 2008.
Note 6—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. See Note 3 above. 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 $23,370 at June 30, 2008.
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 $15,063 at June 30, 2008.

 

812


Note Purchase Agreements consist of the following at March 31,June 30, 2008:
                        
 MATT RSI Total  MATT RSI Total 
Notes Payable, face amount $5,000,000 $2,000,000 $7,000,000  $5,000,000 $2,000,000 $7,000,000 
Discounts on Notes:  
Revaluation of Warrants  (1,341,692)  (263,690)  (1,605,382)  (1,341,692)  (263,690)  (1,605,382)
Termination of Jet Rights  (878,942)   (878,942)  (878,942)   (878,942)
Accumulated Amortization 45,987 5,844 51,831  109,395 13,902 123,297 
              
Total Discounts  (2,174,647)  (257,846)  (2,432,493)  (2,111,239)  (249,788)  (2,361,027)
Accrued Interest 40,883 16,354 57,237  96,633 38,653 135,286 
              
Notes Payable, net
 $2,866,236 $1,758,508 $4,624,744  $2,985,394 $1,788,865 $4,774,259 
              
Note 7—Commitments and Contingencies
Operating Leases
On March 20, 2008, the Company terminated its future lease obligations of $344,495, relating to one of its operating leases for office space in Scottsdale, Arizona. Under the terms of the Lease Termination Agreement, the Company paid $64,261 to the Lessor and forfeited the security deposit in the amount of $44,703.
The Company leases its facilities under three non-cancelable operating leases which expire in 2008 and 2010. Future minimum lease payments under these leases as of March 31,June 30, 2008 are as follows:
        
Remainder of 2008 $93,025  $44,271 
2009 54,832  54,832 
2010 13,856  13,856 
      
 $161,713  $112,959 
      
Litigation
From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. 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.
Note 8—Series A Preferred Stock
On June 30, 2008, the Company entered into a Termination Agreement (the “Transaction”) with the Organization terminating the CSMSA, see note 5. 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.
Note 9—Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), 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 and six months ended March 31,June 30, 2008 and 2007 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.

13


The fair values of share-based payments are estimated on the date of grant using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of the Company’s common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.
In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 110. This guidance 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 SFAS 123(R),Share-Based Payment. 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 2007, we used the simplified method to determine the expected option term, based upon the vesting and original contractual terms of the option. On January 1, 2008, 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.

9


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
A summary of employee stock option activity under the 1998 Stock Option Plan during the threesix months ended March 31,June 30, 2008 is as follows:
                
 Number of Weighted-  Number of Weighted- 
 Stock Average  Stock Average 
Options Options Exercise Price  Options Exercise Price 
Outstanding at December 31, 2007 (1) 814,506 $2.76  814,506 $2.76 
Granted      
Exercised  (300,000) $1.26   (300,000) $1.26 
Forfeited or expired  (413,506) $3.72   (414,506) $3.73 
          
Outstanding at March 31, 2008 (2) 101,000 $3.27 
Outstanding at June 30, 2008 (2) 100,000 $3.23 
          
Exercisable at March 31, 2008 (2) 97,000 $3.10 
Exercisable 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.
In September 2006, the Board of Directors approved, subject to stockholder approval, 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.
2006 Stock Incentive Plan
On June 27, 2007, the stockholders approved the 2006 Stock Incentive Plan (the “2006 Plan”). All stock options previously granted under the 2006 Plan that were subject to stockholder approval are now outstanding. Pursuant to the terms of the 2006 Plan, the Company may issue 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.

14


In April 2008, our Board of Directors approved a resolution to increase the 2006 Plan by 2,000,000 shares. 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. As of March 31,June 30, 2008, there are 166,4562,106,456 shares of common stock reserved for issuance 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. See Note 10 below.
A summary of employee stock option activity under the 2006 Stock Incentive Plan during the threesix months ended March 31,June 30, 2008 is as follows:
                
 Number of Weighted-  Number of Weighted- 
 Stock Average  Stock Average 
Options Options Exercise Price  Options Exercise Price 
Outstanding at December 31, 2007 (1) 3,600,319 $3.57  3,600,319 $3.57 
Granted(2) 1,175,000 $2.49  1,190,000 $2.49 
Exercised      
Forfeited or expired  (142,500) $10.00   (144,000) $10.00 
          
Outstanding at March 31, 2008 (1) 4,632,819 $3.10 
Outstanding at June 30, 2008 (3) 4,646,319 $3.09 
          
Exercisable at March 31, 2008 (2) 71,750 $8.04 
Exercisable 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 exercise 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.

10


The fair value of each employee 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 Ended  For the Six Months Ended
 March 31,  June 30,
 2008 2007  2008 2007
Risk-free interest rate:  2.8% n/a   2.9%  5.0%
Expected term: 6 Years n/a  6 Years 5 Years
Expected dividend yield:  0% n/a   0%  0%
Expected volatility:  151% n/a   151%  156%
The Company recognized stock-based compensation expense for the issuance of options of $1,130,285$1,149,374 and $314,790$597,307 for the three months ended March 31,June 30, 2008 and 2007, respectively, and $2,279,662 and $912,097 for the six months ended June 30, 2008 and 2007, respectively.
As of March 31,June 30, 2008, there was $11,226,332$10,233,120 in total unrecognized compensation cost, which is expected to be recognized over a weighted average period of 2.62.3 years.
Unrestricted Shares
During the threesix months ended March 31,June 30, 2008, the Company issued 58,750 shares of unrestricted common stock to consultants and its non-employee directors under the 2006 Plan. The shares are fully vested. The fair value of the unrestricted shares is determined based on the closing price of the Company’s stock on the date of issuance. The Company recognized stock-based compensation expense of $0 and $250,475, respectively, for the unrestricted shares issued during the three and six months ended March 31,June 30, 2008.

15


Restricted Shares
On January 18, 2008, the Board of Directors granted 25,800 shares of restricted common stock to the Company’s non-employee directors for compensation during 2008 under the 2006 Plan. The restricted shares vest monthly on the last day of the month through December 31, 2008. Restricted shares activity during the threesix months ended March 31,June 30, 2008 was as follows:
                
 Weighted-Average  Weighted-Average 
 Shares Share Price  Shares Share Price 
Unvested at January 1, 2008 0 n/a  0 n/a 
Granted 25,800 $2.49  25,800 $2.49 
Vested during period  (6,450) $2.49   (12,900) $2.49 
Cancelled during period 0 n/a  0 n/a 
          
Unvested at March 31, 2008 19,350 $2.49 
Unvested at June 30, 2008 12,900 $2.49 
        
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 stock-based compensation expense of $16,061 and $32,121 for the restricted shares that vested during the three and six months ended March 31, 2008.June 30, 2008, respectively. As of March 31,June 30, 2008, there was $48,181$32,121 in total unrecognized stock -based compensation expense related to non-vested restricted share grants, which is expected to be recognized over the last ninesix months of 2008. During the three months ended June 30, 2008, the Company issued 5,575 of the vested restricted shares, resulting in an increase of $13,882 to stockholders’ equity.
Note 9—10—Warrant Re-pricing
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 June 30, 2008. The fair value of the warrant re-pricing was determined using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate:2.81%
Expected term:4.36 years
Expected dividend yield:0.00
Expected volatility:103.55%
In March 2006, the Company issued three series of warrants to purchase 500,000 shares of common stock each at exercise prices of $2.87, $4.00 and $7.00 per share to RSI as compensation for certain strategic initiatives. The first warrant was exercised in 2006. 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 6. The Series 2 and Series 3 warrants were still outstanding at June 30, 2008 and expire in March 2016. The fair value of the warrant re-pricing was determined using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate:2.81%
Expected term:4.08 years
Expected dividend yield:0.00
Expected volatility:105.68%
Note 11—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; see Note 3 — Jet Rights, Note 5 - Long-term debt, and Note 6 — Notes Payable.Payable, Note 8 — Preferred Stock, and Note 10 — Warrant Re-pricing. MATT Inc. is also the Company’s largest shareholder.

 

1116


Note 10—12—Subsequent Events
On April 4,July 22, 2008, the staffCompensation Committee of the Nasdaq Stock Market sent the Company a deficiency letter because we were not in compliance with the Nasdaq listing requirements. From April 7th through April 23rd, the price of our common stock closed at a level so that we met the listing requirements. On April 24th, our stock price closed at a price which caused us to not meet Nasdaq’s minimum of $35 million market value for listed common stock. The Nasdaq Rules require our common stock to trade above the threshold of $2.77 per share. For us to again fail to comply with the $35 million threshold, our common stock must trade below $2.77 for 10 consecutive business days. On April 28, 2008, the price closed at $2.85.
In the event of any future declines in our common stock price, we have entered into a Term Sheet with the Organization which will nullify the CSMSA, and we will issue the Organization $2,500,000 of senior preferred stock. We are currently negotiating a definitive Agreement. Once consummated, we will also meet the minimum stockholders’ equity required by Nasdaq. The following description will no longer apply once the CSMSA terminates. The CSMSA provides that we will develop, operate and host the Organization’s website and provide all the services necessary to conduct such operations. During the first three years of the term of the CSMSA, the Organization will reimburse us for our costs and expenses in providing these services, not to exceed $500,000 per year. The CSMSA further provides that we will pay the Organization’s operating costs through October 2016, up to $1,200,000 per year minus our costs and expenses for providing the services described above.
In April 2008, our Board of Directors approvedgranted 727,500 10-year stock options to executive officers of the Company and 75,000 10-year stock options to the Chairman of the Board in his capacity as a resolution to increaseconsultant under the 2006 Plan by 2,000,000 shares.Plan. The proposal will be considered by our shareholdersstock options are exercisable at $2.07 and vest subject to meeting specific performance milestones on or before December 31, 2009.
On July 22, 2008, the 2008 Annual Meeting scheduled for June 27, 2008.Company granted 696,500 10-year stock options to employees of the Company and 10,000 10-year stock options to a consultant under the 2006 Plan. The stock options are exercisable at $2.07 and vest subject to meeting specific performance milestones on or before December 31, 2009.

 

1217


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 thisForm 10-Q.
Company Overview
In 2007, Quepasa transitioned from being a bilingual search engine into a bilingual portal and Hispanic social network. With the evolution of the siteour website into a Hispanic portal and social network, the products and services provided to businesses transitioned towe expect future revenues will come from predominately display advertising. In December 2006, the portal service of Quepasa was discontinued.
Highlights for the three months ended March 31,first and second quarters of 2008 included:
  We launchedIn late January 2008, we borrowed $7,000,000, including $5,000,000 from a company controlled by one of our new websitenon-employee directors. The notes are due in beta mode on February 6, 2008, which marked our transformation to an Hispanic social network;2016;
 
  We elected Jeffrey ValdezOn February 6, 2008, we re-launched our website in beta mode as Chairmana Hispanic social network; and
On June 30, 2008, we terminated the CSMSA issuing the Organization $2,500,000 of our BoardPreferred Stock and recorded a one-time non-cash gain of Directors in January 2008$5,056,052 based upon the difference between the value of the liabilities we eliminated and at the same time entered into a Consulting Agreement with him. Mr. Valdez is a leading Hispanic-American television and motion picture figure who founded SlTV,value of the first English language cable network aimed at the Hispanic market. Mr. Valdez is devoting substantial time working with our management in developing content for our website.Preferred Stock.
Quepasa re-launched the site on February 6, 2008, to be solely a Hispanic social network with content provided by the user community. Our community provides access to an expansive, bilingual menu of resources that promote social interaction, information sharing, and other topics of importance to Hispanic 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. We also use our targeting capabilities to help advertisers reach their desired audiences by placing contextually relevant advertisements on our pages.
We seek to create innovative and high quality Internet services for users and to provide efficient and effective marketing services for businesses to reach these users. We focus on increasing our user base and enhancing the user experience on our website to broaden the value of our user base to advertisers and to increase the revenue from these advertisers. We believe that we can increase our user base by offering compelling Internet services and effectively integrating community, personalization, and content to create a powerful user experience. These user relationships and the social community enable us to leverage our offered forms of online advertising as well as premium services for users.
While many of our services are free to our users, we intend to generate revenue by providing marketing services and advertising opportunities to businesses and by establishing paying relationships with our users for premium services and products. All of our offerings are currently available in both English and Spanish.
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 following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board 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.

13


Stock-Based Compensation Expense
See Note 89 — Stock-Based Compensation to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for discussion of stock-based compensation expense.
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 as additional information becomes available during the administration and litigation process.available.

18


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.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening accumulated deficit. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position, cash flows, and results of operations.
Recent Accounting Pronouncements
See Note 1 — Description of Business and Summary of Significant Accounting Policies to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.
Results of Operations
Revenue Sources
During the threesix months ended March 31,June 30, 2008, and 2007, our revenue was generated from threetwo principal sources: revenue earned from the sale of banner advertising on our website the Google AdSense program, and subscription 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.
Google AdSense Revenue:Google AdSense Approximately 80% of our revenue is generated when a quepasa.com user clicks on a Google advertiser through either the displayed advertisements associated with content or by utilizing the Google search feature. We recognize revenuecame from Google AdSense in the period it is reported by Google.banner advertising.
Subscription Sales:Subscription sales related to the internetInternet dating service Corazones.Corazones.com. We have not focused our efforts on marketing this website. We recognize revenue from subscription sales as services are delivered. In February of 2008, this service ceased charging for subscriptions. Revenue will be derived indelivered, or ratably over the future from advertising salessubscription period.
Operating Expenses
Our principal operating expenses are divided into the following categories:
  
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.

14


  
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


  
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


Comparison of the three months ended March 31,June 30, 2008 with the three months ended March 31,June 30, 2007
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 three months ended March 31,  For the three months ended June 30, 
 2008 2007 Change ($) Change (%)  2008 2007 Change ($) Change (%) 
  
REVENUES
 $6,863 $52,482 $(45,619)  -87% $24,774 $73,260 $(48,486)  -66%
         
          
CASH-BASED OPERATING EXPENSES  
Sales and marketing 80,623 469,316  (388,693)  -83% 55,049 292,788  (237,739)  -81%
Product and content development 548,714 972,740  (424,026)  -44% 703,585 1,070,313  (366,728)  -34%
General and administrative 941,665 1,585,138  (643,473)  -41% 509,019 1,621,452  (1,112,433)  -69%
                  
Total cash-based operating expenses 1,571,002 3,027,194  (1,456,192)  -48% 1,267,653 2,984,553  (1,716,900)  -58%
                  
  
NET CASH BURN
  (1,564,139)  (2,974,712) 1,410,573  -47%  (1,242,879)  (2,911,293) 1,668,414  -57%
Net Cash Monthly Burn Rate
  (521,380)  (991,571) 470,191  -47%  (414,293)  (970,431) 556,138  -57%
 
NON-CASH OPERATING EXPENSES  
Stock based compensation expense 1,396,821 314,790 1,082,031  344% 1,165,437 788,795 376,642  48%
Depreciation and amortization 108,415 92,603 15,812  17% 113,008 103,658 9,350  9%
                  
Total Non-Cash Operating Expenses 1,505,236 407,393 1,097,843  269% 1,278,445 892,453 385,992  43%
                  
  
         
LOSS FROM OPERATIONS
  (3,069,375)  (3,382,105) 312,730  -9%  (2,521,324)  (3,803,746) 1,282,422  -34%
                  
  
OTHER INCOME (EXPENSE):  
Interest income 50,579 164,386  (113,807)  -69% 46,925 127,438  (80,513)  -63%
Interest expense  (289,082)   (289,082)  -100%  (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 7,395 12,708  (5,313)  -42% 12,084 1,529 10,555  690%
                  
TOTAL OTHER INCOME (EXPENSE)  (231,108) 177,094  (408,202)  -231% 4,733,353 132,416 4,600,937  3475%
                  
  
NET LOSS
 $(3,300,483) $(3,205,011) $(95,472)  3%
NET INCOME (LOSS)
 $2,212,029 $(3,671,330) $5,883,359  -160%
                  
Our results of operations for the three months ended March 31, 2008 and 2007 were characterized by expenses that significantly exceeded revenues during the periods. We reported a net loss of $3,300,483 for the three months ended March 31, 2008, compared to a net loss of $3,205,011 for the three months ended March 31, 2007.

15


Revenues
Our revenues were $6,863$24,774 for the three months ended March 31,June 30, 2008, a decrease of 87%66% compared to the firstsecond quarter of 2007. In September 2007, we launched a new beta version of our website, which experienced technical difficulties and performance issues that adversely affected the amount of traffic visiting our website. In late October 2007, a new senior management team was put into place and immediately began to address the performance issues with the website. The bulk of the banner advertising campaigns were discontinued in the fourth quarter of 2007, and efforts to generate additional banner advertising campaigns were temporarily put on hold while emphasis was placed on enhancing the functionality and the content of our website. In February 2008, we re-launched our website in beta mode. We experienced a 222% increase in page views during the second quarter of 2008 from the first quarter of 2008. We are hopeful that website traffic will continue to increase in the third and fourth quarters of 2008. 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; and (ii) effective email deliverability. 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 have resulted in meaningful gains in the number of new registered users and site traffic. While we are hopeful that the low email rejection rate and increase in traffic and new registered users will continue, we can not assure you that this will occur. If it does not, our future results of operations may be materially and adversely affected.

21


Operating Costs and Expenses
Sales and Marketing:Sales and marketing expenses decreased $237,739, or 81%, to $55,049 for the three months ended June 30, 2008. The decrease is primarily attributed to the closing of the New York sales office and a reduction of our sales force in November 2007, which resulted in a decrease in salaries of approximately $123,000 versus the second quarter of 2007. In addition, the discontinuance of advertising efforts in the first half of 2008 resulted in savings of approximately $114,000 versus the second quarter of 2007.
Product and Content Development:Product and content development expenses decreased $366,728, or 34%, to $703,585 for the three months ended June 30, 2008. This decrease is attributable to a focused effort to reduce costs. During the three months ended June 30, 2008, we had decreases in technology consulting fees of $301,000, salaries within our U.S. operations of $107,000, and content fees of $39,000, partially offset by an increase in salaries and associated payroll costs of $75,000 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.
General and Administrative:General and administrative expenses decreased $1,112,433, or 69%, to $509,019, for the three months ended June 30, 2008. The significant changes consisted of:
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:Stock based compensation expense increased $376,642, or 48%, to $1,165,437 for the three months ended June 30, 2008. This increase is primarily attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008. At June 30, 2008, we had $10,233,120 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next nine quarters.
Depreciation and Amortization:Depreciation and amortization expense increased $9,350, or 9%, to $113,008 for the three months ended June 30, 2008. This increase is primarily attributable to capital purchases from 2007, offset by the termination of the jet rights in the first quarter of 2008 and the associated amortization expense.
Other Income (Expense): Other income increased $4,600,937 to $4,733,353 for the three months ended June 30, 2008. The increase is mainly attributable to a gain on extinguishment of debt of $5,056,052 recorded in the second quarter of 2008 as a result of the termination of the CSMSA discussed in Note 5 of the condensed consolidated financial statements. The gain was partially offset by $339,000 of interest expense associated with the CSMSA and the Note Purchase Agreements entered into in the first quarter of 2008 (see note 6 of the condensed consolidated financial statements), a decrease of $81,000 of interest income associated with lower average cash balances during the second quarter of 2008 versus the second quarter of 2007, and a $43,000 loss recorded in the second quarter of 2008 on the disposal of office furniture and equipment associated with the shutdown of our Scottsdale, AZ headquarters.

22


Comparison of the six months ended June 30, 2008 with the six months ended June 30, 2007
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 six months ended June 30, 
  2008  2007  Change ($)  Change (%) 
                 
REVENUES
 $31,637  $125,742  $(94,105)  -75%
             
                 
CASH-BASED OPERATING EXPENSES                
Sales 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 EXPENSES                
Stock 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
Our revenues were $31,637 for the six months ended June 30, 2008; a decrease of 75% compared to the six months ended June 30, 2007. In September 2007, we launched a new beta version of our website, which experienced technical difficulties and performance issues that adversely affected the amount of traffic visiting our website. In late October 2007, a new senior management team was put into place and immediately began to address the performance issues with the website. The bulk of the banner advertising campaigns were discontinued in the fourth quarter of 2007, and efforts to generate additional banner advertising campaigns were temporarily put on hold while emphasis was placed on enhancing the functionality and the content of our website. In February 2008, we re-launched our website in beta mode. We experienced a 222% increase in page views during the second quarter of 2008 from the first quarter of 2008. We are hopeful that website traffic will continue to increase in the third and fourth quarters of 2008. We believe there will be a direct correlation between website traffic and our ability to increase revenue.
Operating Costs and Expenses
Sales and Marketing:Sales and marketing expenses decreased $388,693,$626,432, or 83%82%, to $80,623$135,672 for the threesix months ended March 31,June 30, 2008. The decrease is primarily attributed to the discontinuance of advertising efforts in the first quartersix months of 2008, which resulted in savings of approximately $390,000$506,000 versus the first quartersix months of 2007. In addition, we closed the New York sales office and reduced our sales force in November 2007, which resulted in a decrease in salaries of approximately $44,000$167,000 versus the first quartersix months of 2007. These savings were partially offset by an increase of $38,000$40,000 associated with a Mexican sales office that was opened in May 2007 and, subsequently, closed in March 2008 and an increase of $7,000 for other sales and marketing expenses.2008.

23


Product and Content Development:Product and content development expenses decreased $424,026,$790,754, or 44%39%, to $548,714$1,252,299 for the threesix months ended March 31,June 30, 2008. This decrease is attributable to a focused effort to reduce costs. During the threesix months ended March 31,June 30, 2008, we had decreases in technology consulting fees of $370,000,$670,000, content fees of $107,000,$146,000, salaries within our U.S. operations of $95,000 and other professional fees of $50,000,$45,000, partially offset by an increase in salaries and associated payroll costs of $102,000$184,000 for our product development and technology personnel primarily within Quepasa.com de Mexico, which provides substantially all of our design, translation services, and website management and development services.
General and Administrative:General and administrative expenses decreased $643,473,$1,755,906, or 41%55%, to $941,665,$1,450,684 for the threesix months ended March 31,June 30, 2008. The significant changes consisted of:
  a decrease in professional fees expense of $349,000,$831,000, made up of decreases in legal fees of $186,000$306,000 and accounting fees of $163,000,$389,000, due to unusually high activity in 2007;2007, and a settlement of $135,000 toward legal fees received during the second quarter of 2008;
 
  a decrease in recruiting fees of $147,000,$435,000, due to reduced hiring during 2008;
 
  a decrease in salaries and related payroll costs of $93,000,$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 entertainmentsubscriptions of $71,000,$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 $45,000,$28,000, a decrease in dues and subscriptionsinsurance costs of $33,000,$22,000, and a decrease in printingother general and reproductionadministrative costs of $32,000,$34,000, attributable to a focused effort to reduce costs;
 
  these decreases were partiallya 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 forin the terminationfirst quarter of the operating lease for our Scottsdale, AZ headquarters.2008, resulting in a net decrease of $48,000. .
Stock Based Compensation:Stock based compensation expense increased $1,082,031,$1,458,673, or 344%132%, to $1,396,821$2,562,258 for the threesix months ended March 31,June 30, 2008. This increase is primarily attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008.
Depreciation and Amortization:Depreciation and amortization expense increased $15,812,$25,162, or 17%13%, to $108,415$221,423 for the threesix months ended March 31,June 30, 2008. This increase is attributable to the depreciation associated with capital purchases from 2007.2007, offset by the termination of the jet rights in the first quarter of 2008 and the associated amortization expense.
Other Income (Expense): Other income (expense)increased $4,192,735 to $4,502,245 for the six months ended June 30, 2008. The increase is primarily consistsattributable to a gain on extinguishment of interest expensedebt of $5,056,052 recorded in the second quarter of 2008 as a result of the termination of the CSMSA discussed in Note 5 of the condensed consolidated financial statements. The gain was partially offset by interest income. Other income for the three months ended March 31, 2008 decreased $408,202, to other expense of $231,108 from $177,094 of other income for the three months ended March 31, 2007. The change is mainly attributable to $289,000$628,000 of interest expense associated with the CSMSA and the Note Purchase Agreements entered into in the first quarter of 2008 see(see note 6 of the condensed consolidated financial statements, andstatements), a decrease of $114,000$194,000 of interest income associated with lower average cash balances during the first quartersix months of 2008 versus the first six months of 2007, and a $43,000 loss recorded in the second quarter of 2007.2008 on the disposal of office furniture and equipment associated with the shutdown of our Scottsdale, AZ headquarters.

16


Liquidity and Capital Resources
                
 For the Three Months Ended  For the Six Months Ended 
 March 31,  June 30, 
 2008 2007  2008 2007 
Net cash used in operating activities $(1,614,353) $(2,235,500) $(2,805,083) $(5,046,813)
Net cash used in investing activities $(323,583) $(253,039) $(396,767) $(610,340)
Net cash provided by financing activities $7,337,019 $890,650  $7,337,019 $913,150 

24


Cash used in operating activities for the threesix months ended March 31,June 30, 2008 is driven by our net loss, adjusted for non-cash items. Non-cash adjustments include a gain on the extinguishment of debt, depreciation and amortization, the issuance of stock options and common stock for compensation, and interest associated with long-term debt. Net cash used in operations was $1,614,353$2,805,083 for the threesix months ended March 31,June 30, 2008 compared to $2,235,500$5,046,813 for the first threesix months of 2007. For the threesix months ended March 31,June 30, 2008, net cash used by operations consisted primarily of a net loss of $3,300,483$1,088,454 plus a gain on extinguishment of debt of $5,056,052, offset by non-cash expenses of $108,415$221,423 in depreciation and amortization, $248,490$514,530 in non-cash interest, $52,692$125,344 in amortization of discounts on notes payable and debt issuance costs, $42,977 loss on the disposal of fixed assets, and $1,380,760$2,544,019 related to the issuance of stock options, warrants, and common stock for compensation and professional services. Additionally, changes in working capital impacted the net cash used in operating activities. These changes included a decrease in accounts payable and accrued expenses of $166,782,$176,101, offset by decreases in trade accounts receivable of $21,272 and other current assets and other assets of $41,330.$75,325. Net cash used by operations for the threesix months ended March 31,June 30, 2007 consisted of a net loss of $3,205,011$6,876,341 offset by non-cash expenses of $92,603$196,261 in depreciation and amortization and $314,790$1,103,585 related to the issuance of stock options and warrants for compensation. Changes in working capital for the threesix months ended March 31,June 30, 2007 included decreases in other current assets and other assets of $102,769 and trade accounts receivable of $32,489 and an increase of $439,568$531,729 in accounts payable and accrued expenses.
Net cash used in investing activities for the threesix months ended March 31,June 30, 2008 is primarily attributable to Investment in BRC/La Alianza of $300,000,$350,000, see note 4 of the condensed consolidated financial statements. Our capital expenditures were $23,583$57,368 for the threesix months ended March 31,June 30, 2008, compared to capital expenditures of $253,039$613,789 for the same period in 2007.
Net cash provided by financing activities for the threesix months ended March 31,June 30, 2008 came from net proceeds of $6,959,519 from our borrowing in January 2008. See note 6 of the condensed consolidated financial statements. Cash proceeds from the exercise of stock options and warrants was $377,500 for the threesix months ended March 31,June 30, 2008, compared to $890,650$913,150 for the same period in 2007.
                
 March 31, December 31,  June 30, December 31, 
 2008 2007  2008 2007 
Cash and cash equivalents $9,074,037 $3,673,281  $7,811,995 $3,673,281 
Total assets $10,590,435 $5,900,908  $9,234,486 $5,900,908 
 
Percentage of total assets  86%  62%  85%  62%
          
We invest excess cash predominately in liquid marketable securities to support our growing infrastructure needs for operational expansion.
We have substantial capital resource requirements and have generated significant losses since inception. At March 31,June 30, 2008, we had $9,074,037$7,811,995 in cash and cash equivalents compared to $3,673,281 at December 31, 2007, resulting in a net increase in cash and cash equivalents of 5,400,7564,138,714 for the first quartersix months of 2008.
The increase in cash for 2008 was primarily attributed to the issuance of subordinated notes payable in the amount of $7,000,000 in January, 2008, partially offset by cash-based operating expenses of $1,571,002$2,838,655 during the first quartersix months of 2008.
In October 2007, a new senior management team was put into place. Along with addressing the website performance issues, the management team focused their attention on reducing costs while maintaining the efforts to improve the performance of our websites. In November 2007, the management team terminated the majority of the consulting arrangements, closed the sales office in New York, and significantly reduced the headcount at the corporate headquarters in Scottsdale. Based on the reductions initiated in November 2007, the net cash burn rate for the first quartersix months of 2008 dropped to $521,380$467,836 per month, which included one-time charges of $129,000 associated with the termination of the lease for our Scottsdale headquarters.headquarters and $78,000 of promotional activities launched in the second quarter of 2008. We expect a net cash burn rate of approximately $425,000 per month for the remainder of 2008, excluding any promotional activities.

17


During the first quartersix months of 2008, we obtained proceeds of $377,500 from the exercise of common stock options and warrants compared to $890,650$913,150 from the exercise of stock options and warrants during the first quartersix months of 2007.
Based on the reduction of the net cash burn rate, we believe that our current cash balances are sufficient to finance our current level of operations throughbeyond the next 12 months. We have budgeted additional capital expenditures of approximately $500,000 for the remainder of 2008 and are currently negotiating alternative financing arrangements as we continue to invest in the expansion of our product and services offerings. The capital expenditures are primarily for the construction of two-fully redundant data centers in the Phoenix, Arizona and Dallas, Texas metropolitan areas.

25


Forward-LookingForward Looking Statements
The statements in this Report relating to the opportunities presented by beingcontinued viability of our solution to email problems with a bilingual portalleading Internet service provider and Hispanic social network, our agreement with BRC, issues relating to our Nasdaq listing and common stock price, proposed agreement with the Organization, proposed increase in shares under the 2006 Plan, our ability to create innovative and high quality Internet services and increase our user base, anticipated increase in revenue from website traffic, our intention to generate revenue through marketing services, and anticipated future cash flowsliquidity are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, words such as “expects,” “anticipates,” “intends,” “believes,” “will” and similar words are used to identify forward-looking statements.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include technological issues relating to our email delivery rates, delays in product development, changes in social network needs, internal issues with regard to the Organization and issues which generally affect public trading markets. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the risk factors contained in Quepasa’s Form 10-KSB for the year ended December 31, 2007.

26


Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable for smaller reporting companies.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the specified time periods and accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management, under the supervision and with the participation of its Principal Executive Officer and its Principal Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were adequateeffective as of March 31,June 30, 2008 to provide reasonable assurance in the Company’s financial reporting.
Remediation of Certain Weaknesses and Changes in Internal Controls
As discussed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the SEC on March 31, 2008, during the financial reporting process for the fiscal year end December 31, 2007, certain weaknesses in the Company’s internal control over financial reporting were identified, including inadequate documentation of policies, procedures, and internal controls; weaknesses in information technology controls and procedures; a lack of sufficient accounting personnel and expertise to address the Company’s expanding and increasingly complex financial reporting needs; and incorrect accounting treatment of certain expenses and equity issuances. The Company believes that the primary cause of those control issues stemmed from the lack of accounting personnel and expertise.

18


In addition to the new Chief Financial Officer hired in October 2007, the Company hired a new Vice President of Finance and replaced the Controller during the first quarter of 2008. As a result of these new hires, the Company believes that the lack of sufficient accounting personnel and expertise has been addressed. Additionally, in January 2008, the Company hired a Chief Technology Officer to help address the information technology control issues. During the remainder of 2008, the new financial management team will continue to address and improve the identified weaknesses in the Company’s internal controls.
Management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the condensed consolidated financial statements for the quarter ended March 31,June 30, 2008, fairly present in all material respects the financial condition and results of operations for the Company in conformity with accounting principles generally accepted in the United States of America.
Other than as described above, there have not been any other changes in the Company’s internal control over financial reporting during the quarter ended March 31,June 30, 2008, which have materially affected, or are reasonably likely to materially affect, the Company’s 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.

 

1927


QUEPASA CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. 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 for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the threesix months ended March 31,June 30, 2008, we sold securities without registration under the Securities Act of 1933 in reliance upon exemption provided in Section 4(2) and Rule 506 thereunder as described below:
                
 No. of   No. of  
Name of Class Date Issued Securities Reason for Issuance Date Issued Securities Reason for Issuance
Holders of Subordinated Promissory Notes January 25, 2008 $7,000,000  Notes issued pursuant to the terms of two Note Purchase Agreements January 25, 2008 $7,000,000  Notes issued pursuant to the terms of two Note Purchase Agreements
                
Holders 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. 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
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
(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
The following directors’ terms of office as a director continued after the Annual Meeting:
John C. Abbott
Alonso Ancira
Ernesto Cruz
Malcolm Jozoff

28


(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  Withheld 
Lionel Sosa  6,636,094   6,525   5,950 
Dr. Jill Syverson-Stork  6,636,694   7,925   3,950 
Jeffrey 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:
                 
              Broker 
Proposal For  Against  Abstain  Non-Votes 
To 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   2,204,979 
To 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
None
Item 6. Exhibits
See Exhibit Index

 

2029


QUEPASA CORPORATION AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 Quepasa Corporation
 
May 12,July 25, 2008 By:  /s/ John C. Abbott   
  Name:  John C. Abbott  
  Title:  Chairman and Chief Executive Officer
(Principal Executive Officer) 
 
 
May 12,
July 25, 2008 By:  /s/ Michael D. Matte   
  Name:  Michael D. Matte  
  Title:  Executive Vice President
and Chief Financial Officer
(Principal Financial Officer) 
 

 

2130


EXHIBIT INDEX
   
Exhibit  
No. Description of Exhibit
3.1 Certificates of Restated Articles of Incorporation (1)
3.2*Certificate of Designation
3.3 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*
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)
31.1* Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2* Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1*10.18*Employment Agreement with Louis Bardov dated as of January 22, 2008
10.19*Termination Agreement with Mexicans & Americans Thinking Together Foundation, Inc. and Mexicans & Americans Trading Together, Inc. dated June 30, 2008.

31


Exhibit
No.Description of Exhibit
31.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Section 302)
32.2*
31.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906(Section 302)
32.1**Certification of the Sarbanes-Oxley ActPrincipal Executive Officer (Section 906)
32.2**Certification of 2002Principal 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) This replaces the form Agreement filed withIncorporated by reference from the Registrant’s AnnualQuarterly Report on Form 10-KSB10-Q as filed with the SEC on March 31, 2008, which contained an incorrect version of the Agreement. The Agreement was approved by the Board of Directors of the Company on January 18,May 13, 2008.
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 D. Matte, Quepasa Corporation, 224 Datura Street, Suite 1100, West Palm Beach, FL 33401.

 

2232