##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 Amendment No. 1 to 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 September 30, 2005
 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: 001-16105
 STONEPATH GROUP, INC.
  Delaware
    
    65-0867684(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 2200 Alaskan Way, Suite 200
Seattle, WA 98121
 (206) 336-5400
 þ o
  o o þ
 o þ




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##### Table of Contents



STONEPATH GROUP, INC.
 INDEX
 PART IFINANCIAL INFORMATIONItem 1.Financial StatementsConsolidated Balance Sheets at September 30, 2005 (Restated) and December 31, 2004Consolidated Statements of Operations  Three- and Nine-months ended September
30, 2005 (Restated) and 2004Consolidated Statements of Cash Flows  Nine-months ended September 30, 2005
(Restated) and 2004Notes to Unaudited Consolidated Financial StatementsItem 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.Quantitative and Qualitative Disclosures About Market RiskItem 4.Controls and ProceduresPART IIOTHER INFORMATIONItem 1.Legal ProceedingsItem 2.Unregistered Sales of Equity Securities and Use of ProceedsItem 3.Defaults Upon Senior SecuritiesItem 4.Submission of Matters to a Vote of Security HoldersItem 5.Other InformationItem 6.ExhibitsSIGNATURESEXHIBIT 12EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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EXPLANATORY STATEMENT
  Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock.




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
  September 30, 2005
    
    
    December 31, 2004(UNAUDITED)RestatedAssetsCurrent assetsCash and cash equivalents
    
    $
    5,387,335
    
    
    $
    2,800,645Accounts receivable, net
    
    
    72,040,653
    
    
    
    64,064,382Prepaid expenses and other current assets
    
    
    2,022,179
    
    
    
    2,559,858Total current assets
    
    
    79,450,167
    
    
    
    69,424,885Goodwill
    
    
    40,579,684
    
    
    
    37,278,661Technology, furniture and equipment, net
    
    
    6,862,045
    
    
    
    7,595,859Acquired intangibles, net
    
    
    5,632,364
    
    
    
    7,079,986Note receivable, related party
    
    
    87,500
    
    
    
    87,500Other assets
    
    
    3,371,416
    
    
    
    1,479,181Total assets
    
    $
    135,983,176
    
    
    $
    122,946,072Liabilities and Stockholders EquityCurrent liabilities:Short term debt
    
    $
    20,426,240
    
    
    $
    16,911,700Accounts payable
    
    
    49,513,771
    
    
    
    38,537,750Earn-outs payable
    
    
    2,640,045
    
    
    
    2,645,695Accrued payroll and related expenses
    
    
    3,509,204
    
    
    
    3,192,889Accrued restructuring costs
    
    
    2,054,384
    
    
    
    741,637Capital lease obligation
    
    
    335,419
    
    
    
    1,510,461Accrued expenses
    
    
    6,158,665
    
    
    
    5,627,276Total current liabilities
    
    
    84,637,728
    
    
    
    69,167,408Other long-term liabilities
    
    
    5,966,321
    
    
    
    2,064,128Deferred tax liability
    
    
    2,189,100
    
    
    
    1,650,900Total liabilities
    
    
    92,793,149
    
    
    
    72,882,436Minority interest
    
    
    5,996,022
    
    
    
    5,094,336Commitments and contingencies (Note 9)Stockholders equity:Preferred stock, $.001 par value, 10,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.001 par value, 100,000,000 shares authorized; issued and
outstanding: 43,712,726 and 42,839,795 shares at 2005 and 2004, respectively
    
    
    43,713
    
    
    
    42,840Additional paid-in capital
    
    
    222,639,560
    
    
    
    221,728,796Accumulated deficit
    
    
    (185,754,931
    )
    
    
    (176,806,892
    )Accumulated other comprehensive income
    
    
    265,663
    
    
    
    35,856Deferred compensation
    
    
    
    
    
    
    (31,300
    )Total stockholders equity
    
    
    37,194,005
    
    
    
    44,969,300Total liabilities and stockholders equity
    
    $
    135,983,176
    
    
    $
    122,946,072
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Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Restated
    
    
    
    
    
    
    RestatedTotal revenue
    
    $
    111,311,674
    
    
    $
    109,711,414
    
    
    $
    301,328,275
    
    
    $
    256,405,516Cost of transportation
    
    
    87,971,539
    
    
    
    84,638,366
    
    
    
    235,451,678
    
    
    
    195,515,923Net revenue
    
    
    23,340,135
    
    
    
    25,073,048
    
    
    
    65,876,597
    
    
    
    60,889,593Personnel costs
    
    
    11,805,255
    
    
    
    13,600,160
    
    
    
    35,395,425
    
    
    
    36,628,969Other selling, general and administrative costs
    
    
    7,985,747
    
    
    
    8,608,533
    
    
    
    26,266,035
    
    
    
    22,080,720Depreciation and amortization
    
    
    1,163,778
    
    
    
    1,039,742
    
    
    
    3,460,457
    
    
    
    3,023,520Restructuring charges
    
    
    
    
    
    
    
    
    
    
    3,448,209
    
    
    
    Income (loss) from operations
    
    
    2,385,355
    
    
    
    1,824,613
    
    
    
    (2,693,529
    )
    
    
    (843,616
    )Other income (expense):Loan refinancing costs
    
    
    (911,998
    )
    
    
    
    
    
    
    (911,998
    )
    
    
    Interest expense, net
    
    
    (953,202
    )
    
    
    (174,924
    )
    
    
    (2,086,430
    )
    
    
    (269,967
    )Change in fair value of derivatives
    
    
    (740,531
    )
    
    
    
    
    
    
    (740,531
    )
    
    
    Provision for excess earn-out payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,075,190
    )Other income (expense), net
    
    
    (3,838
    )
    
    
    (33,865
    )
    
    
    74,828
    
    
    
    (69,149
    )Income (loss) from continuing operations before
income tax expense and minority interest
    
    
    (224,214
    )
    
    
    1,615,824
    
    
    
    (6,357,660
    )
    
    
    (4,257,922
    )Income tax expense
    
    
    481,016
    
    
    
    964,061
    
    
    
    1,688,693
    
    
    
    1,607,532Income (loss) from continuing operations before
minority interest
    
    
    (705,230
    )
    
    
    651,763
    
    
    
    (8,046,353
    )
    
    
    (5,865,454
    )Minority interest
    
    
    296,584
    
    
    
    545,996
    
    
    
    901,686
    
    
    
    1,098,032Income (loss) from continuing operations
    
    
    (1,001,814
    )
    
    
    105,767
    
    
    
    (8,948,039
    )
    
    
    (6,963,486
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (50,000
    )
    
    
    
    
    
    
    (50,000
    )Net income (loss)
    
    $
    (1,001,814
    )
    
    $
    55,767
    
    
    $
    (8,948,039
    )
    
    $
    (7,013,486
    )Basic and
diluted income (loss) per common share Continuing operations
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.21
    )
    
    $
    (0.17
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted income (loss) per common share
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.21
    )
    
    $
    (0.17
    )Basic weighted average shares outstanding
    
    
    43,712,726
    
    
    
    41,352,322
    
    
    
    43,550,871
    
    
    
    40,099,518Diluted weighted average shares and share
equivalents outstanding
    
    
    43,712,726
    
    
    
    45,773,006
    
    
    
    43,550,871
    
    
    
    40,099,518
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Nine months ended September 30,2005
    
    
    2004RestatedCash flow from operating activities:Net loss
    
    $
    (8,948,039
    )
    
    $
    (7,013,486
    )Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:Deferred income taxes
    
    
    538,200
    
    
    
    363,000Depreciation and amortization
    
    
    3,460,457
    
    
    
    3,023,520Change in fair value of derivatives
    
    
    740,531
    
    
    
    Amortization of loan discount
    
    
    81,733
    
    
    
    Minority interest in income of subsidiaries
    
    
    901,686
    
    
    
    1,098,032Stock-based compensation
    
    
    31,300
    
    
    
    42,474Loss (Gain) on disposal of technology, furniture and equipment and other
    
    
    (57,436
    )
    
    
    8,350Changes in assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (7,976,271
    )
    
    
    (13,880,578
    )Prepaid expenses and other assets
    
    
    48,483
    
    
    
    378,987Accounts payable and accrued expenses
    
    
    13,259,122
    
    
    
    10,092,245Net cash provided by (used in) operating activities
    
    
    2,079,766
    
    
    
    (5,887,456
    )Cash flows from investing activities:Purchases of technology, furniture and equipment
    
    
    (1,049,534
    )
    
    
    (4,070,129
    )Payment of earn-out
    
    
    (2,452,125
    )
    
    
    (3,431,285
    )Proceeds from sales of technology, furniture and equipment
    
    
    129,390
    
    
    
    Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (6,837,119
    )Loans made
    
    
    
    
    
    
    (75,000
    )Net cash used in investing activities
    
    
    (3,372,269
    )
    
    
    (14,413,533
    )Cash flows from financing activities:Proceeds from line of credit, net
    
    
    6,004,569
    
    
    
    18,119,900Principal payments on capital lease
    
    
    (1,245,655
    )
    
    
    (551,670
    )Payment of debt issuance costs
    
    
    (1,109,528
    )
    
    
    Proceeds from issuance of common stock upon exercise of options and warrants
    
    
    
    
    
    
    1,782,819Net cash provided by financing activities
    
    
    3,649,386
    
    
    
    19,351,049Effect of foreign currency translation
    
    
    229,807
    
    
    
    47,919Net increase (decrease) in cash and cash equivalents
    
    
    2,586,690
    
    
    
    (902,021
    )Cash and cash equivalents at beginning of period
    
    
    2,800,645
    
    
    
    3,074,151Cash and cash equivalents at end of period
    
    $
    5,387,335
    
    
    $
    2,172,130Cash paid for interest
    
    $
    1,834,892
    
    
    $
    305,215Cash paid for income taxes
    
    $
    61,597
    
    
    $
    98,602Supplemental disclosure of non-cash investing and financing activities:Issuance of common stock in connection with acquisitions
    
    $
    854,548
    
    
    $
    100,000Issuance of common stock in connection with Employee Stock Purchase Plan
    
    
    57,089
    
    
    
    224,170Issuance of warrants in connection with loan refinancing
    
    
    1,293,721
    
    
    
    Recognition of loan discount on conversion option in connection with loan
refinancing
    
    
    3,770,532
    
    
    
    Increase in goodwill related to accrued earn-out payments
    
    
    2,300,000
    
    
    
    Issuance of warrants for consulting services
    
    
    
    
    
    
    70,000Increase in technology, furniture and equipment and capital lease obligation
    
    
    
    
    
    
    390,754Increase in common stock from conversion of Series D convertible preferred stock
    
    
    
    
    
    
    149Issuance of common stock in connection with exercise of options
    
    
    
    
    
    
    511,068
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(1)
    
    Nature of Operations and Basis of PresentationStonepath Group, Inc. and subsidiaries (the Company) is a non-asset based third-party
logistics services company providing supply chain solutions on a global basis. A full range of
time-definite transportation and distribution solutions is offered through the Companys
Domestic Services platform, where the Company manages and arranges for the movement of raw
materials, supplies, components and finished goods for its customers. These services are
offered through the Companys domestic air and ground freight forwarding business. A full
range of international logistics services including international air and ocean transportation
as well as customs house brokerage services is offered through the Companys International
Services platform. In addition to these core service offerings, the Company also provides a
broad range of value added supply chain management services, including warehousing, order
fulfillment and inventory management. The Company services a customer base of manufacturers,
distributors and national retail chains through a network of owned offices in North America and
Puerto Rico, strategic locations in Asia, South America and Europe, and service partners
strategically located around the world.The accompanying unaudited consolidated financial statements were prepared in accordance with
United States generally accepted accounting principles for interim financial information.
Certain information and footnote disclosures normally included in financial statements have
been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the SEC) relating to interim financial statements. These statements
reflect all adjustments, consisting only of normal recurring accruals, necessary to present
fairly the Companys financial position, operations and cash flows for the periods indicated.
While the Company believes that the disclosures presented are adequate to make the information
not misleading, these unaudited consolidated financial statements should be read in conjunction
with the Companys Annual Report on Form 10-K for the year ended December 31, 2004. Interim
operating results are not necessarily indicative of the results for a full year because our
operating results are subject to seasonal trends when measured on a quarterly basis. Our first
and second quarters are likely to be weaker as compared with our other fiscal quarters, which
we believe is consistent with the operating results of other supply chain service providers.The Company has experienced losses from operations, and has an accumulated deficit. In
addition the Company has experienced negative cash flow from operations in earlier years. In
view of these matters, recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon profitable future operations of the Company
and generation of cash flow sufficient to meet its obligations. The Company believes that
operating improvement and cost reduction actions implemented in the first half of 2005 coupled
with existing availability on its credit facilities will provide the Company with adequate
liquidity to provide uninterrupted support for its business operations through at least
September 30, 2006.Certain amounts for prior periods have been reclassified in the consolidated financial
statements to conform to the classification used in 2005.(2)
    
    RestatementThe Company has restated its Form 10-Q for the period ended September 30, 2005 to correctly
account for its U.S. Credit Facility in accordance with Emerging Issues Task Force (EITF)
Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement, and
EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock.The U.S. Credit Facility, which was entered into August 31, 2005 and has a three-year term,
requires a lock-box arrangement, which provides for all receipts to be swept daily to reduce
borrowings. This arrangement, combined with the existence of a subjective acceleration clause
in the agreement, requires the classification of outstanding borrowings as a current liability
under the provisions of EITF Issue No. 95-22. The Company has reclassified outstanding
borrowings under this facility from long-term debt to short-term debt with this restatement.As discussed in Note 8, when the U.S. Credit Facility was established, $10,000,000 was received
in exchange for a convertible minimum borrowing note (Note). In addition, warrants were
issued entitling the holder to purchase 2,500,000 shares of the Companys common stock. Shares
issued, if any, under the conversion feature to the Note and the warrants require delivery of
registered shares pursuant to a registration rights agreement. At August 31, 2005, the
inception of the facility, the Company did not have an effective registration statement
covering the shares which may be issued under these agreements and is required to register such shares. The inability to provide an effective registration within a specified timeframe
triggers liquidated damages. The Company is required to account for the conversion features and warrants as
derivatives under the guidance provided by EITF Issue No. 00-19. The application of this
accounting requires the derivatives to be recorded as liabilities and stated at fair value on
the consolidated balance sheet with subsequent
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changes in fair value reflected in the consolidated statement of operations. Further, the
carrying value of the related debt must be adjusted to record the discount created by the
original fair value of the conversion feature and the allocated portion of the fair value of
the warrants. The Company has restated its consolidated financial statements to reflect (i) an
adjustment to the carrying amount of the Note of $4,489,266 created by recording the conversion
feature and an allocated portion of the warrants at fair value at the inception of the
agreements; (ii) the recording of incremental non-cash interest charges of $81,733 related to
accretion of the discount; and (iii) recording of a charge of $740,531 relating to the change
in fair value of the derivatives from inception of the contract to September 30, 2005.The effects of the restatement on previously reported consolidated financial statements as of
and for the three and nine-months ended September 30, 2005 are summarized below.
 September 30, 2005As PreviouslyReported
    
    As RestatedSelect Balance Sheet Data:Other assets
    
    $
    4,070,185
    
    
    $
    3,371,416Total assets
    
    
    136,681,945
    
    
    
    135,983,176Short-term debt
    
    
    6,897,539
    
    
    
    20,426,240Total current liabilities
    
    
    89,025,286
    
    
    
    84,637,728Long term debt
    
    
    17,916,269
    
    
    
    Other long-term liabilities
    
    
    161,537
    
    
    
    5,966,321Additional paid-in capital
    
    
    223,933,281
    
    
    
    222,639,560Accumulated deficit
    
    
    (184,932,667
    )
    
    
    (185,754,931
    )Total stockholders equity
    
    
    39,309,990
    
    
    
    37,194,005Total liabilities and stockholders equity
    
    
    136,681,945
    
    
    
    135,983,176
 Three months endedSeptember 30, 2005As PreviouslyReported
    
    As RestatedSelect Statement of Operations Data:Interest expense, net
    
    $
    (871,469
    )
    
    $
    (953,202
    )Change in fair value of derivatives
    
    
    
    
    
    
    (740,531
    )Income (loss) from continuing operations before income tax
expense and minority interest
    
    
    598,050
    
    
    
    (224 214
    )Income (loss) from continuing operations before minority interest
    
    
    117,034
    
    
    
    (705,230
    )Loss from continuing operations
    
    
    (179,550
    )
    
    
    (1,001,814
    )Net loss
    
    
    (179,550
    )
    
    
    (1,001,814
    )Basic and diluted loss per common share:Continuing operations
    
    $
    
    
    
    $
    (0.02
    )Loss per common share
    
    $
    
    
    
    $
    (0.02
    )
 Nine months endedSeptember 30, 2005As PreviouslyReported
    
    As RestatedSelect Statement of Operations Data:Interest expense, net
    
    $
    (2,004,697
    )
    
    $
    (2,086,430
    )Change in fair value of derivatives
    
    
    
    
    
    
    (740,531
    )Loss from continuing operations before income tax
expense and minority interest
    
    
    (5,535,396
    )
    
    
    (6,357,660
    )Loss from continuing operations before minority interest
    
    
    (7,224,089
    )
    
    
    (8,046,353
    )Loss from continuing operations
    
    
    (8,125,775
    )
    
    
    (8,948,039
    )Net loss
    
    
    (8,125,775
    )
    
    
    (8,948,039
    )Basic and diluted loss per common share:Continuing operations
    
    $
    (0.19
    )
    
    $
    (0.21
    )Loss per common share
    
    $
    (0.19
    )
    
    $
    (0.21
    )
 Nine months endedSeptember 30, 2005As PreviouslyReported
    
    As RestatedSelect Statement of Cash Flows Data:Net loss
    
    $
    (8,125,775
    )
    
    $
    (8,948,039
    )Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:Change in fair value of derivatives
    
    
    
    
    
    
    740,531Amortization of loan discount and fees
    
    
    
    
    
    
    81,733
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(3)
    
    Restructuring ChargesIn November 2004, the Company commenced a restructuring program, engineered to accelerate the
integration of its businesses and improve the Companys overall profitability. Currently, the
Company has consolidated its corporate headquarters and is in the process of consolidating its
domestic and international divisional headquarters into one central management facility in
Seattle, Washington. This streamlining will eliminate unnecessary duplication of efforts as
well as provide a much more cohesive day-to-day management coordination capability and improved
internal controls. In addition, the restructuring initiative included the rationalization of
technology systems, personnel and facilities throughout the U.S. In connection with this plan,
the Company recorded pre-tax restructuring charges of $3,448,209 during the six-month period
ended June 30, 2005. No additional restructuring charges were recorded during the three-month
period ended September 30, 2005. A summary of 2005 restructuring charges, cash payments and
related liabilities is as follows:
 Liability Balance,
    
    
    Restructuring
    
    
    Cash
    
    
    Liability Balance,January 1, 2005
    
    
    Charges
    
    
    Payments
    
    
    September 30, 2005Personnel
    
    $
    666,408
    
    
    $
    657,289
    
    
    $
    (978,497
    )
    
    $
    345,200Lease terminations:Building
    
    
    75,229
    
    
    
    2,200,010
    
    
    
    (566,055
    )
    
    
    1,709,185Equipment
    
    
    
    
    
    
    590,910
    
    
    
    (590,910
    )
    
    
    $
    741,637
    
    
    $
    3,448,209
    
    
    $
    (2,135,462
    )
    
    $
    2,054,384
 Personnel charges primarily relate to contractual obligations incurred in 2005 with
certain executives. Lease termination costs relate to vacating certain Domestic facilities,
vacating and relocating the Companys former corporate headquarters in Philadelphia, and the
disposal of related leased equipment. All restructuring charges will result in cash payments
in future periods through 2008. The Company does not expect to incur additional restructuring
costs during the remainder of 2005.(4)
    
    Loan Refinancing CostsAs more fully discussed in Note (8), on August 31, 2005, the Company completed a refinancing of
its $25,000,000 U.S. revolving credit facility. In connection with this transaction, the
Company incurred a charge of $911,998, reflecting payment of a prepayment fee and the expensing
of previously deferred loan issue costs.(5)
    
    Stock-Based CompensationAs permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, the Company has elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options granted to employees and members of the board of directors
is measured as the excess, if any, of the quoted market price of the Companys common stock at
the date of the grant over the amount the grantee must pay to acquire the stock. The Company
accounts for stock-based compensation to non-employees (including directors who provide
services outside their capacity as members of the board) in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The table below illustrates the effect on net income or loss and income or loss per
common share as if the fair value of options granted had been recognized as compensation
expense in accordance with the provisions of SFAS No. 123.
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss):As reported
    
    $
    (1,001,814
    )
    
    $
    55,767
    
    
    $
    (8,948,039
    )
    
    $
    (7,013,486
    )Add: stock-based employee compensation
expense included in reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,174Deduct: total stock-based
compensation expense determined under
fair value method for all awards
    
    
    (61,694
    )
    
    
    (1,051,036
    )
    
    
    (1,837,482
    )
    
    
    (4,147,125
    )Pro forma net loss
    
    $
    (1,063,508
    )
    
    $
    (995,269
    )
    
    $
    (10,785,521
    )
    
    $
    (11,138,437
    )Basic and diluted loss per common share:As reported
    
    $
    
    
    
    $
    
    
    
    $
    (0.21
    )
    
    $
    (0.17
    )Pro forma
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.25
    )
    
    
    (0.28
    )
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In December 2004, the Financial Accounting Standards Board issued its final standard on
accounting for share-based payments, SFAS 123R (Revised 2004), Share-Based Payment.SFAS 123R
requires companies to expense the fair value of employee stock options and other similar
awards. When measuring the fair value of these awards, companies can choose from two different
pricing models that reflect their specific circumstances and the economics of their
transactions. The Company is in the process of selecting one of three transition methods
available under SFAS 123R. Accordingly, the Company has not yet determined the impact on its
consolidated financial statements of adopting SFAS 123R. In April 2005, the SEC adopted a new
rule which delayed the date for compliance with SFAS 123R. The new effective date for the
Company is January 1, 2006.On April 28, 2005, the Compensation Committee of the board of directors approved the
acceleration of the vesting of unvested stock options having an exercise price of more than
$.92 per share granted under the Companys stock option plan that are held by employees,
including all executive officers. As a result of this action, options to purchase 1,931,244
shares of common stock became immediately exercisable. Because the accelerated options had
exercise prices in excess of the current market value of the Companys common stock, they were
not fully achieving their original objectives of incentive compensation and employee retention.
The Company expects the acceleration to have a positive effect on employee morale, retention,
and perception of option value. Further, the acceleration is also intended to eliminate future
compensation expense the Company would otherwise have to recognize in its consolidated
statements of operations once SFAS No. 123R becomes effective. The Company reflected the
effect of the acceleration in the stock-based compensation expense determined under the fair
value method as of the date of the acceleration.(6)
    
    AcquisitionsOn February 9, 2004, the Company acquired, through its indirect wholly-owned subsidiary,
Stonepath Holdings (Hong Kong) Limited, a 55% interest in Shaanxi Sunshine Cargo Services
International Co., Ltd. (Shaanxi). Shaanxi is a Class A licensed freight forwarder
headquartered in Shanghai, PRC and provides a wide range of customized transportation and
logistics services and supply chain solutions, including global freight forwarding, warehousing
and distribution, shipping services and special freight handling. As consideration for the
purchase, which was effective as of March 1, 2004, the Company paid $3,500,000 in cash,
financed through its revolving credit agreement, and 630,915 shares of the Companys common
stock which had a value of $2,000,000 on the date of the transaction. The common shares issued
in the transaction were subject to a one-year restriction on sale and were subject to a pro
rata forfeiture based upon a formula that compares the actual pre-tax income of Shaanxi through
December 31, 2004 with the targeted level of income of $4,000,000 (on an annualized basis).
Also, if the trading price of the Companys common stock was less than $3.17 per share at the
end of the one-year restriction, the Company could issue up to 169,085 additional shares to the
seller. Because the common shares issued in connection with this transaction were subject to
forfeiture, they were accounted for as contingent consideration. Based upon the actual pre-tax
income through December 31, 2004, the seller forfeited 37,731 shares of common stock. As
provided for in the purchase agreement, the amount of $119,608, which represents the original
fair value of the forfeited shares at the date of acquisition, will be added ratably to the
future earn-outs. Because the quoted market price of the Companys common stock was less than
$3.17 on February 9, 2005, the Company issued 158,973 additional shares of its common stock.
As of February 9, 2005, the Company had issued 752,157 shares of its common stock in connection
with this transaction. The Company recorded additional goodwill amounting to $752,157 in the
first quarter of 2005. The seller may receive additional consideration of up to $5,619,608
under an earn-out arrangement payable at the rate of $1,100,000 in the first year and
$1,129,902 per year over the next four years based on the future financial performance of
Shaanxi.In addition, the Company agreed to pay the seller 55% of Shaanxis accounts receivable
balances, net of assumed liabilities, existing on the date of acquisition realized in cash
within 180 days following the acquisition with a targeted distribution date in August 2004.
Effective September 20, 2004, the Company amended the purchase agreement for a change in the
settlement date from August 2004 to an initial payment of $1,045,000 on or before November 15,
2004, and the final payment of $868,000 on or before March 31, 2005. The amendment also fixed
the date of distribution for collections in cash after the initial 180 day working capital
assessment period from being due when collected to March 31, 2005. On March 21, 2005, the
Company and the seller entered into a financing arrangement whereby the amount due on March 31,
2005 was extended to March 31, 2006 through the execution of a note between the seller and the
Company with interest at 10% per annum. The note balance of $1,897,539 is classified in
current liabilities under the caption short-term debt in the consolidated balance sheet at
September 30, 2005. The note was included in other long-term liabilities in the consolidated
balance sheet at December 31, 2004.The acquisition, which significantly enhances the Companys presence in the region, was
accounted for as a purchase and accordingly, the results of operations and cash flows of
Shaanxi have been included in the Companys consolidated financial statements prospectively
from the date of acquisition. Because the Company consolidates its foreign subsidiaries on a
one-month lag, such information has been reflected in the consolidated statement of operations
effective for periods subsequent to April 1, 2004. The total purchase price, including
acquisition expenses of $269,000, was $7,402,000. The following table summarizes the
allocation of the purchase price based on the fair value of the assets acquired and liabilities
assumed (in thousands):
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Current assets
    
    $
    15,090Furniture and equipment
    
    
    157Goodwill
    
    
    2,913Other intangible assets
    
    
    1,453Total assets acquired
    
    
    19,613Current liabilities assumed
    
    
    (9,727
    )Minority interest
    
    
    (2,484
    )Net assets acquired
    
    $
    7,402
 The acquired intangible assets have a weighted average life of 6.6 years. The intangible
assets include a customer related intangible of $1,112,100 with a 7.1 year life and a
covenant-not-to-compete of $341,000 with a five year life. The $2,913,300 of goodwill was
assigned to the Companys International Services business unit and is not deductible for income
tax purposes.The following unaudited pro forma information for the nine months ended September 30, 2004 is
presented as if the acquisition of Shaanxi had occurred on December 1, 2003, using the one
month lag consolidation policy (in thousands, except earnings per share):
 Nine months endingSeptember 30, 2004Total revenue
    
    $
    280,961Net loss
    
    
    (6,275
    )Loss per share:Basic and diluted
    
    $
    (0.15
    )
 (7)
    
    Acquired Intangible AssetsInformation with respect to acquired intangible assets is as follows:
 September 30, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    GrossCarrying
    
    

Accumulated
    
    
    Carrying
    
    

AccumulatedAmount
    
    
    Amortization

    
    
    Amount
    
    

AmortizationAmortizable intangible assets:Customer related
    
    $
    11,042,100
    
    
    $
    6,062,418
    
    
    $
    11,042,100
    
    
    $
    4,813,229Covenants-not-to-compete
    
    
    1,506,000
    
    
    
    853,318
    
    
    
    1,506,000
    
    
    
    654,885Total
    
    $
    12,548,100
    
    
    $
    6,915,736
    
    
    $
    12,548,100
    
    
    $
    5,468,114
 Aggregate amortization expense:
 For the three-months ended September 30, 2005
    
    $
    454,706For the three-months ended September 30, 2004
    
    
    584,614For the nine-months ended September 30, 2005
    
    
    1,438,659For the nine-months ended September 30, 2004
    
    
    1,707,234
 Estimated aggregate amortization expense:
 For the remainder of the year ended December 31, 2005
    
    $
    420,000For the year ended December 31, 2006
    
    
    1,547,000For the year ended December 31, 2007
    
    
    1,254,000For the year ended December 31, 2008
    
    
    931,000For the year ended December 31, 2009
    
    
    607,000For the year ended December 31, 2010
    
    
    482,000
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(8)
    
    Short-Term DebtShort-term debt consists of the following:
 September 30, 2005
    
    
    December 31, 2004U.S. Credit Facility:Revolving note
    
    $
    7,916,269
    
    
    $
    13,911,700Convertible minimum borrowing
note, ($10,000,000
outstanding principal, net of
discount of $4,387,568)
    
    
    5,612,432
    
    
    
    Total U.S. credit facility
    
    
    13,528,701
    
    
    
    13,911,700Offshore credit facility
    
    
    5,000,000
    
    
    
    3,000,000Note payable
    
    
    1,897,539
    
    
    
    Total short-term debt
    
    $
    20,426,240
    
    
    $
    16,911,700
 U.S. Credit FacilityOn August 31, 2005, the Company entered into several agreements with Laurus Master Fund, Inc.
(Laurus), to provide a new $25,000,000 U.S. revolving credit facility (U.S. Facility) which
replaced its previous revolving credit facility held by Zohar II 2005-1, Limited, an affiliate
of Patriarch Partners, LLC (Patriarch). In connection with establishing the U.S. Facility
with Laurus, the Company entered into two principal borrowing agreements and a warrant
agreement, the terms of which are as follows:Secured Convertible Minimum Borrowing Note (Minimum Borrowing Note)The Minimum Borrowing
Note has a principal amount of $10,000,000, has a three-year term expiring August 31, 2008 and
bears interest at prime plus 1% subject to a minimum interest rate of 5.5%. The Minimum
Borrowing Note is convertible into the Companys common stock at a conversion price of $1.08
per share subject to customary antidilution adjustments. A total of 9,259,259 shares of the
Companys common stock would be issued upon the full conversion of the principal of the Minimum
Borrowing Note. Assuming the Company has registered the shares necessary to complete the full
conversion of the Minimum Borrowing Note, and if the market price of the Companys common stock
for the last five trading dates of any month exceeds the conversion price of $1.08 per share by
25%, then the interest rate for the next month will be reduced by 200 basis points for each
incremental 25% increase in market price above $1.08.In the event that the Minimum Borrowing Note has been converted in full into the Companys
common stock and there remains at least $11,000,000 outstanding under the U.S. Facility, then a
new Minimum Borrowing Note will be issued. The terms of the new Minimum Borrowing Note would be
the same as the initial note except for the conversion price, which would be 115% of the
average closing price of the Companys common stock for the ten trading days immediately prior
to the date of the issuance of a new Minimum Borrowing Note, but in no event greater than 120%
of the closing price of the Companys common stock on such date.Secured Revolving Note (Revolving Note)The Revolving Note covers borrowing outstanding under
the facility that are not represented by the Minimum Borrowing Note. The Revolving Note has a
three-year term expiring August 31, 2008 and bears interest at prime plus 3.5% subject to a
floor of 8.0% and prepayment premiums of 3% in the first year, 2% in the second year, and 1% in
the third year of the Revolving Note.Common Stock Purchase Warrants (Warrant)The Warrant entitles Laurus to purchase 2,500,000
shares of the Companys common stock for a period of five years, at an exercise price that
varies with the number of shares purchased under the Warrant. The exercise price is $1.13 for
the first 900,000 shares, $1.41 for the next 700,000 shares, $4.70 for the next 450,000 shares
and $7.52 for the remaining 450,000 shares.Registration Rights Agreement (Rights Agreement)The Rights Agreement provides that the
Company file a registration statement for resale of the shares issuable upon conversion of the
Minimum Borrowing Note or exercise of the Warrant by October 30, 2005, have the registration
statement effective by December 31, 2005 and keep the registration statement effective for a
period of five years. If the Company fails to meet the deadlines, or if the registration
statement is unavailable after it becomes effective, then the Company is subject to liquidated
damages in the amount of $5,000 per day.The Minimum Borrowing Note and Warrant require the Company to deliver registered shares as
specified in the Rights Agreement. Under EITF Issue No. 00-19, since the Company did not have
an effective registration statement at inception of the agreements and is subject to
liquidated damages in the event that effective registration does not occur or if effectiveness
is not maintained, the conversion feature and warrants are to be accounted for as derivatives.
The application of this accounting requires the derivatives to be recorded as liabilities and
stated at fair value on the consolidated balance sheet with subsequent changes in fair value
reflected in the consolidated statement of operations. The carrying value of the Minimum
Borrowing Note must be adjusted to record the discount created by the original fair value of
the conversion feature and the allocated portion of the fair value of the Warrants. The Company
used the Black-Scholes option-pricing model to determine fair value of these
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conversion features. The initial fair value of the Minimum Borrowing Note conversion feature
recorded on inception of the agreement was $3,770, 532. The initial fair value of the Warrants
was $1,293,721, with $718,734 allocated to the Minimum Borrowing Note and the remaining
$574,987 allocated to the Revolving Note. The initial fair value of the derivatives were
included in other long-term liabilities on the consolidated balance sheet with amounts
allocated to the Companys debt recorded as a discount to such debt. The amount allocated to
the Revolving Note is considered a debt issue cost and is classified in other assets on the
consolidated balance sheet. This amount is being amortized on a straight-line basis over the
three-year term of the agreement.The derivatives have been measured at fair value as of September 30, 2005, resulting in a
charge of $740,531 being recognized and included in other income (expense). This charge
represents the change in fair value of the derivatives from the inception of the agreements to
September 30, 2005. Additional interest expense of $101,698 was recorded resulting from the
accretion of the discount utilizing the effective interest method.The level of eligible accounts receivable of the Company limits the amounts available to be
borrowed under the Minimum Borrowing Note and Revolving Note. The U.S. Facility generally
provides for an advance rate of 90% of eligible accounts receivable. The U.S. Facility does not
contain financial covenants although it does have affirmative and negative covenants, including
the requirement for consent from the lender for certain actions, including future acquisitions,
the payment of cash dividends or a merger. The Minimum Borrowing Note and Revolving Note are
further secured by a global security interest in substantially all the assets of the Companys
domestic subsidiaries, excluding any stock held in a foreign subsidiary.To complete the transaction, the Company paid a loan fee to Laurus of $875,000, which is
included in other assets and is being amortized to expense over the term of the facility.
Additionally, prepayment fees due upon early termination of the previous domestic credit
facility and expensing of previously capitalized loan issue costs resulted in a charge of
$911,998 being recorded during the three months ended September 30, 2005.As of September 30, 2005, the Company had $10,000,000 outstanding under the Minimum Borrowing
Note and $7,916,269 outstanding under the Revolving Note. Based on the level of eligible
receivables there was additional borrowing availability of $2,080,000 under the Revolving Note.The U.S. facility requires a lock-box arrangement, which provides for all receipts to be swept
daily to reduce borrowings outstanding under the facility. This arrangement, combined with the
existence of a subjective acceleration clause in the agreement, requires the classification of
outstanding borrowings as a current liability in accordance with EITF Issue No. 95-22. The
acceleration clause allows Laurus to forego additional advances should they determine there has
been a material adverse change in the Companys financial position or prospects reasonably
likely to result in a material adverse effect on its business, condition (financial or
otherwise), operations or properties.In April and May 2005, the Company had amended its previous U.S. credit facility to assign the
facilitys interest to Patriarch in addition to making changes to other key terms, including
changes to certain restrictive covenants. As noted above, the agreement with Laurus replaced
this amended facility.Offshore Credit FacilityIn October, 2004, a subsidiary of the Company, Stonepath Holdings (Hong Kong) Limited (Asia
Holdings) entered into a Term Credit Agreement with Hong Kong League Central Credit Union (the
Lender) and SBI Advisors, LLC, as agent for the Lender. The Term Credit Agreement provided
Asia Holdings with the right to borrow an initial amount of $3,000,000 and up to an additional
$7,000,000 upon the satisfaction of certain conditions. Asia Holdings borrowed $3,000,000 on
November 4, 2004 and $2,000,000 on February 16, 2005. The borrowings under the Term Credit
Agreement were secured by floating charges on the foreign accounts receivable of three of its
subsidiaries, Planet Logistics Express (Singapore) Pte. Ltd., G-Link Express (Singapore) Pte.
Ltd., and Stonepath Logistics (Hong Kong) Limited. All borrowings under the Term Credit
Agreement bore interest at an annual rates of between 12% and 15% and were to be repaid on or
before November 4, 2005. Stonepath Group, Inc. has guaranteed the obligations of Asia Holdings
under the Term Credit Agreement. The outstanding balance on the Term Credit Agreement was
$5,000,000 at September 30, 2005.On October 26, 2005, the Company exchanged $3,000,000 of principal outstanding under the Term
Credit Agreement for 30,000 newly issued preferred shares of Asia Holdings and extended the
maturity date for the repayment of $1,000,000 of the remaining $2,000,000 outstanding principal
under the Term Credit Agreement to November 4, 2007. The preferred shares are convertible into
the Companys common stock at a conversion price of $1.08 per share. Dividends on the preferred shares accumulate at a rate of 12% payable monthly in cash or, at the option of the Company,
payable in additional preferred shares. A total of 2,777,778 shares of the Companys common
stock would be issued upon the full conversion of the preferred shares, assuming dividends are
paid in cash. The remaining $1,000,000 due under the Term Credit Agreement would be unsecured,
bear interest at an annual rate of 12%, and previous security provided through floating rate
charges would be released. No additional borrowing availability exists under the Term Credit
Agreement. The Company also issued warrants to the Lender entitling the holder to purchase
277,778 shares of the Companys common stock at an exercise price of $1.13 for a period of four
years. The Company has determined that the exchange transaction, including consideration for
the fair value of the warrants, will result in a loss of
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$117,079 being recognized in the fourth quarter of 2005 since the net carrying amount of the
extinguished debt was less than the fair value of the preferred shares and new note issued. The
preferred shares contain mandatory redemption features that allow the holders to be repaid upon
the occurrence of certain triggering events, including events of default on other debt
agreements of the Company. Further, the amount to be repaid in the event of a triggering event
is based upon the greater of 120% of the par value of the preferred shares or the market value
of the number of common shares issuable under the conversion of the preferred shares. Since the
preferred shares contain these redemption features, the proceeds received will not be
considered permanent equity of the Company. Further, since the redemption provisions do not
specify the ultimate amount of proceeds to be paid to the holder upon occurrence of a
triggering event, the conversion feature must be accounted for as a derivative under the
provisions of EITF 00-19. The application of this accounting requires the derivative to be
recorded as a liability and stated at fair value on the consolidated balance sheet with
subsequent changes in fair value reflected in the consolidated statement of operations. The
carrying amount of the preferred shares must be adjusted to record the discount created by the
original fair value of the conversion feature. The Company used the Black-Scholes
option-pricing model to determine fair value of the conversion features, with an initial fair
value of approximately $1,300,000 being recorded.(9)
    
    Commitments and ContingenciesThe Company was named as a defendant in eight purported class action complaints filed in the
United States Court for the Eastern District of Pennsylvania between September 24, 2004 and
November 19, 2004. Also named as defendants in these lawsuits were officers Dennis L. Pelino
and Thomas L. Scully and former officer Bohn H. Crain. These cases were consolidated for all
purposes in that Court under the caption In re Stonepath Group, Inc. Securities Litigation,
Civ. Action No. 04-4515 and the lead plaintiff, Globis Capital Partners, LP, filed an amended
complaint in February 2005. The lead plaintiff seeks to represent a class of purchasers of the
Companys shares between March 29, 2002 and September 20, 2004, and alleges claims for
securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. These
claims were based upon the allegation that certain public statements made during the period
from March 29, 2002 through September 20, 2004 were materially false and misleading because
they failed to disclose that the Companys Domestic Services operations had improperly
accounted for accrued purchased transportation costs. The plaintiffs sought unspecified
compensatory damages, attorneys fees and costs, and further relief as may be determined by the
Court and an estimate of any possible loss to the Company that could result from this action
cannot be made. On October 27, 2005, the Court granted the defendants motion to dismiss the
plaintiffs complaint with leave to file an amended complaint and the plaintiff filed a second
amended complaint on November 15, 2005. The Company and the individual defendants believe that
this action is without merit and intend to vigorously defend against the claims raised in this
action.The Company was named as a nominal defendant in a shareholder derivative action on behalf of
the Company that was filed on October 12, 2004 in the United States District Court for the
Eastern District of Pennsylvania under the caption Ronald Jeffrey Neer v. Dennis L. Pelino, et
al., Civ. A. No. 04-cv-4971. Also named as defendants in the action were all of the individuals
who were serving as directors of the Company when the complaint was filed (Dennis L. Pelino, J.
Douglas Coates, Robert McCord, David R. Jones, Aloysius T. Lawn and John H. Springer), former
directors Andrew Panzo, Lee C. Hansen, Darr Aley, Stephen George, Michela OConnor-Abrams and
Frank Palma, officer Thomas L. Scully and former officers Bohn H. Crain and Stephen M. Cohen.
The derivative action alleged breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment and violations of the Sarbanes-Oxley Act of 2002.
These claims were based upon the allegation that the defendants knew or should have known that
the Companys public filings for fiscal years 2001, 2002 and 2003 and for the first and second
quarters of fiscal year 2004, and certain press releases and public statements made during the
period from January 1, 2001 through August 9, 2004, were materially misleading. The complaint
alleged that the statements were materially misleading because they understated the Companys
accrued purchase transportation liability and related costs of transportation in violation of
generally accepted accounting principles and they failed to disclose that the Company lacked
internal controls. The derivative action sought compensatory damages in favor of the Company,
attorneys fees and costs, and further relief as may be determined by the Court. The Court
granted the defendants motion to dismiss this action on September 27, 2005 and the plaintiff
has filed a notice of appeal on October 26, 2005. The Company and the individual defendants
believe that the action is without merit and intend to vigorously defend against the claims
raised in this action.On October 22, 2004, Douglas Burke filed a two-count action against United American
Acquisitions, Inc. (UAF), Stonepath Logistics Domestic Services, Inc., and the Company in the
Circuit Court for Wayne County, Michigan. Mr. Burke is the former President and Chief Executive
Officer of UAF. The Company purchased the stock of UAF from Mr. Burke on May 30, 2002 pursuant
to a Stock Purchase Agreement. At the closing of the transaction Mr. Burke received $5,100,000
and received the right to receive an additional $11,000,000 in four annual installments based
upon UAFs performance in accordance with the Stock Purchase Agreement. Subject to the
purchase, Stonepath Logistics Domestic Services, Inc. and Mr. Burke entered into an Employment
Agreement. Mr. Burkes complaint alleges that the defendants breached the terms of the
Employment Agreement and Stock Purchase Agreement and seeks, among other things, the production
of financial information, unspecified damages, attorneys fees and interest. In early October
2005, the Wayne County Circuit Court granted the defendants motion to dismiss the lawsuit and
to compel arbitration. The court ordered, and the parties agreed, to submit the issues
concerning the plaintiffs objections regarding the earn-out calculation under the Stock
Purchase Agreement to a national accounting firm and to submit plaintiffs claim relating to
the Employment Agreement and defendants counterclaims to a different neutral arbitrator. The
defendants believe that Mr. Burkes claims are without merit and intend to vigorously defend
against them. In addition, the Company is seeking $456,000 in excess earn-out payments that
were paid to Mr. Burke.
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##### Table of Contents



The Company has received notice that the Securities and Exchange Commission (Commission) is
conducting an informal inquiry to determine whether certain provisions of the federal
securities laws have been violated in connection with the Companys accounting and financial
reporting in connection with the restatement of the Companys financial statements for the
years ended December 31, 2001, 2002 and 2003 and the first two quarters of 2004. As part of the
inquiry, the staff of the Commission has requested information relating to the restatement
amounts, personnel at the Air Plus subsidiary and Stonepath Group, Inc. and additional
background information for the period from October 5, 2001 to December 2, 2004. The Company is
voluntarily cooperating with the staff.The Company is not able to predict the outcome of any of the foregoing actions at this time,
since each action is in an early stage. An adverse determination in any of those actions could
have a material and adverse effect on the Companys financial position, results of operations
and/or cash flows.The Company is also involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of those matters
will not have a material adverse effect on the Companys consolidated financial position,
results of operations or liquidity. No accruals have been established for any pending legal
proceeding, either because a loss is not probable, the amount of a loss cannot be reasonably
estimated, or both.(10)
    
    Stockholders EquityIn connection with the December 2003 acquisition of the Malaysia operations of the G Link
Group, the Company agreed to pay $102,000, as additional consideration on a post-closing basis,
for net assets acquired through the issuance of common stock. In May 2005, 41,757 shares of the
Companys common stock were issued to complete this transaction.In connection with the Shaanxi acquisition, as of February 9, 2005 the Company had issued
752,157 shares of its common stock. Because the ultimate number of shares issued in connection
with the transaction were contingent on the financial performance of Shaanxi through December
31, 2004, and the trading price of the Companys common stock on February 9, 2005, such shares
were not reflected as outstanding securities in the accompanying consolidated financial
statements for periods prior to February 9, 2005. As discussed in Note 6, 630,915 shares were
originally designated for issuance with this transaction as of the date of acquisition and
121,242 shares were issued upon ultimate completion of all contingent matters.Stock option activity for the nine months ended September 30, 2005 included the grant to an
employee of 30,000 options to purchase common shares at a price of $0.70 per share. The option
price was the trading price of the Companys common stock on the date of the grant.
Additionally, 467,406 options were cancelled during the first nine-months of 2005. As discussed
in Note 5, on April 28, 2005, the Compensation Committee of the board of directors approved the
acceleration of the vesting of unvested stock options having an exercise price of more than
$0.92 per share granted under the Companys stock option plan that are held by employees,
including all executive officers. As a result of this action, options to purchase 1,931,244
shares of common stock became immediately exercisable.On April 29, 2005, 79,016 shares of common stock were issued to satisfy obligations to
employees under the Companys Employee Stock Purchase Plan.During the nine-month period ended September 30, 2004, holders converted 149,293 shares of the
Companys Series D Preferred Stock into 1,492,930 shares of the Companys common stock.(11)
    
    Earnings (Loss) per ShareBasic earnings (loss) per common share and diluted earnings (loss) per common share are
presented in accordance with SFAS No. 128, Earnings per Share. Basic earnings (loss) per
common share has been computed using the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common share incorporates the
incremental shares issuable upon the assumed exercise of stock options, warrants and
convertible securities if dilutive. Dilutive shares for the three-month period ended September
30, 2004 were 4,420,684. The inclusion of these dilutive shares did not cause diluted earnings
per share to differ from basic earnings per share for this period. Certain stock options,
warrants and convertible securities were excluded from the calculation of diluted earnings
(loss) per common share because their effect was antidilutive. The total number of such shares
excluded from diluted earnings (loss) per common share are 12,892,847 and 9,628,684 for the
three-month periods ended September 30, 2005 and 2004, respectively and 11,463,372 and
8,777,902 for the nine-month periods ended September 30, 2005 and 2004, respectively.Also, the 630,915 shares of common stock issued in connection with the Shaanxi acquisition were
subject to pro rata forfeiture based upon the financial performance of Shaanxi through December
31, 2004. Accordingly, such shares have been excluded from the calculation of basic and
diluted loss per common share for the three- and nine-month periods ended September 30, 2004.
 12




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##### Table of Contents



(12)
    
    Income TaxesThe components of income tax expense consist of the following:
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004U.S. federal
    
    $
    155,400
    
    
    $
    105,200
    
    
    $
    466,200
    
    
    $
    315,600State
    
    
    37,505
    
    
    
    76,137
    
    
    
    156,999
    
    
    
    156,737Foreign
    
    
    288,111
    
    
    
    782,724
    
    
    
    1,065,494
    
    
    
    1,135,195$
    481,016
    
    
    $
    964,061
    
    
    $
    1,688,693
    
    
    $
    1,607,532
 The Company has accumulated net operating losses (NOLs). Due to the uncertainty
surrounding the realization of the NOLs, the Company has placed a valuation allowance on its
deferred tax assets. Income tax expense for the three- and nine-month periods ended September
30, 2005 and 2004 resulted primarily from non-U.S.-based earnings, state income taxes and
deferred income taxes arising from the amortization of goodwill for income tax purposes.(13)
    
    Related Party TransactionsThe Company, through its Shaanxi subsidiary, advanced $416,000 to the principal minority
shareholder of Shaanxi, who is also a current officer. The advance is repayable, at the
Companys option, in cash or by the contribution to Shaanxi of 100% of the stock in a newly
opened Taiwan logistics company currently owned by that individual. The Company has a note
payable outstanding to this minority shareholder amounting to $1,897,539 in connection with the
acquisition of Shaanxi as discussed in Note 5.(14)
    
    Segment InformationSFAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
established standards for reporting information about operating segments in financial
statements. Operating segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is evaluated regularly
by the chief operating decision maker or group in deciding how to allocate resources and in
assessing performance. The Company identifies operating segments based on the principal
service provided by the business unit. Each segment has a separate management structure. The
accounting policies of the reportable segments are the same as described in our Annual Report
on Form 10-K for the year ended December 31, 2004. Segment information, in which corporate
expenses have been fully allocated to the operating segments, is as follows (in thousands):
 Three months ended September 30, 2005Domestic
    
    InternationalServices
    
    Services
    
    Corporate
    
    TotalRevenue from external customers
    
    $
    29,672
    
    
    $
    81,640
    
    
    $
    
    
    
    $
    111,312Intersegment revenue
    
    
    100
    
    
    
    55
    
    
    
    
    
    
    
    155Segment operating income
    
    
    1,036
    
    
    
    1,349
    
    
    
    
    
    
    
    2,385
 Three months ended September 30, 2004Domestic
    
    InternationalServices
    
    Services
    
    Corporate
    
    TotalRevenue from external customers
    
    $
    37,822
    
    
    $
    71,889
    
    
    $
    
    
    
    $
    109,711Intersegment revenue
    
    
    4
    
    
    
    123
    
    
    
    
    
    
    
    127Segment operating income (loss)
    
    
    (823
    )
    
    
    2,648
    
    
    
    
    
    
    
    1,825
 Nine months ended September 30, 2005Domestic
    
    InternationalServices
    
    Services
    
    Corporate
    
    TotalRevenue from external customers
    
    $
    91,608
    
    
    $
    209,720
    
    
    $
    
    
    
    $
    301,328Intersegment revenue
    
    
    175
    
    
    
    162
    
    
    
    
    
    
    
    337Segment operating income (loss)
    
    
    (4,862
    )
    
    
    2,170
    
    
    
    
    
    
    
    (2,694
    )Segment assets
    
    
    40,177
    
    
    
    90,614
    
    
    
    5,891
    
    
    
    136,682Segment goodwill
    
    
    19,731
    
    
    
    20,849
    
    
    
    
    
    
    
    40,580
 13




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##### Table of Contents



Nine months ended September 30, 2004Domestic
    
    InternationalServices
    
    Services
    
    Corporate
    
    TotalRevenue from external customers
    
    $
    105,685
    
    
    $
    150,720
    
    
    $
    
    
    
    $
    256,405Intersegment revenue
    
    
    14
    
    
    
    217
    
    
    
    
    
    
    
    231Segment operating income (loss)
    
    
    (4,816
    )
    
    
    3,973
    
    
    
    
    
    
    
    (844
    )Segment assets
    
    
    43,642
    
    
    
    68,941
    
    
    
    12,086
    
    
    
    124,669Segment goodwill
    
    
    19,641
    
    
    
    14,823
    
    
    
    
    
    
    
    34,464
 The revenue in the table below is allocated to geographic areas based upon the location of
the customer (in thousands):
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Total revenue:United States
    
    $
    57,930
    
    
    $
    70,285
    
    
    $
    170,974
    
    
    $
    178,281Asia
    
    
    49,239
    
    
    
    35,815
    
    
    
    118,331
    
    
    
    65,761North America
(excluding the United States)
    
    
    97
    
    
    
    190
    
    
    
    350
    
    
    
    1,128Europe
    
    
    2,020
    
    
    
    2,051
    
    
    
    5,686
    
    
    
    5,900South America
    
    
    1,236
    
    
    
    807
    
    
    
    4,149
    
    
    
    2,697Other
    
    
    790
    
    
    
    563
    
    
    
    1,838
    
    
    
    2,638Total
    
    $
    111,312
    
    
    $
    109,711
    
    
    $
    301,328
    
    
    $
    256,405
 The following table presents long-lived assets by geographic area (in thousands):
 September 30,2005
    
    
    2004United States
    
    $
    5,965
    
    
    $
    10,106Asia
    
    
    771
    
    
    
    663South America
    
    
    112
    
    
    
    114Europe
    
    
    14
    
    
    
    Total long-lived assets
    
    $
    6,862
    
    
    $
    10,883
 Cash held with foreign banks amounted to $5,607,000 at September 30, 2005.
 14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statement For Forward-Looking Statements
  OVERVIEW
     15




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16




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CRITICAL ACCOUNTING POLICIES
  RESTATEMENT
  RESULTS OF OPERATIONS
 Quarter ended September 30, 2005 compared to quarter ended September30, 2004
  Quarter ended September 30,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentageTotal revenue
    
    $
    111,312
    
    
    $
    109,711
    
    
    $
    1,601
    
    
    
    1.5
    %Transportation revenue
    
    $
    105,380
    
    
    $
    103,999
    
    
    
    1,381
    
    
    
    1.3Cost of transportation
    
    
    87,971
    
    
    
    84,638
    
    
    
    3,333
    
    
    
    3.9Net transportation revenue
    
    
    17,409
    
    
    
    19,361
    
    
    
    (1,952
    )
    
    
    (10.1
    )Net transportation margin
    
    
    16.5
    %
    
    
    18.6
    %Customs brokerage
    
    
    1,889
    
    
    
    1,683
    
    
    
    206
    
    
    
    12.2Warehousing and other value added services
    
    
    4,042
    
    
    
    4,029
    
    
    
    13
    
    
    
    0.3Total net revenue
    
    $
    23,340
    
    
    $
    25,073
    
    
    $
    (1,733
    )
    
    
    (6.9
    )%Net revenue margin
    
    
    21.0
    %
    
    
    22.9
    %
 $
  17




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##### Table of Contents



Quarter ended September 30,2005
    
    
            2004
    
    
            ChangeAmount
    
    
    Percent
    
    
     Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentRestated
    
    
    
    
    
    
    RestatedNet revenue
    
    $
    23,340
    
    
    
    100.0
    %
    
    $
    25,073
    
    
    
    100.0
    %
    
    $
    (1,733
    )
    
    
    (6.9
    )%Personnel costs
    
    
    11,805
    
    
    
    50.6
    
    
    
    13,600
    
    
    
    54.3
    
    
    
    (1,795
    )
    
    
    (13.2
    )Other selling, general and
administrative costs
    
    
    7,986
    
    
    
    34.2
    
    
    
    8,608
    
    
    
    34.3
    
    
    
    (622
    )
    
    
    (7.2
    )Depreciation and amortization
    
    
    1,164
    
    
    
    5.0
    
    
    
    1,040
    
    
    
    4.1
    
    
    
    124
    
    
    
    11.9Total operating costs
    
    
    20,955
    
    
    
    89.8
    
    
    
    23,248
    
    
    
    92.7
    
    
    
    (2,293
    )
    
    
    (9.9
    )Income from operations
    
    
    2,385
    
    
    
    10.2
    
    
    
    1,825
    
    
    
    7.3
    
    
    
    (560
    )
    
    
    (30.7
    )Loan refinancing costs
    
    
    (912
    )
    
    
    (3.9
    )
    
    
    
    
    
    
    
    
    
    
    (912
    )
    
    
    NMInterest expense, net
    
    
    (953
    )
    
    
    (4.1
    )
    
    
    
    
    
    
    
    
    
    
    (953
    )
    
       
    NMChange in fair value of
financial instruments
    
    
    (741
    )
    
    
    (3.2
    )
    
    
    
    
    
    
    
    
    
    
    (741
    )
    
    
    NMOther income (expense), net
    
    
    (3
    )
    
    
    
    
    
    
    (209
    )
    
    
    (0.9
    )
    
    
    (206
    )
    
    
    (98.1
    )Income from continuing
operations before income tax
expense and minority
interest
    
    
    (224
    )
    
    
    (1
    )
    
    
    1,616
    
    
    
    6.4
    
    
    
    (1,840
    )
    
    
    (114
    )Income tax expense
    
    
    481
    
    
    
    2.1
    
    
    
    964
    
    
    
    3.8
    
    
    
    (483
    )
    
    
    (50.1
    )Income from continuing
operations before minority
interest
    
    
    (705
    )
    
    
    (3
    )
    
    
    652
    
    
    
    2.6
    
    
    
    (1,357
    )
    
       
    NMMinority interest
    
    
    297
    
    
    
    1.3
    
    
    
    546
    
    
    
    2.2
    
    
    
    (249
    )
    
    
    (45.8
    )Income (loss) from
continuing operations
    
    
    (1,002
    )
    
    
    (4.3
    )
    
    
    106
    
    
    
    0.4
    
    
    
    (1,108
    )
    
    
    NMLoss from discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (0.2
    )
    
    
    50
    
    
    
    NMNet income (loss)
    
    $
    (1,002
    )
    
    
    (4.3
    )
    
    $
    56
    
    
    
    0.2
    %
    
    $
    (1,058
    )
    
    
    NM
  18




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RESULTS OF OPERATIONS
 Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
  Nine months ended September 30,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentageTotal revenue
    
    $
    301,328
    
    
    $
    256,405
    
    
    $
    44,923
    
    
    
    17.5
    %Transportation revenue
    
    $
    282,787
    
    
    $
    239,633
    
    
    
    43,154
    
    
    
    18.0Cost of transportation
    
    
    235,452
    
    
    
    195,516
    
    
    
    39,936
    
    
    
    20.4Net transportation revenue
    
    
    47,335
    
    
    
    44,117
    
    
    
    3,218
    
    
    
    7.3Net transportation margin
    
    
    16.7
    %
    
    
    18.4
    %Customs brokerage
    
    
    6,067
    
    
    
    6,784
    
    
    
    (717
    )
    
    
    (10.6
    )Warehousing and other value added services
    
    
    12,475
    
    
    
    9,988
    
    
    
    2,487
    
    
    
    24.9Total net revenue
    
    $
    65,877
    
    
    $
    60,889
    
    
    $
    4,988
    
    
    
    8.2
    %Net revenue margin
    
    
    21.9
    %
    
    
    23.7
    %
 19




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$
      20




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##### Table of Contents



Nine months ended September 30,2005
    
    
     2004
    
    
    ChangeAmount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentRestatedNet revenue
    
    $
    65,877
    
    
    
    100.0
    %
    
    $
    60,889
    
    
    
    100.0
    %
    
    $
    4,988
    
    
    
    8.2
    %Personnel costs
    
    
    35,395
    
    
    
    53.7
    
    
    
    36,629
    
    
    
    60.2
    
    
    
    (1,234
    )
    
    
    (3.4
    )Other selling, general and
administrative costs
    
    
    26,267
    
    
    
    39.9
    
    
    
    22,080
    
    
    
    36.3
    
    
    
    4,187
    
    
    
    19.0Depreciation and amortization
    
    
    3,461
    
    
    
    5.3
    
    
    
    3,024
    
    
    
    4.9
    
    
    
    437
    
    
    
    14.5Restructuring charges
    
    
    3,448
    
    
    
    5.2
    
    
    
    
    
    
    
    
    
    
    
    3,448
    
    
    
    NMTotal operating costs
    
    
    68,571
    
    
    
    104.1
    
    
    
    61,733
    
    
    
    101.4
    
    
    
    6,838
    
    
    
    11.1Loss from operations
    
    
    (2,694
    )
    
    
    (4.1
    )
    
    
    (844
    )
    
    
    (1.4
    )
    
    
    (1,850
    )
    
    
    (219.2
    )Loan refinancing costs
    
    
    (912
    )
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    (912
    )
    
    
    NMChange in fair value of derivatives
    
    
    (741
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (741
    )
    
    
    NMProvision for excess earn-out payments
    
    
    
    
    
    
    
    
    
    
    (3,075
    )
    
    
    (5.1
    )
    
    
    3,075
    
    
    
    NMOther income (expense), net
    
    
    (2,010
    )
    
    
    (3.1
    )
    
    
    (339
    )
    
    
    (0.5
    )
    
    
    (1,671
    )
    
    
    (492.9
    )Loss from continuing operations
before income tax expense and
minority interest
    
    
    (6,357
    )
    
    
    (9.7
    )
    
    
    (4,258
    )
    
    
    (7.0
    )
    
    
    (2,099
    )
    
    
    (49.3
    )Income tax expense
    
    
    1,689
    
    
    
    (2.6
    )
    
    
    1,607
    
    
    
    2.6
    
    
    
    82
    
    
    
    5.1Loss from continuing operations
before minority interest
    
    
    (8,046
    )
    
    
    (12.3
    )
    
    
    (5,865
    )
    
    
    (9.6
    )
    
    
    (2,181
    )
    
    
    (37.2
    )Minority interest
    
    
    902
    
    
    
    1.4
    
    
    
    1,098
    
    
    
    1.8
    
    
    
    196
    
    
    
    (17.9
    )Loss from continuing operations
    
    
    (8,948
    )
    
    
    (13.7
    )
    
    
    (6,963
    )
    
    
    (11.4
    )
    
    
    (1,985
    )
    
    
    (28.5
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (0.1
    )
    
    
    50
    
    
    
    NMNet loss
    
    $
    (8,948
    )
    
    
    (13.7
    )%
    
    $
    (7,013
    )
    
    
    (11.5
    )%
    
    $
    (1,935
    )
    
    
    (27.6
    )%
      21




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##### Table of Contents



FINANCIAL OUTLOOK
  LIQUIDITY AND CAPITAL RESOURCES
       22




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##### Table of Contents



Number of shares
    
    
    Proceeds if exercisedOptions outstanding under our stock option plan
    
    
    10,413,784
    
    
    $
    16,622,835Non-plan options
    
    
    552,000
    
    
    
    920,750Warrants
    
    
    3,249,000
    
    
    
    10,712,010Total
    
    
    14,214,784
    
    
    $
    28,255,595Exercisable
    
    
    13,457,283
    
    
    $
    27,681,712
  Secured Convertible Minimum Borrowing Note
     Secured Revolving Note
   Common Stock Purchase Warrant
  23




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##### Table of Contents



Security Agreement
  Registration Rights Agreement
   Other
  Other Debt
   Acquisitions
   24




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25




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##### Table of Contents



2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    TotalEarn-out payments(1)(2):Domestic
    
    $
    8,050
    
    
    $
    2,500
    
    
    $
    2,500
    
    
    $
    
    
    
    $
    13,050International
    
    
    5,131
    
    
    
    5,503
    
    
    
    3,769
    
    
    
    3,235
    
    
    
    17,638Total earn-out payments
    
    $
    13,181
    
    
    $
    8,003
    
    
    $
    6,269
    
    
    $
    3,235
    
    
    $
    30,688Prior year pre-tax earnings targets(3):Domestic
    
    $
    12,306
    
    
    $
    3,500
    
    
    $
    3,500
    
    
    $
    
    
    
    $
    19,306International
    
    
    12,446
    
    
    
    13,502
    
    
    
    9,203
    
    
    
    8,160
    
    
    
    43,311Total pre-tax earnings targets
    
    $
    24,752
    
    
    $
    17,002
    
    
    $
    12,703
    
    
    $
    8,160
    
    
    $
    62,617Earn-outs as a percentage of prior
year pre-tax earnings targets:Domestic
    
    
    65.4
    %
    
    
    71.4
    %
    
    
    71.4
    %
    
    
    
    
    
    
    67.6
    %International
    
    
    41.2
    %
    
    
    40.8
    %
    
    
    41.0
    %
    
    
    39.6
    %
    
    
    40.7
    %Combined
    
    
    53.3
    %
    
    
    47.1
    %
    
    
    49.4
    %
    
    
    39.6
    %
    
    
    49.0
    %
 
 (1)
    
    Excludes the impact of prior years pre-tax earnings carryforwards (excess or
shortfalls versus earnings targets).(2)
    
    During the 2005-2008 earn-out period, there is an additional contingent obligation
related to tier-two earn-outs that could be as much as $18.0 million if certain of the
acquired companies generate an incremental $37.0 million in pre-tax earnings. 26




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##### Table of Contents



(3)
    
    Aggregate pre-tax earnings targets as presented here identify the uniquely defined
earnings targets of each acquisition and should not be interpreted to be the consolidated
pre-tax earnings of the Company which would give effect for, among other things,
amortization or impairment of intangible assets created in connection with each acquisition
or various other expenses which may not be charged to the operating groups for purposes of
calculating earn-outs.  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4. Controls and Procedure
    27




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##### Table of Contents



28




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##### Table of Contents



Changes in Internal Control over Financial Reporting
       
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
    29




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    30




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##### Table of Contents



Preferred Shares Exchange Agreement
  Warrant
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
    For
    
    WithheldDennis Pelino
    
    
    31,367,170
    
    
    
    2,770,005J. Douglass Coates
    
    
    32,318,609
    
    
    
    1,818,566John Springer
    
    
    32,313,958
    
    
    
    1,823,217David R. Jones
    
    
    32,311,458
    
    
    
    1,825,717Aloysius T. Lawn, IV
    
    
    32,305,483
    
    
    
    1,831,692Robert McCord
    
    
    32,232,284
    
    
    
    1,813,391
  For
    
    Against
    
    Abstain32,448,265
    
    
    570,910
    
    
    
    1,823,217
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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  12
    
    Calculation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit
shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit
shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.)
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SIGNATURES
  STONEPATH GROUP, INC.Date: March 31, 2006
    
    /s/ Jason TotahJason TotahChief Executive OfficerDate: March 31, 2006
    
    /s/ Robert ArovasRobert ArovasPresident & Chief Financial OfficerDate: March 31, 2006
    
    /s/ Robert T. ChristensenRobert T. ChristensenVice President, Controller andPrincipal Accounting Officer
 33