<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| 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 0-29413
STONEPATH GROUP, INC.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
-----------------------------------------------------------------------------
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1085 Mission Street
San Francisco, CA 94103
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 335-4700
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
There were 18,589,028 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at October 31, 2000. In addition, there were
312,200 shares of treasury stock as of such date.
<PAGE>
STONEPATH GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 ...............................................1
Consolidated Statements of Operations
Three and nine months ended September 30, 2000 and 1999 .............2
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 .......................3
Notes to Consolidated Financial Statements ..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........22
Part II. Other Information
Item 1. Legal Proceedings ..................................................22
Item 2. Changes in Securities and Use of Proceeds ..........................23
Item 3. Defaults Upon Senior Securities ....................................23
Item 4. Submission of Matters to a Vote of Security Holders ................23
Item 5. Other Information ..................................................24
Item 6. Exhibits and Reports on Form 8-K ...................................24
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
As of September 30 As of December 31
------------------ -----------------
Assets 2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,710,951 $ 3,127,232
Available for sale securities 410,205 --
Interest receivable 2,369 28,176
Loans receivable 554,162 218,808
Capitalized financing fees, net -- 142,958
Prepaid expenses 111,375 41,911
------------- -------------
Total current assets 33,789,062 3,559,085
Ownership interests in and advances to Affiliate Companies 16,591,466 7,065,557
Goodwill, net of accumulated amortization of $1,511,990 and $578,906 in 2000 and 1999 2,294,214 3,227,298
Furniture and equipment, net 278,121 70,082
Other assets 133,522 67,346
------------- -------------
$ 53,086,385 $ 13,989,368
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 669,727 $ 802,202
Notes and loans payable -- 12,000
Convertible promissory notes -- 1,921,929
Convertible debentures -- 3,250,500
Long-term debt due within one year -- 11,732
Net liabilities of discontinued operations 1,171,557 1,773,591
------------- -------------
Total current liabilities 1,841,284 7,771,954
------------- -------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year -- 67,302
------------- -------------
Total noncurrent liabilities -- 67,302
------------- -------------
Convertible preferred stock, Series B,
$.001 par value (0 and 4,824 shares authorized, issued and outstanding at
2000 and 1999), net of costs of issuance. Liquidation
preference: $0 and $4,824,000 at 2000 and 1999 -- 4,448,872
------------- -------------
-- 4,448,872
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series C,
$.001 par value (4,096,151 shares authorized, issued and outstanding at 2000)
Liquidation preference: $49,153,812 at 2000 4,096 --
Common stock, Net Value, Inc. $.001 par value (49,000,000 shares authorized at
2000 and 1999; 1,092,588 and 1,037,338 issued and outstanding at
2000 and 1999, respectively) 1,093 1,038
Common stock, $.001 par value (100,000,000 and 50,000,000 shares authorized at 2000
and 1999, respectively; 18,479,251 issued and 18,205,351 outstanding at 2000;
15,522,807 issued and outstanding at 1999) 18,479 15,523
Additional paid-in capital 217,187,380 103,946,136
Accumulated deficit (147,793,293) (74,919,285)
Deferred compensation (17,228,700) (27,342,172)
Unrealized gain on available-for-sale securities 165,128 --
Treasury stock, at cost (273,900 shares at 2000) (1,109,082) --
------------- -------------
Total stockholders' equity 51,245,101 1,701,240
------------- -------------
$ 53,086,385 $ 13,989,368
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation 1,852,424 2,695,740 15,219,173 2,781,740
General and administrative 2,232,038 733,557 6,649,241 1,680,553
------------ ------------ ------------ ------------
Total operating expenses 4,084,462 3,429,297 21,868,414 4,462,293
Interest income (653,148) (14,874) (1,569,094) (19,690)
Interest expense -- 10,330,995 84,627 12,890,150
Other losses 1,235,447 -- 2,192,548 --
------------ ------------ ------------ ------------
Loss before equity in losses of Affiliate Companies 4,666,761 13,745,418 22,576,495 17,332,753
Equity in losses of Affiliate Companies 1,880,520 21,138 4,546,276 21,138
------------ ------------ ------------ ------------
Net loss from continuing operations 6,547,281 13,766,556 27,122,771 17,353,891
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations 157,031 2,576,534 157,031 5,582,166
Loss on extinguishment of debt -- -- 554,676 --
------------ ------------ ------------ ------------
Net loss 6,704,312 16,343,090 27,834,478 22,936,057
------------ ------------ ------------ ------------
Preferred stock dividends - continuing operations 1,026,905 6,605,261 45,039,530 6,605,261
------------ ------------ ------------ ------------
Net loss to common stockholders $ 7,731,217 $ 22,948,351 $ 72,874,008 $ 29,541,318
============ ============ ============ ============
Basic and diluted net (loss) per common share -
continuing operations $ (0.42) $ (1.88) $ (4.23) $ (2.77)
============ ============ ============ ============
Basic and diluted net (loss) per common share -
discontinued operations $ (0.01) $ (0.24) $ (0.04) $ (0.65)
============ ============ ============ ============
Basic and diluted weighted average common shares outstanding: 17,984,444 10,835,609 17,060,208 8,647,063
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(27,834,478) $(22,936,057)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 962,307 12,098,336
Stock-based compensation - continuing operations 15,219,173 2,781,740
Stock-based compensation - discontinued operations -- 1,445,276
Interest paid with stock 216,511 395,348
Other losses 2,155,048 --
Equity in losses of Affiliate Companies 4,546,276 21,138
Loss from discontinued operations 711,707 --
Changes in assets and liabilities:
Interest receivable 25,807 (15,562)
Prepaid expenses (69,464) (127,956)
Other assets (66,176) (72,197)
Accounts payable and accrued expenses (132,475) 641,100
Discontinued operations (187,902) 801,159
------------ ------------
Net cash used in operating activities (4,453,666) (4,967,675)
Cash flows from investing activities:
Collections on loans -- 467,000
Collections on advances to Affiliate Companies 75,000 --
Acquisition of ownership interests in Affiliate Companies (12,750,000) (1,325,000)
Advances to Affiliate Companies (735,000) --
Loans made (350,000) (524,000)
Purchases of furniture and equipment (234,616) (43,011)
------------ ------------
Net cash used in investing activities (13,994,616) (1,425,011)
Cash flows from financing activities:
Proceeds from notes payable -- 12,000
Repayments of notes payable (28,281) (240,000)
Long-term debt borrowings -- 6,455,000
Long-term debt payments (79,034) (5,240)
Issuance of warrants 1,099,602 --
Issuance of preferred stock 48,274,760 1,732,000
Purchase of treasury stock (1,126,582) --
Payment of preferred stock dividend, Series B (108,464) (9,133)
Payment of financing fees -- (501,477)
------------ ------------
Net cash provided by financing activities 48,032,001 7,443,150
Net increase in cash and cash equivalents 29,583,719 1,050,464
Cash and cash equivalents at beginning of year 3,127,232 1,466
------------ ------------
Cash and cash equivalents at end of period $ 32,710,951 $ 1,051,930
============ ============
Cash paid for interest $ 29,153 $ 43,866
============ ============
Cash paid for income taxes $ 2,586 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. ("Stonepath" or the "Company"), formerly known as
Net Value Holdings, Inc., is actively engaged in identifying, financing,
and providing business development services for a network of early-stage
technology businesses that possess significant growth potential.
Stonepath's operating strategy is to acquire a significant equity
interest in development stage technology companies, which Stonepath calls
its "Affiliate Companies," and to provide financial, management, and
technical support to accelerate the achievement of the Affiliate
Companies' business goals and objectives. To date, Stonepath has focused
on technology businesses with significant Internet features and
applications. As of September 30, 2000, Stonepath owned interests in ten
Affiliate Companies. Stonepath is based in San Francisco with offices in
New York, Boston and Philadelphia.
The accompanying unaudited consolidated financial statements were
prepared in accordance with 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 SEC relating to
interim financial statements. These statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly Stonepath'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
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K filed with the SEC on May 11, 2000.
Interim operating results are not necessarily indicative of the results
for a full year. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current period
presentation.
The accompanying unaudited consolidated financial statements of Stonepath
reflect the results of the in-process merger with Net Value, Inc. ("NV
Inc."). At September 30, 2000, Stonepath owned approximately 65% of the
outstanding common stock of NV Inc. Because it is unlikely that the
minority shareholders will make additional capital contributions to erase
accumulated NV Inc. losses, no amount has been ascribed to the
approximate 35% minority interest. On November 8, 2000, Stonepath
completed the merger whereby NV Inc. shareholders were offered .4
Stonepath common shares for every one NV Inc. share tendered.
Additionally, Stonepath issued common stock purchase warrants and stock
options to the holders of NV, Inc.'s common stock purchase warrants and
vested stock options at the same exchange ratio. Because the consolidated
financial statements of Stonepath already include those of NV Inc., the
only effect of completing this merger will be the reallocation of
approximately $1,100 from NV Inc.'s capital accounts to Stonepath's
capital accounts, which will not change stockholder's equity in the
aggregate.
(2) Available-For-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the unrealized gain or loss reported as a component
of other comprehensive income in stockholders' equity. At September 30,
2000, available-for-sale securities consist of the following equity
security:
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost Loss Gain Fair Value
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Student Advantage, Inc. $ 245,077 $ -- $165,128 $410,205
--------- ------- -------- --------
$ 245,077 $ -- $165,128 $410,205
========= ======= ======== ========
</TABLE>
-4-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Stonepath's ownership interests in and advances
to Affiliate Companies accounted for under the equity method and cost
method of accounting at September 30, 2000. One Affiliate Company,
metacat.com, is consolidated and therefore is not included in the table
below. All of the Affiliate Companies are privately held companies.
<TABLE>
<CAPTION>
Excess of carrying
value over equity Percentage of
Carrying value in net assets ownership
-------------- ------------------ -------------
<S> <C> <C> <C>
Equity method:
AlarmX.com $ 480,726 $ 279,234 69%(1)
AssetExchange 246,401 214,962 20%
FlowerGarage.com 1,228,980 735,685 43%
Stonepath Europe 100,000 57,100 43%
Swapit.com 4,343,867 4,343,867 55%(1)
Webmodal 4,447,086 3,377,894 41%
----------- -----------
$10,847,060 $ 9,008,742
=========== ===========
Cost method:
BrightStreet.com $ 3,994,406 14%(2)
E-Quill 450,000 8%
YesAsia 1,300,000 9%
-----------
5,744,406
-----------
$16,591,466
===========
</TABLE>
(1) AlarmX and SwapIt are not consolidated because Stonepath anticipates
that its majority ownership is temporary and will be reduced below
50% within 12 months of obtaining its majority ownership.
(2) Stonepath owns this interest indirectly through Net Value, Inc., a
65% owned subsidiary at September 30, 2000.
The following summarized financial information for Affiliate Companies
accounted for under the equity method of accounting at August 31, 2000,
has been compiled from the unaudited financial statements of the
respective companies:
Balance sheets: August 31, 2000
--------------- ---------------
Current assets $ 5,280,855
Noncurrent assets 3,693,475
--------------
Total assets $ 8,974,330
==============
Current liabilities $ 2,171,902
Noncurrent liabilities 1,302,153
Stockholders' equity 5,500,275
--------------
Total liabilities and
stockholders' equity $ 8,974,330
==============
Eight months ended
Results of operations: August 31, 2000
---------------------- ------------------
Revenues $ 769,218
Net loss $ (8,972,954)
-5-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(4) Acquisitions
On May 9, 2000, Stonepath acquired an additional equity interest in
Webmodal for total consideration of $4,877,099 consisting of $4,000,000
cash and 113,174 shares of Stonepath common stock valued at $877,099.
This acquisition increased Stonepath's approximate voting ownership from
10% to 39% and necessitated a change from the cost method to the equity
method of accounting for the investment in Webmodal.
The following unaudited pro forma financial information presents the
combined results of operations for the nine month periods ended September
30, 2000 and 1999 as if Stonepath had owned its 39% ownership interest
since the beginning of each period, and includes the effect of
Stonepath's proportionate share of Webmodal's net losses and amortization
of the excess investment cost over the equity in Webmodal's net assets.
<TABLE>
<CAPTION>
Nine months ended September 30
-----------------------------------
2000 1999
------------ --------------
<S> <C> <C>
Revenue $ -- $ --
Pro forma net loss to common
shareholders 73,436,008 30,080,287
============ ==============
Pro forma net loss per common share $ 4.29 $ 3.45
============ ==============
</TABLE>
On August 23, 2000, Stonepath acquired an additional equity interest in
SwapIt for total consideration of $4,233,145, which was funded from the
Company's existing cash and by cancellation of outstanding promissory
notes from SwapIt to the Company in the principal amount of $3,800,000,
plus accrued interest thereon of $133,945. This acquisition increased
Stonepath's approximate voting ownership from 30% to 52%.
The following unaudited pro forma financial information presents the
combined results of operations for the nine month period ended September
30, 2000 as if Stonepath had owned its 52% ownership interest since the
beginning of the period, and includes the effect of Stonepath's
proportionate share of SwapIt's net losses and amortization of the excess
investment cost over the equity in SwapIt's net assets. Pro forma results
for the corresponding period in 1999 are not presented because SwapIt
commenced operations on October 28, 1999.
Nine months ended
September 30, 2000
------------------
Revenue $ --
Pro forma net loss to common shareholders 75,335,683
=============
Pro forma net loss per common share $ 4.42
=============
-6-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(5) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
8% Convertible debentures $ -- $3,250,500
12% Convertible promissory notes -- 1,021,929
Convertible promissory note, bearing interest at 10% -- 900,000
Installment loan payable, bearing interest at 7.76% -- 79,034
Other -- 12,000
---------- ----------
-- 5,263,463
Less amount due within one year -- 5,196,161
---------- ----------
Noncurrent portion $ -- $ 67,302
========== ==========
</TABLE>
(a) 8% Convertible Debentures
Stonepath repaid in full the 8% Convertible Debentures plus accrued
interest through the payment of $15,869 and the issuance of
1,391,853 shares of common stock pursuant to the original
conversion terms of the debentures.
(b) 12% Convertible Promissory Notes
Stonepath repaid in full the 12% Convertible Promissory Notes plus
accrued interest through the payment of $28,281 and the issuance of
563,094 shares of common stock, pursuant to the original terms of
the notes. The terms of the conversion obligated Stonepath to issue
warrants to purchase one-half of one share of Stonepath common
stock for each share issued upon conversion. Accordingly, Stonepath
issued 281,547 warrants to purchase common stock in connection with
the conversions. These warrants are exercisable over a three-year
period from the date of issuance at a $6 per share exercise price.
(c) 10% Convertible Promissory Note
Stonepath repaid in full the 10% Convertible Promissory Notes plus
accrued interest through the issuance of 400,000 shares of common
stock pursuant to the original conversion terms of the note.
-7-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(6) Preferred Stock
Preferred Stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------- --------------------------------
Shares Shares
outstanding Proceeds (1) outstanding Proceeds (2)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series B -- $ -- 4,824 $ 4,448,872
Series C 4,096,151 40,883,087 -- --
----------- ----------- ----------- -----------
4,096,151 $40,883,087 4,824 $ 4,448,872
=========== =========== =========== ===========
</TABLE>
(1) Amount is net of issuance costs and proceeds allocated to the
Series C Warrants described below.
(2) Amount is net of issuance costs.
Series B Preferred Stock
In February 2000, the holders of Stonepath's Redeemable Convertible
Series B Preferred Stock (Series B Shares) converted their Series B
Shares into 1,180,180 shares of common stock pursuant to the original
terms of the issuance. The Series B Shares had a liquidation preference
of $1,000 per share, bore a noncumulative dividend rate of 5%, and were
redeemable at $1,250 per share in the event Stonepath failed to achieve
certain performance objectives.
In connection with the Series B issuance in 1999, Stonepath issued
warrants to purchase 295,040 shares of common stock (Series B Warrants).
These warrants were exercisable until August 2000 at prices equivalent to
a range between 110% to 140% of the conversion price of the Series B
Shares. Through September 30, 2000, the warrant holders exercised 210,944
Series B Warrants with cash proceeds to Stonepath of $1,077,792.
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Convertible
Series C Preferred Stock (Series C Shares) at $12 per share for net
proceeds of $48,274,760 after payment of issuing costs consisting of
$1,305,240 and 35,000 Series C Shares valued at $420,000. The Series C
Shares are convertible into one share of the Company's common stock at
any time at the election of the shareholder, bear a cumulative dividend
of 8% per annum payable in kind on a quarterly basis and have a
liquidation preference of $12 per share. Through September 30, 2000, the
shareholders elected to convert 281,446 Series C Shares into shares of
the Company's common stock.
In connection with the issuance of the Series C Shares, Stonepath issued
warrants to purchase 416,667 shares of common stock (Series C Warrants).
The Series C Warrants are exercisable until March 2, 2003 at an exercise
price of $26.58 per share of common stock. Stonepath allocated $7,391,673
of the net proceeds received to the cost of the Series C Warrants as
determined using a Black-Scholes option-pricing model.
-8-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(6) Preferred Stock (continued)
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Series B Preferred Stock dividend $ $ -- $ 108,464 $ --
Series C Preferred Stock dividend 1,026,905 -- 2,322,739 --
Non-cash charge: beneficial
conversion feature on Series A
Shares -- 5,955,261 -- 5,955,261
Non-cash charge: beneficial
conversion feature on Series B
Shares -- 650,000 -- 650,000
Non-cash charge: beneficial
conversion feature on Series C
Shares -- -- 42,608,327 --
----------- ------------ ----------- ----------
$ 1,026,905 $ 6,605,261 $45,039,530 $6,605,261
=========== ============ =========== ==========
</TABLE>
The Series B Preferred Stock dividend was paid in cash in February 2000
as the holders converted their Series B Shares into shares of Stonepath's
common stock. The Series C Preferred Stock dividend is payable in
additional Series C Shares on a quarterly basis and therefore does not
represent a cash obligation of the Company.
At the time of issuance of the Series C Shares, the then fair market
value of Stonepath's common stock was higher than the Series C Shares
sales price of $12 per share. As the Series C shares are convertible into
shares of Stonepath's common stock, this differential in price
constitutes a beneficial conversion feature as defined in the Emerging
Issues Task Force Issue No. 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" (EITF 98-5). Accordingly, Stonepath recorded $42,608,327 as
additional paid in capital for the discount deemed related to a
preferential dividend for the beneficial conversion feature. In
accordance with EITF 98-5, this discount was limited to the proceeds
allocated to the Series C Shares and was recognized immediately as a
preferred stock dividend as the Series C Shares are immediately
convertible.
During the nine months ended September 30, 1999, Stonepath recorded the
effect of the beneficial conversion features of $5,955,261, representing
the excess of the fair value of the common stock issued over the fair
value of the Series A Shares redeemed and $650,000, representing the fair
value of the Series B Warrants issued.
-9-
<PAGE>
(7) Deferred Compensation
The components of deferred compensation from continuing operations are as
follows:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
------------ -------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,137,600 $ 20,180,172 $ 27,317,772
Additions to deferred compensation 20,037,675 4,195,356 24,233,031
Cancellations and fair value adjustments (3,367,619) (16,444,686) (19,812,305)
Amortization to stock-based compensation (6,944,206) (7,565,592) (14,509,798)
------------ ------------ ------------
Balance at September 30, 2000 $ 16,863,450 $ 365,250 $ 17,228,700
============ ============ ============
</TABLE>
(8) Other Loss
Other loss consists of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------- ------------------------------
2000 1999 2000 1999
---------- ------------ --------- ---------------
<S> <S> <C> <C> <C>
Gain on sale of College411 holdings $ -- $ -- $ (195,088) $ --
Affiliate Company impairment charge -- -- 1,152,189 --
Litigation settlement 1,235,447 -- 1,235,447 --
---------- ------------ ---------- ---------------
$1,235,447 $ -- $2,192,548 $ --
========== ============ ========== ===============
</TABLE>
In May 2000, College411 was merged into a wholly owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received
.0144 shares of Student Advantage common stock for every share of
College411 common stock which they owned on the date of the merger. As a
result of this merger, Stonepath received 55,621 shares of Student
Advantage's common stock. The fair market value of Student Advantage's
common stock received, based on publicly quoted market prices, was
$245,077, which exceeded the carrying value of our investment in
College411 by $195,088. Accordingly, we recorded a $195,088 gain as a
result of this transaction.
In June 2000 the Company recorded an impairment charge of $1,152,189 for
the other than temporary decline in the carrying value of one of its
Affiliate Companies accounted for under the equity method. The Company
acquired its ownership interest in the Affiliate Company in 2000 for
$1,000,000 and advanced loans of $650,000. From the date of the Company's
initial acquisition of ownership interest through June 30, 2000, the
Company's funding to this Affiliate Company represented all the outside
capital the company had available to fund its operations. Once it was
determined that this company was unable to obtain further rounds of
financing necessary to sustain operations, Stonepath recorded an
impairment charge to reduce the remaining carrying value of this company
to zero.
-10-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(8) Other Loss (continued)
In August 2000, the Company entered into a settlement agreement for its
legal claims with Douglas Spink, the former Chief Technology Officer and
director. The litigation centered on the number of shares of common stock
which Mr. Spink was entitled to following his termination from the
Company. Under the terms of the agreement, Mr. Spink agreed to allow the
Company to reacquire for cancellation 1,212,876 shares of the 2,047,876
common shares originally issued to him. The settlement agreement allowed
Mr. Spink to retain ownership of 835,000 common shares, consisting of
504,532 previously vested shares and an additional 330,468 shares vested
as part of the settlement. The vesting of these additional 330,468 shares
resulted in a charge to Other Loss of $1,197,947 equal to the fair value
of such shares on the date of settlement. Additionally, the Company paid
$37,500 in severance to Mr. Spink as required by the settlement
agreement.
(9) Comprehensive Income (Loss)
Excluding net loss, the Company's source of comprehensive income is from
the unrealized gain on its equity holdings of Student Advantage, Inc.,
which is classified as available-for-sale. The Company has not provided
for a deferred tax liability relating to this unrealized gain as the
Company expects to have sufficient net operating losses to offset any
potential tax liability resulting from the sale of its equity holdings.
The following summarizes the components of comprehensive income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------------- -------------------------------------
2000 1999 2000 1999
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (6,704,312) $(16,343,090) $ (27,834,478) $ (22,936,057)
Other comprehensive income:
Unrealized gain 3,447 -- 165,128 --
------------- ------------ ------------- -------------
Comprehensive income (loss) $ (6,700,865) $(16,343,090) $ (27,699,350) $ (22,936,057)
============= ============ ============= =============
</TABLE>
(10) Net Loss per Share
Basic net loss per common share and diluted net loss per common share are
presented in accordance with Statement of Financial Accounting Standards
No. 128, Earnings Per Share (FAS 128), for all periods presented. In
accordance with FAS 128, basic and diluted net loss per common share have
been computed using the weighted-average number of shares of common stock
outstanding during the period. Shares associated with stock options,
stock warrants, convertible debt, and convertible preferred stock are not
included because the inclusion would be anti-dilutive (i.e., reduce the
net loss per share). The total numbers of such shares excluded from
diluted net loss per common share are 12,052,327, and 11,742,750 at
September 30, 2000 and 1999, respectively. Such securities, had they been
dilutive, would have been included in the computations of diluted loss
per share using the treasury stock method.
-11-
<PAGE>
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
(11) Commitments and Contingencies
In August 1999, coolsavings.com filed an action against NV Inc. alleging
that NV Inc. through its Internet website and products had committed
various acts of patent infringement. NV Inc. filed its answer to the
patent infringement action in November 1999 seeking a declaratory
judgment of invalidity and non-infringement of the patent.
Brightstreet.com has agreed to assume all liabilities related to this
lawsuit, including all legal expenses incurred in defending against these
claims, as part of their purchase of substantially all of the assets of
NV Inc. Stonepath believes that the resolution of this action will not
have a material adverse effect on its or Brightstreet.com's financial
position.
On August 22, 2000, Austost Anstall Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's Series A convertible
notes filed suit against Stonepath in the United States District Court
for the District of Delaware. The plaintiffs allege that, contrary to the
obligation in the agreement pursuant to which the plaintiffs purchased
the Series A notes that Stonepath would "use reasonable commercial
efforts to register" the stock underlying the notes "at some future
date," that Stonepath failed to register their stock in its next filed
registration statement. The plaintiffs assert claims for breaches of
contract and the duty of good faith and fair dealing, fraud, violation of
federal securities laws, estoppel, and reformation and seek damages in
excess of $20 million, plus attorneys' fees and costs. Based upon
Stonepath's preliminary review of the facts and without conducting
discovery, it does not believe that it was required to register the
plaintiffs' stock in the manner they have asserted, nor does Stonepath
believe that the complaint presents a significant claim against the
Company. Stonepath has not yet responded to the complaint, but intends to
defend it vigorously.
On October 12, 2000, Emergent Capital Investment Management, LLC filed
suit against the Company and two of its officers contending that it was
misled by statements made by the defendants in connection with the amount
of the Company's Series C offering in which they participated. The
plaintiff contends that the Company represented the Series C offering
would place $20 million worth of the Company's securities and were not
told that the Series C offering would instead place $50 million until
after the plaintiff had completed its investment. The plaintiff seeks a
return of its $2 million purchase price of Series C stock and damages in
the amount of $1.7 million. Although no formal fact finding has occurred,
Stonepath believes that it has strong defenses to this action and that
discovery will demonstrate that, in fact, no such representations were
made, and that the case is without merit. Accordingly, at the present
time, Stonepath believes that this action will not have a material
adverse effect on its financial position.
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 these matters will not have a material
adverse effect on the Company's consolidated financial position, results
of operations or liquidity.
-12-
<PAGE>
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 7A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies, that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," " believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-1 declared
effective on June 30, 2000 by the SEC (File No. 333-38716), our Registration
Statement on Form S-4 declared effective on October 6, 2000 by the SEC (File No.
333-88629) and our Annual Report on Form 10-K filed on May 11, 2000. The
following discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto included elsewhere in this
report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
We were originally formed as a Florida corporation in 1991 and did not have any
operations until our change of domicile into Delaware in October 1998. This
occurred in conjunction with our acquisition of a controlling interest in Net
Value, Inc., a developer and distributor of online promotional campaigns. We
obtained control of Net Value, Inc. during 1998 when we acquired 66% of its
outstanding common stock through share exchange transactions with 20 of its
largest stockholders in the first stage of a two-step process. Since we owned a
majority of Net Value, Inc.'s capital stock, we could assure that the merger
would ultimately be completed, and accordingly our 1999 and 2000 financial
statements reflect the results of this in-process merger with Net Value, Inc. On
November 8, 2000, we completed the merger whereby Net Value, Inc. shareholders
were offered .4 Stonepath common shares for every one NV Inc. share tendered,
which based on the capitalization of Net Value, Inc. prior to the merger,
totaled 1,754,140 Stonepath common shares. Additionally, we issued common stock
purchase warrants and stock options to the holders of NV, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio. Because
the consolidated financial statements of Stonepath already include those of Net
Value, Inc., the only effect of completing this merger will be the reallocation
of approximately $1,100 from Net Value, Inc.'s capital accounts to our capital
accounts, which will not change stockholder's equity in the aggregate.
Our financial statements also reflect the operations of Net Value, Inc. as a
discontinued operation. This was necessitated when, in November 1999, we made
the strategic decision to exit the development and distribution of online
promotional campaign operations of Net Value, Inc. In December 1999, we sold the
business and assets of Net Value, Inc. to BrightStreet.com, Inc., a new company
formed by members of Net Value, Inc.'s then senior management team and a group
of third party investors. Through Net Value, Inc., we retained a 14% interest in
the common stock of BrightStreet.com. We have segregated the operating results
of the discontinued operations of Net Value, Inc. from continuing operations and
have reported these operating results as a separate line item on the statements
of operations.
Because we acquire significant interests in early-stage companies, many of which
generate net losses, we have experienced, and expect to continue to experience,
significant volatility in our quarterly results. We do not know if we will
report net income in any period, and we expect that we will report net losses in
many quarters for the foreseeable future. While our affiliate companies have
consistently reported losses, we may have net income in certain periods and may
experience significant volatility from period to period due to non-recurring
transactions and other events incidental to our ownership interests in and
advances to affiliate companies. These transactions include dispositions of, and
changes to, our affiliate company ownership interests, and impairment charges.
-13-
<PAGE>
On a continuous basis, but no less frequently than at the end of each quarter,
we evaluate:
o the carrying value of our ownership interest in and advances to each
of our affiliate companies for possible impairment based on
achievement of business plan objectives and milestones;
o the value of each ownership interest in the affiliate company relative
to carrying value;
o the financial condition and prospects of the affiliate company; and
o other relevant factors.
The business plan objectives and milestones we consider include those related to
financial performance such as achievement of planned financial results or
completion of capital raising activities, and those that are not primarily
financial in nature such as the launching of an Internet website or the hiring
of key employees. The fair value of our ownership interests in and advances to
privately held affiliate companies is generally determined based on the value at
which independent third parties have or have committed to invest in our
affiliate companies.
Effect of Various Accounting Methods on our Results of Continuing Operations
Accounting for Stock-Based Compensation
Stock-based compensation is a non-cash charge relating to the amortization of
deferred compensation and the issuance of stock for services. We record deferred
compensation when we make restricted stock awards or compensatory stock option
or warrant grants to employees, consultants or advisory board members. In the
case of stock option grants to employees, the amount of deferred compensation
initially recorded is the difference between the exercise price and fair market
value of our common stock on the date of grant. In the case of options granted
to consultants or advisory board members, the amount of deferred compensation
recorded is the fair value of the stock options on the grant date as determined
using a Black-Scholes option pricing model. We record deferred compensation as a
reduction to stockholders' equity and an offsetting increase to additional
paid-in capital. We then amortize deferred compensation into stock-based
compensation over the performance period, which typically coincides with the
vesting period of the stock-based award of 3 to 4 years.
Grants to Employees. All awards to employees are fixed awards. This means
that the number and exercise price of the stock options are known on the
date of grant. Under these fixed awards, the amount of deferred
compensation which we record is similarly fixed and represents the total
amount of future amortization to stock-based compensation.
Grants to Consultants and Advisory Board. In accordance with the Emerging
Issues Task Force 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, stock-based awards to consultants and advisory
board members for future professional services are considered variable.
This means that the amount of deferred compensation is periodically
adjusted to the current fair value of the unvested awards as determined
using a Black-Scholes option pricing model. Similarly, the amortization to
stock-based compensation for variable awards also fluctuates in direct
proportion to the increase or decrease in deferred compensation resulting
from changes in fair value. These fluctuations are largely dependent on the
fair market value of our common stock, which therefore makes future
prediction or estimate of the amortization charge to stock-based
compensation extremely difficult.
Accounting for Affiliate Company Ownership
The various interests that we acquire in our affiliate companies are accounted
for under one of the following three methods: consolidation, equity method and
cost method. The applicable accounting method is generally determined based on
our voting ownership in an affiliate company.
Consolidation. Affiliate companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting.
-14-
<PAGE>
Under this method, an affiliate company's financial statements are
reflected within our consolidated financial statements. As of September 30,
2000, metacat.com, Inc. is our only consolidated affiliate company. In
those instances where we believe that our majority ownership is temporary
and will be reduced below 50% within 12 months of obtaining our majority
interest, we do not follow the consolidation method; rather we follow the
equity method described below.
Equity Method. Affiliate companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise
significant influence with respect to an affiliate company depends on an
evaluation of several factors including, among others, representation on
the affiliate company's board of directors and ownership level, which is
generally a 20% to 50% interest in the voting securities of the affiliate
company, including voting rights associated with our holdings in common
stock and preferred stock in the affiliate company. Under the equity method
of accounting, our share of the earnings or losses of the affiliate company
is reflected in the caption "Equity in Losses of Affiliate Companies" in
the Consolidated Statements of Operations. Additionally, our excess
investment cost over equity in each affiliate company's net assets is
amortized over three years to "Equity in Losses of Affiliate Companies." As
of September 30, 2000 and December 31, 1999 we accounted for the following
affiliate companies under this method:
<TABLE>
<CAPTION>
Voting Ownership
Affiliate -----------------------------------------
Company Since September 30, 2000 December 31, 1999
-------------- ------------------ -----------------
<S> <C> <C> <C>
AlarmX.com 2000 69%(1) --
Asset Exchange, Inc. 1999 20% 20%
FlowerGarage.com 2000 43% --
Stonepath Europe 2000 43% --
SwapIt.com 1999 55%(1) 11%
Webmodal, Inc. 1999 41% 12%
</TABLE>
(1) AlarmX.com and SwapIt.com are not consolidated because we anticipate
that our majority ownership is temporary and will be reduced below 50%
within 12 months of obtaining our majority ownership.
The effect of an affiliate company's net results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each
of these methods only our share of the earnings or losses of an affiliate
company is reflected in our results of operations in the Consolidated
Statements of Operations.
We have representation on the board of directors of all of the above
affiliate companies. Most of our equity method affiliate companies are in
an early stage of development and have not generated significant revenues.
All of our equity method affiliate companies were formed less than two
years ago and are expected to incur substantial losses in 2000.
-15-
<PAGE>
Cost Method. Affiliate companies not accounted for under either the
consolidation or the equity methods of accounting are accounted for under
the cost method of accounting. Under this method, our share of the earnings
or losses of these companies is not included in our Consolidated Statements
of Operations. Our affiliate companies accounted for under the cost method
of accounting at September 30, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Affiliate -----------------------------------------
Company Since September 30, 2000 December 31, 1999
------------- ------------------ -----------------
<S> <C> <C> <C>
Brightstreet.com 1999 14%(1) 14%
E-Quill 2000 8% --
YesAsia 1999 9% 11%
</TABLE>
(1) We own this interest indirectly through Net Value, Inc., our 65%
owned subsidiary at September 30, 2000.
Our cost method affiliate companies are in a very early stage of
development and have not generated significant revenues. In addition, our
cost method affiliate companies have incurred substantial losses and are
expected to continue to incur substantial losses in 2000.
Results of Operations
Three and Nine Months Ended September 30, 2000 compared to the Three and Nine
Months Ended September 30, 1999
Continuing Operations
Stock-Based Compensation. Stock-based compensation is a non-cash expense
resulting from the amortization of deferred compensation and the issuance of
stock for services and totaled $1,852,424 and $15,219,173 for the three and nine
months ended September 30, 2000, respectively, compared to $2,695,740 and
$2,781,740 for each of the corresponding periods in 1999. The decrease in
stock-based compensation for the three months ended September 30, 2000 versus
the three months ended September 30, 1999 is due to the May 2000 cancellation of
unvested options to consultants resulting in a decrease to deferred compensation
and related reduction in amortization to stock-based compensation.
Notwithstanding this decrease, stock-based compensation increased for the nine
months ended September 30, 2000 versus the corresponding period in 1999 due to
the hiring of a significant portion of our management team and use of
consultants in the first and second quarter of 2000.
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the three months ended September
30, 2000:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
------------ --------------- ------------
<S> <C> <C> <C>
Balance beginning of period $ 18,638,004 $ 1,202,557 $ 19,840,561
Additions to deferred compensation -- 43,621 43,621
Cancellations and fair value adjustments -- (803,058) (803,058)
Amortization to stock-based compensation (1,774,554) (77,870) (1,852,424)
------------ ------------ ------------
Balance at September 30, 2000 $ 16,863,450 $ 365,250 $ 17,228,700
============ ============ ============
</TABLE>
-16-
<PAGE>
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the nine months ended September 30,
2000:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
------------ -------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,137,600 $ 20,180,172 $ 27,317,772
Additions to deferred compensation 20,037,675 4,195,356 24,233,031
Cancellations and fair value adjustments (3,367,619) (16,444,686) (19,812,305)
Amortization to stock-based compensation (6,944,206) (7,565,592) (14,509,798)
------------ ------------ ------------
Balance at September 30, 2000 $ 16,863,450 $ 365,250 $ 17,228,700
============ ============ ============
</TABLE>
During the nine months ended September 30, 2000, we also recorded stock-based
compensation of $709,375 relating to investment banking services that were paid
via the issuance of 25,000 shares of our common stock. We valued these services
based on our closing stock market price of $28.375 on the date of issuance.
Of the total unamortized deferred compensation relating to employees of
$16,863,450, we expect to amortize into stock-based compensation $1,681,994,
$6,727,975, $5,414,925, $2,673,774 and $364,782 during the remainder of 2000,
2001, 2002, 2003 and 2004, respectively. These amounts correspond to the vesting
schedule of the underlying stock-based award. The amount of deferred
compensation recorded and related amortization to stock-based compensation will
increase with any future compensatory grants and decrease with any
cancellations.
As discussed above in "Effects of Various Accounting Methods on our Results of
Continuing Operations," stock-based awards to consultants and advisory board
members for future professional services are considered variable, meaning the
amount of the unamortized deferred compensation is periodically adjusted to the
fair market value of the unvested awards. The fair market value adjustments are
determined using a Black-Scholes option pricing model and generally increase or
decrease with corresponding increases and decreases in the market price of our
common stock. Due to this market variability, we cannot accurately predict the
future amortization to stock-based compensation associated with these awards.
General and Administrative Expenses. Our general and administrative expenses
have increased to $2,232,038 and $6,649,241 for the three and nine months ended
September 30, 2000, respectively, compared to $733,557 and $1,680,553 for the
corresponding respective periods in 1999. This increase is due to the execution
of our operating plan and the expansion of our operations which began in
mid-1999 and continued through June 2000. We expect our general and
administrative expenses to stabilize now that we have solidified our corporate
infrastructure and met our immediate hiring needs. The following is a schedule
of the significant components that comprise general and administrative expense:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
---------------------------------- ----------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Professional fees $ 285,063 $ 130,604 $2,069,213 $ 513,903
Salaries and benefits 542,273 28,451 1,544,259 51,513
Depreciation and amortization 299,171 221,353 962,307 221,353
Marketing 259,490 147,218 451,821 149,068
Other general and administrative 846,041 205,931 1,621,641 744,716
---------- ---------- ---------- ----------
Total $2,232,038 $ 733,557 $6,649,241 $1,680,553
========== ========== ========== ==========
</TABLE>
Professional fees consist primarily of legal and accounting fees associated with
our SEC filings, annual and interim audit services, and general corporate
matters.
-17-
<PAGE>
The increase in salaries and benefits expense over the prior quarter and prior
year periods is due to our active recruitment of executive personnel during the
first six months of 2000. We had 23 more full-time employees at September 30,
2000 than the corresponding period of the prior year. Salaries and benefits
include employee cash compensation and medical and dental coverage.
Depreciation and amortization consists of depreciation associated with our
furniture and equipment and the amortization of goodwill attributable to our
acquisition of Strategicus Partners, Inc. in July 1999. Total goodwill for the
Strategicus transaction was approximately $3.8 million, which is being amortized
on a straight-line basis over three years.
Marketing expense consists primarily of expenses associated with our name
change, market positioning, and branding.
Other general and administrative consists primarily of travel-related, office,
and other operating expenses.
Interest Income. Our interest income totaled $653,148 and $1,569,094 for the
three and nine months ended September 30, 2000, respectively, compared to
$14,874 and $19,690 for each of the corresponding periods in 1999. Interest
income consists of the interest earned on our cash and cash equivalents
balances, with the change period over period due to significant increases in our
cash balances resulting from our equity financings.
Interest Expense. Interest expense consists of:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest expense based on stated interest
rates $ -- $ 195,158 $ 84,627 $ 589,555
Non-cash charge: beneficial conversion
features on convertible promissory
notes and debentures -- 10,135,837 -- 12,300,595
------------ ----------- ----------- -----------
Total $ -- $10,330,995 $ 84,627 $12,890,150
============ =========== =========== ===========
</TABLE>
The non-cash charge is the result of beneficial conversion features attached to
our convertible promissory notes and convertible debentures issued in 1999 that
allowed the holders to convert their notes and debentures into shares of our
common stock at below market rates. These promissory notes and debentures were
repaid in full in 2000 through cash payments or the issuance of stock pursuant
to the original conversion terms. We expect to fund our future operations
through the use of equity financings or the sale of our investments in affiliate
companies and do not anticipate that we will incur these interest expense
charges in the future.
Other loss. Other loss consists of:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Gain on sale of College411 holdings $ -- $ -- $ (195,088) $ --
Affiliate Company impairment charge -- -- 1,152,189 --
Litigation settlement 1,235,447 -- 1,235,447 --
---------------- --------------- --------------- ---------------
$ 1,235,447 $ -- $ 2,192,548 $ --
================ =============== =============== ===============
</TABLE>
In May 2000, College411 was merged into a wholly owned subsidiary of Student
Advantage, Inc. whereby the College411 stockholders received .0144 shares of
Student Advantage common stock for every share of College411 common stock which
they owned on the date of the merger. As a result of this merger, Stonepath
received 55,621 shares of Student Advantage's common stock. The fair market
value of Student Advantage's common stock received, based on publicly quoted
market prices, was $245,077, which exceeded the carrying value of our investment
in College411 by $195,088. Accordingly, we recorded a $195,088 gain as a result
of this transaction.
-18-
<PAGE>
We recorded an impairment charge of $1,152,189 for the other than temporary
decline in carrying value of one of our Affiliate Companies accounted for under
the equity method. We acquired our ownership interest in this Affiliate Company
in 2000 for $1 million and advanced loans totaling $650,000. From the time of
our initial investment and through June 30, 2000, our funding to this company
represented all the outside financing it had available to fund its operations.
When we determined that this company was unable to obtain further rounds of
financing necessary to sustain operations, we recorded impairment charges to
reduce the remaining carrying value of this company to zero.
In August 2000, we entered into a settlement agreement for our legal claims with
Douglas Spink, our former Chief Technology Officer and director. The litigation
centered on the number of shares of common stock which Mr. Spink was entitled to
following his termination from the company. Under the terms of the agreement,
Mr. Spink agreed to allow us to reacquire for cancellation 1,212,876 shares of
the 2,047,876 common shares originally issued to him. The settlement agreement
allowed Mr. Spink to retain ownership of 835,000 common shares, consisting of
504,532 previously vested shares and an additional 330,468 shares vested as part
of the settlement. The vesting of these additional 330,468 shares resulted in a
charge to Other Loss of $1,197,947 equal to the fair value of such shares on the
date of settlement. Additionally, we paid $37,500 in severance to Mr. Spink as
required by the settlement agreement.
Equity in losses of affiliate companies. Equity in losses of affiliate companies
for the three and nine months ended September 30, 2000 amounted to $1,880,520
and $4,546,276, respectively compared to $21,138 for each of the corresponding
periods in 1999. These amounts represent our proportionate share of the losses
of our affiliate companies and the amortization of the excess of the cost of our
investment over our equity interest in the net assets of the affiliate companies
accounted for under the equity method of accounting. During the nine months
ended September 30, 2000, College411.com, AssetExchange, Inc., AlarmX.com,
IndustrialVortex.com, Webmodal, Inc., SwapIt.com, FlowerGarage.com, and
Stonepath Europe were accounted for under the equity method of accounting.
During the three and nine months ended September 30, 1999, College411.com was
accounted for under the equity method. Our equity in losses will increase as we
purchase additional equity interests in early stage technology companies or
increase our existing equity ownership in our affiliate companies. Conversely,
our equity in losses will decrease when our affiliate companies report earnings
and as the excess of our investment over our equity interest in the net assets
of the affiliate companies is amortized to zero. We expect to continue to incur
equity losses given the early stage development of our affiliate companies.
Net Loss From Continuing Operations
We have had net losses from continuing operations for each period since
inception. This amount could fluctuate significantly from period to period,
depending on the operating results of our affiliate companies and other
non-recurring transactions. For the three and nine months ended September 30,
2000, our net loss from continuing operations was $6,547,281 and $27,122,771,
respectively compared to $13,766,556 and $17,353,891 for each of the
corresponding periods in 1999. We are aggregating this amount to the maximum
extent allowable by law into our federal and state net loss carry forwards to be
available to offset future taxable income, if any.
Discontinued Operations
In December 1999, we completed the sale of substantially all of the assets of
Net Value, Inc. to BrightStreet.com (f/k/a Promotions Acquisitions, Inc.), a
newly formed corporation formed by the former management team of Net Value, Inc.
With the sale of Net Value, Inc. to BrightStreet.com, all operations relating to
the discontinued operations effectively ceased.
-19-
<PAGE>
We are currently in the process of merging with Net Value, Inc., after which we
will own all of Net Value, Inc.'s assets and liabilities. In preparation for the
merger, we are negotiating with former creditors to settle various outstanding
debt instruments and liabilities that remain obligations of Net Value, Inc.
Depending on the circumstances for each of these liabilities, we may record a
gain or loss upon settlement. During the nine months ended September 30, 2000,
we recorded a loss from discontinued operations of $157,031 and a loss from
extinguishment of debt of $554,676 as a result of these ongoing negotiations.
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Series B Preferred Stock dividend $ -- $ -- $ 108,464 $ --
Series C Preferred Stock dividend 1,026,905 -- 2,322,739 --
Non-cash charge: beneficial
conversion feature on Series A
Shares -- 5,955,261 -- 5,955,261
Non-cash charge: beneficial
conversion feature on Series B
Shares -- 650,000 -- 650,000
Non-cash charge: beneficial
conversion feature on Series C
Shares -- -- 42,608,327 --
----------- ------------ ----------- --------------
$ 1,026,905 $ 6,605,261 $45,039,530 $ 6,605,261
=========== ============ =========== ==============
</TABLE>
The Series B preferred stock dividend was paid in cash in February 2000, when
the holders converted their Series B Shares into shares of our common stock. We
will not incur this dividend in future periods as the Series B Shares have been
entirely converted into common shares.
The Series C preferred stock dividend is at 8% and payable in additional Series
C Shares on a quarterly basis and therefore does not represent a cash
obligation. We will continue to incur this dividend until the Series C Shares
are converted to common stock or otherwise redeemed.
At the time of issuance of our Series C Preferred Stock, the fair market value
of our common stock was higher than the offering price of our Series C Preferred
Stock of $12 per share. This differential in price constitutes a beneficial
conversion as defined in the Emerging Issues Task Force Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" (EITF 98-5). Accordingly, we recorded
$42,608,327 as additional paid in capital for the discount deemed related to a
preferential dividend for the beneficial conversion feature. In accordance with
EITF 98-5, this discount was limited to the proceeds allocated to the Series C
Preferred Stock and was recognized immediately as a preferred stock dividend as
the Series C Preferred Stock is convertible into shares of common stock at any
time at the election of the shareholder.
During the nine months ended September 30, 1999, we recorded beneficial
conversion features of $5,955,261, representing the excess of the fair value of
the common stock issued over the fair value of the Series A Shares redeemed and
$650,000, representing the fair value of the Series B Warrants issued.
Changes in Financial Position, Liquidity and Capital Resources
Our current operations do not generate sufficient operating funds to meet our
cash needs and, as a result, we have funded our operations with a combination of
equity and debt proceeds. We ultimately expect to fund our operations from the
cash flows of our affiliate companies. Currently however, our affiliate
companies do not generate sufficient earnings to pay dividends or otherwise
distribute amounts which are sufficient to cover our operating expenses.
-20-
<PAGE>
Furthermore, we do not expect to receive such dividends within the next twelve
months due to the fact that each of our affiliate companies is in an early stage
of development. We may also generate cash proceeds from the sale of interests in
our affiliate companies. Until we receive dividends from our affiliate companies
or realize cash proceeds from the sale of interests in our affiliate companies,
if at all, we will remain dependant on outside sources of capital to fund our
operations. We are not certain that such funds will be available on terms that
are satisfactory to us or at all.
In March 2000, we sold 4,166,667 shares of our Series C Preferred Stock and
warrants to purchase 416,667 shares of our common stock for net proceeds of
approximately $48.3 million after payment of offering costs. Each share of our
Series C Preferred Stock is convertible into one share of our common stock at
any time at the election of the shareholder. Our Series C Preferred Stock bears
a cumulative dividend of 8% per annum payable in kind on a quarterly basis and
has a liquidation preference of $12 per share.
In June 2000, we received repayment in full, plus accrued interest, of our
advances to College411 totaling $75,000 in connection with their merger into a
wholly owned subsidiary of Student Advantage, Inc.
During the nine months ended September 30, 2000, we used approximately $5.7
million to fund our general corporate expenses, including salaries and wages,
professional and consulting fees and interest expense. In addition, we repaid in
full all of our outstanding convertible debentures and convertible promissory
notes through payments of $72,431 and the issuance of 2,338,633 shares of our
common stock and warrants to purchase 273,390 shares of our common stock.
During the nine months ended September 30, 2000, we made the following cash
investments and advances to our affiliate companies:
January 2000 College 411 25,000
February 2000 YesAsia.com 300,000
March 2000 AlarmX.com 1,000,000
May 2000 Webmodal 4,000,000
May 2000 Asset Exchange, Inc. 30,000
August 2000 AlarmX.com 30,000
August 2000 Flowergarage 1,250,000
September 2000 Stonepath Europe 100,000
September 2000 E-Quill 450,000
Various Industrial Vortex 1,650,000
Various SwapIt.com 4,650,000
------------
$ 13,485,000
============
Also, during the nine months ended September 30, 2000, we advanced $248,000 to
our consolidated subsidiary, metacat, for its operating expenses. We are
committed to make an additional investment in metacat of at least $2 million at
the time of any subsequent private equity financing of metacat whereby metacat
receives a minimum of $3 million from an outside investor.
As of September 30, 2000, we had on hand existing cash and cash equivalents of
approximately $32.7 million. We believe that our cash and cash equivalents will
be sufficient to meet our operating expenses and investment requirements for at
least the next twelve months. However, our long-term liquidity needs are
dependant primarily on the number of future acquisitions of equity interests in
new affiliate companies and the extent to which we participate in subsequent
rounds of financings of our existing affiliate companies. We may be required to
curtail or reduce the scope of our investment activities to satisfy our
long-term liquidity needs. Alternatively, we would be required to seek
additional funds through the sale of our securities to outside sources of
capital, which could result in substantial
-21-
<PAGE>
dilution to stockholders. We are not certain that these funds would be available
on terms that are satisfactory to us, or at all. If we are unable to obtain
these funds, then we would be required to reduce our acquisitions of equity
interests in affiliate companies and reduce our operating activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest rates and
the resulting impact on our invested cash. We place our cash with high credit
quality financial institutions and invest that cash in short term fixed income
investments with remaining maturities of less than 90 days. We are averse to
principal loss and ensure the safety and preservation of our invested funds by
investing in only highly rated investments and by limiting our exposure in any
one issuance. If market interest rates were to increase immediately and
uniformly by 10% from levels at September 30, 2000, the fair value of our
portfolio would decline by an immaterial amount. We do not invest in derivative
financial instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1999, coolsavings.com filed an action against NV Inc. alleging
that NV Inc. through its Internet website and products had committed
various acts of patent infringement. NV Inc. filed its answer to the
patent infringement action in November 1999 seeking a declaratory
judgment of invalidity and non-infringement of the patent.
Brightstreet.com has agreed to assume all liabilities related to this
lawsuit, including all legal expenses incurred in defending against these
claims, as part of their purchase of substantially all of the assets of
NV Inc. Stonepath believes that the resolution of this action will not
have a material adverse effect on its or Brightstreet.com's financial
position.
On August 22, 2000, Austost Anstall Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's Series A convertible
notes filed suit against Stonepath in the United States District Court
for the District of Delaware. The plaintiffs allege that, contrary to the
obligation in the agreement pursuant to which the plaintiffs purchased
the Series A notes that Stonepath would "use reasonable commercial
efforts to register" the stock underlying the notes "at some future
date," that Stonepath failed to register their stock in its next filed
registration statement. The plaintiffs assert claims for breaches of
contract and the duty of good faith and fair dealing, fraud, violation of
federal securities laws, estoppel, and reformation and seek damages in
excess of $20 million, plus attorneys' fees and costs. Based upon
Stonepath's preliminary review of the facts and without conducting
discovery, it does not believe that it was required to register the
plaintiffs' stock in the manner they have asserted, nor does Stonepath
believe that the complaint presents a significant claim against the
Company. Stonepath has not yet responded to the complaint, but intends to
defend it vigorously.
On October 12, 2000, Emergent Capital Investment Management, LLC filed
suit against the Company and two of its officers contending that it was
misled by statements made by the defendants in connection with the amount
of the Company's Series C offering in which they participated. The
plaintiff contends that the Company represented the Series C offering
would place $20 million worth of the Company's securities and were not
told that the Series C offering would instead place $50 million until
after the plaintiff had completed its investment. The plaintiff seeks a
return of its $2 million purchase price of Series C stock and damages in
the amount of $1.7 million. Although no formal fact finding has occurred,
Stonepath believes that it has strong defenses to this action and that
discovery will demonstrate that, in fact, no such representations were
made, and that the case is without merit. Accordingly, at the present
time, Stonepath believes that this action will not have a material
adverse effect on its financial position.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
-22-
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on September 25,
2000. At this meeting, the shareholders voted on the following proposals listed
in the Proxy Statement dated September 8, 2000:
(1) Amendment to our certificate of incorporation to change the name of
the Company from Net Value Holdings to Stonepath Group
FOR AGAINST ABSTAIN
--- ------- -------
12,852,500 302,281 37,397
(2) Amendment to our certificate of incorporation to provide for a
classified Board of Directors
FOR AGAINST ABSTAIN
--- ------- -------
9,544,233 458,220 52,257
(3) Amendment to our certificate of incorporation to increase the
number of authorized shares of common stock from 50,000,000 to
100,000,000
FOR AGAINST ABSTAIN
--- ------- -------
12,258,501 651,166 12,511
(4) Amendment to our certificate of incorporation to increase the
number of authorized shares of preferred stock from 10,000,000 to
20,000,000
FOR AGAINST ABSTAIN
--- ------- -------
8,909,335 1,125,470 19,896
(5) Election of Directors
FOR WITHHELD
--- --------
Andrew P. Panzo 12,808,117 384,061
Lee C. Hansen 12,809,307 382,871
Darr Aley 12,798,957 393,221
Stephen George 12,347,480 844,699
David Jones 12,809,607 382,571
Michela O'Connor Abrams 12,809,607 382,571
(6) Granting of ISOs under the Amended and Restated 2000 Stock
Incentive Plan and qualification of the Plan for the section 162(m)
exemption
FOR AGAINST ABSTAIN
--- ------- -------
11,319,722 1,524,697 347,760
-23-
<PAGE>
(7) Ratification of appointment of KPMG LLP as Independent Auditors for
the Company
FOR AGAINST ABSTAIN
--- ------- -------
12,911,834 243,287 37,057
Proposals (1), (3), (5), (6), and (7) were approved by the
stockholders. Proposals (2) and (4) were not approved as these items did not
receive the affirmative vote of the majority of the outstanding shares of
Stonepath Group common stock entitled to a vote at the Annual Meeting of
Stockholders, as required by Delaware law.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
27.1 Financial Data Schedule.
(b) The Company filed the following Current Reports on Form 8-K during the
three month period ended September 30, 2000:
(i) Amended Current Report on Form 8-K/A, dated July 11, 2000.
The Company filed the foregoing Report on Form 8-K/A, which
amended Item 7 of the Form 8-K filed by the Company on May
23, 2000 to include the required financial statements of the
Company and Webmodal, Inc. and the related pro forma
financial information not available at the time of the
filing of the initial report.
(ii) Current Report on Form 8-K, dated August 31, 2000.
The Company filed the foregoing Current Report on Form 8-K
reporting, under Item 2, the acquisition of 2,208,166 shares
of Series A Preferred Stock and 775,056 shares of Series B
Preferred Stock in SwapIt.com, Inc, in exchange for total
consideration of $4,233,945, which was funded from the
Company's existing cash and by cancellation of outstanding
promissory notes from SwapIt.com to the Company in the
principal amount of $3,800,000, plus accrued interest
thereon of $133,945.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: November 13, 2000 /s/ Andrew P. Panzo
----------------------------------
Andrew P. Panzo
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 13, 2000 /s/ Jay Elwell
-----------------------------------
Jay Elwell
Treasurer and
Principal Accounting Officer
-25-
