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 March 31, 2001
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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
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(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 564-9193
--------------
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 20,476,613 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at April 30, 2001.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at March 31, 2001
and December 31, 2000 ...............................................1
Consolidated Statements of Operations
Three months ended March 31, 2001 and 2000 ..........................2
Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000 ..........................3
Notes to Consolidated Financial Statements ..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........19
Part II. Other Information
Item 1. Legal Proceedings ..................................................19
Item 2. Changes in Securities and Use of Proceeds ..........................21
Item 3. Defaults Upon Senior Securities ....................................21
Item 4. Submission of Matters to a Vote of Security Holders ................21
Item 5. Other Information ..................................................21
Item 6. Exhibits and Reports on Form 8-K ...................................21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
(unaudited)
As of March 31 As of December 31
-------------- -----------------
Assets 2001 2000
-------------- -----------------
Current assets:
Cash and cash equivalents $ 33,874,340 $ 29,099,651
Available-for-sale securities 945,629 236,389
Interest receivable - 15,000
Loans receivable from related parties 187,162 217,745
Prepaid expenses 70,875 91,125
------------ ------------
Total current assets 35,078,006 29,659,910
Ownership interests in and advances to Affiliate Companies 2,062,457 14,894,262
Furniture and equipment, net 85,233 228,676
Other assets 117,654 127,655
------------ ------------
$ 37,343,350 $ 44,910,503
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 556,488 $ 889,898
Liabilities of discontinued operations 695,000 695,000
------------ ------------
Total liabilities 1,251,488 1,584,898
------------ ------------
Stockholders' equity:
Convertible preferred stock, Series C, $.001 par value, (3,970,206 shares
authorized at 2001 and 2000; 3,729,209 and 3,657,070 issued and outstanding
at 2001 and 2000, respectively)
Liquidation preference: $44,750,508 at 2001 3,729 3,657
Common stock, $.001 par value (100,000,000 shares authorized at 2001 and 2000;
20,473,541 and 20,419,542 issued and outstanding at 2001 and 2000, respectively) 20,473 20,419
Additional paid-in capital 208,562,111 210,923,329
Accumulated deficit (166,994,569) (156,841,388)
Deferred compensation (5,747,534) (10,771,724)
Accumulated other comprehensive gain (loss) 247,652 (8,688)
------------ ------------
Total stockholders' equity 36,091,862 43,325,605
------------ ------------
$ 37,343,350 $ 44,910,503
============ ============
See accompanying notes to consolidated financial statements.
-1-
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(unaudited)
Three months ended March 31,
2001 2000
----------- -----------
Revenue $ - $ -
Operating expenses:
Stock-based compensation 1,235,060 5,894,187
General and administrative 1,254,389 2,103,478
----------- -----------
Total operating expenses 2,489,449 7,997,665
Interest income (444,087) (211,957)
Interest expense - 73,776
Other losses, net 3,444,346 -
----------- -----------
Loss before equity in losses of Affiliate Companies 5,489,708 7,859,484
Equity in losses of Affiliate Companies 3,235,435 298,851
----------- -----------
Net loss 8,725,143 8,158,335
Preferred stock dividends 1,428,038 43,052,686
----------- -----------
Net loss to common stockholders $10,153,181 $51,211,021
=========== ===========
Basic and diluted net loss per common share $ (0.50) $ (3.01)
=========== ===========
Basic and diluted weighted average common shares outstanding: 20,433,783 16,986,005
=========== ===========
See accompanying notes to consolidated financial statements.
-2-
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31
---------------------------------------
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (8,725,143) $ (8,158,335)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 39,975 322,993
Stock-based compensation 1,235,060 5,894,187
Interest paid with stock - 346,110
Other losses, net 3,444,346 -
Equity in losses of Affiliate Companies 3,235,435 298,851
Changes in assets and liabilities:
Interest receivable 15,000 6,573
Prepaid expenses 20,250 (160,964)
Other assets 10,001 (39,106)
Accounts payable and accrued expenses (333,410) (485,443)
-------------- --------------
Net cash used in operating activities (1,058,486) (1,975,134)
Cash flows from investing activities:
Advances to Affiliate Companies (522,000) (2,025,000)
Purchase of available for sale securities (452,900) -
Collections on advances to Affiliate Companies 1,000,000 -
Acquisition of ownership interests in Affiliate Companies (200,000) (2,300,000)
Proceeds from sale of ownership interests in Affiliate Companies 5,979,199 -
Proceeds from sale of furniture and equipment 28,876 -
Purchases of furniture and equipment - (47,836)
-------------- --------------
Net cash provided by (used in) investing activities 5,833,175 (4,372,836)
Cash flows from financing activities:
Repayments of notes payable - (28,281)
Long-term debt payments - (15,869)
Issuance of common stock - 831,704
Issuance of preferred stock and warrants - 48,274,760
Purchase of treasury stock - (17,500)
Payment of preferred stock dividend, Series B - (108,464)
-------------- --------------
Net cash provided by financing activities - 48,936,350
-------------- --------------
Net increase in cash and cash equivalents 4,774,689 42,588,380
Cash and cash equivalents at beginning of year 29,099,651 3,127,232
-------------- --------------
Cash and cash equivalents at end of period $ 33,874,340 $ 45,715,612
============== ==============
Cash paid for interest $ - $ 28,744
============== ==============
See accompanying notes to consolidated financial statements.
-3-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
(1) Nature of Operations and Basis of Presentation
The principal business strategy of Stonepath Group, Inc. and subsidiaries
("Stonepath" or the "Company") is to acquire controlling interests in one
or more operating businesses whose enterprise value can be enhanced
through the adoption of an e-commerce strategy and other technologies,
the implementation of innovative business practices, the addition of
experienced industry specific management, or through other traditional
means of increasing efficiency and profitability. Stonepath's objective
is to acquire businesses that present a reasonable opportunity to
establish or expand one or more lines of business by leveraging its
financial, technological and employee resources. Prior to the first
quarter, Stonepath's principal business strategy focused on the
development of early-stage technology businesses with significant
Internet features and applications that Stonepath refers to as "Affiliate
Companies." Stonepath continues to provide strategic and operational
assistance to its existing Affiliate Companies and provided services to
eight such businesses at March 31, 2001. Stonepath is based in
Philadelphia with an office in New York.
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 U.S. Securities
and Exchange Commission (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 April 2, 2001. Certain prior period
amounts have been reclassified to conform to the current period
presentation. Interim operating results are not necessarily indicative of
the results for a full year.
(2) Available-For-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a
component of other comprehensive income or loss in stockholders' equity.
At March 31, 2001, available-for-sale securities consist of the
following:
Unrealized
Cost Gain, net Fair Value
------------- ---------------- -------------
Equity securities $ 697,977 247,652 945,629
----------- ------- -------
$ 697,977 247,652 945,629
=========== ======= =======
During the quarter ended March 31, 2001, the Company purchased equity
securities in a company primarily owned by a former shareholder and
officer of Stonepath for $452,900.
-4-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Stonepath's ownership interests in and advances
to Affiliate Companies at March 31, 2001. All of the Affiliate Companies
are privately held companies.
Excess of carrying
value over equity in Percentage of
Carrying value net assets ownership
---------------------- ---------------------- ----------------------
Equity method:
AssetExchange $ 182,957 $ 161,682 20%
Seedra -- -- 45%
Stonepath Europe -- -- 43%
SwapIt -- -- 58%
-------------- ------------
182,957 $ 161,682
-------------- ============
Cost method:
Brightstreet -- 14%
Metacat 129,500 19%
E-Quill 450,000 8%
YesAsia 1,300,000 9%
--------------
1,879,500
--------------
$ 2,062,457
==============
SwapIt is 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. Metacat was previously
accounted for under the equity method and beginning in February 2001 was
accounted for under the cost method as a result of our reduced ownership
percentage from 47% to 19%.
The following summarized financial information for the equity method
Affiliate Company with a remaining carrying value at March 31, 2001, has
been compiled from the unaudited financial statements of the affiliate:
Balance sheet: February 28, 2001
-------------- ------------------
Current assets $ 126,665
Noncurrent assets 23,316
---------------
Total assets $ 149,981
===============
Current liabilities $ 16,314
Stockholders' equity 133,667
---------------
Total liabilities and stockholders'
equity $ 149,981
===============
Three months ended
Results of operations: February 28, 2001
---------------------- ------------------
Revenues $ --
===============
Net loss $ (79,937)
===============
-5-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
(4) Accounts Payable and Accrued Expenses
In December 2000, the Company's Board of Directors approved a plan to
close the San Francisco and Boston offices and to discontinue the
employment of nine employees located there. In connection with this plan,
Stonepath accrued lease and employee termination fees of $278,098 at
December 31, 2000, which were subsequently paid in the first quarter of
2001.
(5) Preferred Stock
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 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. This conversion ratio is subject to
adjustment under certain circumstances to protect the holders of the
Series C Shares against future dilutive transactions. The Series C Shares
bear a cumulative dividend of 8% per annum payable in kind at a deemed
value of $12 per share on a quarterly basis, have a liquidation
preference of $12 per share, and require the Company to reserve 200% of
the aggregate number of common shares issuable upon conversion of the
Series C Shares and warrants. The Series C Shares obligate the Company to
redeem the issued and outstanding Series C Shares within 60 days of
receiving written notice from holders of at least 80% of the then issued
and outstanding Series C Shares upon: (i) any voluntary or involuntary
bankruptcy or receivership, and (ii) any payment default continuing for
at least 120 days where the amount in default is greater than $750,000.
The Series C Shares were initially presented as temporary equity in the
Company's balance sheet because the holders of the Series C Shares had
redemption rights in the event that Stonepath did not register with the
SEC the Company's common shares which the Series C Shares are convertible
into or in the event that Stonepath did not file a listing application
for the Company's common shares with a national exchange. The Series C
Shares were subsequently accounted for as permanent equity in June 2000
once the Company successfully registered the common shares and filed the
listing application as events which could allow Series C shareholder
initiated redemption became under control of the Company. During 2001,
the Series C holders earned 72,139 shares from payment of dividends
resulting in 3,729,209 Series C Shares outstanding at March 31, 2001.
Stonepath issued warrants to purchase an aggregate of 416,667 shares of
common stock (Series C Warrants) in connection with the issuance of the
Series C Shares. The Series C Warrants are exercisable until March 2,
2003 at an exercise price of $26.58 per share of common stock, subject to
adjustment described below. Stonepath allocated $7,391,673 of the net
proceeds received from this offering to the cost of the Series C Warrants
based on a Black-Scholes option-pricing model.
-6-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
Series C Preferred Stock (continued)
In February 2001, the Company received the consent from the holders of
more than two thirds of its issued and outstanding shares of Series C
Shares to modify the use of proceeds provisions as originally defined
within the Series C Preferred Stock Purchase Agreement. As amended, the
Company may now use the proceeds from the sale of the Series C Shares to
make any investments in the ordinary course of our business, as from
time-to-time determined by the Company's Board of Directors, or for any
other business purpose approved by the Board of Directors. Previously,
Stonepath was limited to use the proceeds to investments in early-stage
Internet companies.
In exchange for this consent Stonepath agreed to:
(i) issue to the holders of the Series C Shares as of July 18,
2002, warrants to purchase up to a maximum of 3.0 million
shares of the Company's common stock at an exercise price of
$1.00 per share if the then-effective conversion price of the
Series C Shares is greater than the lesser of (a) $6.00 per
share; or (b) the market price of the Company's common stock
at such time (but not less than $5.00 per share). The number
of such warrants issued is to be reduced by the number of
outstanding warrants described below; and
(ii) reduce to $1.00 per share the exercise price of the existing
Series C Warrants to purchase 416,667 shares of the Company's
common stock held by the holders of the Company's Series C
Preferred Shares as of July 18, 2002.
As a condition to receiving the new warrants and the reduction in the
exercise price of the existing Series C Warrants, the holders of the
Series C Shares will be required to convert their Series C Shares into
shares of the Company's common stock on July 18, 2002.
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
Three months ended March 31,
-----------------------------------------
2001 2000
----------------- -----------------
Series B Preferred Stock cash dividend $ -- $ 108,464
Non-cash charge: Series C Preferred Stock dividend
payable in kind 865,668 335,895
Non-cash charge: issuance of contingent warrants 562,370 --
Non-cash charge: beneficial conversion feature on
Series C Shares -- 42,608,327
----------------- -----------------
$ 1,428,038 $ 43,052,686
================= =================
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.
-7-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
Preferred Stock Dividends (continued)
In February 2001 Stonepath agreed to issue warrants to purchase shares of
it's common stock to the holders of the Company's Series C Shares. As
further described above, these warrants (the "Contingent Warrants") are
contingently issuable upon the satisfaction of several criteria relating
to the Series C Shares including requirements over holding period,
conversion, and price. Under the relevant accounting guidance, the
Company recorded a one-time dividend equal to the estimated fair value of
the right to receive the Contingent Warrants. This dividend was
accompanied by a corresponding increase to additional paid in capital
thus leaving the Company's aggregate cash and capital position unchanged.
Additionally, this dividend will not require adjustment in the future
when the amount of Contingent Warrants are determined and ultimately
issued.
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. This dividend was accompanied by a corresponding increase to
additional paid in capital thus leaving the Company's aggregate cash and
capital position unchanged.
(6) Deferred Compensation
The components of deferred compensation are as follows:
Consultants and
Employees Advisory Board Total
----------------- ----------------- -----------------
Balance at beginning of year $ 10,679,930 91,794 10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (3,795,730) (91,794) (3,887,524)
Amortization to stock-based compensation (1,155,702) (1,621) (1,157,323)
----------------- ----------------- -----------------
Balance at March 31, 2001 $ 5,729,705 17,829 5,747,534
================= ================= =================
The Company also recorded stock based compensation of $77,737 relating to
investment banking and consulting services that were paid via the
issuance of 125,000 options to purchase it's common stock. Stonepath
valued these equity instruments using the Black-Scholes valuation model
on the date of issuance which is when the counterparty performance was
complete.
-8-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
(7) Other Loss, net
Other loss, net consists of the following:
Three months ended March 31,
-----------------------------------------
2001 2000
----------------- -----------------
Gain on sale of Webmodal holdings $ (3,617,699) $ --
Affiliate Company impairment charges 6,956,870 --
Other 105,175 --
----------------- -----------------
$ 3,444,346 $ --
================= =================
In March 2001, Webmodal, previously an Affiliate Company, was sold to a
wholly owned subsidiary of Enron Global Markets, LLC for $6,990,532 in
cash consisting of $5,979,199 for Stonepath's equity interest in
Webmodal, $1,000,000 as repayment by Webmodal of advances made by the
Company, and $11,333 of accrued interest thereon. The cash consideration
received for Stonepath's equity interest exceeded it's then carrying
value by $3,617,699 and accordingly the Company recorded a gain for that
amount as a result of the sale.
The Company recorded impairment charges of $6,956,870 for the other than
temporary decline in the fair value of three of its Affiliate Companies.
From the date of Stonepath's initial acquisition of ownership interests
and subsequent advances and investments, the Company's funding to these
Affiliate Companies represented all or a significant portion of the
outside capital the companies had available to fund their operations. In
April 2001, as a result of the Company's continuous evaluation process,
it was determined that these companies were unlikely to obtain further
rounds of financing necessary to sustain operations and that substantial
doubt existed over the companies' ability to repay advances made.
Accordingly, Stonepath recorded an impairment charge to reduce the
remaining carrying value of the ownership interest in and advances to
these Affiliate Companies to zero.
(8) Comprehensive Loss
Excluding net loss, the Company's source of comprehensive income is from
the net unrealized gain on its marketable equity securities which are
classified as available-for-sale. The Company has not provided for a
deferred tax liability relating to the net 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 loss:
Three months ended
March 31
------------------------------------------
2001 2000
-------------------- ------------------
Net loss $ (8,725,143) $ (8,158,335)
Other comprehensive income:
Unrealized gain, net 247,652 --
-------------------- ------------------
Comprehensive loss $ (8,477,491) $ (8,158,335)
==================== ==================
-9-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
(9) Net Loss per Share
Basic 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 14,154,172, and 16,253,817 at March 31, 2001 and 2000,
respectively. Such securities, had they been dilutive, would have been
included in the computations of diluted loss per share using the treasury
stock method, or the if-converted method, depending on the type of
security.
(10) Commitments and Contingencies
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. ("NV Inc."), a wholly-owned subsidiary of Stonepath, alleging
that NV Inc., through its Internet Web site and products, has committed
acts of patent infringement by:
o performing or completing steps of the methods and processes
described and claimed in Patent No. 5,761,648;
o actively inducing others to practice the methods and processes
described and claimed in Patent No. 5,761,648 by, among other
things, performing or completing steps of such methods and
processes; and
o offering to sell or selling a system or service for offering and
providing targeted electronic certificates such as coupons, for
use in practicing the methods and processes described and
claimed in Patent No. 5,761,648.
Pursuant to the 1999 Asset Purchase Agreement which NV Inc. entered into
with BrightStreet.com, Inc. (f/k/a Promotion Acquisition, Inc.),
BrightStreet has agreed to assume all liabilities related to this
lawsuit, including all legal expenses incurred in defending against these
claims. However, NV Inc. may be liable for liabilities arising from this
action to the extent that the plaintiff is successful in asserting its
claims and to the extent that BrightStreet has insufficient capital or is
otherwise unable to continue to provide their indemnification. In
addition to damages, the complaint seeks both a preliminary and permanent
injunction prohibiting NV Inc. from further acts of infringement.
Coolsavings.com, Inc. also seeks damages for willful infringement and
attorneys' fees. On November 23, 1999, NV Inc. filed its answer to this
complaint as well as a counterclaim against coolsavings.com, Inc. seeking
a declaratory judgment of invalidity and on infringement of Patent No.
5,761,648. On November 16, 2000, Brightstreet filed an amended answer and
counterclaim further alleging the defense of inequitable conduct against
coolsavings.com, Inc. The court has entered a discovery schedule, which
is in the process of being revised, and both parties to the litigation
have had some fact discovery. However, no trial date has been set in this
matter. Brightstreet and coolsavings.com, Inc. have engaged in settlement
discussions with the assistance of the court. However, no settlement has
been reached. Unless and until coolsavings.com, Inc. makes a satisfactory
settlement offer to Brightstreet, Brightstreet's current intentions are
to vigorously defend itself against coolsavings' allegations.
BrightStreet cannot estimate the amount of damages that it may incur if
the court issues a final judgment concluding that NV Inc. has infringed
on coolsavings' patent. In any event, any judgment which would not be
indemnified by Brightstreet would be entered against NV Inc. which has a
nominal carrying value within Stonepath's consolidated financial
statements. Accordingly, management does not believe that an adverse
outcome in this proceeding would have a material adverse effect on
Stonepath's financial position or results of operations.
-10-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
Commitments and Contingencies (continued)
On August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's convertible promissory
notes, filed suit against Stonepath in the United States District Court
for the District of Delaware. The plaintiffs allege that, contrary to the
Company's covenant in the subscription agreement they executed, which
required Stonepath to "use reasonable commercial efforts to register" the
shares of its common stock underlying the convertible promissory notes
"at some future date," the Company verbally agreed to register such
shares in the first registration statement it filed with the Securities
and Exchange Commission subsequent to the transaction. The plaintiffs
assert claims for breach 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. Stonepath has filed a motion to dismiss this lawsuit
which is still pending. If the motion to dismiss is not granted, the
Company believes it has meritorious defenses to this claim and intends to
defend it vigorously.
On October 12, 2000, Emergent Capital Investment Management, LLC filed
suit against the Company and two of its officers in the United States
District Court for the Southern District of New York contending that it
was misled by statements made in connection with the offering of the
Company's Series C Preferred Stock which closed in March 2000.
Specifically, the plaintiff alleges that it is entitled to rescind the
transaction because it was allegedly represented that the size of the
offering would be $20 million and Stonepath actually raised $50 million.
The plaintiff seeks a return of the $2 million purchase price for its
shares of Series C Preferred Stock and damages in the amount of $1.7
million. Discovery has just commenced, and the Company believes that it
has strong defenses to this action. Accordingly, at the present time, the
Company believes that this action will not have a material adverse effect
on its financial position or results of operations.
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 its consolidated financial position, results of
operations or liquidity.
-11-
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 April 2, 2001. The
following discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto included elsewhere in this report
and in the most recent Annual Report on Form 10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Our principal business strategy is to acquire a controlling interest in one or
more operating businesses whose enterprise value can be enhanced through the
adoption of an e-commerce strategy and other technologies, the implementation of
innovative business practices, the addition of experienced industry specific
management, or through other traditional means of increasing efficiency and
profitability. Our objective is to acquire businesses that present a reasonable
opportunity to establish or expand one or more lines of business by leveraging
our financial, technological and employee resources. Prior to the first quarter
of 2001, our principal business strategy focused on the development of
early-stage technology businesses with significant Internet features and
applications that we refer to as our affiliate companies. Stonepath continues to
provide strategic and operational assistance to its existing affiliate companies
and provided services to eight such businesses at March 31, 2001.
We currently realize revenue and losses from the operating activities
of our affiliate companies accounted for under the equity method of accounting.
This generally includes all affiliate companies for which we have a voting
ownership greater than 20%. We also realize income from the sale of our equity
interests equal to the excess of the fair value of the proceeds received from
the sale over our carrying value of the investment at the time of disposition.
The decision to sell our equity interest in an affiliate company is based on a
number of factors, including the affiliate company's business prospects and
potential and whether or not our invested capital can be better applied to fund
new acquisitions in connection with our new business strategy. Because we
acquired interests in early-stage Internet companies, many of which were in the
development stage, we have experienced and expect to experience, net losses as a
result of these equity interests. Such losses totaled $3.2 million and $.3
million in the first quarters of fiscal 2001 and fiscal 2000, respectively, and
are recorded under "equity in losses of affiliate companies" within our
consolidated statement of operations. Also, given the development stage of our
existing affiliate companies, it is unlikely that we will record significant
revenues from their operating activities in the near term. Rather, the income we
derive, if at all, will more likely be from sales of our interests in our
affiliate companies. This occurred when we sold our interest in College411
during fiscal 2000, and when we sold our interest in Webmodal during the first
quarter of fiscal 2001. We believe that we are more likely to generate revenues
from our subsidiaries' operations under our new business strategy since that
strategy entails the acquisition of a controlling interest in an operating
business.
-12-
Our operating expenses primarily consist of stock based compensation,
professional fees, depreciation , and salaries and benefits, which totaled
approximately $2.5 million for the first quarter of fiscal 2001. However,
stock-based compensation and depreciation are non-cash charges, and in the first
quarter of fiscal 2001 we only used cash of $1.1 million to fund our operating
expenses. As part of the reorganization we completed in the first quarter of
2001, we moved our corporate headquarters to Philadelphia, closed our San
Francisco and Boston offices, and significantly reduced our workforce. We expect
our operating expenses to continue to decrease in the very near term as a result
of these changes.
A significant component of our fiscal 2000 results is the deemed
preferred stock dividend resulting from the issuance of our Series C Preferred
Stock. In March 2000, 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. Since our Series C Preferred
Stock was immediately convertible into shares of our common stock, this
differential in price constituted a beneficial conversion feature as defined in
the relevant accounting literature and resulted in a preferred stock dividend
totaling $42.6 million. This dividend was a non cash charge and was accompanied
by a corresponding increase to additional paid in capital thus leaving our
aggregate cash and capital positions unchanged.
We have experienced, and expect to continue to experience, significant
volatility in our quarterly results 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. 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; and,
o the financial condition and prospects of the affiliate company.
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 bringing to market of a major product
or key service. If impairment is determined, the carrying value is adjusted to
fair value. 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 invested, or have committed to invest, in
our affiliate companies.
Effect of Various Accounting Methods on our Results of Operations
Several accounting methods affect the reported results and amounts
contained within our financial statements presented in this quarterly report.
The following significant accounting methods are presented in greater detail to
further aid your understanding when reviewing our consolidated financial
statements and related notes.
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, if any,
between the exercise price and fair market value of our common stock on the date
of grant. Such deferred compensation is fixed and remains unchanged for
subsequent increases or decreases in the market value of our common stock. In
the case of options granted to consultants or advisory board members, the amount
of deferred compensation initially recorded is the fair value of the stock
options on the grant date as determined using the Black-Scholes valuation model.
We record deferred compensation as a reduction to stockholders' equity with 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.
-13-
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. Under this
method, an affiliate company's financial statements are reflected
within our consolidated financial statements. At March 31, 2001 and
December 31, 2000, none of our affiliate companies were accounted for
under this method. 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."
We have representation on the board of directors of all of our equity
method affiliate companies which are early-stage or development-stage
companies and which have not generated significant revenues. All of our
equity method affiliate companies were formed less than two years ago
and are expected to continue to incur substantial losses in 2001.
-14-
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.
Discontinued Operations
Our consolidated financial statements reflect the operations of Net
Value, Inc., a wholly-owned subsidiary, 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. and sold substantially all of Net Value, Inc.'s assets to
Brightstreet.com. Accordingly, the assets and liabilities of the discontinued
online promotional campaigns have been segregated from continuing operations and
reported as a separate line item on our consolidated financial statements.
Results of Operations
Three Months Ended March 31, 2001 compared to the Three Months Ended March 31,
2000
We reported a net loss to common stockholders of $10.2 million for the
three months ended March 31, 2001, ($0.50 per basic and diluted share) compared
to a loss of $51.2 million ($3.01 per basic and diluted share) in the
corresponding period of the prior year. The significant reduction in net loss to
common stockholders is primarily attributable to the deemed preferred stock
dividend of $42.6 million recorded in the first quarter of fiscal 2000 resulting
from the issuance of our Series C Preferred Stock which did not reoccur in the
first quarter of fiscal 2001. Our 2001 first quarter operating expenses of $2.5
million were significantly lower than the $8.0 million of the prior period
largely due to the reduction of our workforce and associated decrease in
stock-based compensation. Our first quarter 2001 results were also positively
impacted by the sale of Webmodal and resulting $3.6 million gain. Offsetting the
reduction in operating expenses and Webmodal gain were affiliate company
impairment charges of $7.0 million and equity in losses of affiliate companies
of $3.2 million which collectively totaled $.3 million in the corresponding
period of the prior year.
The following sections provide in greater detail the individual
components of our results of operations on a line item basis and should be read
in conjunction with our consolidated financial statements and related notes.
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 $1,235,060 for the three months ended March 31,
2001, compared to $5,894,187 for the corresponding period in 2000. The decrease
in stock-based compensation is due to the reduction of our workforce and our
advisory board, and associated cancellation of their options resulting in a
decrease to deferred compensation and related reduction in amortization to
stock-based compensation.
-15-
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the three months ended March 31,
2001:
Consultants and
Employees Advisory Board Total
----------------- ----------------- -----------------
Balance at beginning of year $ 10,679,930 91,794 10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (3,795,730) (91,794) (3,887,524)
Amortization to stock-based compensation (1,155,702) (1,621) (1,157,323)
----------------- ----------------- -----------------
Balance at March 31, 2001 $ 5,729,705 17,829 5,747,534
================= ================= =================
During the first quarter of fiscal 2001, we also recorded stock based
compensation of $77,737 relating to investment banking and consulting services
that were paid via the issuance of options to purchase our common stock. We
valued these equity instruments using the Black-Scholes valuation model on the
date of issuance when counterparty performance was complete.
Of the total unamortized deferred compensation relating to employees of
$5,729,705, we expect to amortize into stock-based compensation $2,650,588,
$2,219,456, $729,556, and $130,105 during the remainder of 2001, and during the
years ended December 31, 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. All employee option grants during fiscal 2001 had exercise
prices equal to the fair value of the stock on the date of grant resulting in no
additional deferred compensation.
General and Administrative Expenses. Our general and administrative expenses
have decreased to $1,254,389 for the three months ended March 31, 2001, compared
to $2,103,478 for the corresponding period in 2000. This decrease is
attributable to several factors including a decline in the level of our
investment and corporate activities thereby reducing our professional fees and
from the fiscal 2000 write-off of our goodwill arising from the Strategicus
acquisition thereby reducing depreciation and amortization. We expect our
general and administrative expenses to continue to decline in the very near term
as a result of the restructuring completed in the first quarter of fiscal 2001
during which we closed our San Francisco and Boston offices and significantly
reduced our workforce. The following is a schedule of the significant components
that comprise general and administrative expense:
Three months ended March 31,
-----------------------------------------
2001 2000
----------------- -----------------
Professional fees $ 476,324 $ 756,191
Salaries and benefits, including severance 475,500 332,145
Depreciation and amortization 39,975 322,993
Marketing 47,086 95,534
Rent and other 215,504 596,615
----------------- -----------------
$ 1,254,389 $ 2,103,478
================= =================
-16-
Interest Income and Expense. Our interest income totaled $444,087 for the three
months ended March 31, 2001, compared to $211,957 for the corresponding period
in 2000. Interest income consists of the interest earned on our invested cash,
with the period over period increase due to a full quarters effect of our
invested cash arising from the March 2000 sale of our Series C Preferred Stock.
Interest expense totaled $0 and $73,776 for the three months ended March 31,
2001 and 2000, respectively, with the decrease attributable to the repayment of
substantially all outstanding debt in the first quarter of fiscal 2000.
Other Losses, Net. Other losses consists of:
Three months ended March 31,
-----------------------------------------
2001 2000
----------------- -----------------
Gain on sale of Webmodal holdings $ (3,617,699) $ --
Affiliate Company impairment charges 6,956,870 --
Other 105,175 --
----------------- -----------------
$ 3,444,346 $ --
================= =================
In March 2001, Webmodal, previously an affiliate company, was sold to a wholly
owned subsidiary of Enron Global Markets, LLC for $6,990,532 in cash consisting
of $5,979,199 for our equity interest in Webmodal, $1,000,000 as repayment by
Webmodal of advances made by Stonepath, and $11,333 of accrued interest thereon.
The cash consideration received for our equity interest exceeded it's then
carrying value by $3,617,699 and accordingly we recorded a gain for that amount
as a result of the sale.
We recorded impairment charges of $6,956,870 for the other than temporary
decline in the fair value of three of our Affiliate Companies. From the date of
our initial acquisition of ownership interests and subsequent advances and
investments, our funding to these Affiliate Companies represented all or a
significant portion of the outside capital the companies had available to fund
their operations. In April 2001, as a result of our continuous evaluation
process, we determined that these companies were unlikely to obtain further
rounds of financing necessary to sustain operations and that substantial doubt
existed over the companies' ability to repay advances made. Accordingly, we
recorded an impairment charge to reduce the remaining carrying value of the
ownership interest in and advances to these Affiliate Companies to zero.
Equity in Losses of Affiliate Companies. Equity in losses of affiliate companies
for the three months ended March 31, 2001 and 2000 amounted to $3,235,435 and
$298,851, respectively. 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 three
months ended March 31, 2001 and 2000, there were five affiliate companies
accounted for under the equity method of accounting, however, our equity in
losses significantly increased due to the development and expansion of affiliate
company operations during this period. We expect to record significantly lower
losses from our equity in affiliate companies due to the reduction in the number
of affiliate companies currently accounted for under the equity method and our
intent to acquire controlling interests in operating companies which would
follow the consolidation method of accounting.
Net Loss. We have had net losses 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 months ended March 31, 2001 and 2000, our net loss was $8,725,143 and
$8,158,335, respectively.
-17-
Preferred Stock Dividends. The components of the preferred stock dividends are
as follows:
Three months ended March 31,
-----------------------------------------
2001 2000
----------------- -----------------
Series B Preferred Stock cash dividend $ -- $ 108,464
Non-cash charge: Series C Preferred Stock dividend
payable in kind 865,668 335,895
Non-cash charge: issuance of contingent warrants 562,370 --
Non-cash charge: beneficial conversion feature on
Series C Preferred Stock -- 42,608,327
---------------- -----------------
$ 1,428,038 $ 43,052,686
================ =================
The Series B Preferred Stock dividend was paid in cash in February 2000 as the
holders converted their Series B Shares into shares of our 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.
In February 2001 we agreed to issue warrants to purchase shares of our common
stock to the holders of our Series C Preferred Stock. As further described in
the footnotes to the consolidated financial statements, these warrants are
contingently issuable upon the satisfaction of several criteria relating to the
Series C Preferred stock including requirements over holding period, conversion,
and price. Under the relevant accounting guidance, we recorded a one-time
dividend equal to the estimated fair value of the right to receive these
contingently issuable warrants. This dividend was accompanied by a corresponding
increase to additional paid in capital thus leaving our aggregate cash and
capital position unchanged. Additionally, this dividend will not require
adjustment in the future when the amount of contingently issuable warrants are
determined and ultimately issued.
In March 2000, at the time of issuance of the Series C Shares, the then fair
market value of our 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 our
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, 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 Shares and
was recognized immediately as a preferred stock dividend as the Series C Shares
are immediately convertible. This dividend was accompanied by a corresponding
increase to additional paid in capital thus leaving our aggregate cash and
capital position unchanged.
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 future ownership interests in operating companies and from the
sale or cash flows of our interests in existing affiliate companies. Currently
however, our affiliate companies do not generate sufficient earnings to pay
dividends or otherwise make distributions to us. 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. Until we
receive dividends from our affiliate or operating companies or realize cash
proceeds from the sale of interests in our affiliate companies, if at all, we
will remain dependant on our existing cash and on outside sources of capital to
fund our operations.
During the first quarter of 2001, we used $1.1 million to fund our operating
expenses. As part of the reorganization we completed in the first quarter of
2001, we moved our corporate headquarters to Philadelphia, closed our San
Francisco and Boston offices, and significantly reduced our workforce. We expect
our operating expenses to continue to decrease as a result of these changes.
-18-
In March 2001, we received $7.0 million from the sale of Webmodal consisting of
$6.0 million for our equity interest and $1.0 million as repayment of
outstanding promissory notes. During the three months ended March 31, 2001, we
made the following cash investments and advances to affiliate companies:
January 2001 Webmodal $ 500,000
February 2001 Metacat 200,000
March 2001 Seedra 22,000
-----------------
$ 722,000
=================
As of March 31, 2001, we had on hand existing cash and cash equivalents of
approximately $33.9 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 and for the foreseeable future. However, our
long-term liquidity needs are dependant primarily on the number of future
acquisitions of interests in new companies and the extent to which we
participate in subsequent rounds of financings of our existing affiliate
companies. In the future, we may be required to curtail or reduce the scope of
our acquisition 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
dilution to stockholders. We are not certain that these funds would be available
on terms that are satisfactory to us, or at all.
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. 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 March 31, 2001, 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
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. ("NV Inc."), a wholly-owned subsidiary of Stonepath,
alleging that NV Inc., through its Internet Web site and products, has
committed acts of patent infringement by:
o performing or completing steps of the methods and processes
described and claimed in Patent No. 5,761,648;
o actively inducing others to practice the methods and processes
described and claimed in Patent No. 5,761,648 by, among other
things, performing or completing steps of such methods and
processes; and
o offering to sell or selling a system or service for offering
and providing targeted electronic certificates such as
coupons, for use in practicing the methods and processes
described and claimed in Patent No. 5,761,648.
-19-
Pursuant to the 1999 Asset Purchase Agreement which NV Inc. entered into
with BrightStreet.com, Inc. (f/k/a Promotion Acquisition, Inc.)
BrightStreet has agreed to assume all liabilities related to this
lawsuit, including all legal expenses incurred in defending against these
claims. However, NV Inc. may be liable for liabilities arising from
this action to the extent that the plaintiff is successful in asserting
its claims and to the extent that BrightStreet has insufficient capital
or is otherwise unable to continue to provide their indemnification.
In addition to damages, the complaint seeks both a preliminary and
permanent injunction prohibiting NV Inc. from further acts of
infringement. Coolsavings.com, Inc. also seeks damages for willful
infringement and attorneys' fees. On November 23, 1999, NV Inc. filed its
answer to this complaint as well as a counterclaim against
coolsavings.com, Inc. seeking a declaratory judgment of invalidity and on
infringement of Patent No. 5,761,648. On November 16, 2000, Brightstreet
filed an amended answer and counterclaim further alleging the defense of
inequitable conduct against coolsavings.com, Inc. The court has entered a
discovery schedule, which is in the process of being revised, and both
parties to the litigation have had some fact discovery. However, no trial
date has been set in this matter. Brightstreet and coolsavings.com, Inc.
have engaged in settlement discussions with the assistance of the court.
However, no settlement has been reached. Unless and until
coolsavings.com, Inc. makes a satisfactory settlement offer to
Brightstreet, Brightstreet's current intentions are to vigorously defend
itself against coolsavings' allegations. BrightStreet cannot estimate the
amount of damages that it may incur if the court issues a final judgment
concluding that NV Inc. has infringed on coolsavings' patent. In any
event, any judgment which would not be indemnified by Brightstreet would
be entered against NV Inc. which has a nominal carrying value within
Stonepath's consolidated financial statements. Accordingly, management
does not believe that an adverse outcome in this proceeding would have a
material adverse effect on its financial position or results of
operations.
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, Stonepath does not believe that the complaint states a claim
for relief. As a result, Stonepath has filed a motion to dismiss which is
still pending.
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. The case is now proceeding
through discovery and Stonepath intends to file a motion for summary
judgment. Accordingly, at the present time, Stonepath believes that this
action will not have a material adverse effect on its financial position
or results of operations.
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.
-20-
Item 2. Changes in Securities and Use of Proceeds
(a) In March 2001, the Company issued options to purchase 75,000 shares of
common stock at an exercise price $.70 per share to PMG Capital, Inc. in
connection with services under an investment banking agreement. In March
2001, the Company also issued options to purchase 50,000 shares of common
stock at an exercise price of $.70 in connection with consulting services
performed by one of its Directors. Both issuances were pursuant to Section
4(2) of the Securities Act of 1933.
(b) In February 2001, the Company received the consent from the holders of more
than two thirds of its issued and outstanding shares of Series C Preferred
Stock to modify the use of proceeds provisions as originally defined within
the Series C Preferred Stock Purchase Agreement. As amended, the Company
may now use the proceeds from the sale of the Series C Preferred Stock to
make any investments in the ordinary course of our business, as from
time-to-time determined by the Company's Board of Directors, or for any
other business purpose approved by the Board of Directors. Previously,
Stonepath was limited to use the proceeds to investments in early-stage
Internet companies.
In exchange for this consent Stonepath agreed to:
(i) issue to the holders of the Series C Preferred Stock as of
July 18, 2002, warrants to purchase up to a maximum of 3.0
million shares of the Company's common stock at an exercise
price of $1.00 per share if the then-effective conversion
price of the Series C Preferred Stock is greater than the
lesser of (a) $6.00 per share; or (b) the market price of the
Company's common stock at such time (but not less than $5.00
per share). The number of such warrants issued is to be
reduced by the number of outstanding warrants described below;
and
(ii) reduce to $1.00 per share the exercise price of the existing
Series C Warrants to purchase 416,667 shares of the Company's
common stock held by the holders of the Company's Series C
Preferred Stock as of July 18, 2002.
As a condition to receiving the new warrants and the reduction in the
exercise price of the existing Series C Warrants, the holders of the Series
C Preferred Stock will be required to convert their Series C Preferred
Stock into shares of the Company's common stock on July 18, 2002.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
None
(b) The Company filed the following Current Reports on Form 8-K during the
three month period ended March 31, 2001:
(i) Current Report on Form 8-K, dated March 16, 2001.
The Company filed the foregoing Current Report on Form 8-K
reporting under Item 2 the sale of it's 37% interest in
Webmodal, Inc. for aggregate proceeds of $6,990,532.
-21-
(ii) Current Report on Form 8-K, dated February 22, 2001.
The Company filed the foregoing Current Report on Form 8-K
reporting under Item 5 the modification of the use of proceeds
section of the agreement under which the Company's Series C
Convertible Participating Preferred Stock was sold and the
future issuance of warrants to purchase up to 3.0 million
shares of the Company's common stock subject to certain
conditions.
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: May 14, 2001 /s/ Andrew P. Panzo
---------------------
Andrew P. Panzo
Chief Executive Officer and
Chairman of the Board of Directors
Date: May 14, 2001 /s/ Jay Elwell
----------------
Jay Elwell
Treasurer and
Principal Accounting Officer
-22-