UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

STONEPATH GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		65-0867684
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2200 Alaskan Way, Suite 200
Seattle, WA 98121
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 336-5400

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o    Accelerated filer o    Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o Noþ

There were 43,777,151 issued and outstanding shares of the registrant’s common stock, par value $.001 per share, as of August 4, 2006.

 

 

Table of Contents

STONEPATH GROUP, INC.
INDEX

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS	2
PART I FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets at June 30, 2006 and December 31, 2005	3
Consolidated Statements of Operations — Three and Six-months ended June 30, 2006 and 2005	4
Consolidated Statements of Cash Flows — Six-months ended June 30, 2006 and 2005	5
Notes to Unaudited Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II OTHER INFORMATION	24
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Submission of Matters to a Vote of Security Holders	25
Item 5. Other Information	26
Item 6. Exhibits	26
SIGNATURES	27
EXHIBIT 10
EXHIBIT 12
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding future results, levels of activity, events, trends or plans. We have based these forward-looking statements on our current expectations and projections about such future results, levels of activity, events, trends or plans. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, events, trends or plans to be materially different from any future results, levels of activity, events, trends or plans 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. While it is impossible to identify all of the factors that may cause our actual results, levels of activity, events, trends or plans to differ materially from those set forth in such forward-looking statements, such factors include the inherent risks associated with: (i) our ability to achieve and sustain an annual growth rate in revenue consistent with our targets, (ii) our ability to achieve our targeted operating margins, (iii) our ability to realize the planned benefits from our restructuring efforts, (iv) our dependence on certain large customers, (v) our dependence upon certain key personnel, (vi) an unexpected adverse result in any legal proceeding, (vii) competition in the freight forwarding, logistics and supply chain management industry, (viii) the impact of current and future laws affecting the Company’s operations, (ix) adverse changes in general economic conditions as well as economic conditions affecting the specific industries and customers we serve, (x) regional disruptions in transportation, and (xi) other factors which are or may be identified from time to time in our Securities and Exchange Commission filings and other public announcements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

STONEPATH GROUP, INC.

		June 30, 2006
		(UNAUDITED)				December 31, 2005
Assets
Current assets:
Cash and cash equivalents		$	5,709			$	4,601
Accounts receivable, net			56,403				69,836
Prepaid expenses and other current assets			1,413				2,312
Total current assets			63,525				76,749
Goodwill			44,330				43,762
Technology, furniture and equipment, net			5,789				6,856
Acquired intangibles, net			4,406				5,212
Other assets			2,926				2,703
Total assets		$	120,976			$	135,282
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term debt		$	19,384			$	14,039
Accounts payable			38,644				50,054
Earn-outs payable			3,778				3,513
Accrued payroll and related expenses			2,819				3,393
Accrued restructuring costs			332				1,485
Accrued expenses			7,388				7,516
Total current liabilities			72,345				80,000
Long-term debt			1,969				1,137
Long-term earn-outs payable			—				2,255
Other long-term liabilities			883				4,210
Deferred tax liability			3,353				2,898
Total liabilities			78,550				90,500
Minority interest			6,599				6,478
Commitments and contingencies (Note 8)
Convertible preferred stock, $100.00 par value, 48,000 shares authorized, 30,000 shares issued			1,804				1,804
Stockholders’ equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; none issued			—				—
Common stock, $.001 par value, 100,000,000 shares authorized; issued and outstanding: 43,777,151 and 43,749,693 shares at June 30, 2006 and December 31, 2005, respectively			44				44
Additional paid-in capital			223,126				222,779
Accumulated deficit			(189,610	)			(186,581	)
Accumulated other comprehensive income			463				258
Total stockholders’ equity			34,023				36,500
Total liabilities and stockholders’ equity		$	120,976			$	135,282

See accompanying notes to consolidated financial statements.

STONEPATH GROUP, INC.

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Total revenue		$	90,923			$	100,027			$	183,106			$	190,017
Cost of transportation			73,766				77,905				146,433				147,481
Net revenue			17,157				22,122				36,673				42,536
Personnel costs			10,751				11,485				22,051				23,590
Other selling, general and administrative costs			7,255				8,111				15,713				18,281
Depreciation and amortization			950				1,138				1,885				2,296
Restructuring charges			(735	)			107				(735	)			3,448
Income (loss) from operations			(1,064	)			1,281				(2,241	)			(5,079	)
Other income (expense):
Interest expense, net			(1,565	)			(695	)			(2,938	)			(1,133	)
Change in fair value of derivatives			3,649				—				3,306				—
Other income (expense), net			(38	)			38				(32	)			79
Income (loss) before income tax expense and minority interest			982				624				(1,905	)			(6,133	)
Income tax expense			316				672				673				1,208
Income (loss) before minority interest			666				(48	)			(2,578	)			(7,341	)
Minority interest			136				335				271				605
Net income (loss)			530				(383	)			(2,849	)			(7,946	)
Preferred stock dividends			90				—				180				—
Net income (loss) attributable to common stockholders		$	440			$	(383	)		$	(3,029	)		$	(7,946	)
Income (loss) per common share:
Basic		$	0.01			$	(0.01	)		$	(0.07	)		$	(0.18	)
Diluted		$	(0.04	)		$	(0.01	)		$	(0.08	)		$	(0.18	)
Weighted average shares outstanding:
Basic			43,750				43,669				43,750				43,465
Diluted			55,910				43,669				55,910				43,465

See accompanying notes to consolidated financial statements.

STONEPATH GROUP, INC.

		Six months ended June 30,
		2006				2005
Cash flow from operating activities:
Net loss		$	(3,029	)		$	(7,946	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Deferred income taxes			455				359
Depreciation and amortization			1,885				2,296
Change in fair value of derivatives			(3,306	)			—
Amortization of loan discount and fees			875				—
Minority interest in income of subsidiaries			271				605
Stock-based compensation			168				31
Gain on disposal of technology, furniture and equipment and other			28				(27	)
Changes in assets and liabilities:
Accounts receivable			13,433				946
Prepaid expenses and other assets			551				(1,323	)
Accounts payable and accrued expenses			(13,044	)			6,175
Net cash (used in) provided by operating activities			(1,713	)			1,116
Cash flows from investing activities:
Purchases of technology, furniture and equipment			(173	)			(444	)
Proceeds from sales of technology, furniture and equipment			134				49
Payment of earn-out			(467	)			(2,362	)
Net cash used in investing activities			(506	)			(2,757	)
Cash flows from financing activities:
Proceeds from credit facilities, net			3,363				4,409
Principal payments on capital leases			(92	)			(1,205	)
Payment to minority shareholder			(150	)			—
Net cash provided by financing activities			3,121				3,204
Effect of foreign currency translation			206				139
Net increase in cash and cash equivalents			1,108				1,702
Cash and cash equivalents at beginning of period			4,601				2,801
Cash and cash equivalents at end of period		$	5,709			$	4,503
Cash paid for interest		$	1,082			$	1,028
Cash paid for income taxes		$	111			$	13
Supplemental disclosure of non-cash investing and financing activities:
Issuance of notes payable in connection with financing of earn-out payments		$	2,377			$	—
Increase in goodwill related to accrued earn-out payments			568				—
Issuance of warrants in connection with loan refinancing			170				—
Issuance of common stock in connection with acquisitions			—				854
Issuance of common stock in connection with employee stock purchase plan			8				57

See accompanying notes to consolidated financial statements.

STONEPATH GROUP, INC.

(1) Nature of Operations and Basis of Presentation

     Stonepath Group, Inc. and subsidiaries (the “Company”) is a non-asset-based third-party logistics services company providing supply chain solutions on a global basis. A full range of time and date certain transportation and distribution solutions is offered through its Domestic Services segment, where the Company manages and arranges the movement of raw materials, supplies, components and finished goods for its customers. These services are offered through the Company’s domestic air and ground freight forwarding business. A full range of international logistics services including international air and ocean transportation as well as customs house brokerage services is offered through the Company’s International Services segment. In addition to these core service offerings, the Company also provides a broad range of supply chain management services, including warehousing, order fulfillment and inventory control. The Company serves a customer base of manufacturers, distributors and national retail chains through a network of owned offices in the United States, strategic locations in the Asia Pacific region, Germany and Brazil, and service partners strategically located around the world.

     The accompanying unaudited consolidated financial statements were prepared in accordance with United States generally accepted accounting principles for interim financial information. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) relating to interim financial statements. These statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position, operations and cash flows for the periods indicated. While the Company believes that the disclosures presented are adequate to make the information not misleading, these unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Interim operating results are not necessarily indicative of the results for a full year because our operating results are subject to seasonal trends when measured on a quarterly basis. The Company’s first and second quarters are likely to be weaker as compared with other fiscal quarters, which the Company believes is consistent with the operating results of other supply chain service providers.

     The Company has experienced losses from operations, and has an accumulated deficit. In view of these matters, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon future profitable operations of the Company and generation of cash flow sufficient to meet its obligations. The Company can give no assurance that it will achieve future profitability, generate sufficient operating cash flow or obtain additional capital financing necessary to ensure continued uninterrupted business operations. The Company’s consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

     Certain amounts for prior periods have been reclassified in the consolidated financial statements to conform to the classification used in 2006.

(2) Sale of Subsidiaries

     On July 19, 2006, the Company signed a non-binding letter of intent with ComVest Investment Partners, II, LLC (“ComVest”) and JTM Acquisition Corporation (“JTM”, together with ComVest, “ComVest-JTM”) to sell its Stonepath Logistics International Services, Inc. (“SLIS”) and Stonepath Logistics (Germany) GmbH subsidiaries. SLIS is the Company’s U.S.-based logistics business that provides international air and ocean logistics services. JTM was formed by and its President is Jason Totah, the Company’s CEO. As a result of his role in this acquisition, Mr. Totah has stepped down as CEO while the transaction is pending, and Mr. Robert Arovas, the Company’s President and CFO has assumed the role of interim CEO.

     The proposed transaction is expected to provide the Company with net proceeds of approximately $17.1 million. The Company will further avoid future payments of up to $0.9 million in contingent earn-out obligations associated with a previous acquisition of SLIS. The proceeds will be used to reduce short-term debt outstanding under the Company’s U.S. credit facility and reduce earn-out obligations due selling shareholders of these operations. Net proceeds will further be adjusted, either upward or downward based on the level of working capital of the subsidiaries as of the closing date. The Company expects the transaction to close in the Company’s 2006 third quarter.

(3) Restructuring Charges

     In late 2004, the Company commenced a restructuring program, designed to accelerate the integration of its businesses and improve the Company’s overall profitability. This program and related initiatives were substantially completed by June 30, 2005. A summary of remaining restructuring liabilities, adjustments to liabilities, and cash payments is as follows for the six-month period ended June 30, 2006 (in thousands):

		Liability																Liability
		Balance,				Restructuring								Cash				Balance,
		January 1, 2006				Charges				Adjustments				Payments				June 30, 2006
Personnel		$	159			$	—			$	—			$	(133	)		$	26
Building leases			1,326				—				(735	)			(285	)			306
		$	1,485			$	—			$	(735	)		$	(418	)		$	332

     Personnel charges primarily relate to contractual obligations incurred in 2005 with certain executives. Remaining lease termination costs relate to the 2005 vacating of a Domestic facility and vacating and relocating the Company’s former corporate headquarters in Philadelphia. Effective May 2006, the Company agreed to sublease its remaining vacated Domestic facility for the remainder of the term of the original lease that extends through February 2008. In connection with this sublease, which reimburses the Company for a majority of the lease payments due to the lessor, the Company recorded a restructuring credit and related reductions in liabilities of $735,000 during the three-month period ended June 30, 2006. No other remaining restructuring liabilities extend past the expiration of this lease.

(4) Stock-Based Compensation

     At June 30, 2006, Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive Plan covered 15,000,000 shares of common stock. Under its terms, employees, officers and directors of the Company and its subsidiaries are currently eligible to receive non-qualified and incentive stock options and restricted stock awards. Options granted generally vest over three to four years and expire ten years following the date of grant. The Board of Directors or a committee thereof determines the exercise price of options granted.

     Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” No stock-based compensation was recognized in the Statement of Operations for the three and six-months ended June 30, 2005, as all outstanding unvested options granted under the plan at that time had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company accounted for stock-based compensation to non-employees (including directors who provide services outside their capacity as members of the board) in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96 – 18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” In addition, the Company disclosed pro forma amounts illustrating the effect on net income or loss attributable to common stockholders and income or loss per share as if the fair value of options granted had been recognized in accordance with the provisions of SFAS No. 123.

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share Based Payment,” using the modified-prospective-transition method. SFAS No. 123(R) supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123. The Company uses the Black-Scholes formula to estimate the fair value of stock options granted to employees. Based on the terms of the stock option plan, the Company did not have a cumulative effect related to the implementation of SFAS No. 123(R) and results for prior periods have not been restated. As of June 30, 2006, there was approximately $580,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a weighted-average period of approximately 1.9 years. This expected cost does not include the impact of any future stock-based compensation awards.

     As a result of the adoption of SFAS No. 123(R), the Company’s income (loss) before income tax expense and minority interest and net income (loss) attributable to common shareholders was lower by $83,000 and $167,000 for the three and six-month periods ended June 30, 2006, respectively. The adoption did not lower the Company’s reported basic and diluted income (loss) per common share for the 2006 periods presented. The adoption of SFAS No. 123(R) had no effect on reported cash flows or stockholder’s equity for the three and six-month periods ended June 30, 2006. Although no options were exercised during any period covered by this report and accordingly did not record any related tax benefits, under SFAS No. 123(R) any tax benefits resulting from tax deductions in excess of compensation cost recognized for those options would have classified as a financing cash flow instead of an operation cash flow if the Company had not adopted SFAS No. 123(R).

     The following table shows the effect on net loss attributable to common stockholders and loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted in periods presented prior to adoption of SFAS No. 123(R). For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options vesting periods.

		Three months ended June 30, 2005				Six months ended June 30, 2005
		(In thousands, except per share data)
Net loss:
As reported		$	(383	)		$	(7,946	)
Add: stock-based employee compensation expense included in reported net loss			—				—
Deduct: total stock-based compensation expense determined under fair value method for all awards			(1,419	)			(1,776	)
Pro forma net loss		$	(1,802	)		$	(9,722	)
Basic and diluted loss per common share:
As reported		$	(0.01	)		$	(0.18	)
Pro forma			(0.04	)			(0.22	)

(5) Acquired Intangible Assets

     Information with respect to acquired intangible assets is as follows (in thousands):

		June 30, 2006								December 31, 2005
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortizable intangible assets:
Customer related		$	11,042			$	7,104			$	11,042			$	6,421
Covenants-not-to-compete			1,506				1,038				1,506				915
Total		$	12,548			$	8,142			$	12,548			$	7,336
Aggregate amortization expense:
For the three-months ended June 30, 2006														$	393
For the three-months ended June 30, 2005															477
For the six-months ended June 30, 2006															806
For the six-months ended June 30, 2005															984
Estimated aggregate amortization expense:
For the remainder of the year ended December 31, 2006														$	741
For the year ended December 31, 2007															1,254
For the year ended December 31, 2008															931
For the year ended December 31, 2009															607
For the year ended December 31, 2010															482

(6) Goodwill

     The changes in the carrying amount of goodwill for the six-months ended June 30, 2006 are as follows (in thousands):

						International
		Domestic Services				Services				Total
Balance, December 31, 2005		$	19,821			$	23,941			$	43,762
Adjustments to 2005 earn-out accruals			100				318				418
2006 earn-out accrual			—				150				150
Balance, June 30, 2006		$	19,921			$	24,409			$	44,330

     Adjustments in 2006 to earn-out accruals for 2005 resulted from differences between actual performance used to compute final earn-out obligations to the selling shareholders and estimates used to compute accruals.

(7) Credit Facilities

     Short and long-term debt consists of the following (in thousands):

		June 30, 2006				December 31, 2005
Short-term debt —
U.S. Facility:
Revolving note		$	8,408			$	6,045
Convertible minimum borrowing note, ($10,000 in principal outstanding, net of discount of $3,420 and $4,075)			6,580				5,925
Total U.S. Facility			14,988				11,970
Note payable — related party			2,134				1,897
Note payable — earn-outs			2,090				—
Capital lease obligations			172				172
Total short-term debt		$	19,384			$	14,039

		June 30, 2006				December 31, 2005
Long-term debt —
Offshore Credit Facilities, (net of discount of $76 as of June 30, 2006)		$	1,924			$	1,000
Capital lease obligations			45				137
Total long-term debt		$	1,969			$	1,137

     U.S. Facility —

     In August 2005, the Company entered into several agreements with Laurus Master Fund, Inc. (“Laurus”), to provide a $25,000,000 U.S. Facility which replaced a previously outstanding facility. In connection with establishing the U.S. Facility with Laurus, the Company entered into two principal borrowing agreements and a warrant agreement, the terms of which are as follows:

     Secured Convertible Minimum Borrowing Note (“Minimum Borrowing Note”) — The Minimum Borrowing Note has a principal amount of $10,000,000, a three-year term expiring August 31, 2008 and bears interest at prime plus 1% subject to a minimum interest rate of 5.5%. The Minimum Borrowing Note is convertible into the Company’s common stock at a conversion price of $1.0658 per share subject to customary antidilution adjustments. A total of 9,382,623 shares of the Company’s common stock would be issued upon the full conversion of the principal of the Minimum Borrowing Note. Assuming the Company registered the shares necessary to complete the full conversion of the Minimum Borrowing Note, and if the market price of the Company’s common stock for the last five trading dates of any month exceeds the conversion price of $1.0658 per share by 25%, then the interest rate for the next month will be reduced by 200 basis points for each incremental 25% increase in market price above $1.0658. The stated interest rate on the Minimum Borrowing Note was 9.25% and 8.25% as of, June 30, 2006 and December 31, 2005, respectively.

     In the event the Minimum Borrowing Note has been converted in full into the Company’s common stock and there remains at least $11,000,000 outstanding under the U.S. Facility, a new Minimum Borrowing Note will be issued. The terms of the new Minimum Borrowing Note would be the same as the initial note except for the conversion price, which would be 115% of the average closing price of the Company’s common stock for the ten trading days immediately prior to the date of issuance of a new Minimum Borrowing Note, but in no event greater than 120% of the closing price of the Company’s common stock on the date of issuance.

     Secured Revolving Note (“Revolving Note”) — The Revolving Note covers borrowings outstanding under the facility that are not represented by the Minimum Borrowing Note. The Revolving Note has a three-year term expiring August 31, 2008 and bears interest at prime plus 3.5% subject to a floor of 8.0% and prepayment premiums of 3% in the first year, 2% in the second year, and 1% in the third year of the Revolving Note. The stated interest rate on the Revolving Note was 11.75% and 10.75% as of June 30, 2006 and December 31, 2005 respectively.

     Common Stock Purchase Warrants (“Warrant”) — The Warrant entitles Laurus to purchase 2,500,000 shares of the Company’s common stock for a period of five years, at an exercise price that varies with the number of shares purchased under the Warrant. The exercise price is $1.13 per share for the first 900,000 shares, $1.41 per share for the next 700,000 shares, $4.70 per share for the next 450,000 shares and $7.52 per share for the remaining 450,000 shares.

     Registration Rights Agreement (“Rights Agreement”) — The Rights Agreement provides that the Company file by October 30, 2005 a registration statement for resale of the shares issuable upon conversion of the Minimum Borrowing Note or exercise of the Warrant, have the registration statement effective by the SEC by December 30, 2005 and keep the registration statement effective for a period of five years. If the Company fails to meet the deadlines or if the registration statement is unavailable after it becomes effective, then the Company is subject to liquidated damages in the amount of $5,000 per day. The Company filed a registration statement within the time period specified in the Rights Agreement but subsequently withdrew it based on indications that the current structure of the Minimum Borrowing Note would prevent effectiveness. For the three and six-months ended June 30, 2006, liquidated damages of $450,000 and $900,000, respectively were recorded and included in interest expense.

     The Minimum Borrowing Note and Warrant require the Company to deliver registered shares as specified in the Rights Agreement. Under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, since the Company did not have an effective registration statement at inception of the agreements and is subject to liquidated damages in the event that effective registration does not occur or if effectiveness is not maintained, the conversion feature and Warrant are to be accounted for as derivatives that are recorded as liabilities, and measured at fair value at the inception of the contract with subsequent changes in fair value to be reflected in the consolidated statement of operations. The carrying value of the Minimum Borrowing Note was adjusted for the discount created by the initial fair value of the conversion feature and the allocated portion of the fair value of the Warrant in accordance with APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” The initial fair value of the derivatives were included in other long-term liabilities on the consolidated balance sheet with amounts allocated to the Company’s debt recorded as a discount on such debt. The amount allocated to the Revolving Note is considered a debt issue cost and is classified in other assets on the consolidated balance sheet. This amount is being amortized on a straight-line basis over the three-year term of the agreement.

     The derivatives have been measured at fair value as of June 30, 2006, resulting in non-cash credits of $2,897,000 and $2,592,000 being recognized in the consolidated statement of operations for the three and six-months ended June 30, 2006, respectively. In addition, interest expense includes $334,000 and $656,000 resulting from the accretion of the initial discount for the three and six-months ended June 30, 2006.

     The level of eligible accounts receivable of the Company limits the amounts available to be borrowed under the Minimum Borrowing Note and Revolving Note. The U.S. Facility generally provides for an advance rate of 90% of eligible accounts receivable. The U.S. Facility does not contain financial covenants although it does have affirmative and negative covenants, including the requirement for consent from the lender for certain actions, including future acquisitions, the payment of cash dividends or a merger. The Minimum Borrowing Note and Revolving Note are further secured by a global security interest in substantially all the assets of the Company’s domestic subsidiaries, excluding any stock held in a foreign subsidiary.

     As of June 30, 2006, the Company had $10,000,000 outstanding under the Minimum Borrowing Note and $8,408,000 outstanding under the Revolving Note. Based on the level of eligible receivables there was borrowing availability of $12,000.

     The U.S. Facility requires a lock-box arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the facility. This arrangement, combined with the existence of a subjective acceleration clause in the agreement, requires the classification of outstanding borrowings as a current liability in accordance with EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement.” The acceleration clause allows Laurus to forego additional advances should they determine there has been a material adverse change in the Company’s financial position or prospects reasonably likely to result in a material adverse effect on

its business, condition (financial or otherwise), operations or properties.

     Offshore Credit Facilities —

     In October 2005, the Company exchanged $3,000,000 of principal outstanding under a term credit agreement with Hong Kong League Central Credit Union (the “Lender”) and SBI Advisors, LLC, as agent for the Lender for 30,000 newly issued preferred shares of a subsidiary of the Company, Stonepath Holdings (Hong Kong) Limited (“Asia Holdings”). The preferred shares are convertible into the Company’s common stock at a conversion price of $1.08 per share. Dividends on the preferred shares accumulate at a rate of 12% payable monthly in cash or, at the option of the Company, payable in additional preferred shares. A total of 2,777,778 shares of the Company’s common stock would be issued upon the full conversion of the preferred shares, assuming dividends are paid in cash. The Company also issued warrants to the Lender entitling the holder to purchase 277,778 shares of the Company’s common stock at an exercise price of $1.13 per share for a period of four years.

     The preferred shares contain mandatory redemption features that allow the holders to be repaid upon the occurrence of certain triggering events, including events of default on other debt agreements of the Company. Further, the amount to be repaid in the event of a triggering event is based upon the greater of 120% of the par value of the preferred shares or the market value of the number of common shares issuable under the conversion of the preferred shares. Since the preferred shares contain these redemption features, the proceeds received will not be considered permanent equity of the Company. Further, since the redemption provisions do not specify the ultimate amount of proceeds to be paid to the holder upon occurrence of a triggering event, the conversion feature must be accounted for as a derivative under the provisions of EITF Issue No. 00-19. The application of this accounting requires the derivative to be recorded as a liability and measured at fair value at the inception of the contract with subsequent changes in fair value to be reflected in the consolidated statement of operations. The carrying amount of the preferred shares was adjusted to record the discount created by the initial fair value of the derivative that amounted to $1,196,000. The initial fair value was recorded as a discount to the preferred stock, and a corresponding derivative liability was included in other liabilities on the consolidated balance sheet.

     The derivative liability has been measured at fair value as of June 30, 2006, resulting in non-cash credits of $752,000 and $714,000 being recognized in the consolidated statement of operations for the three and six-months ended June 30, 2006.

     Effective June 19, 2006, Asia Holdings entered into a term credit agreement which SBI Brightline (“SBI”) providing proceeds of $4,000,000, of which $2,000,000 was used to repay in full principal borrowings outstanding under term credit agreements with several lenders entered into in October 2005 and February 2006. The agreement bears interest at a rate of 10% and is to be repaid by June 19, 2008. Borrowings outstanding under the agreement are secured by assets of Asia Holdings, including stock and accounts receivable of Asia Holdings subsidiary companies. Further, Asia Holdings has agreed that upon any default by it or any U.S. subsidiary of the Company under its U.S. Facility with Laurus, or the payment of any dividends in additional preferred shares rather than cash to the holders of Asia Holdings’ preferred shares, then Asia Holdings will permit the conversion of the then outstanding preferred share par value to a secured obligation under the agreement. Because of the Company’s consolidation policy which consolidates Asia Holdings results of operations and financial position on a one-month lag basis, the full principal balance of the new agreement and the repayment of previous agreements will be reflected in the Company’s 2006 fiscal third quarter consolidated financial statements.

     The proceeds from the term credit agreement with SBI repaid $1,000,000 of borrowings outstanding under several term credit agreements that Asia Holdings had entered into in February 2006. In connection with entering into these agreements, the Company issued warrants entitling the lenders the right to acquire 500,000 shares of the Company’s common stock at a price of $0.80 per share for a four-year term. The initial fair value of the warrants, as measured using the Black-Scholes option-pricing model was approximately $170,000 with $85,000 allocated to the initial borrowing as a discount and the remaining $85,000 allocated to debt issue costs for the unused portion of the agreement. The remaining unamortized discount and debt issue costs will be charged to interest expense in the Company’s 2006 fiscal third quarter consolidated financial statements once the new term credit agreement is recognized under the Company’s consolidation policy.

     Other Debt —

     The Company has a note payable of $2,134,000 due the principal minority shareholder of its Shanghai, China subsidiary, Shaanxi Sunshine Cargo Services International Co. Ltd. (“Shaanxi”). This note, which was originally due on March 31, 2006, was extended to June 30, 2006. Further, in connection with the extension, the interest rate on the note was increased from 10% to 15% per annum. The Company is currently in discussion regarding offsetting this note and earn-out notes of $456,000 due with amounts due from the shareholder and anticipates a settlement to be recorded in the third quarter of 2006. The settlement is not anticipated to have a material effect on the Company’s financial position, results of operations or liquidity.

     The Company entered into note agreements with the selling shareholders of certain acquired companies that extended the payment date of most of its earn-out payments for the 2005 earn-out performance measurement period. As of June 30, 2006, $2,090,000 of notes were outstanding which bear interest at annual rates of between 8% and 15%. Of these notes, $1,101,000 is anticipated to be settled upon completion of the proposed sale of the Company’s SLIS operations as discussed in Note 2. The remaining notes mature on December 31, 2006.

     Derivative Liabilities —

     The following is information regarding the Company’s derivative instruments that are included in other long-term liabilities on the consolidated balance sheet (dollars in thousands):

		Minimum Borrowing
		Note				Warrant				Preferred Shares				Total
Derivative liabilities recorded upon inception of contracts		$	3,771			$	1,294			$	1,196			$	6,261
Non-cash change in fair value of derivatives during 2005			(1,332	)			(512	)			(273	)			(2,117	)
Derivative liabilities as of December 31, 2005			2,439				782				923				4,144
Non-cash change in fair value of derivatives during the three-month period ended March 31, 2006			374				(69	)			38				343
Derivative liabilities as of March 31, 2006			2,813				713				961				4,487
Non-cash change in fair value of derivatives during the three-month period ended June 30, 2006			(2,347	)			(550	)			(752	)			(3,649	)
Derivative liabilities as of June 30, 2006		$	466			$	163			$	209			$	838
Significant assumptions used in Black-Scholes fair value calculations:
At December 31, 2005:
Closing price of common stock		$	0.72			$	0.72			$	0.72
Expected life in years			2.8				4.8				4.0
Expected volatility			70.1	%			79.3	%			70.5	%
Discount rate			4.2	%			4.2	%			4.2	%
At March 31, 2006:
Closing price of common stock		$	0.78			$	0.78			$	0.78
Expected life in years			2.4				4.4				3.6
Expected volatility			74.8	%			70.2	%			68.6	%
Discount rate			4.8	%			4.8	%			4.8	%
At June 30, 2006:
Closing price of common stock		$	0.33			$	0.33			$	0.33
Expected life in years			2.2				4.2				3.3
Expected volatility			74.4	%			70.9	%			70.1	%
Discount rate			5.2	%			5.1	%			5.1	%

     The non-cash changes in the fair value of the Company’s derivatives are determined through assumptions used in the Black-Scholes option-pricing model and changes in those assumptions as of a particular fair value measurement date in comparison to previous measurement dates. Key assumptions and inputs to the Black-Scholes option-pricing calculation include expected volatility over the term of the derivative instrument, the selection of a discount rate equivalent to a risk-free interest rate on a security bearing the same expected term, the underlying term and conversion price of the derivative, and the trading price of the Company’s common stock as of a particular measurement date. The most significant input effecting the change in fair value of the Company’s derivatives is the change in the trading price of its common stock. As the trading price for the Company’s common stock increases, the value of the derivatives increases, and as the trading price decreases, the value of the derivatives decreases. The trading price of the Company’s common stock has decreased 54.2% during the six-month period ended June 30, 2006. This decline is the primary cause of the $3,306,000 non-cash reduction in fair value of the Company’s derivative liabilities and resulting credit recorded in the consolidated statement of operations for the six-months ended June 30, 2006.

(8) Commitments and Contingencies

     The Company was named as a defendant in eight purported class action complaints filed in the United States Court for the Eastern District of Pennsylvania between September 24, 2004 and November 19, 2004. Also named as defendants in these lawsuits were officers Dennis L. Pelino and former officers Bohn H. Crain and Thomas L. Scully. These cases were consolidated for all purposes in that Court under the caption In re Stonepath Group, Inc. Securities Litigation, Civ. Action No. 04-4515. The lead plaintiff, Globis Capital Partners, LP, filed an amended complaint in February 2005, which was dismissed on April 3, 2006. The lead plaintiff sought to represent a class of purchasers of the Company’s shares between March 29, 2002, and September 20, 2004, and alleged claims for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. These claims were based upon allegations that certain public statements made during the period from March 29, 2002 through September 20, 2004 were materially false and misleading because they failed to disclose that the Company’s Domestic Services operations had improperly accounted for accrued purchased transportation costs. The plaintiffs sought compensatory damages, attorneys’ fees and costs, and further relief and filed a notice of appeal in the United States Court of Appeals for the Third Circuit on May 1, 2006.

     The Company was named as a nominal defendant in a shareholder derivative action on behalf of the Company that was filed on October 12, 2004 in the United States District Court for the Eastern District of Pennsylvania under the caption Ronald Jeffrey Neer v. Dennis L. Pelino, et al., Civ. A. No. 04-cv-4971. Also named as defendants in the action were all of the individuals who were serving as directors of the Company when the complaint was filed (Dennis L. Pelino, J. Douglass Coates, Robert McCord, David R. Jones, Aloysius T. Lawn and John H. Springer), former directors Andrew Panzo, Lee C. Hansen, Darr Aley, Stephen George, Michela O’Connor-Abrams and Frank Palma, and former officers Bohn H. Crain, Stephen M. Cohen and Thomas L. Scully. The derivative action alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violations of the Sarbanes-Oxley Act of 2002. These claims were based upon allegations that the defendants knew or should have

known that the Company’s public filings for fiscal years 2001, 2002 and 2003 and for the first and second quarters of fiscal year 2004, and certain press releases and public statements made during the period from January 1, 2001 through August 9, 2004, were materially misleading. The complaint alleged that the statements were materially misleading because they understated the Company’s accrued purchase transportation liability and related costs of transportation in violation of generally accepted accounting principles and they failed to disclose that the Company lacked internal controls. The derivative action sought compensatory damages in favor of the Company, attorneys’ fees and costs, and further relief as may be determined by the Court. The Court granted the defendants’ motion to dismiss this action on September 27, 2005, and the plaintiff filed a notice of appeal on October 26, 2005.

     On October 22, 2004, Douglas Burke filed a lawsuit against United American Acquisitions and Management, Inc. (“UAF”), Stonepath Logistics Domestic Services, Inc., and the Company in the Circuit Court for Wayne County, Michigan. Mr. Burke is the former President and Chief Executive Officer of UAF. The Company purchased the stock of UAF from Mr. Burke on May 30, 2002 pursuant to a Stock Purchase Agreement. At the closing of the transaction Mr. Burke received $5.1 million and received the right to receive an additional $11.0 million in four annual installments based upon UAF’s performance in accordance with the Stock Purchase Agreement. Stonepath Logistics Domestic Services, Inc. and Mr. Burke also entered into an Employment Agreement. Mr. Burke’s complaint alleges, among other things, that the defendants breached the terms of the Employment Agreement and Stock Purchase Agreement and seeks, among other things, the production of financial information, unspecified damages, attorney’s fees and interest. Mr. Burke has objected to the Company’s calculation of earn-outs payable to him for the years 2002, 2003, 2004, and 2005. In early October 2005, the Wayne County Circuit Court granted the defendants’ motion to dismiss the lawsuit and to compel arbitration. The defendants believe that Mr. Burke’s claims are without merit and intend to vigorously defend against them. In addition, the Company is seeking $0.5 million in excess earn-out payments that were made previously to Mr. Burke based upon financial statements that for the years 2002 and 2003 were subsequently restated due to the underreporting of purchased transportation costs and other matters. Arbitration proceedings commenced in late July 2006 with further proceedings scheduled for September 2006.

     On July 25, 2005, the Company made a demand on the Shareholders’ Agent under the Stock Purchase Agreement dated August 30, 2001, as amended on October 1, 2001, relating to the acquisition of M.G.R., Inc., Contract Air, Inc, and Distribution Services, Inc. for the repayment of $3.9 million in overpayments of earn-outs for the 2002 and 2003 performance periods, which were made in the aggregate amount of $8 million. These overpayments resulted from restatements of financial statements for 2002 and 2003 due to the underreporting of purchased transportation costs and other matters. The Shareholders’ Agent has taken the position that the Company cannot reopen these calculations as they are contractually time barred but has expressed willingness to present the question to an arbitration panel together with the demand for earn-out payments of $10.0 million for the 2004 and 2005 performance periods. The Company refutes these positions and contends that there are no obligations for earn-out payments for 2004 and 2005. The Company anticipates scheduling of arbitration of these disputes later this year.

     On April 26, 2006 the Company received a formal objection to the earn-out calculation on behalf of the former shareholders of Customs Services International, Inc. (“CSI”) for 2005 and a restatement of their objection to the earn-out calculation for 2004. The Company believes that their objections are without merit and will vigorously defend its position through the dispute resolution process as provided within the Asset Purchase Agreement for the acquisition of certain assets of CSI.

     The Company is not able to predict the outcome of any of the foregoing actions at this time, since each action is in an early stage. An adverse determination in any of those actions could have a material and adverse effect on the Company’s financial position, results of operations and cash flows.

     In March 2006, the Company settled two lawsuits filed by a former employee for $0.3 million.

     In May 2006, the Company settled a lawsuit for a preference claim filed by the trustee of a bankrupt debtor for $0.2 million.

     In July 2006, the Company settled a lawsuit with a technology services provider and received $1.0 million. This recovery partially offsets costs incurred in the fourth quarter of 2004 in connection with the Company’s write off of its investment in a forwarding system. The recovery will be recorded in the Company’s third quarter of 2006.

     The Company is also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of those matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity. No material reserves have been established for any pending legal proceeding, either because a loss is not probable or the amount of a loss, if any, cannot be reasonably estimated.

(9) Stockholders’ Equity

     In February 2005 the Company issued 752,157 shares of its common stock in connection with the 2004 acquisition of a 55% interest in Shaanxi. Because the ultimate number of shares issued in connection with the transaction were contingent on the financial performance of Shaanxi through December 31, 2004, and the trading price of the Company’s common stock on February 9, 2005, such shares were not reflected as outstanding securities in the accompanying consolidated financial statements for periods prior to February 9, 2005.

     During the three and six-months ended June 30, 2006, there were no issuances or exercises of employee stock options. As discussed in Note 7, the Company issued 500,000 warrants on February 19, 2006 in connection with entering into borrowing agreements.

     On June 30, 2006, 27,458 shares of common stock were issued to satisfy obligations to employees under the Company’s Employee Stock Purchase Plan.

(10) Earnings (Loss) per Share

     Basic earnings (loss) per common share and diluted loss per common share are presented in accordance with SFAS No. 128, “Earnings per Share”. Basic earnings (loss) per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share incorporates the incremental shares issuable upon the assumed exercise of stock options and warrants and upon the assumed conversion of the Company’s convertible debt and preferred stock, if dilutive. Certain stock options, stock warrants, and convertible securities were excluded because their effect was antidilutive. The total numbers of such shares excluded from diluted loss per common share were 16,367,000 and 7,944,000 for the three-month

periods ended June 30, 2006 and 2005, respectively, and 16,367,000 and 8,134,000 for the six-month periods ended June 30, 2006 and 2005, respectively.

     Basic and diluted earnings (loss) per common share is calculated as follows:

		Three months ended								Six months ended
Net Earnings (Loss):		2006				2005				2006				2005
Net earnings (loss)		$	530			$	(383	)		$	(2,849	)		$	(7,946	)
Less: Preferred stock dividends			(90	)			—				(180	)			—
Basic net earnings (loss) attributable to common stockholders			440				(383	)			(3,029	)			(7,946	)
Change in fair value of derivatives resulting from conversion feature on convertible debt and preferred stock			(3,098	)			—				(2,687	)			—
Interest expense on convertible debt			500				—				974				—
Preferred stock dividends			90				—				180				—
Diluted net loss attributable to common stockholders		$	2,068			$	(383	)		$	(4,562	)		$	(7,946	)
Shares:
Basic weighted average common shares outstanding			43,750				43,669				43,750				43,465
Convertible debt			9,382				—				9,382				—
Convertible preferred stock			2,778				—				2,778				—
Diluted weighted average common shares outstanding			55,910				43,669				55,910				43,465
Net Earnings (Loss) Per Share:
Basic		$	0.01			$	(0.01	)		$	(0.07	)		$	(0.18	)
Diluted		$	(0.04	)		$	(0.01	)		$	(0.08	)		$	(0.18	)

(11) Income Taxes

     The components of income tax expense consist of the following (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
U.S. federal		$	206			$	155			$	395			$	311
State			57				96				104				120
Foreign			53				421				174				777
		$	316			$	672			$	673			$	1,208

     The Company has accumulated net operating losses (NOLs). Due to the uncertainty surrounding the realization of the NOLs, the Company has placed a valuation allowance on its deferred tax assets. Income tax expense for the three-month period ending March 31, 2006 and 2005 resulted primarily from non-U.S.-based earnings, state income taxes and deferred income taxes arising from the amortization of goodwill for income tax purposes.

(12) Related Party Transactions

     In March 2006, the company, entered into an agreement with the representatives of the former SLIS shareholders, a group that includes the Company’s chief executive officer, to extend the payment date of the base earn-out payable for 2005 performance from April 2006 until June 2006. Under the terms of the agreement, the Company would also be obligated to, among other things (i) make the base earn-out payment for the pro rata portion of 2007 on April 30, 2007 instead of in 2008, (ii) accelerate the date for the determination of 50% of the payment of an additional earn-out (“SLIS tier-two earn-out”) from December 31, 2006 to December 31, 2005, (iii) make that payment in 2006 instead of 2007, and (iv) make the final payment of the SLIS tier-two earn-out in 2007 instead of in 2008. The Company has fully accrued for these earn-out obligations as of June 30, 2006 and December 31, 2005. These obligations, which total $4.2 million, would be settled from the net proceeds of the proposed sale of SLIS as discussed in Note 2.

     The Company, through its Shaanxi subsidiary, has several related party transactions with the principal minority shareholder of Shaanxi, who is also a current officer, or a direct family member of the principal minority shareholder.

	•		The Company has receivables of approximately $5,825,000 due from the principal minority shareholder as of June 30, 2006.
	•		The Company has notes payable for $2,590,000 and accrued interest of $65,000 due to the principal minority shareholder as of June 30, 2006. The notes were issued in connection with the Company’s acquisition of a 55% interest in Shaanxi and for extension of earn-out payments for the 2005 performance period.
	•		The Company pays rent for office space to a direct family member of the principal minority shareholder. Monthly and annual rental payments are approximately $20,000 and $240,000, respectively. The rental payments are scheduled to continue through April 30, 2009.

     The Company is currently in discussion regarding offsetting the notes payable, accrued interest and portions of minority interest obligations due the principal minority shareholder with amounts due from the shareholder. The Company anticipates a settlement to be recorded in the third quarter of 2006. The settlement is not anticipated to have a material effect on the Company’s financial position, results of operations or liquidity.

(13) Segment Information

     SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker or group in deciding how to allocate resources and in assessing performance. The Company identifies operating segments based on the principal service provided by the business unit. Each segment has a separate management structure. The accounting policies of the reportable segments are the same as described in our Annual Report on Form 10-K for the year ended December 31, 2005. Segment information, in which corporate expenses have been fully allocated to the operating segments, is as follows (in thousands):

		Three months ended June 30, 2006
		Domestic				International
		Services				Services				Corporate				Total
Revenue from external customers		$	20,022			$	70,901			$	—			$	90,923
Intersegment revenue			28				631				—				659
Segment operating income (loss)			(836	)			(228	)			—				(1,064	)

		Three months ended June 30, 2005
		Domestic				International
		Services				Services				Corporate				Total
Revenue from external customers		$	29,529			$	70,498			$	—			$	100,027
Intersegment revenue			71				41				—				112
Segment operating income			28				1,253				—				1,281

		Six months ended June 30, 2006
		Domestic				International
		Services				Services				Corporate				Total
Revenue from external customers		$	45,703			$	137,403			$	—			$	183,106
Intersegment revenue			79				968				—				1,047
Segment operating loss			(1,808	)			(433	)			—				(2,241	)
Segment assets			35,672				90,679				(5,376	)			120,976
Segment goodwill			19,921				24,409				—				44,330

		Six months ended June 30, 2005
		Domestic				International
		Services				Services				Corporate				Total
Revenue from external customers		$	61,937			$	128,080			$	—			$	190,017
Intersegment revenue			75				107				—				182
Segment operating loss			(5,899	)			(820	)			—				(5,079	)
Segment assets			40,087				81,588				2,388				124,063
Segment goodwill			19,641				18,549				—				38,190

     The revenue in the table below is allocated to geographic areas based upon the location of the customer (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Total revenue:
United States		$	45,999			$	56,613			$	95,583			$	113,044
Asia			41,288				38,916				78,449				69,092
North America (excluding the United States)			303				90				372				254
Europe			1,279				2,199				5,207				3,665
South America			1,325				1,683				2,093				2,913
Other			737				526				1,402				1,049
Total		$	90,923			$	100,027			$	183,106			$	190,017

     The following table presents long-lived assets by geographic area (in thousands):

		June 30,
		2006				2005
United States		$	5,024			$	6,153
Asia			674				662
South America			80				109
Europe			11				9
Total long-lived assets		$	5,789			$	6,933

     Cash held with foreign banks amounted to $5,651,000 and $4,470,000 at June 30, 2006 and December 31, 2005, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

     We are a non-asset-based third-party logistics services company providing supply chain solutions on a global basis. We offer a full range of time and date certain transportation and distribution solutions through our Domestic Services platform where we manage and arrange the movement of raw materials, supplies, components and finished goods for our customers. These services are offered through our domestic air and ground freight forwarding business. We offer a full range of international logistics services including international air and ocean transportation as well as customs house brokerage services through our International Services platform. In addition to these core service offerings, we also provide a broad range of supply chain management services, including warehousing, order fulfillment and inventory control solutions. We serve a customer base of manufacturers, distributors and national retail chains through a network of offices in 20 major metropolitan areas in North America, 17 locations in the Asia Pacific region, three locations in Brazil and a location in Europe, as well as through an extensive network of independent carriers and service partners strategically located around the world.

     As a non-asset-based provider of third-party logistics services, we seek to limit our investment in equipment, facilities and working capital through contracts and preferred provider arrangements with various transportation providers who generally provide us with favorable rates, minimum service levels, capacity assurances and priority handling status. The dollar volume of our purchased transportation services enables us to negotiate attractive pricing with our transportation providers.

     Our principal source of income is derived from freight forwarding services. As a freight forwarder, we arrange for the shipment of our customers’ freight from point of origin to point of destination. Generally, we quote our customers a turnkey cost for the movement of their freight. Our price quote will often depend upon the customer’s time and date certain needs (same day or later as scheduled), special handling needs (heavy equipment, delicate items, environmentally sensitive goods, electronic components, etc.) and the means of transport (truck, air, ocean or rail). In turn, we assume the responsibility for arranging and paying for the underlying means of transportation.

     We also provide a range of other services including customs brokerage, warehousing and other logistics services which include customized distribution and inventory control services and fulfillment services.

     Gross revenue represents the total dollar value of services we sell to our customers. Our cost of transportation includes direct costs of transportation, including motor carrier, air, ocean and rail services. We act principally as the service provider to add value in the execution and procurement of these services to our customers. Our net transportation revenue (gross transportation revenue less the direct cost of transportation) is the primary indicator of our ability to source, consolidate, add value and resell services provided by third parties, and is considered by management to be a key performance measure. Management believes that net revenue is also an important measure of economic performance. Net revenue includes transportation revenue and our fee-based activities, after giving effect to the cost of purchased transportation. In addition, management believes measuring operating costs as a function of net revenue provides a useful metric as our ability to control costs as a function of net revenue directly impacts operating earnings. With respect to our services other than freight transportation, net revenue is identical to gross revenue as the principal costs for these services are payroll and facility costs.

     Our operating results have been affected by our past acquisitions. Starting in the second half of 2003, we began a program to establish an offshore network of owned offices with an initial focus in Asia. To help facilitate the consolidation, analysis and public reporting process, our offshore operations are included within our consolidated results on a one-month lag, or more specifically, our second quarter results will include results from offshore operations for the period March 1 through May 31.

     Our GAAP based net income will also be affected by non-cash charges relating to the amortization of customer related intangible assets and other intangible assets arising from our completed acquisitions. Under applicable accounting standards, purchasers are required to allocate the total consideration in a business combination to the identified assets acquired and liabilities assumed based on their fair values at the time of acquisition. The excess of the consideration paid over the fair value of the identifiable net assets acquired is to be allocated to goodwill, which is tested at least annually for impairment. Applicable accounting standards require the Company to separately account for and value certain identifiable intangible assets based on the unique facts and circumstances of each acquisition. As a result of the Company’s acquisition strategy, our net income (loss) will include material non-cash charges relating to the amortization of customer related intangible assets and other intangible assets acquired in our acquisitions.

     A significant portion of our revenue is derived from our international operations, and the growth of those operations is an important part of our business strategy. Our international operations have historically focused on the shipment of goods into and out of the United States and have been dependent on the volume of international trade with the United States.

     Our operating results are also subject to seasonal trends when measured on a quarterly basis. Our first and second quarters are likely to be weaker as compared with our other fiscal quarters, which we believe is consistent with the operating results of other supply chain service providers. This trend is dependent on numerous factors, including the markets in which we operate, holiday

seasons, consumer demand and economic conditions. Since our revenue is largely derived from customers whose shipments are dependent upon consumer demand and just-in-time production schedules, the timing of our revenue is often beyond our control. Factors such as shifting demand for retail goods and/or manufacturing production delays could unexpectedly affect the timing of our revenue. As we increase the scale of our operations, seasonal trends in one area may be offset to an extent by opposite trends in another area. We cannot accurately predict the timing of these factors, nor can we accurately estimate the impact of any particular factor, and thus we can give no assurance that historical seasonal patterns will continue in future periods.

CRITICAL ACCOUNTING POLICIES

     Our accounting policies, which are in compliance with accounting principles generally accepted in the United States, require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our financial statements. In our Annual Report on Form 10-K for the year ended December 31, 2005 we have discussed those policies that we believe are critical and require the use of complex judgment in their application. Since December 31, 2005, there have been no material changes to our critical accounting policies.

RESULTS OF OPERATIONS

     Quarter ended June 30, 2006 compared to quarter ended June 30, 2005

     The following table summarizes our total revenue, net transportation revenue and other revenue (dollars in thousands):

										Change
		2006				2005				Amount				Percent
Total revenue		$	90,923			$	100,027			$	(9,104	)			(9.1	%)
Transportation revenue		$	87,008			$	93,853				(6,845	)			(7.3	)
Cost of transportation			73,766				77,905				(4,139	)			(5.3	)
Net transportation revenue			13,242				15,948				(2,706	)			(17.0	)
Net transportation margin			15.2	%			17.0	%
Customs brokerage			1,574				2,036				(462	)			(22.7	)
Warehousing and other services			2,341				4,138				(1,797	)			(43.4	)
Net revenue		$	17,157			$	22,122			$	(4,965	)			(22.4	%)
Net revenue margin			18.9	%			22.1	%

     Total revenue was $90.9 million in the second quarter of 2006, a decrease of 9.1% over total revenue of $100.0 million in the second quarter of 2005. The Domestic Services segment delivered $20.0 million in total revenue in the second quarter of 2006, a decline of $9.5 million or 32.1% below the same prior year period. The decline in Domestic Services revenue was due primarily to reduced volume from two major, national retail-based customers, resulting in a decline in revenue of $10.2 million for the quarter. One of these customers realigned a portion of their distribution program to an in-house operation, and we retained a portion of their logistics business, while the contract for the other customer was not renewed upon its expiration in April 2006. The Domestic Services segment has taken action to align operating expenses with these changes, including reducing personnel levels, facility costs and other administrative expenses. The International Services segment delivered $70.9 million in total revenue in the second quarter of 2006, a period over period improvement of $0.4 million or 0.5%. Declines in our U.S. and China- based businesses were offset by growth in our other Asia operations.

     Net transportation revenue was $13.2 million in the second quarter of 2006, a decline of $2.7 million or 17.0% compared to the same period in 2005. The Domestic Services segment delivered $5.1 million of net transportation revenue in the second quarter of 2006, a decrease of $2.6 million or 33.5% compared to the same prior year period. This decrease is primarily a result of lower transportation revenues as mentioned previously. The International Services segment delivered $8.1 million of net transportation revenue in the first quarter of 2006, a period over period decline of 1.7%.

     Net transportation margin decreased to 15.2% for the quarter ended June 30, 2006 from 17.0% for the comparable period in 2005. The decline is due to lower revenues from our higher margin Domestic Services segment coupled with a decline in net transportation margin from this segment to 27.7% from 29.4% in the second quarter of 2005. For the International Services segment, net transportation margin declined to 11.9% from 12.2% as a result continued heavy competition in Asia, particularly in China.

     Customs brokerage and other services revenue was $3.9 million in the second quarter of 2006, a decrease of 36.6% compared to $6.2 million recorded in the second quarter of 2005. The Domestic Services segment delivered $1.7 million of warehousing and other services revenue in the second quarter of 2006, a decline of $1.9 million or 52.3% over the same prior year period. The decline was the result of much lower warehousing revenue, which coincided with the loss of business from the two major retail accounts. The International Services segment delivered $2.2 million of customs brokerage and other services revenue in the second quarter of 2006, a decrease of $0.4 million or 16.1%.

     Net revenue was $17.2 million in the second quarter of 2006, a decrease of 22.4% over total net revenue of $22.1 million in 2005. The Domestic Services segment delivered $6.8 million of net revenue in the second quarter of 2006, a decline of $4.4 million or 39.4% over the same prior year period. The International Services segment delivered $10.4 million of net revenue in the second quarter of 2006, a period over period decline of $0.5 million or 5.2%.

     Net revenue margin decreased to 18.9% for the second quarter of 2006 compared to 22.1% for the same period in 2005. Net

revenue margin for the Domestic Services segment decreased to 33.8% for the quarter ended June 30, 2006 from 37.8% for the comparable period in 2005. Net revenue margin for the International Services segment decreased to 14.7% for the quarter ended June 30, 2005 from 15.5% for the comparable period in 2005.

     The following table summarizes certain consolidated statement of operations data as a percentage of our net revenue for the three months ended June 30, 2006 and 2005 (dollars in thousands):

		2006								2005								Change
		Amount				Percent				Amount				Percent				Amount				Percent
Net revenue		$	17,157				100.0	%		$	22,122				100.0	%		$	(4,965	)			(22.4	%)
Personnel costs			10,751				62.7				11,485				51.9				(734	)			(6.4	)
Other selling, general and administrative costs			7,255				42.3				8,111				36.7				(856	)			(10.5	)
Depreciation and amortization			950				5.5				1,138				5.1				(188	)			(16.5	)
Restructuring charges			(735	)			(4.3	)			107				0.5				(842	)		NM
Total operating costs			18,221				106.2				20,841				94.2				(2,620	)			(12.6	)
Income (loss) from operations			(1,064	)			(6.2	)			1,281				5.8				(2,345	)			183.0
Change in fair value of derivatives			3,649				21.3				—				0.0				3,649			NM
Other income (expense), net			(1,603	)			(9.3	)			(657	)			(3.0	)			(946	)			143.8
Income before income tax expense and minority interest			982				5.7				624				2.8				358				57.4
Income tax expense			316				1.8				672				3.0				(356	)			(52.8	)
Income (loss) before minority interest			666				3.9				(48	)			(0.2	)			714			NM
Minority interest			136				0.8				335				1.5				(199	)			(59.7	)
Net income (loss)			530				3.1				(383	)			(1.7	)			913			NM
Preferred stock dividends			(90	)			(0.5	)			—				—				(90	)		NM
Income (loss) attributable to common stockholders		$	440				2.6	%		$	(383	)			(1.7	%)		$	823			NM		%

     Personnel costs were $10.8 million in the second quarter of 2006, a decrease of 6.4% compared to $11.5 million in 2005. We decreased total headcount by 9.6%, primarily to improve productivity and reduce our staffing in response to the loss of domestic business. The number of total employees decreased to 995 at June 30, 2006 from 1,101 at June 30, 2005, a decrease of 106 employees, with U.S. headcount decreasing by 119. The number of employees in operations was 665 or 66.8%; employees engaged in sales and marketing activities were 95 or 9.5% and finance, management and administration employees were 235 or 23.6% of total employees. Personnel costs as a percent of net revenue increased by to 62.7% during second quarter 2006 compared to 51.9% in the second quarter of 2005.

     Other selling, general and administrative costs were $7.3 million in 2006, a decrease of 10.5% over $8.1 million in 2005. The decrease was attributable to lower facilities expenses, as a result of fewer facilities in operation and lower general & administrative expense, partially due to lower insurance and accounting related expenses, compared to second quarter of 2005. Despite the decrease, we were unable to leverage these expenses as a percentage of net revenue, coming in at 42.3% of net revenue in second quarter of 2006 compared with 36.7% in second quarter 2005.

     Depreciation and amortization decreased to $0.9 million for the quarter ended June 30, 2006, a decrease of $0.2 million or 16.5% over the comparable period in 2005. The decrease was due to lower amortization of intangible assets as a result of previously capitalized intangibles becoming fully amortized since the second quarter of 2005.

     During the second quarter of 2006, we recorded a $0.7 million credit to adjust previously established restructuring reserves. The adjustment related to our subleasing of a facility that had closed in 2005 and been fully reserved with respect to its remaining lease payments. The second quarter of 2005 includes charges related to our restructuring initiative, which was announced in January 2005. The restructuring involved rationalizing the number of facilities in which we operate, as well as the level of employment in the U.S. We had completed the majority of this initiative as of the end of the second quarter of 2005. Restructuring charges related to this initiative were $0.1 million in the second quarter of 2005.

     Results for the second quarter of 2006 include a non-cash credit of $3.6 million resulting from the decline in fair value of our derivative liabilities recorded in connection with agreements governing our U.S. credit facility and preferred stock that were entered into in the second half of 2005. We are required to account for the conversion and warrant features contained in these agreements as derivatives. The accounting for derivatives requires that they be recorded as liabilities and stated at fair value on the consolidated balance sheet with subsequent changes in fair value reflected in the consolidated statement of operations. The change in fair value is computed using the Black-Scholes option pricing model, which requires the use of key assumptions and inputs relating to the expected volatility of the derivative over its term, the selection of a discount rate equivalent to a risk-free interest rate for a security bearing the same expected term, the underlying term and conversion price of the derivative, and the trading price of our common stock as of a particular measurement date. As the trading price for our common stock increases, the value of the derivatives increases, and as the trading price decreases, the value of the derivatives decreases. During the second quarter of 2006, our stock price declined 57.7%, which, when coupled with other assumption changes, produced a decrease in the fair value of our derivative liabilities and corresponding non-cash credit in the consolidated statement of operations.

     Other income (expense) principally consists of interest expense. Net interest expense was $1.6 million compared to $0.7 million in the second quarter of 2005. The increase in expense was due to higher average borrowings in the U.S. and Asia used to fund operating and investing activities, higher interest rates contained in our revolving credit agreements and $0.5 million of costs related to

liquidated damage provisions contained in our U.S. credit facility agreement. The provisions of this agreement required us to pay $5,000 for each day we do not provide the lender with an effective registration statement after December 30, 2005. This registration statement would allow for the resale of shares of our common stock which could be issued under conversion features of the underlying borrowings and warrants issued in connection with implementing the facility.

     Income tax expense for the second quarter of 2006 was $0.3 million compared to $0.7 million in the prior year. A portion of our tax expense is associated with earnings from our overseas operations. The foreign income tax provision decreased to $0.1 million in the second quarter of 2006 compared to $0.4 million in the second quarter of 2005, in part due to certain transfer pricing strategies which were implemented in the fourth quarter of 2005. The balance of our taxes are state income taxes and deferred income taxes resulting from the amortization of goodwill for income tax purposes.

     Net income attributable to common stockholders was $0.4 million in the second quarter of 2006, compared to a loss of $0.4 million in the second quarter of 2005. Basic earnings per common share were $0.01 and diluted earnings per share were ($0.04) in the second quarter of 2006 compared to a basic and diluted net loss of ($0.01) per common share in the second quarter of 2005.

     Six months ended June 30, 2006 compared to six months ended June 30, 2005

     The following table summarizes our total revenue, net transportation revenue and other revenue (dollars in thousands):

										Change
		2006				2005				Amount				Percent
Total revenue		$	183,106			$	190,017			$	(6,911	)			(3.6	%)
Transportation revenue		$	173,788			$	177,562				(3,774	)			(2.1	)
Cost of transportation			146,433				147,481				(1,048	)			(0.7	)
Net transportation revenue			27,355				30,081				(2,726	)			(9.1	)
Net transportation margin			15.7	%			16.9	%
Customs brokerage			3,383				4,114				(731	)			(17.8	)
Warehousing and other services			5,935				8,341				(2,406	)			(28.8	)
Net revenue		$	36,673			$	42,536			$	(5,863	)			(13.8	%)
Net revenue margin			20.0	%			22.4	%

     Total revenue was $183.1 million in the first six months of 2006, a decrease of 3.6% over total revenue of $190.0 million in the first six months of 2005. The Domestic Services segment delivered $45.7 million in total revenue in the first six months of 2006, a decline of $16.3 million or 26.2% below the same prior year period. The decline in Domestic Services revenue was due to reduced volume from two major, national retail-based customers, resulting in a decline in revenue of greater than $14.0 million for the six months. One of these customers realigned a portion of their distribution program to an in-house operation and we retained a portion of their logistics business, while the contract for the other customer was not renewed upon its expiration in April 2006. The Domestic Services segment has taken action to align operating expenses with these changes, including reducing personnel levels, facility costs and other administrative expenses. The International Services segment delivered $137.4 million in total revenue in the first six months of 2006, a period over period improvement of $9.4 million or 7.3%. Declines in our U.S. international operations were offset by growth in our other Asia-based businesses.

     Net transportation revenue was $27.4 million in the first six months of 2006, a decline of $2.7 million or 9.1% compared to the same period in 2005. The Domestic Services segment delivered $11.5 million of net transportation revenue in the first six months of 2006, a decrease of $3.5 million or 23.4% compared to the same prior year period. This decrease is primarily a result of lower transportation revenues as discussed above. The International Services segment delivered $15.9 million of net transportation revenue in the first six months of 2006, a period over period increase of 5.0%.

     Net transportation margin decreased to 15.7% for the six months ended June 30, 2006 from 16.9% for the comparable period in 2005 primarily due to the International Services segment, which has lower margins, comprising a larger part of the total business. Domestic Services net transportation margin increased to 28.0% for the first six months of 2006 compared to 27.2% for the same period in 2005. For the International Services segment, net transportation margin declined to 12.0% from 12.4% as a result continued heavy competition in Asia, particularly in China.

     Customs brokerage and other services revenue was $9.3 million in the first six months of 2006, a decrease of 25.2% compared to $12.5 million recorded in the first six months of 2005. The Domestic Services segment delivered $4.9 million of warehousing and other services revenue in the first six months of 2006, a decline of $2.2 million or 30.2% over the same prior year period. The decline was the result of much lower warehousing revenue, which coincided with the loss of business from the two major retail accounts. The International Services segment delivered $4.4 million of customs brokerage and other services revenue in the first six months of 2006, a decrease of $1.0 million or 18.7%.

     Total net revenue was $36.7 million in the first six months of 2006, a decrease of 13.8% over total net revenue of $42.5 million in 2005. The Domestic Services segment delivered $16.3 million of net revenue in the first six months of 2006, a decline of $5.6 million or 25.6% over the same prior year period. The International Services segment delivered $20.3 million of net revenue in the first six months of 2006, a period over period decline of $0.3 million or 1.2%.

     Net revenue margin decreased to 20.0% for the first six months of 2006 compared to 22.4% for the same period in 2005. Net revenue margin for the Domestic Services segment increased to 35.7% for the six months ended June 30, 2006 from 35.4% for the

comparable period in 2005. Net revenue margin for the International Services segment decreased to 14.8% for the six months ended June 30, 2005 from 16.1% for the comparable period in 2005.

     The following table summarizes certain consolidated statement of operations data as a percentage of our net revenue for the six months ended June 30, 2006 and 2005 (dollars in thousands):

		2006								2005								Change
		Amount				Percent				Amount				Percent				Amount				Percent
Net revenue		$	36,673				100.0	%		$	42,536				100.0	%		$	(5,863	)			(13.8	%)
Personnel costs			22,051				60.1				23,590				55.5				(1,539	)			(6.5	)
Other selling, general and administrative costs			15,713				42.8				18,281				43.0				(2,568	)			(14.0	)
Depreciation and amortization			1,885				5.1				2,296				5.4				(412	)			(17.9	)
Restructuring charges			(735	)			(2.0	)			3,448				8.1				(4,183	)		NM
Total operating costs			38,914				106.1				47,615				111.9				(8,701	)			(18.3	)
Loss from operations			(2,241	)			(6.1	)			(5,079	)			(11.9	)			2,838				55.9
Change in fair value of derivatives			3,306				9.0				—				0.0				3,306			NM
Other income (expense), net			(2,970	)			(8.1	)			(1,054	)			(2.5	)			(1,916	)			181.7
Loss from before income tax expense and minority interest			(1,905	)			(5.2	)			(6,133	)			(14.4	)			4,228				68.9
Income tax expense			673				1.8				1,208				2.8				(535	)			(44.2	)
Loss before minority interest			(2,578	)			(7.0	)			(7,341	)			(17.3	)			4,763				64.9
Minority Interest			271				0.7				605				1.4				(334	)			(55.4	)
Net loss			(2,849	)			(7.8	)			(7,946	)			(18.7	)			5,097				64.1
Preferred stock dividends			(180	)			(0.5	)			—				—				(180	)		NM
Loss attributable to common stockholders		$	(3,029	)			(8.3	%)		$	(7,946	)			(18.7	%)		$	4,917				61.9	%