10QSB 1 fittipaldi-10qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 [ ] 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 0-25753 ___________________ FITTIPALDI LOGISTICS, INC. -------------------------- (Exact name of small business issuer as specified in its charter) Nevada 87-04496677 ------ ----------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 903 Clint Moore Road, Boca Raton, Florida 33487-2802 ---------------------------------------------------- (Address of principal executive offices) (561) 998-7557 -------------- (Issuer's telephone number) not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) ___________________ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 14, 2006, the number of outstanding shares of the issuer's common stock was 106,454,220. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ______________________________________________________________________________

TABLE OF CONTENTS ----------------- Page ---- PART I. FINANCIAL INFORMATION ------- --------------------- Item 1. Financial Statements (Unaudited): Consolidated Balance Sheet, September 30, 2006 4 Consolidated Statements of Operations, Three Months Ended September 30, 2006 and 2005 5 Consolidated Statements of Cash Flows, Three Months Ended September 30, 2006 and 2005 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 26 Item 3. Controls and Procedures 34 PART II. OTHER INFORMATION -------- ----------------- Item 1. Legal Proceedings 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 3. Defaults Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 36 Item 6. Exhibits 36

2 Cautionary Statements Regarding Forward Looking Information Certain statements in this annual report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to implement our business model, raise sufficient capital to fund our operating losses and pay our ongoing obligations, economic and market conditions and fluctuations, government and industry regulation, competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this annual report in its entirety, including the risks described in "Risk Factors." Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this annual report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business. 3 PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 2006 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 251,000 Accounts receivable, net of allowance of $97,287 1,971,489 Prepaid expenses 193,110 ------------ Total current assets 2,415,599 Property and equipment 650,733 Less: accumulated depreciation (286,306) ------------ Net property and equipment 364,427 Software development costs, net of accumulated amortization of $166,862 1,089,449 Deferred financing costs 27,101 Intangible asset, net of accumulated amortization of $241,546 30,379 Restricted cash for interest on debentures 2,395 Other assets 392,165 ------------ Total assets $ 4,321,515 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable - short term $ 272,280 Convertible notes payable less discount of $44,809 3,477,191 Lines of credit 861,053 Accounts payable 995,392 Accrued expenses 850,166 Accrued salaries 179,604 ------------ Total current liabilities 6,635,686 Long term debt: Long term notes payable 40,660 Convertible notes payable less discount of $382,018 82,982 ------------ Total liabilities 6,759,328 Stockholders' deficit : Preferred stock, $.01 par value, 1,000,000 shares authorized: Series B convertible preferred stock, $.01 par value, 200,000 shares authorized; 151,600 shares issued and outstanding 1,516 Series C convertible preferred stock, $.01 par value, 20,000 shares authorized; 832 shares issued and outstanding 8 Series D convertible preferred stock, $.01 par value, 40 shares authorized; 38 shares issued and outstanding -- Series Y convertible preferred stock, $.01 par value, 87,000 shares authorized; 87,000 shares issued and outstanding 870 Common stock, $.001 par value, 250,000,000 shares authorized; 99,152,180 issued and outstanding 99,152 Deferred compensation (1,345,104) Additional paid-in capital 25,048,209 Accumulated deficit (26,242,464) ------------ Total stockholders' deficit (2,437,813) ------------ Total liabilities and stockholders' deficit $ 4,321,515 ============

See accompanying notes 4

FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended September 30, ------------------------------- 2006 2005 ------------ ---------- Revenue: Freight transportation $ 6,387,696 $ 8,199,598 Access services -- 5,668 ------------ ------------ Total revenue 6,387,696 8,205,266 Operating expenses: Freight transportation 5,762,524 7,320,256 Selling, general and administrative: Salaries, benefits and consulting fees 744,969 1,000,828 Other selling, general and administrative 523,773 574,633 ------------ ------------ Total operating expenses 7,031,266 8,895,717 ------------ ------------ Loss from operations (643,570) (690,451) ------------ ------------ Other income (expense): Gain on asset disposal -- 1,415 Forgiveness of debt (94,864) -- Interest expense, net (772,659) (471,581) Other income -- 2,906 ------------ ------------ Total other expense (867,523) (467,260) ------------ ------------ Net loss (1,511,093) (1,157,711) ============ ============ Loss per share-basic and diluted $ (0.02) $ (0.02) ============ ============ Weighted average shares outstanding - basic and diluted 92,444,796 69,327,258 ============ ============

See accompanying notes 5

FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended September 30, ---------------------------------------- 2006 2005 ---------------- --------------- Cash flows from operating activities: Net loss $(1,511,093) $(1,157,711) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 32,679 26,334 Amortization of software development costs 13,523 13,523 Amortization of intangible asset 12,440 41,262 Amortization of deferred compensation 181,592 45,875 Amortization of deferred financing costs 42,374 235,618 Amortization of discount on notes payable 571,813 62,278 Increase (decrease) in allowance for doubtful accounts -- (17,997) Loss on forgiveness of debt 94,864 -- Issuance of stock options and warrants for services and conversion -- 28,581 Issuance of stock for services, interest and litigation settlement -- 104,700 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 801,530 (319,480) Decrease (increase) in prepaid expenses 77,697 (8,790) Decrease (increase) in other assets 61,063 (131,256) (Decrease) increase in accounts payable and accrued expenses (952,136) 360,703 ----------- ----------- Net cash used in operating activities (573,654) (716,360) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (14,191) (31,167) Capitalized costs of software development (69,446) (93,328) ----------- ----------- Net cash used in investing activities (83,637) (124,495) ----------- ----------- Cash flows from financing activities: Proceeds from promissory notes 76,000 -- Proceeds from line of credit net of costs of $0 and $0, respectively -- 125,171 Repayments of line of credit (51,234) Proceeds from sale of preferred stock and warrants net of costs of $0 and $0, respectively 660,000 Proceeds from sale of common stock and warrants net of costs of $0 and $0, respectively -- 807,500 ----------- ----------- Net cash provided by financing activities 684,766 932,671 ----------- ----------- Net increase in cash and cash equivalents 27,475 91,816 Cash and cash equivalents, beginning of period 223,525 837,753 ----------- ----------- Cash and cash equivalents, end of period $ 251,000 $ 929,569 =========== ===========

See accompanying notes 6 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - DESCRIPTION OF BUSINESS Organization ------------ Fittipaldi Logistics, Inc. (the "Company"), formerly Power2Ship, Inc., was incorporated in Nevada on October 28, 1987. On March 11, 2003, the Company merged with Freight Rate, Inc. which became a wholly owned subsidiary. The Company is a technology company that specializes in providing pertinent, real-time information to the worldwide transportation and security industries. Its technological solutions integrate disparate legacy systems, and synthesize historically fragmented inaccessible data. This data is then reformatted into valuable, actionable information, and delivered to appropriate end users across the logistics value chain. Specific applications of our technology include: vehicle tracking, inventory/asset visibility, secure trucking, and matching available freight with available trucks. The Company is licensed by the United States Department of Transportation as a broker, arranging for transportation of freight (except household goods) by motor carriers. The Company has a patent pending solution for providing freight carriers (currently trucking companies), shippers (companies sending or receiving freight) and their customers with supply chain, tracking and other logistics information. On February 25, 2005, the Company formed P2S Holdings, Inc., a Florida corporation, as a wholly owned subsidiary. Then, on March 21, 2005, Commodity Express Transportation, Inc. ("CXT"), a wholly owned subsidiary of P2S Holdings formed as a Delaware corporation on March 21, 2002, acquired certain assets and liabilities representing the business of Commodity Express Transportation, Inc., a South Carolina based company engaged in the business of motor carriage specializing in full truckload transportation services primarily using dry vans (see Note 8 - "Acquisitions" for further details). CXT presently serves the southeastern United States from its South Carolina base with a fleet of 92 tractors comprised of 45 owned units and 47 owner-operator units with which it has independent contractor lease agreements and 285 trailers. In addition, CXT rents a 137,000 square foot warehouse facility in South Carolina to service its largest customer and provides freight transportation brokerage services through its wholly owned subsidiary, Commodity Express Brokerage, Inc., a Florida corporation formed on March 3, 2005. Also, on March 21, 2005, Power2Ship Intermodal, Inc. ("P2SI"), a wholly owned subsidiary of CXT formed as a Delaware corporation on March 21, 2002, acquired certain assets and liabilities representing the business of GFC, Inc. It is a New Jersey based company in the business of motor carriage specializing in intermodal drayage transportation services. Effective June 30, 2006, the operations of P2SI ceased to exist (see Note 8 - "Acquisitions" for further details). The accompanying unaudited financial statements for the period ended September 30, 2006 have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles as would be included in audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three month period ended September 30, 2006 are not necessarily indicative of the results to be expected for the fiscal year ended June 30, 2007. 7 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions have been eliminated. Reclassifications ----------------- Certain prior period balances have been reclassified to conform to the current year's presentation. These reclassifications had no impact on previously reported results of operations or stockholders' deficit. Cash and Cash Equivalents ------------------------- The Company considers all unrestricted deposits and highly liquid investments, readily convertible to known amounts, with an original maturity of three months or less, to be cash equivalents. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Expenditures for major renewals and betterments that extend the useful lives of the assets are capitalized. Expenditures for maintenance and repairs of the assets are charged to expense as incurred. Income Taxes ------------ Under the asset and liability method of FASB Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company's opinion it is likely that some portion or the entire deferred tax asset will not be realized. Revenue Recognition ------------------- The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the reported revenue streams of the Company: Freight transportation revenue consists of the total dollar value of services purchased from us by our customers. The Company recognizes freight transportation revenue when shipments of goods reach their destinations and the receiver of the goods acknowledges their receipt by signing a bill of lading. At that time, our obligations to the customer are completed and collection of receivables is reasonably assured. Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue 8 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS, continued Gross as a Principal versus Net as an Agent", establishes the criteria for recognizing revenues on a gross or net basis. When we provide these freight transportation services, we are the primary obligor, we are a principal to the transaction not an agent, we have the risk of loss for collection, we have discretion to select the supplier when we do not supply the services and we have latitude in pricing decisions. Access services revenue is recognized in the month that access to the P2S MobileMarket(TM) is provided to customers. When the Company provides equipment to customers, in conjunction with providing access services to them, on any basis in which ownership is retained by the Company, then the Company accounts for equipment provided to the customer as part of the access services agreement and revenue is recognized ratably over the term of the agreement. Implementation services revenue, generated pursuant to software development contracts with customers, is recognized on the percentage of completion basis for each deliverable provided for in the contract. Revenue from implementation services is expected to be insignificant as a percentage of total revenue in the foreseeable future. Stock-Based Compensation ------------------------ The Company previously accounted for stock-based compensation issued to its employees using the intrinsic value method. Accordingly, compensation cost for stock options issued was measured as the excess, if any, of the fair value of our common stock at the date of grant over the exercise price of the options. The pro forma net loss and per share amounts as if the fair value method had been applied to employee stock options granted are presented below for the three months ended September 30, 2005 and the actual net loss and per share amounts are presented below for the three months ended September 30, 2006 in accordance with the Company's adoption of SFAS 123(R) effective January 1, 2006. For purposes of the following disclosures during the transition period of adoption of SFAS 123(R), the weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants for the three months ended September 30, 2006: no dividend yield; expected volatility of 174%; risk free interest rate of 4.5%; and the actual term of options granted. Had the compensation cost for the three months ended September 30, 2005 been determined based on the fair value at the grant dates, our net loss and basic and diluted loss per share would have been reduced to the pro forma amount for that period indicated in the table below. For the three months ended September 30, 2006, the net loss and loss per share reflect the actual deduction for option expense as compensation. Compensation recorded for stock options is a non-cash expense item. 9

FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS, continued Three Months Ended Three Months Ended September 30, 2006 September 30, 2005 ------------------ ------------------ Loss available to common shareholders, as reported $(1,511,093) $(1,157,711) Less: Stock-based employee compensation expense determined under fair value based method, net of - (18,120) related tax effects Net loss $(1,511,093) $(1,175,831) Loss per share: Basic and diluted - as reported $(.02) $(.02) Basic and diluted - pro forma $(.02) $(.02)

Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Impairment of long-lived assets ------------------------------- The Company evaluates the recoverability and carrying value of its long-lived assets at each balance sheet date, based on guidance issued in SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Among other factors considered in such evaluation is the historical and projected operating performance of business operations, the operating environment and business strategy, competitive information and market trends. At September 30, 2006, the Company had no assets which were considered to be impaired. Research and Development ------------------------ Research and development costs are expensed as incurred. No research and development expenses were incurred for the three months ended September 30, 2006 and 2005. Computer Software and Web Site Development Costs ------------------------------------------------ The Company has adopted the provisions of AICPA Statement of Position ("SOP") 98-1, Accounting for the Costs of Software Developed or Obtained for Internal Use, and Emerging Issues Task Force ("EITF") Consensus #00-2, Accounting for Web Site Development Costs. The type of costs incurred by the Company in developing its internal use software and Web site include, but are not limited to, payroll and payroll-related costs (e.g. fringe benefits) for employees who devote time to the internal use computer software or Web site project, consulting fees, the 10 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS, continued price of computer software purchased from third parties and travel expenses incurred by employees or consultants in their duties directly associated with developing the software. These costs are either expensed or capitalized depending on the type of cost and the stage of development of the software and Web site. SOP 98-1 and EITF #00-2 define three stages of development: - the preliminary or planning stage includes all activities related to conceptualizing, evaluating and selecting the alternatives for implementing the project including, but not limited to, developing a project plan, determining desired functionalities and content, identifying required hardware and software tools and selecting external vendors and consultants. All internal and external costs during the preliminary project stage are expensed as incurred. - the application and infrastructure development stage begins immediately upon conclusion of the preliminary or planning stage and includes, but is not limited to, all activities related to designing the software configuration and software interfaces, acquiring or customizing the software necessary to build the application, coding, hardware installation and testing, including parallel processing. Generally, any internal and external costs incurred during the application and infrastructure development stage are capitalized and amortized on a straight-line basis over the estimated economic life of the software of three to five years. General and administrative costs and overhead costs are not capitalized. Amortization for each module or component of software begins after all substantial testing is completed and it is deemed to be ready for its intended use. The only exception to beginning amortization at that time would be if the functionality of that module or component is entirely dependent on the completion of other modules or component in which case the amortization would begin when both the module and the other modules upon which it is functionally dependent are ready for their intended use. - the post-implementation/operation stage includes, but is not limited to, activities related to training, user administration, application maintenance, system backups, routine security reviews, the costs of which are expensed as incurred. Also, upgrades and enhancements that result in additional functionality may occur during this stage, the costs of which are amortized on a straight-line basis over the estimated economic life of the upgrade or enhancement of three to five years. At September 30, 2006, the net book value of capitalized software was $1,089,449. Amortization expense for the three months ended September 30, 2006 and 2005 was $13,523 and $13,523, respectively. The Company makes ongoing evaluations of the recoverability of its capitalized internal use software and Web site by comparing the amount capitalized for each module or component of software to their estimated net realizable values. If such evaluations indicate that the unamortized costs exceed the net realizable values, the Company writes off the amount by which the unamortized costs exceed the net realizable values. 11 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS, continued Concentrations of Credit Risk and Accounts Receivable ----------------------------------------------------- Financial assets that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company's investment policy is to invest in low risk, highly liquid investments. The Company does not believe it is exposed to any significant credit risk in its cash investments. The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation up to $100,000 per institution. At September 30, 2006, the Company's cash balances exceeded the insured limits by approximately $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The Company performs on-going credit evaluations of its customer base including those that represent its accounts receivable at September 30, 2006. The Company maintains reserves for potential credit losses and such losses historically have been within management's expectations. The Company has a deposit of approximately $28,000 with a factoring company that may be used to cover potential credit losses that is included in other assets on the balance sheet. The Company no longer factors its accounts receivable. Advertising ----------- Advertising is expensed as incurred. Advertising expenses for the three months ended September 30, 2006 and 2005 totaled approximately $10,506 and $25,167, respectively. NOTE 3 - CONCENTRATIONS During the quarter ended September 30, 2006, one customer accounted for $3,975,719 or approximately 62% of the Company's quarterly revenue and that same customer accounted for $284,386 or approximately 14% of accounts receivable as of September 30, 2006. No other customer accounted for more than 10% of revenue or accounts receivable. NOTE 4 - NOTE RECEIVABLE In May 2005, the Company loaned $50,000 to an unrelated third party that issued the Company a short-term promissory note with a term of sixty days and an interest rate of 10%. The note was repaid with interest in October 2005. NOTE 5 - INTANGIBLE ASSETS In March 2005, the Company allocated $89,874 of the purchase price for certain assets of Commodity Express Transportation, Inc. These intangible assets are being amortized over their estimated useful lives of 5 years. In March 2006, the Company determined that the net realizable value of the intangible assets of Commodity Express Transportation, Inc. should be reduced to $45,925 and recorded $43,949 of impairments to intangible assets. Also, in March 2005, the Company allocated $334,600 of the purchase price for certain assets of GFC, Inc. to intangible assets attributable to the customer 12 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 - INTANGIBLE ASSETS, continued lists of these businesses. These intangible assets were being amortized over their estimated useful lives of 5 years. In March 2006, the Company entered into a settlement agreement and mutual release with the parties that sold it the GFC assets in which the Company agreed to issue the seller 300,000 shares of its common stock valued at $38,700 and to pay the seller a total of $36,000 over two years in full settlement of the $191,667 outstanding balance of the purchase price. Based on this settlement, the Company determined that the net realizable value of the intangible assets purchased from GFC should be reduced to $220,933 and recorded a $113,667 impairment to intangible assets. Power2Ship Intermodal ceased operations effective June 30, 2006 and the Company recorded a $185,578 impairment to reduce the intangible assets to $0. In July and August, 2004, the Company entered into Intellectual Property Assignment Agreements with three of its executives pursuant to which each of them assigned to the Company all of their right, title and interest in and to all the intellectual property which they had contributed to the Company in the past in consideration for an aggregate of 600,000 shares of the Company's common stock that was issued in January 2005. The Company believes that there are no other parties with any claims to any right, title and interest in and to any of the Company's intellectual property. The shares issued in this transaction were valued at their fair market value of $226,000 and recorded as an intangible asset which was amortized over its estimated useful life of 24 months from the effective dates of the Intellectual Property Assignment Agreements. The Company recorded amortization expense for its intangible assets for the three months ended September 30, 2006 and 2005 of $12,440 and $41,262, respectively. At September 30, 2006, future amortization expense for these intangible assets was as follows: 2007 $ 5,878 2008 8,909 2009 8,909 2010 6,683 --------- $ 30,379 ========= NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE As of September 30, 2006, the balance on the Company's revolving line of credit with Branch Banking and Trust Company was $861,053. As of September 30, 2006, the Company owed $50,440 to a vendor for software maintenance services of which $23,280 were recorded as short term and $27,160 as long term notes payable. In August 2006, the Company issued a $40,000 short-term promissory note to one accredited investor. The note has an interest rate of 10% and a maturity date in November 2006. In October, the holder exchanged the $40,000 note for 1.6 shares of the Series D convertible preferred stock. In July 2006, the Company issued $36,000 short-term promissory notes to five accredited investors. The notes have an interest rate of 10% and maturity dates 13 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, continued in October 2006. In October, one holder exchanged a $10,000 note for 0.4 shares of the Series D convertible preferred stock and the other four holders exchanged $26,000 of these notes for 5.2 shares of Series F convertible preferred stock. In June 2006, the Company issued a $50,000 short-term promissory note to one accredited investor. The note had an interest rate of 10% and a maturity date of September 25, 2006. In September, the holder exchanged this note for two shares of the Series D convertible preferred stock. In April and May 2006, the Company issued $940,000 of its Series D 8% unsecured convertible debentures to seven accredited investors, all of whom were existing significant shareholders of our company, in consideration for $690,000 and the exchange of $250,000 principal amount of the Company's unsecured short term promissory notes and convertible debentures. The maturity date of the Series D debentures is the earlier to occur of June 30, 2008 or the date the Company receives proceeds from a private or public offering of its securities resulting in gross proceeds of at least $5,000,000. The debenture holders received three-year warrants to purchase an aggregate of 9,400,000 shares of common stock for $0.05 per share. The fair value of these warrants, estimated using the Black-Scholes option-pricing model, was $613,640 and recorded as discounts on notes payable to be amortized as interest expense over the term of the debentures. In addition, the Company modified the exercise prices of warrants previously granted to the seven debenture holders to purchase an aggregate of 14,650,000 shares of common stock at prices ranging from $0.10 to $1.00 per share, to an exercise price of $0.05 per share. The increase in value associated with the modified warrants, estimated using the Black-Scholes option-pricing model, was $106,199 and recorded as discounts on notes payable to be amortized as interest expense over the term of the debentures. The key assumptions used in this estimate were the market price of our common stock on the grant date of each warrant, no dividend yield, an expected volatility factor of 192.56%, an approximate risk-free interest rate of 7.25% and a three year expected life. Finally, the conversion price per share of these debentures equal to 80% of the price per common share offered by the Company in any subsequent offering, but in no event less than $0.02 per share or greater than $0.10 per share, results in recognition of a beneficial conversion provision having a value of $235,000. However, after giving affect to the fair value of the warrants granted in conjunction with these debentures, the beneficial conversion provision was limited to the remaining face value of the debentures or $220,161 that was recorded as discounts on notes payable to be amortized as interest expense over the term of the debentures. During the three months ended September 30, 2006, two holders converted an aggregate of $225,000 into 10,558,185 shares of common stock and three holders exchanged an aggregate of $250,000 into 10 shares of the Company's Series D convertible preferred stock. In March 2006, the Company borrowed $100,000 from one accredited investor and issued the investor a short-term 8% unsecured promissory note with a due date of April 30, 2006. In April 2006, the investor exchanged the note for a $100,000 principal amount Series D 8% convertible debenture. In December 2005, the Company borrowed $400,000 from one accredited investor and issued the investor a $400,000 unsecured debenture having a maturity date of May 15, 2006 at which date a $40,000 transaction fee is due and payable. The lender received a five-year warrant to purchase 1,000,000 shares of common stock for $.07 per share that expires on December 30, 2010. The fair value of this warrant was estimated on its grant date using the Black-Scholes option-pricing model 14 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, continued when the market price was $.07 per share and assuming no dividend yield, an expected volatility factor of 193%, an approximate risk-free interest rate of 7.25% and a five year expected life. The warrant was valued at $68,200 which was recorded as a discount on notes payable and is being amortized as interest expense over the term of the debenture. The principal amount of the note and associated transaction fee were paid to the investor prior to the maturity date in May 2006. In October and November 2005, the Company issued $420,000 of its Series C 10% unsecured, convertible debentures to eight accredited investors in consideration for $320,000 and the forgiveness of a $100,000 unsecured short-term promissory note originally issued to one investor in January 2005. The maturity dates of the debentures are the earlier to occur of the one-year anniversary of the debentures or the date the Company receives at least $5,000,000 in aggregate proceeds from subsequent financings. In addition, the lenders received three-year warrants to purchase an aggregate of 5,600,000 shares of common stock for $0.15 per share. The fair value of these warrants was estimated on their grant dates using the Black-Scholes option-pricing model when the market prices ranged from $.13 to $.15 per share and assuming no dividend yield, an expected volatility factor of 193%, an approximate risk-free interest rate of 7.25% and a three year expected life. Since these warrants were valued at $700,133, which exceeded the principal amount of the debentures, the discount on notes payable was limited to $420,000 and is being amortized as interest expense over the term of the debentures. The conversion price per share is the greater of i) $0.15 or ii) 50% of the average closing price of the common stock for the ten trading days immediately preceding the conversion date. However, in the event the Company sells unregistered shares of its common stock, excluding shares underlying employee options or shares issued in connection with a merger or acquisition, for less than $0.15 per share, then the conversion price for any outstanding debentures automatically changes to the greater of i) 50% of the average closing price of the Common Stock on the Over-the-Counter Bulletin Board or such other quotation system as the Common Stock may be principally quoted for the ten (10) trading days immediately preceding the date that holder provides written notice to Company of their intent to exercise the conversion provision or ii) the lowest price per share paid by any investor for the Company's unregistered shares of common stock at any time between the date of issue of the debenture and the conversion date. Since the Company sold shares of its common stock for $.10 per share in December 2005, a beneficial conversion feature was realized which, in this case, is not recorded since the discount on notes payable associated with the warrants already equaled the principal amount of the debentures. In January 2006, one holder converted $25,000 principal amount of the debentures, and $432 of accrued interest, into 254,316 shares of common stock. In April and May 2006, three holders exchanged an aggregate of $250,000 of the debentures for $250,000 of the Series D debentures and in September 2006 two holders exchanged an aggregate of $40,000 for $40,000 of the Series D convertible preferred stock leaving a balance of $105,000 at September 30, 2006. In March 2005, pursuant to its asset purchase agreement with GFC, Inc., the Company agreed to pay GFC a total of $200,000 in twenty-four equal payments of $8,333 per month without interest commencing on April 21, 2005 and continuing for the next twenty-three consecutive months subject to partial or full acceleration based on the gross freight revenue of Power2Ship Intermodal generated during the one month period commencing on March 21, 2006. In March 2006, the Company entered into a settlement agreement and mutual release with the parties that sold it the GFC assets in which the Company agreed to issue the 15 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, continued seller 300,000 shares of its common stock valued at $42,000 and to pay the seller a total of $36,000 over two years in full settlement of the $191,667 outstanding balance of the purchase price. In March 2006, the Company recorded an impairment of intangible assets of $113,667 based on this settlement. As of September 30, 2006, the Company had recorded $18,000 of this obligation as current notes payable and $13,500 as long term notes payable. Effective June 30, 2006, Power2Ship Intermodal ceased operations. In January 2005, the Company issued a 5% unsecured three-month promissory note for $30,000 to one accredited investor. The Company obtained a waiver from the investor as to the repayment of $30,000 of principal and accrued interest in April 2005. In August 2005, the investor forgave the repayment of the promissory note and accrued interest in consideration for the purchase of one unit consisting of 200,000 shares of common stock and a warrant to purchase 200,000 shares for $0.15 per share that expires on July 31, 2008. In June and September 2004, the Company issued $1,000,000 and $1,000,000, respectively, of its Series B 5% secured convertible debentures to one accredited investor. Interest accrues at the rate of 5% per annum during the term of the debentures unless converted or redeemed prior to their maturity dates. The Company paid $225,000 in commissions and expenses related to these debentures that were accounted for as deferred financing costs and are being amortized as interest expense over the term of the debentures. Any portion of the outstanding balance of the debentures may be converted by the holder at any time into common stock at a conversion price per share equal to the lesser of $0.456 or 100% of the average of the three lowest closing bid prices of the common stock for the thirty trading days immediately preceding the conversion date. The Company may redeem the debentures at any time by providing three days notice and paying a premium of up to 20% of the amount being redeemed in a combination of cash and common stock. The Company has provided the debenture holder with a security interest in its tangible and intangible assets, subject to automatic subordination to most traditional asset-based loans, to secure the prompt payment of principal. As of September 30, 2006, the Series B 5% secured convertible debenture holder had converted $250,000 of the debentures into 5,725,248 shares of common stock leaving an outstanding balance of $1,750,000. These debentures were not repaid when due. In September 2006, the Company reached agreement with the investor with respect to these debentures and $350,000 of its 14.25% secured convertible debentures due December 31, 2006 also held by this investor. The investor agreed not to exercise its rights of conversion under the aforementioned debentures until November 1, 2006, for which the Company paid $100,000 in accrued interest, and not to exercise its rights of conversion under the aforementioned debentures from November 1 until January 1, 2007 upon the Company paying the holder an additional $100,000 in accrued interest by November 1, 2006 (see Note 10 - "Subsequent Events" for further details). In addition, the Company agreed to amend the conversion price of the $350,000 principal amount of 14.25% secured convertible debenture to make it identical to the conversion price of the 5% Series B secured convertible debentures which is the lesser of i) $0.456 per share or ii) 100% of the average of the three lowest closing bid prices for our common stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding any conversion date. Also in June 2004, the Company issued the Series B 5% secured convertible debenture holder and a placement agent an aggregate of 816,260 shares of its 16 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, continued common stock valued at $310,179 upon entering into a Standby Equity Distribution Agreement and related agreements with the investor. The value of these shares was accounted for as deferred financing costs that are being amortized as interest expense over a two-year term. In July 2005, the Standby Equity Distribution Agreement and related agreements were terminated and the unamortized deferred financing costs of $155,090 were amortized as interest expense. In March and April, 2004, the Company issued $1,747,000 of its 14.25% secured convertible debentures to 35 accredited investors and paid commissions and expenses of $227,110 accounted for as deferred financing costs that are being amortized as interest expense over the terms of the debentures. In addition, the Company issued 873,500 warrants valued at $108,160 and 131,025 common shares valued at $55,031 to the lenders accounted for as interest expense. The debentures mature on December 31, 2006, and earn interest of 14.25% per annum payable semi-annually in arrears on June 30 and December 31. The debentures may be converted by the holders at any time into common stock at a conversion price per share of $0.2673. EITF 98-5 requires that a beneficial conversion feature be recognized when the conversion price is less than the market price at the time the debentures are issued. The Company recognized a beneficial conversion provision of $194,111 that was recorded as a discount on notes payable and is being amortized as interest expense over the remaining terms of the debentures. The Company may redeem the debentures with fifteen days notice at any time, by paying a premium of up to 15% of their original purchase price in a combination of cash and common stock. The Company has provided the debenture holders with a security interest in its tangible and intangible assets, subject to automatic subordination to most traditional asset-based loans, to secure the prompt payment of principal. In addition, the Company is subject to a security agreement requiring it to deposit six months of interest on the debentures in a separate account with Newbridge Securities Corporation to be paid to investors in the event of a default. As of September 30, 2006, one investor had converted $150,000 of their debentures into common stock decreasing the outstanding balance to $1,597,000 (see Note 10 - "Subsequent Events" for further details). In September 2006, the Company reached agreement with one of the investors with respect to $350,000 of these debentures in which the Company agreed to amend the conversion price to the lesser of i) $0.456 per share or ii) 100% of the average of the three lowest closing bid prices for our common stock, as quoted by Bloomberg, LP, for the 30 trading days immediately preceding any conversion date. The Company may be in default under certain covenants contained in its agreements with the debenture holders. If the Company receives notice of noncompliance and potential default, the Company would have an obligation to rectify or otherwise receive a waiver from the debenture holders under the terms of those agreements. While the Company has not received any such notice to date, it is possible that notice could be provided in the future, which would likely cause the Company to be in default under its agreement and obligations to the debenture holders. Any default could accelerate the Company's obligations to the debenture holders in the remaining principal amount of $1,597,000 together with all accrued and unpaid interest thereon and perhaps other obligations owed to other parties. We cannot assure you that we would be in a position to arrange alternative financing to satisfy these obligations in the event of a default. In July 2003, the Company issued a promissory note in the amount of $170,000 to a software vendor for licenses to use certain logistics software. The note 17 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, continued required the Company to pay $30,000 upon issuing the note followed by 22 consecutive payments of $5,000 on the first of each month from August 2003 through May 2005 for a total of $140,000. All the aforementioned payments were made when due and the $30,000 remaining balance of the note was waived resulting in a write-off of $30,000 against prepaid interest and a gain of $18,111 during fiscal year 2005. In March 2003, the Company issued a convertible promissory note in the amount of $175,000 to an unaffiliated Company shareholder. The interest rate of the note is 8% per annum and it has a maturity date of June 30, 2006. The holder of the note has the right to convert the outstanding principal balance of the note into the Company's common stock at any time prior to its maturity date at a conversion price equal to the lesser of 1) $1.51 per share or 2) 50% of the average of the closing bid prices of the common stock for the five trading days immediately preceding the date of conversion but no less than $0.25 per share. Given this type of conversion provision, EITF 98-5 specifies that a beneficial conversion feature be recognized based upon the five days preceding the commitment date. This resulted in a beneficial conversion of $175,000 which was treated as a discount on notes payable which is being amortized as interest expense over the term of the debt. The note is in default and the holder has notified the Company that it is seeking to accelerate full repayment of the $175,000 in principal and accrued interest thereon, and such default may result in acceleration of other obligations owed to other parties. We cannot assure you that we would be in a position to arrange alternative financing to satisfy these obligations. In March 2003, the Company issued a convertible promissory note in the amount of $135,000 to its Chief Executive Officer upon the forgiveness of $147,520 of accrued salary. During fiscal year 2004, the Company repaid $20,000 of this note decreasing its outstanding balance to $115,000 which remains the outstanding balance as of March 31, 2006. The interest rate of the note is 8% per annum and it has a maturity date of June 30, 2006. The holder of the note has the right to convert the outstanding principal balance of the note into the Company's common stock at any time prior to its maturity date at a conversion price equal to the lesser of 1) $1.51 per share or 2) 50% of the average of the closing bid prices of the common stock for the five trading days immediately preceding the date of conversion but no less than $0.75 per share. In September 2006, the Company entered into a Separation and Severance Agreement with the Company's Chief Executive Officer in which he settled all outstanding claims with the Company, including this note and accrued interest thereon, and agreed to the cancellation of all options previously granted to him in consideration for $20,000 and a warrant to purchase 11,000,000 shares of common stock for $0.025 per share that expires in five years. NOTE 7 - STOCKHOLDERS' DEFICIT Common Stock ------------ During the three months ended September 30, 2006, the Company issued an aggregate of 14,804,430 shares of its common stock consisting of: - 10,558,185 shares issued upon the conversion of $225,000 Series D 8% unsecured convertible debentures and accrued interest thereon to two investors; 18 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' DEFICIT, continued - 4,166,245 shares issued upon the conversion of $150,000 Series B 5% secured convertible debentures to its sole debenture holder; and - 80,000 shares issued upon the conversion of 4,000 shares of Series B convertible preferred stock by two investors. Options and Warrants -------------------- The Company's board of directors has the authority to determine when and to whom it grants options and warrants to purchase shares of the Company's common stock. In addition, the board determines the number of options and warrants to be granted and all other terms and conditions related to these securities such as the recipients' vesting schedules, expiration dates, exercise prices and restrictions. The Company adopted SFAS 123(R), "Accounting for Stock-Based Compensation", effective March 31, 2006. Accordingly, the Company now measures the cost of employee services received in exchange for stock options based on the grant-date fair value of the options. This cost is recognized over the vesting period, if any, specified in the stock option agreement. Prior to adopting SFAS 123(R), the Company had chosen to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 in which the cost of employee stock options was measured as the excess, if any, of the estimated fair value of the Company's stock on the grant date over the exercise price of the stock options. For purposes of the pro forma calculations, the fair value of each option was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used: Weighted average: 2006 2005 ----------------- ---- ---- Dividend yield None None Expected volatility factor 174% 152% Approximate risk free interest rates 4.5% 2.75% Expected lives, in years 3 3 The determination of fair values for all stock options and warrants is based on the assumptions described in the preceding paragraph, and because additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects on reported net income or loss for future years. 19 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' DEFICIT, continued Stock options ------------- A summary of the stock option activity is as follows:

Weighted Average Exercise Number Exercise Price Price of Options Per Option ----- ---------- ---------- Outstanding options at June 30, 2006 $0.35 13,600,741 $0.15 - $1.01 Granted......................................................... $0.025 23,000,000 $0.025 Expired......................................................... $0.19 (265,520) $0.38 - $0.50 Cancelled....................................................... $0.33 (5,785,391) $0.25 - $0.38 ---------- Outstanding options at September 30, 2006 $0.11 30,549,830 $0.025 - $1.01 ========== Exercisable options at September 30, 2006 $0.36 30,549,830 $0.025 - $1.01 ==========

The following table summarizes information concerning stock options outstanding and exercisable at September 30, 2006:

Weighted Weighted Average Average Number of Options Remaining Exercise Range of Exercise Price Outstanding Life in Years Price ----------------------- ----------- ------------- ----- $0.025 23,000,000 4.97 $0.025 $0.15 - $0.40 7,224,830 0.90 $0.34 $0.52 - $1.01 325,000 1.13 $0.97 ---------- 30,549,830 ==========

20 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - STOCKHOLDERS' DEFICIT, continued Warrants -------- A summary of the warrant activity is as follows:

Weighted Average Exercise Number of Exercise Price Price Warrants Per Warrant ----- -------- ----------- Outstanding warrants at June 30, 2006 $0.13 59,912,536 $0.05 - $2.00 Granted............................................ $0.025 11,000,000 $0.025 Cancelled.......................................... -- -- -- Expired............................................ $0.47 (859,250) $0.05 - $2.00 ---------- Outstanding warrants at September 30, 2006 $0.12 70,053,286 $0.025 - $2.00 ---------- Exercisable warrants at September 30, 2006 $0.12 68,419,954 $0.025 - $2.00 ==========

The following table summarizes information concerning warrants outstanding at September 30, 2006:

Weighted Weighted Average Average Remaining Exercise Range of Exercise Price Number of Warrants Life in Years Price ----------------------- ------------------ ------------- ----- $ 0.025 - $0.15 63,784,627 2.52 $ 0.09 $ 0.20 - $0.74 5,228,684 1.34 $ 0.41 $ 0.75 - $2.00 1,039,975 0.86 $ 0.88 ----------- 70,053,286 ===========

The following table summarizes information concerning warrants exercisable at September 30, 2006:

Weighted Average Exercise Range of Exercise Price Number of Warrants Price ----------------------- ------------------ ----- $ 0.025 - 0.15 62,951,295 $0.09 $ 0.20 - $0.74 4,428,684 $0.39 $ 0.75 - $2.00 1,039,975 $0.12 ---------- 68,419,954 ==========

21 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 - ACQUISITIONS In March 2005, a wholly owned subsidiary of the Company, Commodity Express Transportation, Inc., purchased certain assets, including customer lists, maintenance equipment, office equipment, telecommunications equipment, certain contracts, five vehicles/trucks, and assumed certain liabilities of Commodity Express Transportation, Inc., a South Carolina company, for a purchase price of $100,000 in cash and the assumption of liabilities in the amount of $193,655 (see Note 5 "Intangible Assets" for further details). In addition, upon closing this transaction, the Company replaced certain deposits and a letter of credit previously made or issued on the seller's behalf with third parties in the aggregate amount of approximately $145,000 related to the operation of the seller's business and, after closing, replaced approximately $20,000 of additional letters of credit. The Company also assumed certain leases related to the operation of the seller's business, including tractor leases, owner/operator leases and a warehouse lease. At the closing of this transaction, the Company entered into a(n): - equipment lease agreement whereby the Company agreed to lease from the seller certain trailers for terms ranging from twelve to sixty months; - commercial lease pursuant to which the Company agreed to rent from the seller the commercial property used as the corporate offices for Commodity Express Transportation for a term of five years for $4,200 per month with a one-year renewal option for $5,040 per month; - agreement with TPS Logistics, Inc., a company in the transportation brokerage business in which the president of Commodity Express Transportation is an officer, to be the exclusive carrier for TPS' largest customer in consideration for one percent of the gross receipts from such customer for a term that will terminate on the earlier of March 20, 2010 or when the agreement between TPS and its largest customer is no longer effective; - consulting agreement with Stokes Logistics Consulting, LLC, a company in which the president of Commodity Express Transportation is a principal, having a term of five years which may be extended for two successive one year terms upon consent of both parties, pursuant to which he will be paid a monthly consulting fee based upon gross revenue of Commodity Express Transportation, with the minimum and maximum payable in any one year of $100,000 and $200,000, respectively; - employment agreement with W.A. Stokes, president of Commodity Express Transportation, having a term of one year which may be extended for two additional one year terms, pursuant to which he will be paid an annual base salary of $150,000 and a quarterly bonus based on the gross revenue that Mr. Stokes is responsible for generating from facilities operated by its current largest customer other than its South Carolina facility; - escrow agreement pursuant to which the Company deposited all the shares of its wholly owned subsidiary that acquired the assets of Commodity Express Transportation into an escrow account until March 21, 2007 during which period the Company retains voting rights over these securities except in the event of a default under the escrow agreement, which would occur if the net worth of Commodity Express Transportation dropped below certain levels or if the Company was delinquent in its payments under the equipment or commercial lease agreements, consulting agreement or agreement with TPS Logistics, Inc. described above, in which case(s) the seller would have the right to assume control of 22 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 - ACQUISITIONS Commodity Express Transportation until such default(s) had been cured; and - fee assumption agreement pursuant to which the Company agreed to assume the seller's liability to pay the business broker involved with this transaction $100,000 which the Company paid at the closing with the issuance of 370,370 shares of our common stock. In March 2005, a wholly owned subsidiary of the Company, Power2Ship Intermodal, Inc., purchased certain assets, including trucking and brokerage authority permits, contracts with shipping customers, contracts with agents, lease contracts with owner-operators and escrow deposits from owner-operators and agents from GFC, Inc., a South Carolina company, for a purchase price of $300,000, of which $100,000 was paid by canceling the $100,000 secured promissory note made by the seller to the Company, and $200,000 is to be paid in twenty-four equal monthly payments of $8,333.33 subject to partial or full acceleration based on the gross freight revenue of Power2Ship Intermodal generated during the one month period commencing on March 21, 2006 and the assumption of those obligations corresponding to owner-operator and agent escrow deposits. In addition, the Company issued the seller a three-year warrant to purchase 200,000 shares of the Company's common stock for $.30 per share, which vests 50% on the closing date and 50% on the one year anniversary of the closing date which was valued at $34,600 using the fair value estimated on the date of the grant using the Black-Scholes option-pricing model. In March 2006, the Company entered into a Settlement Agreement and Mutual General Release that, among other terms and conditions, the $191,667 outstanding balance of the promissory note made by the Company to the seller was settled for $30,000, payable $1,500 per month over consecutive 24 months, and 300,000 shares of the Company's common stock valued at its fair market value of $42,000. Effective June 30, 2006, the operations of Power2Ship Intermodal, Inc. ceased to exist (see Note 5 "Intangible Assets" for further details). Also, in conjunction with the acquisition of certain assets from GFC, the Company entered into a consulting agreement with Michael Allora, the former president of GFC, with a term of five years and automatic one-year extensions unless terminated prior thereto. The agreement provides for Mr. Allora to earn a commission based on the annual increases, if any, in the gross revenue of the acquired business with such commission to be paid in five equal annual installments as well as a three-year stock option at the end of each yearly period during which the annual gross revenue of the acquired business has increased from the prior year and is in excess of $10,000,000. This agreement was terminated in September 2005 due to certain breaches by Mr. Allora. NOTE 9 - RELATED PARTY TRANSACTIONS In September, Richard Hersh resigned as Chief Executive Officer of the Company and entered into a separation and severance agreement in which he agreed to the cancellation of all his outstanding options, including options to purchase an aggregate of 6,182,642 shares of the Company's common stock exercisable at prices ranging from $0.25 to $0.38 per share and an option to purchase 10% of the common stock of the Company's subsidiary Commodity Express Transportation, Inc. for $60,000, to forgive a convertible promissory note with a principal balance of $115,000 and accrued interest of $32,241, to forego $313,201 in accrued compensation, and to settle any other claims with, or obligations by, the Company, in consideration for $20,000 and a warrant to purchase 11,000,000 shares of common stock for $0.025 per share that expires in five years. In 23 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9 - RELATED PARTY TRANSACTIONS, continued addition, Mr. Hersh entered into a consulting agreement with the Company that has a term of five years and a monthly consulting fee of $10,000. He will advise the Company's management and board of directors on various business matters including identifying and introducing the Company to prospective investors, lenders, strategic partners, acquisition and merger candidates and joint venture partners. In September, the Company's Board of Directors elected David S. Brooks Chief Executive Officer of the Company. Mr. Brooks entered into an employment agreement with the Company having a term of two years with one-year renewals thereafter unless terminated by either party prior thereto. Mr. Brooks' annual base salary of $150,000 may be deferred until the Company has raised an aggregate of $3,000,000 and he received an option to purchase 9,000,000 shares of common stock for $0.025 per share that expires in five years. In August 2006, Mr. Brooks purchased one share of the Company's Series D convertible preferred stock for $25,000 in a private transaction and in October 2006 purchased five shares of the Company's Series F convertible preferred stock for $25,000 in a private transaction. In September, the Company's Board of Directors elected S. Kevin Yates Chief Operating Officer of the Company. Mr. Yates entered into an employment agreement with the Company having a term of two years with one-year renewals thereafter unless terminated by either party prior thereto. Mr. Yates' annual base salary of $150,000 may be deferred until the Company has raised an aggregate of $3,000,000 and he received an option to purchase 9,000,000 shares of common stock for $0.025 per share that expires in five years. In September 2006, the Company terminated for cause its employment agreement with Michael Darden, its President. Thereafter, Mr. Darden resigned as a Director from the Company and its subsidiaries. In October 2006, Mr. Darden filed a lawsuit in Broward County, Florida naming as defendant Freight Rate, Inc. d/b/a Power2Ship, Inc. and alleging breach of his employment agreement. The complaint states that Mr. Darden was damaged pursuant to the termination of his employment agreement in the amount of $306,427.64. The Company believes it has substantial defenses and counterclaims against Mr. Darden, including wrongful appropriation of funds of the Company. In August, David S. Brooks and Kevin Yates, the Company's current Chief Executive Officer and Chief Operating Officer, respectively, entered into a consulting agreement to provide the Company with business advisory services including strategic evaluation, planning and advice, fund-raising support, sales and marketing support, contract negotiation and business development. The term of the agreement was 12 months with an optional six-month extension. Subject to the successful completion of various financing activities the Company is pursuing, the Company agreed to pay each of them a fee of $100,000. NOTE 10 - SUBSEQUENT EVENTS In October and November 2006, the Company issued 293 shares of its Series E convertible preferred stock to 6 accredited investors in consideration for the exchange of $280,000 principal amount of the Company's 14.25% secured convertible debentures and $12,684 of accrued interest thereon. The preferred stock is convertible into the Company's common stock at 100% of the average of the three lowest closing bid prices of the Company's common stock, as quoted by 24 FITTIPALDI LOGISTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10 - SUBSEQUENT EVENTS, continued Bloomberg, LP, for the ten (10) trading days immediately preceding the date the Company receives a conversion notice from the preferred stockholder. In October, one holder converted $5,000 of the Series E convertible preferred stock into 123,152 shares of common stock. In October and November 2006, the Company issued approximately 70 shares of its Series F convertible preferred stock to 18 accredited investors, all of whom were existing shareholders of our company, in consideration for $222,500 and the exchange of $126,000 principal amount of the Company's short term unsecured promissory notes. The preferred stock is convertible into the Company's common stock at $0.025 per share. On October 11, 2006, the Company entered into an Amendment to the License Agreement dated March 1, 2005 with EF Marketing, LLC and Emerson Fittipaldi. The Amendment includes provisions providing the Company with the exclusive right to use the property licensed from EF Marketing globally rather than solely in the United States and its territories and the right to change its corporate name to include the name Fittipaldi. Also, the term of the License Agreement was changed from 5 years to an ongoing basis. In consideration for these and other amendments, the Company agreed to provide EF Marketing with a percentage of the net operating cash (as defined in the Amendment) generated by the Company's operations, a five-year warrant to purchase 8,000,000 shares of its common stock for $0.025 per share valued using the Black-Scholes Option Pricing Model at $387,200 and the right to designate one member to the Company's board of directors. No such director has been designated as of the filing of this current report. In October 2006, the Company granted options to its employees to purchase an aggregate of 9,900,000 shares of its common stock for $0.025 per share expiring in October 2011. These options were valued using the Black Scholes Option Pricing model at $529,650 and recorded as salary expense. Simultaneously with granting these options, the Company cancelled options to its employees to purchase an aggregate of 6,207,694 shares of its common stock for prices ranging from $0.15 to $0.52 per share expiring from 2006 through 2008. In October 2006, the Company made the second of two interest payments of $100,000 to the holder of $1,750,000 of its 5% Series B secured convertible debentures, which matured in June and September 2006. This payment, specified in an agreement with the holder entered into in September 2006, precludes the holder from exercising its rights of conversion under all debentures held by it through December 31, 2006. In October 2006, the Company issued $100,000 of 10% short-term unsecured promissory notes to two accredited investors with maturity dates in January 2007. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis of financial condition and results of our operations should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report. Forward-looking Information This quarterly report on Form 10-QSB, including the discussion and analysis of our financial condition and results of operations and our disclosures about market risk, contain certain "forward-looking statements." These statements represent our expectations, beliefs, intentions, or strategies concerning future events and by their nature involve risks and uncertainties. Forward-looking statements include, among others, statements about our future performance, the continuation of historical trends, the sufficiency of our sources of capital for future needs, the expected impact of recently issued accounting pronouncements, and the outcome or effects of litigation. Risks that could cause actual results to differ materially from our current expectations include changes in market demand and pricing for our services, the impact of competition, changes in relationships with our customers, our ability to obtain sufficient carrier capacity at competitive rates to transport freight, our ability to retain shippers willing to have us move their freight, the risks associated with litigation and insurance coverage, the impacts of war on the economy, and changing economic conditions. Therefore, actual results may differ materially from our expectations based on these and other risks and uncertainties. Critical Accounting Policies Financial Reporting Release No. 60, which was released by the SEC, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us: - General. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. - Revenue Recognition. The Company recognizes freight transportation revenue when shipments reach their destinations and the receiver acknowledges the receipt of goods by signing a bill of lading. Revenue from access fees is recognized in the month that access to our P2S MobileMarket(TM) is provided to customers. Revenue generated from implementation services, pursuant to software development contracts with customers defining the scope of work, is recognized on the percentage of completion basis for each deliverable provided for in the contract. Revenue from implementation services are non-recurring and are expected to significantly decrease in total and as a percent of total revenue in future periods. OVERVIEW In March 2005 we acquired certain assets and liabilities of Commodity Express Transportation, Inc., a South Carolina company, and GFC, Inc., a South Carolina company. The consolidated financial statements and accompanying notes thereto included elsewhere in this report reflect the assets, liabilities and 26 results of operations of these two acquisitions from their respective dates of acquisition. These two transactions have substantially increased both our revenues and operating expenses. For the fiscal years ended June 30, 2006 and 2005 and the three months ended September 30, 2006 and 2005, virtually all of our revenue was generated by providing freight transportation services. Revenue from freight transportation services includes the total dollar value of services purchased from us by our customers. We provide freight transportation for our shipper customers using our own transportation equipment (asset based), on transportation equipment of owner-operators which are affiliated with our subsidiary CXT as well as numerous unaffiliated independent carriers located throughout the United States (non-asset based). We are a principal in the transaction to transport the freight. By accepting our customer's order, we accept certain responsibilities for transportation of the load from its origin to its destination. In instances when we arrange for transportation of the load by an unaffiliated independent carrier, the carrier's contract is with our company, not our shipper customer, and we are responsible for prompt payment of carrier charges. We are also generally responsible to our shipper customer for any claims for damage to freight while in transit. The price we charge for these freight transportation services depends largely upon the prices charged by our competitors as well as upon several factors, including the distance the freight is being transported, the type of transportation equipment required to move the freight, the distance that equipment is from the origin of the freight and whether or not that equipment is available in our fleet, the value of the freight and the availability of loads near the locations where the freight is to be delivered. To a lesser extent, we have historically generated revenues from access services and implementation services. For the fiscal year ended June 30, 2004, revenue from access services and implementation services represented approximately 14% and approximately 1%, respectively, of our total revenue for that year. For the fiscal year ended June 30, 2005 less than 1% of our total revenue was attributable to revenue from access services and we reported no revenue during that period from implementation services. For the year ended June 30, 2006 revenue from access services and implementation services represented less than 0.1% of total revenue. For the three months ended September 30, 2006, we reported no revenue from access or implementation services Access services revenue represents revenue generated from the unlimited use of the information available through our proprietary application for a fixed monthly fee. Implementation services include design, programming and testing of custom developed interfaces that permit our proprietary application to communicate and share data with a customer's existing computer software. While we market these services to our existing and potential customer base, we cannot predict if we will report significant revenue from either access services or implementation services in any future periods. During fiscal years ended June 30, 2006 and 2005, revenue generated from one customer represented approximately 53% and 40%, respectively, of our freight transportation revenue. For the three months ended September 30, 2006, this same customer accounted for approximately 62% of our revenue. Because our agreement with that customer can be terminated upon a 30 days notice to us, our dependence on revenues from this customer puts us at risk until such time, if ever, that we can diversify our revenue base. In order to lessen the risks to us from this dependence on a single customer, we are marketing our services to potential shipper customer and companies involved in freight security to the maximum extent permitted by our limited sales and marketing budget. Effective June 30, 2006, management decided to cease the operations of Power2Ship Intermodal as it had been unprofitable since its acquisition. Excluding changes in revenue and costs by our other operations, we expect this 27 event to result in freight transportation revenue and expenses for fiscal year 2007 decreasing by approximately $3,200,000, selling, general and administrative expenses being reduced by approximately $60,000 and our interest expense declining by approximately $60,000. Most of our revenue during fiscal year 2007 is expected to be generated by the assets of a freight transportation company we acquired in March 2005 which now comprise the operations of our CXT subsidiary. CXT is a freight transportation services provider serving customers located in the southeastern United States. Its freight transportation services are provided by independent truck owner-operators under contract with CXT or by independent drivers that utilize tractors and trailers provided by CXT, as well as by other trucking companies, including Power2Ship, arranged by CXT's freight transportation brokerage. Another potential source of revenue may be generated for incorporating our secure, wireless, Internet-based system as a component in the security solutions being developed by other companies to counteract the threat of terrorism. Our system is capable of capturing and processing data transmitted wirelessly from other technologies that may be part of any comprehensive security system. Examples of these technologies include radio-frequency identification (RFID) tags fastened to the outside of containers and/or trailers, smart tags affixed to the goods inside shipping containers, and electronic seals applied at the time the container is loaded. Further, our system has the ability to alert a truck's owner or authorities if a vehicle deviates from its designated route. Because our application was designed to provide economic benefit to the transportation industry, we believe that it is uniquely suited to providing a Homeland Security solution without causing onerous expense to either the private or public sector. During the remainder of fiscal year 2007, our greatest challenge will be raising sufficient additional capital to fund our ongoing operations, pay our past due obligations and other obligations as they become due and continue to implement our business model. As of October 31, 2006, we had $1,750,000 of Series B 5% secured convertible debentures and a $175,000 unsecured convertible promissory note that were past due, $1,317,000 of 14.25% secured convertible debentures which becomes due December 31, 2006 and $168,000 of unsecured debt which becomes due by June 30, 2007. In September 2006, we entered into an agreement with the holder of $1,750,000 of our Series B secured convertible debentures that were past due pursuant to which we paid $200,000 of accrued interest in September and October, effectively extending the maturity date of this debt until December 31, 2006. While we have deferred certain employees' compensation and reduced or eliminated certain non-essential personnel and administrative costs, if we are unable to secure additional capital as needed we may be unable to satisfy this secured and unsecured debt which could adversely affect our ability to continue our operations as presently conducted, as well as severely limiting our ability to diversify our revenue sources. If we are unable to satisfy the secured debt when it becomes due, the holders could foreclose on our assets and we would be forced to cease our operations. RESULTS OF OPERATIONS Three Months Ended September 30, 2006 compared to the Three Months Ended September 30, 2005 Revenue Total revenue generated during the three months ended September 30, 2006 decreased by $1,811,570 or 22% as compared with total revenue generated during the three months ended September 30, 2005. The decrease in revenue for 28 the three months ended September 30, 2006 included decreases of: - $1,095,396 or approximately 93% in freight transportation revenue generated by Power2Ship Intermodal, Inc. due to its operations ceasing on June 30, 2006; - $716,506 or approximately a 10% decrease in freight transportation revenue generated by Commodity Express Transportation, Inc. and the Company's Florida-based freight brokerage operation due to a decrease in freight rates from the rates charged during the three months ended September 30, 2005 in the aftermath of Hurricane Katrina as well as a reduction in the number of freight brokerage employees who were not generating sufficient revenue with acceptable gross margins to justify their positions; and - $5,668 or 100% in revenue from access services during the three months ended September 30, 2006 compared with the three months ended September 30, 2005. Management expects revenue to increase in the second and third fiscal quarters of fiscal year 2007 versus the first fiscal quarter due to normal seasonal increases in demand and then to decline in the fourth fiscal quarter as demand softens. Most of our revenue is expected to be generated from providing freight transportation services using our fleet of tractors and trailers and from our freight brokerage operations. In addition, we expect to generate revenue in fiscal year 2007 by providing logistics consulting and implementation services to large shipper customers such as Averitt Express. Another source of revenue projected for the latter half of fiscal year 2007 is providing logistics consulting and implementation services to countries outside the United States such as Brazil where we are expecting to begin operations in our second fiscal quarter. Finally, we are seeking, subject to the availability of sufficient financing, to increase our revenue by acquiring one or more trucking or third party logistics companies. We have not entered into any acquisition agreements as of the date of this quarterly report and cannot predict if and when we may do so. Operating Expenses Total operating expenses incurred during the three months ended September 30, 2006 decreased by $1,864,451 or approximately 21% compared with the three months ended September 30, 2005. The decrease during the three months ended September 30, 2006 primarily was attributed to decreases of: - $1,557,732 or approximately 21% in freight transportation expenses, consisting of direct costs associated with transporting freight either with our own trucks or through non-affiliated trucking companies we hired to move loads for our shipper customers, as compared with the three months ended September 30, 2005. This decrease was attributed to a $1,075,297 or approximately a 93% decrease by Power2Ship Intermodal, Inc. due to its operations ceasing on June 30, 2006 and a $482,435 or approximately an 8% decrease by Commodity Express Transportation, Inc. associated with its lower revenue. This percentage decrease in freight transportation expense was approximately 1% lower than the percentage decrease in revenue reflecting a decrease in the gross margin on freight transportation services to 9.8% for the three months ended September 30, 2006 versus 10.7% for the three months ended September 30, 2005. This decrease in gross margin during the three months ended September 30, 2006 primarily was attributed to the decrease in freight rates from the rates charged 29 during the three months ended September 30, 2005 in the aftermath of Hurricane Katrina. - $306,719 or approximately 19.5% in selling, general and administrative expenses as compared with the three months ended September 30, 2005 primarily was attributed to decreases of: - $255,859 or approximately 26% in salaries, benefits and consulting fees consisting of: - Salaries and benefits which decreased by $131,247 or approximately 20% to $509,985 in the three months ended September 30, 2006 from $641,232 during the three months ended September 30, 2005. This decrease was attributed primarily to a decrease in the number of employees to 16 as of September 30, 2006 from 28 as of September 30, 2005 due to the elimination of certain non-essential administrative and support personnel and certain freight brokers that were not generating sufficient revenue with acceptable gross margins to justify their positions; and - Consulting fees which decreased by $70,862 or approximately 23% in the three months ended September 30, 2006 to $231,944 from $302,806 during the three months ended September 30, 2005. This decrease was a result of a reduction in the number of consultants engaged by the Company as well as to an increase in the average length of the consulting agreements over which the consulting expenses are realized compared to consulting agreements entered into during the three months ended September 30, 2005. Management expects salaries and consulting expenses during the remaining quarters of fiscal year 2007 to be comparable to those incurred during the first quarter. - Other selling, general and administrative expenses decreased by $50,860 or approximately 9% during the three months ended September 30, 2006 as compared with the three months ended September 30, 2005. This decrease consisted of an: - $89,758 decrease by the Company's Florida-based operation primarily attributed to a: - $28,552 reduction in accounting expenses which, in 2005, included the one-time audit upon the acquisition of CXT; - $14,625 decrease in travel, meals and entertainment expenses and a $9,339 decrease in advertising, convention and trade show expenses as a result of management's decision to stop advertising our products and services to shippers and carriers in trade publications, transportation industry websites and other media and not to attend conventions and trade shows; - $16,990 decrease in Web hosting expenses as a result of our hosting the system in-house; 30 - $18,842 decrease in amortization of our intellectual property as the amortization period ended in July and August 2006; - $8,047 decrease in bank service charges primarily as a result of reducing the transaction fees we incurred to electronically pay our carriers by paying these carriers directly and - $14,956 increase in legal fees. - $30,207 decrease by Power2Ship Intermodal, Inc. due to it ceasing operations on June 30, 2006; that partially was offset by an increase of - $69,105 by Commodity Express Transportation, Inc. primarily attributed to a: - $17,749 increase in taxes and licenses for tractors and trailers; - $14,115 increase in administrative expenses primarily due to hiring of one additional administrative employee; and a - $21,290 increase in South Carolina income tax expense Management expects other selling, general and administrative expenses during the remaining quarters of fiscal year 2007 to be comparable to those incurred during the first quarter. Other Income (Expenses) Total other expenses increased by $400,263 or approximately 86% during the three months ended September 30, 2006 as compared with the three months ended September 30, 2005. This increase primarily resulted from an increase in interest expense, net of interest income, of $301,078 or approximately 64% and a loss of $94,864 on forgiveness of debt related to the severance and settlement agreement entered into with the Company's former Chief Executive Officer. The increase in interest expense primarily was associated with the issuance and re-pricing of warrants to the purchasers of $940,000 principal amount of our Series D convertible debentures in the fourth quarter of fiscal year 2006 and to the conversion of $475,000 of these debentures in the first quarter of fiscal year 2007 resulting in the acceleration of interest expense associated with these debentures. Management expects other expenses, primarily interest expense, during the second quarter of fiscal 2007 to be comparable to the interest expense incurred during the first quarter of fiscal 2006. Interest expense during the second half of fiscal 2007 will depend on how we handle our outstanding debt. If this debt is retired or converted to equity, then interest expense would be expected to decline substantially. However, if outstanding debt is re-structured or replaced with other debt, then interest expense would be expected to increase as a result of costs incurred in such lending arrangements that may include higher interest rates, penalties and other transaction fees. We currently are offering to exchange our $1,317,000 principal amount of our 14.25% secured convertible debentures for our Series E convertible preferred stock. Also, we are negotiating with the holder of $175,000 principal amount of our 8% unsecured convertible promissory note to exchange the holder's debenture for our equity securities. Finally, we are seeking to repay $1,750,000 of our 5% secured convertible debentures with the proceeds from the sale of our equity securities. 31 However, we currently have no commitments for converting any of these debentures and there can be no assurance that acceptable financing to repay our debentures can be obtained on suitable terms, if at all. LIQUIDITY AND CAPITAL RESOURCES We have experienced losses and negative cash flows from operations since our inception. As of September 30, 2006, we had an accumulated deficit of $26,242,464, a stockholders' deficit of $2,437,813, and our independent auditors' report on our financial statements for fiscal year 2006 contained an explanatory paragraph regarding our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our liabilities when they become due and to increase our revenues and generate profitable operations in the future. We plan to continue to provide for our capital requirements through the sale of equity or debt securities; however, we have no firm commitments from any third party to provide this financing and we cannot assure you we will be successful in raising working capital as needed. There are no assurances that we will have sufficient funds to execute our business plan, pay our obligations as they become due or generate positive operating results. If we are unable to raise additional capital, we may be required to reduce or eliminate certain of our operations. At September 30, 2006, we had a working capital deficit of $4,220,087 as compared with a working capital deficit of $4,849,787 at June 30, 2006. This $629,700 reduction of our working capital deficit during these three months was attributed to an $851,752 decrease in current assets which was more than offset by a $1,481,452 decrease in current liabilities. The decrease in current assets consisted of decreases in accounts receivable of $801,530 primarily due to our decrease in revenue and in prepaid insurance of $77,697 partially offset by an increase in cash of $27,475. The decrease in current liabilities consisted of decreases in the current portion of convertible notes payable of $74,346, in convertible note payable to related party of $115,00, in the outstanding balance on our line of credit of $51,234, in accounts payable and accrued expenses of $1,097,980 primarily due to our decrease in revenue and the $100,000 interest payment to the holder of our Series B 5% convertible debentures, and in accrued salaries of $178,892 primarily associated with the forgiveness by Richard Hersh pursuant to his Separation and Severance Agreement, partially offset by an increase in short term notes payable of $36,000, During the three months ended September 30, 2006, our cash balance increased by $27,475. This increase was the result of $573,654 used in operating activities and $83,637 used in investing activities that was more than offset by $684,766 provided by financing activities. This compares with an increase in our cash balance of $91,816 during the three months ended September 30, 2005 as a result of $716,360 used in operating activities and $124,495 used in investing activities that was more than offset by $932,671 provided by financing activities. During the three months ended September 30, 2006, we used $573,654 in operating activities which was made up of our net loss of $1,511,093 and an increase in cash used for operating assets and liabilities of $11,846 that partially was offset by non-cash expenses including depreciation, amortization and a loss on forgiveness of debt of $949,285. This compared with $716,360 used in operating activities during the three months ended September 30, 2005 which consisted of our net loss of $1,157,711 and an increase in cash used for operating assets and liabilities of $98,823 that partially was offset by non-cash expenses including depreciation, amortization and a change in the allowance for doubtful accounts of $406,893 and issuances of our common stock, options and warrants as payment for services, interest and compensation of $133,281. 32 The $83,637 used in investing activities during the three months ended September 30, 2006 consisted of $69,446 of software development costs and $14,191 for purchases of property and equipment. This compared with $124,495 used in investing activities during the three months ended September 30, 2005 which consisted of $93,328 of costs of software development and $31,167 for purchases of property and equipment. The software developments costs primarily are the salaries of our information technology employees who are continually enhancing and making modifications to our internal use software. These costs are expected to remain relatively constant for the remainder of fiscal year 2007. During the three months ended September 30, 2006, we generated net cash from financing activities of $684,766 which consisted of net proceeds of $660,000 from the issuance of 26.4 shares of our Series D convertible preferred stock and $76,000 from the issuance of unsecured short term promissory notes less $51,234 repaid on our line of credit. This compared with net cash provided by financing activities of $932,671 during the three months ended September 30, 2005 which consisted of net proceeds of $807,500 from the issuance of approximately 27 units of our common stock and warrants and $125,171 borrowed from our revolving line of credit. We have a $3,000,000 revolving line of credit secured by our accounts receivable with BB&T Corporation. This facility had a balance on September 30, 2006 of $861,053 and is in effect until February 2007. As of September 30, 2006, the Company was past due on the repayment of principal and interest with respect to $1,750,000 principal amount of Series B 5% secured convertible debentures and $175,000 principal amount of 8% unsecured convertible promissory note. In September 2006, the Company reached agreement with the sole holder of the Series B secured convertible debentures. The investor agreed not to exercise its rights of conversion under the aforementioned debenture until January 1, 2007, for which the Company paid $100,000 in accrued interest in September and an additional $100,000 in accrued interest in October. We intend to repay these debentures with the proceeds from the sale of our equity securities. However, we currently have no commitments for such financing and there can be no assurance that acceptable financing to repay our debentures can be obtained on suitable terms, if at all. We are negotiating with the sole holder of $175,000 principal amount of an 8% unsecured convertible promissory note that is past due to convert or exchange some or all of this note for our equity securities or extend its maturity date. However, we currently have no commitment for converting, exchanging or extending the maturity date of this note and there can be no assurance that, in the event the holder does not convert, exchange or extend the maturity date of the note, that acceptable financing to repay this note can be obtained on suitable terms, if at all. We estimate that our cash on hand at September 30, 2006 and our receipt since then of $222,500 in net proceeds from sales of shares of our Series F convertible preferred stock, $100,000 from issuances of short-term unsecured promissory notes, the proceeds expected from verbal commitments made by accredited investors to purchase shares of our Series F convertible preferred stock and additional borrowings from our revolving credit facility, should fund our operating activities for approximately ninety days from the date of filing this report. Thereafter, we will need additional working capital to fund our operations or may be forced to curtail some or all of our operations. Management expects to raise approximately $2,000,000 through the sale of our equity securities by December 31, 2006. However, we currently have no written commitments to purchase these shares and there can be no assurance that such commitments will be obtained and, if not, if alternative financing can be obtained on a timely basis on suitable terms, if at all. Our future capital requirements depend primarily on the rate at which we can decrease our use of cash to fund operations. Cash used for operations will be affected by numerous known and unknown risks and uncertainties 33 including, but not limited to, our ability to successfully market our products and services, the degree to which competitive products and services are introduced to the market, and our ability to attract key personnel as we grow. As long as our cash flow from operations remains insufficient to completely fund operations, we will continue depleting our financial resources and seeking additional capital through equity and/or debt financing. If we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of Power2Ship held by existing stockholders will be reduced and those stockholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our common stock. There can be no assurance that acceptable financing to fund our ongoing operations and for future acquisitions or for the integration and expansion of existing operations can be obtained on suitable terms, if at all. Our ability to continue our existing operations and to continue to implement our growth and acquisition strategy could suffer if we are unable to raise the additional funds on acceptable terms which will have the effect of adversely affecting our ongoing operations and limiting our ability to increase our revenues or possibly attain profitable operations in the future. We are constantly evaluating our cash needs and current burn rate, and we have a strategy whereby certain non-essential personnel and administrative costs will be reduced or eliminated so that we may continue to meet operating obligations until such time as we can raise additional working capital. If we are unable, however, to secure the necessary additional working capital as needed, we may be forced to curtail some or all of our operations. ITEM 3. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, being September 30, 2006, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's Chief Executive Officer. Based upon that evaluation, our company's Chief Executive Officer concluded that our company's disclosure controls and procedures are effective. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer as appropriate, to allow timely decisions regarding required disclosure. 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 17, 2006, Michael J. Darden, former President and Director of the Company, filed a lawsuit in the Circuit Court in Broward County, Florida (Case No. 0616408) naming as defendant Freight Rate, Inc. d/b/a Power2Ship, Inc. alleging breach of his employment agreement. The lawsuit was served on October 23, 2006. The complaint states that Mr. Darden was damaged pursuant to the termination of his employment agreement in the amount of $306,427.64. The Company terminated Mr. Darden's employment agreement for cause and believes it has substantial defenses and counterclaims against Mr. Darden, including wrongful appropriation of funds of the Company. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. In October and November 2006, we sold an aggregate of approximately 293 shares of Series E convertible preferred stock to six accredited investors in a private placement exempt from registration under the Securities Act in reliance on Section 4(2) of that act. We paid no sales commissions for these sales. We exchanged $280,000 principal amount of our 14.25% secured convertible debentures and $12,684 in accrued interest thereon previously issued to these investors. No general solicitation or advertising was used in connection with this offering, and the certificates evidencing the securities that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom. The purchasers represented that they were acquiring the securities for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. In October and November 2006, we sold an aggregate of approximately 70 shares of Series F convertible preferred stock to 18 accredited investors in a private placement exempt from registration under the Securities Act in reliance on Section 4(2) of that act. We paid no sales commissions for these sales. We received net proceeds of $222,500 and exchanged $126,000 principal amount of our short term promissory notes issued to these investors. No general solicitation or advertising was used in connection with this offering, and the certificates evidencing the securities that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom. The purchasers represented that they were acquiring the securities for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. In July and August 2006, we issued an aggregate of 10,558,185 shares of our common stock to two accredited investors upon conversion of an aggregate of $225,000 Series D 8% unsecured convertible debentures, and accrued interest thereon, held by those debenture holders. The issuances were exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act. In July and August 2006, we issued an aggregate of 4,166,245 shares of our common stock to one accredited investor upon conversions of an aggregate of $150,000 principal amount of our Series B 5% secured convertible debentures. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act. In July and September 2006, we issued an aggregate of 80,000 shares of our common stock to two accredited investors upon conversion of an aggregate of 4,000 shares of our Series B convertible preferred stock held by those 35 stockholders. The issuances were exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act. 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 (a) Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer 31.2 Certification of Chief Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350 36 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2006 FITTIPALDI LOGISTICS, INC. By: /s/ David S. Brooks ------------------- David S. Brooks Chief Executive Officer, principal executive officer and principal financial and accounting officer 37