10QSB 1 pwriform10qsb12312005.htm PWRI FORM10QSB 12-31-2005

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 DECEMBER 31, 2005
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM______ TO _____

Commission File Number 0-25753

___________________

POWER2SHIP, 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 o

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

Yes o 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 February 13, 2006, the number of outstanding shares of the issuer’s common stock was 80,070,654.

Transitional Small Business Disclosure Format (check one): Yes ¨ No x

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TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Consolidated Balance Sheet, December 31, 2005		3

Consolidated Statements of Operations, Three and Six Months Ended
December 31, 2005 and 2004		4

Consolidated Statements of Cash Flows, Six Months Ended
December 31, 2005 and 2004		5

Notes to Consolidated Financial Statements for the Six Months Ended
December 31, 2005		6

Item 2. Management's Discussion and Analysis or Plan of Operation		17

Item 3. Controls and Procedures		23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 3. Defaults Upon Senior Securities		24

Item 4. Submission of Matters to a Vote of Security Holders		24

Item 5. Other Information		24

Item 6. Exhibits		24

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

POWER2SHIP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents	$	1,196,847
Accounts receivable, net of allowance of $30,920		1,426,659
Prepaid expenses		92,034
Total current assets		2,715,540

Property and equipment		607,811
Less: accumulated depreciation		(190,303	)
Net property and equipment		417,508

Software development costs, net of accumulated amortization
of $126,293		884,744
Deferred financing costs		185,098
Intangible assets, net of accumulated amortization of $183,513		459,773
Restricted cash for interest on debentures		2,308
Other assets		547,016

Total assets	$	5,211,987

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Notes payable - short term	$	920,000
Current portion of convertible notes payable less discount of $588,963		3,183,037
Line of credit		288,828
Accounts payable		1,548,209
Accrued expenses		568,533
Accrued salaries		231,633
Total current liabilities		6,740,240

Long term debt:
Long term notes payable		91,667
Convertible note payable to related party		115,000
Total liabilities		6,946,907

Stockholders' deficit :
Preferred stock, $.01 par value, 1,000,000 shares authorized:
Series B convertible preferred stock, $.01 par value, 200,000
shares authorized; 158,200 shares issued and outstanding		1,582
Series C convertible preferred stock, $.01 par value, 20,000
shares authorized; 832 shares issued and outstanding		8
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; 75,088,471 issued and outstanding		75,088
Deferred compensation		(539,671	)
Additional paid-in capital		19,985,757
Accumulated deficit		(21,258,554	)

Total stockholders' deficit		(1,734,920	)

Total liabilities and stockholders' deficit	$	5,211,987

See accompanying notes

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POWER2SHIP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three months ended December 31,						Six months ended December 31,
	2005			2004			2005			2004

Revenue:
Freight transportation	$	8,001,444		$	736,917		$	16,201,042		$	1,467,643
Access services		-			180			-			180
Implementation services		-			-			5,668			-

Total revenue		8,001,444			737,097			16,206,710			1,467,823

Operating expenses:
Freight transportation		7,112,211			658,282			14,432,467			1,310,054
Selling, general and administrative:
Salaries, benefits and consulting fees		999,201			519,235			2,000,029			1,134,049
Other selling, general and administrative		573,557			408,611			1,148,190			829,075

Total operating expenses		8,684,969			1,586,128			17,580,686			3,273,178

Loss from operations		(683,525	)		(849,031	)		(1,373,976	)		(1,805,355	)

Other income (expense):
Gain on asset disposal		-			-			1,415			-
Interest expense, net		(361,225	)		(222,545	)		(832,806	)		(419,668	)
Other income		-			571			2,906			571

Total other expense		(361,225	)		(221,974	)		(828,485	)		(419,097	)

Net loss	$	(1,044,750	)	$	(1,071,005	)		(2,202,461	)	$	(2,224,452	)


Loss per share-basic and diluted	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.06	)

Weighted average shares outstanding
- basic and diluted		74,666,383			39,776,956			71,996,823			39,129,646

See accompanying notes

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POWER2SHIP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Six Months Ended December 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(2,202,461	)	$	(2,224,452	)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation		53,724			24,686
Amortization of software development costs		27,046			27,046
Amortization of intangible asset		64,876			47,085
Amortization of deferred compensation		189,149			13,875
Amortization of deferred financing costs		301,429			193,284
Amortization of discount on notes payable		181,595			45,474
Increase in allowance for doubtful accounts		62			-
Issuance of stock options and warrants
for services and conversion		54,851			61,286
Issuance of stock for services, interest and litigation settlement		106,060			129,299
Changes in operating assets and liabilities:
Increase in receivables		(305,294	)		(117,338	)
Decrease in prepaid expenses		7,561			43,400
Decrease (increase) in other assets		(178,018	)		92,725
Increase (decrease) in accounts payable and accrued expenses		547,783			(11,529	)

Net cash used in operating activities		(1,151,637	)		(1,675,159	)

Cash flows from investing activities:
Disbursement of cash for note receivable		-			(100,000	)
Purchases of property and equipment		(77,303	)		(9,812	)
Capitalized costs of software development		(186,634	)		(179,284	)

Net cash used in investing activities		(263,937	)		(289,096	)

Cash flows from financing activities:
Proceeds from convertible promissory notes net of costs of $0
and $100,000, respectively		320,000			900,000
Proceeds from promissory notes		400,000			110,000
Proceeds from notes receiveable		50,000			-
Repayments of promissory notes		-			(30,000	)
Proceeds from line of credit net of costs of $0 and $24,305, respectively		172,168			166,654
Proceeds from sale of common stock and warrants net of costs of $0
and $0 respectively		832,500			-

Net cash provided by financing activities		1,774,668			1,146,654

Net increase (decrease) in cash and cash equivalents		359,094			(817,601	)

Cash and cash equivalents, beginning of period		837,753			832,130

Cash and cash equivalents, end of period	$	1,196,847		$	14,529

See accompanying notes

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POWER2SHIP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - DESCRIPTION OF BUSINESS

Organization

Power2Ship, Inc. (the "Company"), formerly Jaguar Investments, 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 an information technology company that has developed the P2S MobileMarket™, an Internet-based, patent-pending software application that captures, processes and displays transportation information, forecasts the availability of transportation assets, and matches that future capacity with freight that needs to be transported throughout the United States. In addition, the freight and transportation assets can be tracked while in transit if their location is provided to the P2S MobileMarket™ either by i) electronic transmissions communicated by wireless devices which may be installed in the transportation assets or ii) by manual input through the P2S MobileMarket™ Website. The Company’s management believes that this matching and tracking capability and providing other logistics information through the P2S MobileMarket™ enables our member shippers and carriers to make better informed transportation decisions and improves the efficiency of their supply chain.

Since March 2003, the Company’s primary source of revenue has been providing transportation services for shippers’ inbound and outbound freight both as a freight broker and, since March 2005, by utilizing its own transportation equipment. In order to be a principal in these types of transportation transactions, the Company applied for, and obtained, licenses from the United States Department of Transportation, Federal Motor Carrier Safety Administration, both as a broker arranging for transportation of freight by motor vehicle and as a carrier when operating its own transportation assets. Also in fiscal year 2003, the Company began providing some of its large shipper customers with software development and customization services to interface their existing software with the P2S MobileMarket™. Currently, Power2Ship offers a wide range of other logistics services that reduce or eliminate supply chain inefficiencies to its current and prospective shipper customers.

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. CXT operates a fleet of approximately 85 tractors, including 45 that it owns and 40 from owner-operators with whom it has independent contractor’s lease agreements, and 285 trailers. Also, CXT rents a 137,000 square foot distribution facility in South Carolina to provide warehousing services for 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. See Note 13 - “Acquisitions” for further details related to this transaction.

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. P2SI is a non-asset based drayage company that arranges for the transportation of freight containers arriving at various ports and rail terminals. It has contracts with independent transportation agents in Port Newark, New Jersey and Charlotte, North Carolina who have relationships with various shipper customers. P2SI matches these shippers’ requirements with the transportation assets of approximately 20 owner-operators with whom it has independent contractor’s lease agreements.

The accompanying unaudited financial statements for the period ended December 31, 2005 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 and six month periods ended December 31, 2005 are not necessarily indicative of the results to be expected for the fiscal year ended June 30, 2006.

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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 period'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 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™ 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.

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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.

Loss Per Common Share

Basic loss per common share is based upon the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per common share include the effects of potential dilution that would occur if securities (such as warrants) or other contracts (such as options) to issue common stock were exercised or converted into common stock. Such instruments that are convertible into common stock are excluded from the computation in periods in which they have an anti-dilutive effect. Potential common shares included in the computation are not presented in the consolidated financial statements, as their effect would be anti-dilutive. The Company had outstanding options, warrants and shares issuable upon conversion of outstanding convertible debt and preferred stock totaling 99,775,003 and 39,744,202 as of December 31, 2005 and 2004, respectively, which it did not use in computing its diluted loss per share because the Company had net losses for the periods presented in its financial statements and the inclusion of these securities would have been anti-dilutive.

The following table presents pro forma net loss and per share amounts as if the fair value method had been applied to employee stock options and warrants granted:

	Six Months Ended December 31,
	2005			2004

Loss available to common shareholders, as reported	$	(2,202,461	)	$	(2,224,452	)

Add: Stock compensation expense to employees
included in reported net loss, net of related tax effects		-			-

Deduct: Total stock compensation expense to employees
expense determined under fair value based
method for all awards, net of related tax effects		(25,908	)		(41,513	)
		_________			_________
Pro forma loss available to common shareholders		(2,228,369	)		(2,265,965	)
		========			========
Loss per share:
Basic and diluted - as reported	$	(0.03	)	$	(0.06	)
		=====			=====
Basic and diluted - pro forma	$	(0.03	)	$	(0.06	)
		====			====

Research and Development

Research and development costs are expensed as incurred. No research and development expenses were incurred for the quarters ended December 31, 2005 and 2004.

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 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:

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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 December 31, 2005 and 2004, the net book value of capitalized software was $884,744 and $569,702, respectively. Amortization expense for the six months ended December 31, 2005 and 2004 was $27,046 and $27,046, 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.

Concentrations of Credit Risk

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 December 31, 2005, the Company's cash balances exceeded the insured limits by approximately $1 million. 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 December 31, 2005. The Company maintains reserves for potential credit losses and such losses historically have been within management's expectations.

Advertising and marketing

Advertising and marketing is expensed as incurred. Advertising and marketing expenses, including convention and trade show expenses, for the six months ended December 31, 2005 and 2004 were $50,033 and $134,743, respectively.

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Recent accounting pronouncements

In December 2004, the FASB issued SFAS 123R "Share-Based Payment". This Statement requires that the cost resulting from all share-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions. The Statement replaces SFAS 123 "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees". The provisions of 123R will be effective for the Company beginning with the first period after December 15, 2005. The Company is currently evaluating the impact this new Standard will have on its financial position, results of operations or cash flows.

NOTE 3 - CONCENTRATIONS

During the quarter ended December 31, 2005, one customer accounted for 53% of the Company’s revenue. No other customer accounted for more than 10% of revenue and no customers accounted for more than 10% of 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 $77,374 of the purchase price for certain assets of Commodity Express Transportation, Inc. and $334,600 of the purchase price for certain assets of GFC, Inc. to intangible assets attributable to the customer lists of these businesses. These intangible assets are being amortized over their estimated useful lives of 5 years. The Company recorded amortization expense for the six months ended December 31, 2005 and 2004 of $21,385 and $0, respectively. At December 31, 2005, future amortization expense for these intangible assets is expected to be as follows:

			2006		$53,422
			2007		82,395
			2008		82,395
			2009		82,395
			2010		80,243
					$380,850
					=======

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 is to be 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 is being 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 the six months ended December 31, 2005 and 2004 of $56,502 and $47,085, respectively.

NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE

In December 2005, the Company issued a $400,000 unsecured debenture to one accredited investor. The maturity date of the debenture is May 15, 2006 on which date the principal and a $40,000 transaction fee are 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-

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Scholes option-pricing model 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.

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 promissory note. 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 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. As of December 31, 2005, the Company has recorded $100,000 of this obligation as current, and $91,667 as long term notes payable.

In January 2005, the Company issued a 10% unsecured, three-month, promissory note for $100,000 to one accredited investor. The Company obtained a waiver from the investor as to the repayment of $100,000 of principal and accrued interest on its maturity date, as amended, and their consent to extend the maturity date of the note until December 31, 2005. In November 2005, the investor forgave the note in exchange for $100,000 of a 10% unsecured convertible debenture and a three-year warrant to purchase 1,333,333 shares of common stock for $0.15 per share.

The maturity date of the debenture is the earlier to occur of the one-year anniversary of the debenture or the date the Company receives at least $5,000,000 in aggregate proceeds from subsequent financings. The conversion price per share is the greater of $0.15 or 50% of the average closing price of the common stock for the ten trading days immediately preceding the conversion date.

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 a total of $2,000,000 of its Series B 5% secured convertible debentures to one accredited investor. The maturity dates of these debentures are their respective two-year anniversaries. 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

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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. The Company may be in default under certain covenants contained in the debenture and agreements related thereto. 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 investor 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 investor. Any default would permit the investor, in its sole discretion, to accelerate full repayment of the $2,000,000 in principal and accrued interest thereon, claim an indeterminate amount of penalties and perhaps 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 the event of a default.

Also in June 2004, the Company issued an aggregate of 816,260 shares of its common stock valued at $310,179 to the same investor that purchased the Series B unsecured convertible debentures and a placement agent 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. During the quarter ended September 30, 2005, one investor converted $100,000 of their debentures into common stock decreasing the outstanding balance to $1,597,000. 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 would 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 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.

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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.

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. 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.

NOTE 7 - STOCKHOLDERS' DEFICIT

Preferred Stock

During the quarter ended December 31, 2005, two shareholders converted 3,000 shares of Series B preferred stock into 60,000 shares of common stock.

Common Stock

During the quarter ended December 31, 2005, the Company issued an aggregate of 577,000 shares of its common stock. This total issuance consisted of 250,000 shares sold to one investor pursuant to the Company’s unit offering for which it received $25,000 of net proceeds, 267,000 shares issued to three consultants valued at $32,360 pursuant to consulting agreements and 60,000 shares issued to two shareholders upon conversion of their Series B preferred stock. For the six months ended December 31, 2005, the Company recorded $585,225 in deferred compensation for the shares issued as compensation pursuant to agreements and amortized $189,149 as consulting expenses.

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.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for stock options and warrants is measured as the excess, if any, of the estimated fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.

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:

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Weighted average:	2006	2005
Dividend yield	None	None
Expected volatility factor	172 %	94 %
Approximate risk free interest rates	6.88%	4.75%
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.

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, 2005	$	0.37		17,707,517		$	0.25 - $1.01
Granted	$	0.15		54,000		$	0.15
Expired	$	0.51		(1,246,923	)	$	0.38 - $0.50
Cancelled		--		--			--
Outstanding options at December 31, 2005	$	0.36		16,514,594		$	0.15 - $1.01

Exercisable options at December 31, 2005	$	0.36		16,377,094		$	0.15 - $1.01

The following table summarizes information concerning stock options outstanding at December 31, 2005.

			Weighted		Weighted
	Number of		Average		Average
	Options		Remaining		Exercise
Range of Exercise Price	Outstanding		Life in Years		Price
$0.15		54,000		1.98	$	0.15
$ 0.25 - $0.40		15,935,594		1.53	$	0.34
$ 0.50 - $0.52		225,000		0.72	$	0.55
$.1.01		300,000		1.79	$	1.01
		16,514,594

The following table summarizes information concerning stock options exercisable at December 31, 2005.

			Weighted
			Average
	Number of		Exercise
Range of Exercise Price	Options		Price
$ 0.15		54,000	$	0.15
$ 0.25 - $0.40		15,798,094	$	0.34
$ 0.50 - $0.52		225,000	$	0.50
$ 1.01		300,000	$	1.01
		16,377,094

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, 2005	$	0.28		30,483,206		$	0.15 - $2.00
Granted	$	0.14		14,383,333		$	0.07 - $0.15
Cancelled	$	0.50		(1,250,000	)	$	0.50
Expired	$	0.75		(145,658	)	$	0.75

Outstanding warrants at December 31, 2005	$	0.23		43,470,881		$	0.07 - $2.00

Exercisable warrants at December 31, 2005	$	0.22		42,450,881		$	0.07 - $2.00

The following table summarizes information concerning warrants outstanding at December 31, 2005:

			Weighted		Weighted
			Average		Average
	Number of		Remaining		Exercise
Range of Exercise Price	Warrants		Life in Years		Price
$ 0.07 - $0.15		35,265,668		2.46	$	0.15
$ 0.20 - $0.74		5,908,314		1.89	$	0.42
$ 0.75 - $2.00		2,296,899		0.90	$	0.99

		43,470,881

The following table summarizes information concerning warrants exercisable at December 31, 2005:

			Weighted
			Average
	Number of		Exercise
Range of Exercise Price	Warrants		Price

$ 0.07 - 0.15		35,265,668	$	0.15
$ 0.20 - $0.74		4,888,314	$	0.40
$ 0.75 - $2.00		2,296,899	$	0.99

		42,450,881

NOTE 8 - ACQUISITIONS

In March 2005 we purchased certain assets, including customer lists, back-shop equipment, office equipment, telecommunications equipment, certain contracts, five vehicle/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 4 “Intangible Assets” for further details related to the allocation of the purchase price. In addition, we 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 agreed to replace additional letters of credit totaling approximately $20,000 on

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or before June 10, 2005. We 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, we entered into a(n):

- equipment lease agreement whereby we agreed to lease from the seller certain trailers for terms ranging from twelve to sixty months;

- commercial lease pursuant to which we 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 we will pay 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 we agreed to pay an annual base salary of $150,000 and a quarterly bonus based on the gross revenue that Mr. Stokes is responsible for generating from additional facilities operated by its current largest customer outside of South Carolina;

- escrow agreement pursuant to which we have deposited all the shares of Commodity Express Transportation into an escrow account until March 21, 2007 during which period we retain 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 drops below certain levels or if we are delinquent in our payments under the equipment or commercial lease agreements, consulting agreement or agreement with TPS Logistics, Inc. described above, the seller would have the right to assume control of Commodity Express Transportation until such default has been cured; and

- fee assumption agreement pursuant to which we agreed to assume the seller’s liability to pay the business broker involved with this transaction $100,000 which we paid at the closing with the issuance of 370,370 shares of our common stock.

In March 2005, we 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 will be paid in twenty-four equal monthly payments of $8,333 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.

Also, in conjunction with this transaction, we entered into a five year consulting agreement with automatic one-year extensions unless terminated prior thereto, with Michael Allora, the former president of GFC. 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.

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The following Pro Forma Combined Financial Statement of Power2Ship, Inc., Commodity Express Transportation, Inc. and GFC, Inc. gives effect to the acquisitions of certain assets of Commodity Express Transportation, Inc. and GFC, Inc. under the purchase method of accounting prescribed by Accounting Principles Board Opinion No. 16, Business Combinations, as if they had occurred on July 1, 2004. This pro forma statement is presented for illustrative purposes only. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable.

Pro Forma Combined Statement of Operations for the Six Months Ended December 31, 2004

				Commodity						Pro Forma
	Power2Ship			Express			GFC			Adjustments		Pro Forma
Revenue:
Freight transportation	$	1,467,643		$	7,789,673		$	3,013,396		$	-	$	12,270,712
Implementation services		180			-			-			-		180
-								-			-		-
Total revenue		1,467,823			7,789,673			3,013,396			-		12,270,892

Operating expenses:
Freight transportation		1,310,054			6,864,111			2,484,357			-		10,658,522
Selling, general and administrative:
Salaries, benefits and consulting fees		1,134,049			543,372			180,956			-		1,858,377
Other selling, general and administrative		829,075			318,961			309,711			-		1,457,747

Total operating expenses		3,273,178			7,726,444			2,975,024			-		13,974,646

Loss from operations		(1,805,355	)		63,229			38,372			-		(1,703,754	)

Other income (expense):
Forgiveness of debt		-			-			-			-		-
Interest expense, net		(419,668	)		(115,021	)		(57,034	)		-		(591,723	)
Other income		571			-			-			-		571

Total other expense		(419,097	)		(115,021	)		(57,034	)		-		(591,152	)

Net loss	$	(2,224,452	)	$	(51,792	)	$	(18,662	)	$	-	$	(2,294,906	)

NOTE 9 - SUBSEQUENT EVENTS

Subsequent to December 31, 2005, the Company:

-	sold 17.1 units consisting of 4,275,000 shares of common stock and three-year warrants to purchase a total of 4,275,000 shares of common stock exercisable at $0.10 per share and received net proceeds of $427,500 from 18 investors;

-	issued 512,640 shares of common stock and three-year warrants to purchase 1,012,640 shares of common stock exercisable at $0.15 per share to three consultants to provide various management consulting services; and

-	issued 169,544 shares of common stock to one holder of $25,000 principal amount of the Company’s Series C convertible debentures.

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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. For accounting purposes, our merger with Freight Rate, Inc. was treated as a recapitalization of Freight Rate, Inc. and accounted for as a reverse acquisition. Therefore, the financial statements and accompanying notes thereto included elsewhere in this report reflect the assets, liabilities and operations of Freight Rate, Inc. as if it had been the reporting entity since inception. In February 2004 we changed our fiscal year from May 31 to June 30 in order to align our quarterly reporting obligations with calendar quarters.

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™ 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.

- Stock Based Compensation. The Company uses SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provision of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 and SFAS No. 148.

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OVERVIEW

We operate as an application service provider that delivers supply chain, tracking and logistics information to the freight industry. We provide logistics information and services to shippers that need to have truckloads of goods transported to or from their facilities. In certain instances, we provide consulting services to enable our shipper customers to integrate their systems with our logistics information system. We also provide logistics information and services to trucking companies (carriers) that operate fleets of trucks which enable these companies to manage the utilization of their transportation assets and personnel. Our mission is to provide our shipper and carrier members with easily accessible and useful information that allows them to be more profitable by improving the utilization of transportation assets and optimizing the efficiency of the supply chain.

We began providing our freight transportation and implementation services in October 2002 and we began providing logistics information access services in March 2003. A key component of our business model is building our customer base so that we have a sufficient number of shippers and carriers utilizing our Web-based P2S MobileMarket™ system so that when a shipper customer wants to move a load of freight we can offer one or more carriers with available trucks and trailers that meet their criteria. We have been able to increase the number of shipper customers from whom we generated revenue from eight at December 31, 2004 to 27 at December 31, 2005. We have entered into agreements to provide transportation services with some of our shipper customers including International Paper, Nestle Waters, Tyco International, Ltd., Tofutti Brands, Luckey Logistics, Gold Coast Freightways, Associated Grocers, Caruso Foods, Compass Roadmaster, Paper Pak and Valmont Industries. Further, in July 2005, we disclosed the start of a pilot program with International Paper to enable one of their core carriers to become e-commerce compliant by installing the P2S MobileMarket system in their trucks. We can provide no assurance, however, as to the amount of revenue, if any, we will generate from such customers, since these agreements do not commit them to using us for any specific volume of transportation services.

We are presently able to identify available capacity among our carrier customers to move only a very small percentage of these loads. Given the tens of thousand of transportation routes in the U.S., in order to have the P2S MobileMarket™ be successful we must substantially increase the number of our carrier customers in order to capture a greater percentage of our shipper customer’s inbound and outbound transportation business. We spent $50,033 in the six months ended December 31, 2005 compared to $134,743 in the six months ended December 31, 2004 in advertising and marketing our services to potential carriers and shippers utilizing trade publications, transportation industry websites and direct mail as well as company participation in industry trade shows and trade organizations. We intend to curtail most of our marketing expenditures for the remainder of fiscal year 2006 unless we raise sufficient capital to increase our marketing efforts for which no assurances can be given.

As of December 31, 2005, approximately 2,095 carriers had registered on our website to become members. Of the 2,095 carriers that are currently registered to participate in our MobileMarket™, approximately 1,907 have entered into carrier agreements with us. We have used approximately 496 of these carriers to transport freight for our shipper customers.

Our business model also includes the pursuit of mergers, acquisitions and joint ventures of strategic, trucking companies and other transportation-related providers. During the quarter ended March 31, 2005, we consummated the acquisitions of Commodity Express Transportation, Inc. and GFC, Inc. as described in Note 8 to the financial statements in this Form 10-QSB. These transactions resulted in our gaining additional trucking capacity for our existing shipper customers without incurring any additional marketing expense and obtaining new shipper customers. In addition, the acquisition of Commodity Express Transportation, Inc., which had the federal operating authorities required to operate as a trucking company, enables us to recruit truck owner-operators to increase our trucking capacity. Our ability to pursue additional transactions is subject to the availability of sufficient capital as may be necessary. While we have identified potential targets for additional mergers, acquisitions or joint ventures, we have not signed any definitive agreements with any parties as of the date of this report and we cannot assure you we will be successful in consummating any transactions with any of these targets.

In August 2005 we issued a press release announcing our collaboration with L-3 Communications on an end-to-end solution for secure and efficient container transportation worldwide. We are also in discussions with other several technology and defense companies that, in response to the Homeland Security Act and Operation Safe Commerce, are in the process of developing solutions that address global transportation security issues. We believe

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that our secure, wireless, Internet-based system which uses a combination of global positioning satellite technologies can become a key 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 could be part of any comprehensive security system. Examples of these technologies may include radio-frequency identification (RFID) tags fastened to containers and/or trailers, smart tags affixed to the goods inside shipping containers, electronic seals applied at the time the container is loaded and geo fencing to alert a truck’s owner or authorities if a vehicle deviates from its designated route. There can be no assurances, however, that we will ever enter into any agreements with L-3 Communications or any of the other companies we are in discussions with or, if we do, that we will ever generate any significant revenues from such agreements.

Also, we have begun marketing the P2S MobileMarket™ outside of the United States. In November 2004, we retained International Logistics Solutions to represent the company outside of North America. In April, 2005, our President, Michael Darden, traveled to Brazil to attend meetings with several major Brazilian companies to educate them about the P2S MobileMarket™ and explore their interest in becoming customers if it was introduced in Brazil.

In September 2005, we announced that we had signed a referral partner agreement to form a strategic alliance with ShipLogix in which both companies will cross-market each other’s systems to their respective customer bases as well as engage in joint sales and marketing activities.

RESULTS OF OPERATIONS

Six Months Ended December 31, 2005 compared to the Six Months Ended December 31, 2004

Revenue

Total revenue generated during the six months ended December 31, 2005 increased by $14,738,887 as compared with total revenue generated during the six months ended December 31, 2004. The increase during the six months ended December 31, 2005 was attributed to higher freight transportation revenue generated from:

-	Commodity Express Transportation, Inc., our subsidiary which began operations upon consummating an asset purchase in March 2005, that had revenue of $12,373,377 versus no revenue during the same six months of 2004 which was prior to the asset purchase;

-	Power2Ship Intermodal, Inc., our subsidiary which began operations upon consummating an asset purchase in March 2005, that had revenue of $1,976,866 versus no revenue during the same six months of 2004 which was prior to the asset purchase; and

-	Power2Ship which had an increase of $388,644 or approximately 26.5% to $1,850,467 versus $1,467,823 in the same six months of 2004 as a result of growth of revenue from existing customers such as Tire Kingdom and Carroll Tire and additional revenue from several new shipper customers.

Revenue from access services and implementation services during the six months ended December 31, 2005 was $5,668 versus $180 during the same six months of 2004. Access services provide unlimited use of the information available through the Power2Ship MobileMarket™ for a fixed monthly fee. Implementation services generally involve software development related to the design, programming and testing of a custom developed interface to the Power2Ship MobileMarket™.

During the six months ended December 31, 2005, one customer accounted for 53% of the Company’s revenue. Our agreement with this customer may be cancelled upon thirty days notice Because of the significant nature of the revenue from this customer to our results of operations, however, the loss of this customer, prior to our obtaining a comparable amount of revenue from additional customers, could have a material adverse effect on our business operations and prospects.

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Operating Expenses

Total operating expenses incurred during the six months ended December 31, 2005 increased by $14,307,508 or approximately 437% compared to the six months ended December 31, 2004. The increase during the six months ended December 31, 2005 was attributed to the following:

- 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, increased by $13,122,413 in the six months ended December 31, 2005 as compared with the same six months during 2004. This percentage increase in freight transportation expense was approximately the same as the percentage increase in revenue indicating that the gross margin on freight transportation services was approximately the same in both periods.

- Selling, general and administrative expenses increased by $1,185,095 or approximately 60.4% during the six months ended December 31, 2005 compared to the six months ended December 31, 2004. The increase during the six months ended December 31, 2005 was attributed to the following:

Salaries, benefits and consulting fees increased by $865,980 or approximately 76.4% during the six months ended December 31, 2005 which consisted of increases to:

- Salaries and benefits by $630,324 or approximately 74.4% to $1,477,319 in the six months ended December 31, 2005 from $846,995 during the same six months of 2004. This increase can be attributed primarily to the $586,538 in salaries and benefits paid to employees of our subsidiaries Commodity Express Transportation, Inc. and Power2Ship Intermodal, Inc. during the six months ended December 31, 2005 compared to the same six months of 2004 which was prior to our asset purchases that began the operations of Commodity Express Transportation and Power2Ship Intermodal.

- Consulting fees by $235,656 or approximately 82% in the six months ended December 31, 2005 to $522,710 from $287,054 during the same six months of 2004. This increase was attributed to higher consulting fees, primarily in the forms of common stock and warrants, paid to a greater number of consultants to provide the Company with additional management consulting services than in the same six months of 2004.

Other selling, general and administrative expenses increased by $319,115 or approximately 38.5% during the six months ended December 31, 2005 as compared to the six months ended December 31, 2004. The most significant contributors to this increase were:

-	Expenses of $439,755 incurred by our subsidiary Commodity Express Transportation during the six months ended December 31, 2005 as compared with no expenses during the same period of 2004 which was prior to it commencing operations.

-	Expenses of $56,944 incurred by our subsidiary Power2Ship Intermodal during the six months ended December 31, 2005 as compared with no expenses during the same period of 2004 which was prior to it commencing operations.

These increases were partially offset by a decrease of $177,584 or approximately 21.4% in other selling, general and administrative expenses incurred by our Boca Raton, Florida operation. The most significant contributors to this decrease were:

Advertising and marketing expenses, including convention and trade show expenses, which decreased by $84,710 or approximately 62.9% to $50,033 during the six months ended December 31, 2005 from $134,743 during the same six months of 2004. This decrease was a result of management’s decision to stop using an outside public relations firm, to temporarily curtail advertising our products and services to shippers and carriers in trade publications, transportation industry websites and other media, and to reduce our attendance at regional and national trade shows.

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Legal fees and expenses which decreased by $92,617 or approximately 71.0% to $37,841 during the six months ended December 31, 2005 from $130,458 during the same six months of 2004. This decrease resulted from our requiring less legal services to prepare and review agreements and other documents incurred in the ordinary course of business including our required public filings, customer contracts and securities offerings and to represent us in various legal proceedings. In addition, we incurred significant legal expenses during the six months ended December 31, 2004 related to the preparation of our registration statement on Form SB-2 and amendments thereto.

These decreases were partially offset by increases in:

-	Bank services charges of $28,990 to $29,408 during the six months ended December 31, 2005 from $418 during the same six months of 2004 primarily as a result of the increase in transaction fees paid to the vendor that electronically pays our carriers.

Other Income (Expenses)

Total other expenses increased by $409,388 or approximately 97.7% during the six months ended December 31, 2005 as compared with the same six months of 2004. This increase primarily resulted from an increase in interest expense of $413,138 or approximately 98.4%. The higher interest expense primarily was associated with interest incurred by:

-	Amortization of deferred financing costs and discounts on notes payable which increased by $244,266 to $483,024 during the six months ended December 31, 2005 from $238,758 during the same six months of 2004 and

-	Commodity Express Transportation, Inc. and Power2Ship Intermodal, Inc. which had interest expenses of $132,399 and $37,451, respectively, compared with no interest expenses during the same period of 2004 as this was prior to their commencing operations.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced losses and negative cash flows from operations since our inception. As of December 31, 2005, we had an accumulated deficit of $21,258,554, a stockholders' deficit of $1,734,920, and our independent auditors’ report on our financial statements for fiscal year 2005 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 December 31, 2005, we had a working capital deficit of $4,024,700 as compared with a working capital deficit of $38,477 at June 30, 2005. This $3,986,223 decrease in working capital during these six months was attributed to a $606,765 increase in current assets which was more than offset by a $4,592,988 increase in current liabilities. The $606,765 increase in current assets consisted of increases in cash of $359,094 and in accounts receivable of $305,232 offset by a decrease in short term notes receivable of $50,000 and a decrease in prepaid insurance of $7,561. The $4,592,988 increase in current liabilities consisted of increases in short term notes payable of $690,000, in accounts payable and accrued expenses of $464,378, in accrued salaries of $83,405, in the current portion of convertible notes payable of $3,183,037, and in the outstanding balance of our line of credit by $172,168.

During the six months ended December 31, 2005, our cash balance increased by $359,094. This increase was the result of $1,774,668 provided by financing activities that partially was offset by $1,151,637 used in

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operating activities and $263,937 used in investing activities. This compared with a decrease in our cash balance of $817,601 during the six months ended December 31, 2004 as a result of $1,675,159 used in operating activities and $289,096 used in investing activities that partially were offset by $1,146,654 provided by financing activities.

During the six months ended December 31, 2005, we used $1,151,637 in operating activities which was made up of our net loss of $2,202,461 that partially was offset by depreciation and amortization of $817,819, issuances of our common stock, options and warrants as payment for services, interest and compensation of $160,911, changes in operating assets and liabilities of $72,032 and a $62 increase in allowance for doubtful accounts. This compared with $1,675,159 used in operating activities during the six months ended December 31, 2004 which consisted of our net loss of $2,224,452 that partially was offset by depreciation and amortization of $351,450, issuances of our common stock, options and warrants as payment for services, interest and compensation of $190,585 and changes in operating assets and liabilities of $7,258.

The $263,937 used in investing activities during the six months ended December 31, 2005 consisted of $186,634 for costs of software development and $77,303 for purchases of property and equipment. This compared with $289,096 used in investing activities during the six months ended December 31, 2004 which consisted of $100,000 disbursed to GFC, Inc. prior to our acquisition of certain of its assets, $179,284 for costs of software development and $9,812 for purchases of property and equipment.

During the six months ended December 31, 2005, we generated net cash from financing activities of $1,774,668 which consisted of net proceeds of $720,000 from the issuance of units consisting of unsecured convertible debentures and warrants, $50,000 from repayment of a short term loan to an unrelated party, $172,168 from our revolving line of credit and $832,500 from the issuance of units consisting of common stock and warrants. This compared with net cash provided by financing activities of $1,146,654 during the six months ended December 31, 2004 which consisted of net proceeds of $900,000 from the issuance of convertible promissory notes, $110,000 from the issuance of short term unsecured promissory notes and $166,654 from our revolving line of credit less $30,000 from the repayment of promissory notes.

We estimate that the $1,196,847 we had on hand at December 31, 2005 and our receipt since January 1, 2006 of $427,500 in net proceeds pursuant to our unit offering that closed on February 13, 2006, a projected decrease in cash used in operations as a result of our increasing transportation and MobileMarket™ revenue and additional borrowings from our revolving credit facilities should be sufficient to fund our operating activities for approximately sixty 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.

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 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.

In July 2005 we terminated our Standby Equity Distribution Agreement and several other related agreements with Cornell Capital Partners.

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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 the Report, being December 31, 2005, 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 and that there are no occurrences 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 as appropriate, to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During October and November 2005 we issued 250,000 shares of common stock to two consultants to provide various management consulting services valued at $31,000 as compensation pursuant to their respective consulting agreements. The issuances were exempt from registration under the Securities Act in reliance on Section 4(2) thereof. The recipients were accredited investors. No general solicitation or advertising was used in connection with the transaction, and the certificates evidencing the shares that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom.

Between October and November 2005, we sold approximately 17 units of our securities to seven investors in a private placement exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D of that act. Each unit consisted of a $25,000 Series C convertible debenture, currently convertible into 250,000 shares of common stock, and a warrant to purchase 333,333 shares of common stock for a total issuance of warrants to purchase 5,599,994 shares of common stock. We paid no sales commissions in this offering. We received net proceeds of $320,000 after payment of costs related to the offering from six of the investors and one investor exchanged their $100,000 unsecured promissory note for four units. No general solicitation or advertising was used in connection with this offering, and the certificates evidencing the shares 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 had access to business and financial information concerning our company. Each purchaser represented that they were acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.

In December 2005 we sold a $400,000 principal amount unsecured debenture with a five-year warrant attached providing the holder with the right to purchase 1,000,000 shares of our common stock for $.07 per share, to one investor in a private transaction exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(2) of that act. We paid no sales commissions in this offering. We received net proceeds of $400,000 from this sale. No general solicitation or advertising was used in connection with this offering. The purchaser had access to business and financial information concerning our company. The purchaser represented that it was acquiring the securities for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.

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Between December 2005 and February 2006, we sold approximately 18 units of our securities to 18 accredited investors in a private placement exempt from registration under the Securities Act of 1933 in reliance on Rule 506 of Regulation D of that act. Each unit consisted of 250,000 shares of our common stock and a warrant to purchase 250,000 shares of our common stock for an aggregate purchase of 4,525,000 shares of our common stock and warrants to purchase 4,525,000 shares of common stock. We paid no sales commissions in this offering. We received net proceeds of $452,500 from these sales. No general solicitation or advertising was used in connection with this offering, and the certificates evidencing the shares 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 had access to business and financial information concerning our company. Each purchaser represented that they were acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.

In February 2006, we issued 262,640 shares of our common stock valued at $39,396 to a law firm as payment for legal services. The issuance was exempt from registration under the Securities Act in reliance on Section 4(2) thereof. The recipient was an accredited investor represented that it was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. No general solicitation or advertising was used in connection with the transaction, and the certificate evidencing the shares that were issued contained a legend restricting their transferability absent registration under the Securities Act or the availability of an applicable exemption therefrom.

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

32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

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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: February 21, 2006

POWER2SHIP, INC.

By: /s/ Richard Hersh

Richard Hersh

Chief Executive Officer, principal executive

officer and principal financial and accounting officer

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