10KSB/A 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-KSB/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND 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 87-0449667 ------ ---------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 903 CLINT MOORE ROAD, BOCA RATON, FLORIDA 33487 ----------------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (561) 998-7557 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE ---- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK ------------ (TITLE OF CLASS) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] Check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-KSB. Yes [ ] No [x] State issuer's revenue for its most recent fiscal year: $2,091,965 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days (see definition of affiliate in Rule 12b-2 of the Exchange Act). Approximately $12,530,000 as of September 13, 2004. State the number of shares outstanding of each of the issuer's classes of common stock equity, as of August 31, 2004: 38,078,146 shares of common stock, par value $.001 per share (the "Common Stock"). Transitional Small Business Disclosure Format (check one): Yes [ ] No [x] EXPLANATORY NOTE ---------------- This Form 10-KSB/A is being filed for the purpose of amending certain disclosures contained in our Annual Report on Form 10-KSB for the year ended June 30, 2004 filed with the United States Securities and Exchange Commission ("SEC") on September 28, 2004. The amendments are in response to comments made by the SEC in the course of their review of our Registration Statement on Forms SB-2 and SB-2/A filed from September through December 2004. TABLE OF CONTENTS ----------------- PART I ITEM 1. DESCRIPTION OF BUSINESS 3 PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS 21 ITEM 7. FINANCIAL STATEMENTS 30 PART III ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 31 When used in this annual report, the terms the "Company," "Power2Ship," "we," "our," and "us" refers to Power2Ship, Inc., a Nevada corporation and our subsidiary. The information which appears on our web site at www.power2ship.com is not part of this annual report. CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING INFORMATION This Annual Report on Form 10-KSB (this "Report") as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical or current fact constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes", "belief", "expects", "intends", "anticipates" or "plans" to be uncertain forward-looking statements. The forward looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. PART I ITEM 1. DESCRIPTION OF BUSINESS We are an application service provider (ASP) that offers a highly accessible, Web-based information and communication system for certain segments of the truck transportation industry. We have developed our P2S MobileMarket(TM) system which collects, consolidates, processes and presents real-time, transportation-related data that we believe is valuable to logistics personnel working for shippers and carriers. Our customers are both companies shipping full truckloads of goods to or from their facilities, who we refer to as shippers, and companies transporting this freight, who we refer to as carriers. THE TRUCKING INDUSTRY Trucks dominate freight movement in North America. Generally, there are between four and seven separate truck movements required to make a typical finished good. For example, raw materials are transported to component manufacturers, components are shipped to assemblers, assemblers send goods to distributors and distributors transport goods to retailers. Even for imported products, a truck typically is involved at the dock or airport, and for final delivery to the customer. The trucking industry has been forced to offer specialized services in an effort to accommodate the demands of different products. For example, some products require refrigeration, others require certain delivery guarantees, others are only shipped in small loads, and yet others require a combination of different freight services. We believe that our P2S MobileMarket(TM) will benefit the following segments of the trucking industry: - Truckload carriers who use their trucking assets to pick-up and deliver goods only for shippers needing the full capacity of a given truck are the largest and most diverse for-hire segment. These carriers are typically non-union operators that can operate as one driver in the vehicle or they can use driving teams to increase vehicle productivity; - Owner-operators, often called independent truckers, who own or lease a single truck or very small fleets. These independents play a vital role in the growth of many carriers who use them to expand operations without adding the fixed costs associated with equipment and drivers; and - Less-Than-Truckload (LTL) carriers which, as the name implies, use their trucking assets to pick-up and deliver goods for several shippers on the same trip. Many of these companies are characterized by networks of consolidation centers and satellite terminals. The average haul for national LTL carriers is about 650 miles and for regional LTL carrier approximately is approximately 250 miles. 3 Additional carrier segments that could benefit primarily from the real-time tracking feature of our P2S MobileMarket(TM) include: - Private fleets operated by medium and large shippers who account for more than 50% of all truck movements and 35% of truckload volume, predominately medium to short haul. The visibility of the moving inventory is of substantial value for this type of movement. These carriers are prime targets for our GPS solution with the modified asset tracking tool. - Dedicated contract carriers that are set up and run according to a specific shipper's needs. In addition, they offer other services such as warehousing and logistics planning. The visibility of the moving inventory is also of substantial value for this type of movement. These carriers are also prime targets for our GPS solution with our modified asset tracking tool. - Van lines that move household goods, office equipment, trade show and museum displays. Freight rates increase as shipping requirements become more specialized. Shipping rates are extremely inconsistent across the different market segments based on supply and demand of transportation assets availability. These price variances, as well as operational inefficiencies, contribute to higher transportation costs and lower profit margins for shippers. Shippers have been forced to look for alternatives to remain competitive. We believe that the trucking industry can respond to this need to lower rates through the implementation of a more efficient shipping and communication system. To compete effectively today, we believe that small and medium sized trucking companies must use computer and wireless communication systems to enhance customer service and productivity and attract as well as to enhance their abilities to retain quality drivers and other personnel by providing competitive compensation, fringe benefits and other incentives. We believe that our MobileMarket(TM) will cost-effectively enable carriers to meet these challenges. THE P2S MOBILEMARKET(TM) We designed our P2S MobileMarket(TM) to help smaller motor carriers compete more effectively with large carriers, while also providing valuable logistics services to both small and large shippers. This information, accessed through a password-protected portion of our Web site at www.power2ship.com, helps shippers and carriers by enabling them to minimize excess transportation capacity of carriers, execute freight transactions online and easily track the movement of loads and/or trucking assets online. 4 The P2S MobileMarket(TM) is a complex data exchange formulated to identify in real-time the current locations of drivers, with tractors and trailers, and their destinations. Rather than just knowing which driver and truck are connected with each shipment, the MobileMarket(TM) determines when and where available capacity will exist. This current and future capacity is captured in our programs and our shipper customers are able to sort capacity data and identify the closest available carrier at the best price. This sorted capacity data is displayed online to the shipper for its selection. For this software to function, certain information must be collected and maintained in our MobileMarket(TM). We have built a tool for carriers to use, without charge, which extracts the information required to execute the transactions electronically. This tool, which we refer to as our Asset Management Tool, maintains: - descriptions of carriers' terminal locations and facilities; - driver's names, qualification, work schedule, licenses and permits; - tractor manufacturer, model, type and year; - trailer manufacturer, model, type and year; - rates for transportation services; and - lanes of transportation services. We believe that this information enables carriers' dispatchers to manage their trucking assets more effectively by tracking these assets, and it also helps them to determine which trucking asset combination is recommended for a given shipment. At the same time, the unused capacity, or future unused capacity, is displayed in the P2S MobileMarket(TM) for our shipper customers to view and select as shipments are input. In order to complete the marketplace concept for the shipper side of the transaction, we built a shipping tracking and load input screen into the MobileMarket(TM) which provides shippers with a single place to view the location and status of each load booked, en-route and delivered. This screen also consolidates information collected from all carriers currently being used by our shipper customer and, on posted shipments, displays the names and prices of any carriers with available capacity to move the shipment. We believe our product enables our shipper customers to easily track all of their shipments no matter how many carriers they use, as well as being able to identify those carriers with available capacity closest to their pick-up locations for the lowest prices. Some of the information collected to create the shipment tracking and load input screen includes: - shippers' distribution or pick-up locations, including hours of operation, number of docks, and shipping and receiving hours; - shippers' preferences/requirements for carriers, such as types of equipment, amount of insurance and historical performance; and - shipper's payment methods and terms. 5 Once this information has been collected from shippers and carriers, our MobileMarket(TM) facilitates the execution of transportation transactions by creating: - scheduled and actual pick-up and delivery times; - electronic bills of lading; - alerts upon exception generation which are delays in scheduled pick-ups or deliveries; - real-time asset/shipment locations; and - electronic versions of receiver's signatures upon shipment delivery. In addition, we also offer three year contracts to carriers, with a monthly fee of $79 per truck, providing the carrier with wireless access to the P2S MobileMarket(TM) and customer support. Our mobile device consists of a vehicle locator device (GPS) and a handheld personal digital assistant (PDA). The GPS is easily installed in the truck's cab and connected to the truck's battery for power. It uses global positioning system technology to determine specific latitude and longitude coordinates. Next, an internal modem in the GPS wirelessly transmits the location data to the nearest cellular tower. This data is then sent over a terrestrial network to reach the Internet and transmitted to the P2S MobileMarket(TM). The PDA contains our proprietary software that enables communication of location and other transportation-related information between drivers and the P2S MobileMarket(TM) when connected to the GPS. We have negotiated agreements to provide wireless connectivity to carriers at very competitive rates with T-Mobile. We charge the shippers who use our P2S MobileMarket(TM) primarily based upon their actual usage of the system without requiring them to purchase any software or hardware. Carriers who use our system have unlimited access and use of the system for free, although they may choose to purchase vehicle locator and communication devices offered by us to enhance the benefits they derive from the system. 6 Some of the benefits that we believe shippers may derive from using the P2S MobileMarket(TM) include: - a single, consolidated online page listing any carriers meeting their pre-defined load, performance and pricing requirements having excess capacity (equipment) to move their loads; - online access to carriers' profiles and historical performance information prior to selecting the desired carriers; - reduces the time spent searching for carriers thus enabling logistics personnel to concentrate on other transportation tasks; - frequently updated location information of inbound loads and, if the shippers have a captive fleet, outbound loads thus enabling shippers to more accurately schedule advertising campaigns, warehouse personnel, etc.; - receive automatic notification and alerts of probable delivery delays providing more time to develop and implement contingent plans; - electronic bill of lading and exception management tools permit exact settlements, significantly improving relations with vendors and carriers; - customized management reporting utilizing historical data is available for an additional charge; - custom development of interfaces to legacy systems of large shippers; and - access to logistics experts that will use third-party software to analyze historical data and recommend supply chain optimization strategies. Some of the benefits that we believe carriers may derive from using the P2S MobileMarket(TM) include: - free use of an online asset management tool to set-up, store, update and track their trucking assets, such as tractors, trailers and drivers, and provide trucking asset utilization reports; - frequently updated location information available to constantly track trucking assets; - receive automatic notification and alerts to pro-actively address possible delays and problems; - loads offered to qualified carriers with excess capacity without freight brokerage fee or sales commission; - we pay carriers and assume responsibility for collecting payment from shippers; - accelerated payment options; - damaged or improper quantities of goods reported to all parties resulting in faster resolution; and - access to historical transaction data for reporting and performance metrics. 7 HOW WE GENERATE REVENUE The majority of our continuing revenue is generated by providing freight transportation services. We provide freight transportation for our shipper customers using various independent carriers located throughout the United States. The price we charge for these freight transportation services depends upon several factors, including the distance the freight is being transported, the type of transportation equipment required to move the freight, the value of the freight and the volume of available loads near the locations where the freight is delivered. Generally, prices range from approximately $1.00 per mile up to $10.00 per mile multiplied by the distance the freight is being transported. The freight rates we charge our shipper customers include all the direct costs of the shipment as negotiated with the carriers transporting the freight and our, gross profit margin that generally ranges from approximately 7.4% to 10.7% . During fiscal 2003 and fiscal 2004, we also generated revenue from additional services provided pursuant to a contract with one customer, The Great Atlantic and Pacific Tea Company, including: - access services revenue which included unlimited use of the information available through our P2S Mobile Market(TM) for a fixed monthly fee, as well as a virtual private network (VPN) fee which provided our customer with data encryption and other extra security measures for their data; and - implementation services revenue which were software development fees which provided for the design, programming and testing of a custom developed interface to our P2S Mobile Market(TM). The fees charged The Great Atlantic and Pacific Tea Company for these services were determined by us based upon the scope of services provided. While we continue to market these access services and implementation services to our existing and potential customer base, we cannot predict if we will have additional revenue from these types of services in future periods. FUTURE REVENUE SOURCES In the future, as we continue to expand our operations and introduce new services, we may also generate revenue from new service offerings including: - monthly subscription fees of $99 charged to shippers for unlimited access to the P2S MobileMarket(TM). We do not presently charge subscription fees to any of our shipper customers since a free introductory period is being offered in order to attract more customers to this service. We plan to charge monthly subscription fees during 2005. - logistics optimization fees charged to shippers seeking to identify and implement strategies to improve the efficiency of their supply chain. In order to support this service we will use sophisticated logistics optimization software to analyze the historical information collected for a particular shipper, identify embedded trends of activity, and recommend methods of improving complete supply chain strategies for them. This service will become available to all shippers once they have sufficient historical information collected in the P2S MobileMarket(TM). 8 - monthly access services fees for carrier customers that want to receive a higher level of service, in which their transportation equipment is tracked on a "real time" basis and wireless communication is able to take place between the Company's web site and the truck. These customers will need to install vehicle locator and communication devices provided by the Company. Our present business model envisions offering this service to our carrier customers pursuant to three year contracts, with a monthly fee of $79 per truck. Our mobile device consists of a vehicle locator device (GPS) and a handheld personal digital assistant (PDA). The GPS is easily installed in the truck's cab and connected to the truck's battery for power. It uses global positioning system technology to determine specific latitude and longitude coordinates. Next, an internal modem in the GPS wirelessly transmits the location data to the nearest cellular tower. This data is then sent over a terrestrial network to reach the Internet and transmitted to the P2S MobileMarket(TM). The PDA contains our proprietary software that enables communication of location and other transportation-related information between drivers and the P2S MobileMarket(TM) when connected to the GPS. We have negotiated agreements to provide wireless connectivity to carriers at very competitive rates with T-Mobile. We have provided a total of 16 of our vehicle locator and communication devices to six carriers on a no-charge trial basis while we were finalizing this product offering. We recently began offering these devices to our carrier customers at the $79 per truck monthly fee; however, we have not generated any revenue from this product offering as of the filing of this Report. We also are collaborating with several technology and defense companies that, in response to the Homeland Security Act and Operation Safe Commerce, are working to develop solutions that address global transportation security issues. We believe 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 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, electronic seals applied at the time the container is loaded and the ability 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 enter into any agreements with the companies we are in discussions with or that we will ever generate any significant revenues. 9 SUPPORT FOR OUR P2S MOBILEMARKET(TM) In September 2002, we entered into a three year agreement with BellSouth Corporation to provide a comprehensive communications solution for the P2S MobileMarket(TM) at BellSouth's highly secure-business center in Miami, Florida. In August 2003, International Business Machines Corp. (IBM) assumed BellSouth's obligations under this agreement to provide us with dedicated hosting and support services to us at this facility. Our production web server, which houses all of our front-end web pages or application interfaces, and our production database server, which houses all of the back-end database functionality and information, are backed-up daily and two months of backup tapes are stored by IBM at their location. In the second quarter of 2003, we entered into a non-exclusive distributor agreement with a developer and marketer of GPS locator devices. Under the terms of this agreement we have the right to license and distribute these products to our customers located in North America. This company has agreed to a special pricing arrangement that is based upon quantities ordered, a monthly license fee of $15.00 per device and 10% of any activation commission we receive as a result of activation of the devices on wireless networks. These costs are factored into the 36 month access/service contracts which we enter into with carriers described above. We are obligated to make these monthly licensing fees per device to the company even if our customer is not paying our monthly fees. The agreement provides for termination by either party under certain circumstances, and upon the expiration of the initial three-year term is renewable for successive one-year terms upon the consent of the parties. KEY CUSTOMERS All of our revenue for the fiscal year ended May 31, 2003 was derived from two customers, The Great Atlantic & Pacific Tea Company and Tire Kingdom, which represented approximately 53% and 47%, respectively of our revenue. For the fiscal year ended June 30, 2004, Tire Kingdom represented approximately 64% of our revenue and The Great Atlantic & Pacific Tea Company represented approximately 15% of our revenue. Nearly all of the revenue from The Great Atlantic & Pacific Tea Company was derived under the terms of a license and customization agreement which was terminated in January 2004 and does not represent recurring revenues to us. SALES, MARKETING AND STRATEGIC RELATIONSHIPS We market our products and services to both shippers and carriers. Our sales and marketing efforts to expand our carrier base are focused on small to mid-sized carriers. We use a combination of direct sales calls and trade show appearances to market our products and services. Our in-house sales organization is currently comprised of three individuals and supported by an implementation manager. We anticipate expanding this organization as our business increases, and we do not anticipate that we will have any difficulty in locating experienced personnel to fill any new sales and marketing positions we may create in the future. 10 In June 2004 we engaged Palm Beach Media Associates, Inc. to market our P2S MobileMarket(TM). Palm Beach Media Associates has assisted us in preparing marketing materials including several PowerPoint presentations, print collateral materials, hats and signage. We have begun running print advertising in The Trucker Magazine, magazine which serves the trucking market including for-hire carriers, over the road drivers, owners/operators and other trucking management and which has a qualified circulation of approximately 181,000, Transportation Topics, a magazine serving regulated haulers for hire and private carriers and which has a qualified circulation of approximately 127,000, and Logistics Today, a magazine serving business responsible for logistics and the procurement of transportation services and which has a qualified circulation of approximately 77,000. In August 2004 we began a three month Internet marketing campaign which is a marketing mix of web banners and email blasts on www.eyefortransport.com. In September 2004 we are scheduled to complete our Carrier Welcome Package which is a comprehensive user guide of our products and services that will be distributed to new carrier members. In June 2003 we entered into a strategic alliance with ARL, Inc. ARL, which does business under the name of American Road Line, is a freight brokerage service provided to motor carriers which was established in 1978. Over the years, it has grown from a small, family-owned trucking company into a large competitor with 80 agents nationwide and it maintains a large owner/operator and fleet owner base of equipment. ARL also has a brokerage division that has a carrier base of over 7,000 carriers. Under the terms of our strategic alliance with ARL we have agreed to identify and introduce owner-operators and fleet operators to ARL who may want to sign up with ARL. Any of these new owner-operators and fleet operators who sign up with ARL will become our member-carriers and will be required to install our wireless products in their trucks which electronically provide GPS and PDA information to the MobileMarket(TM). In September 2003 we entered into an oral agreement with Driver and Equipment Placement Services, a re-marketer of used transportation tractors for multiple financial institutions, to promote our MobileMarket(TM) to owner-operator customers as a tool for them to increase their profitability. In September 2003 we formed a strategic alliance with Zethcon Corporation to co-market our track and trace ASP solution, which is part of our ASP software that provides real-time visibility of in-transit inventory. Zethcon Corporation develops and markets warehouse management system and order management system solutions specifically tailored to third party logistics providers and manufacturers with extensive fulfillment requirements. Currently, Zethcon's customers have web-based, real time visibility of the movement of their goods within their "four walls." Our track and trace ASP solution adds real time visibility of shipments after they leave the warehouse. We have agreed to develop the interface between Zethcon's warehouse management system and our ASP software. In October 2003 we entered into an agreement with Comdata Corporation(R) which allows us to use the Comdata Express Cash system to settle with our carrier customers. This arrangement allows our carrier customers to access funds from freight transactions processed through the P2S MobileMarket(TM) with a private label Power2Ship Comdata card. Our carriers are able to withdraw funds transferred to them from us at no additional costs with the Comchek(R) convenience card at all locations that support the Comdata Network, or have funds direct deposited to their bank accounts. Our carrier customers can also access their funds from over 400,000 Cirrus(R) ATM locations and through the Maestro(R) network. 11 In April 2004 we formed a strategic alliance with TruckersB2B, Inc. to offer our services to its fleets. TruckersB2B is a majority owned subsidiary of Celadon Group Inc. and is a leading provider of exclusive services and increased purchasing power to small and mid-sized trucking fleets. Through our logistics technology, TruckersB2B members will be able to enroll as P2S member carriers. In August 2004 we announced that we had completed the development and testing of the tools and infrastructure that will support the marketing campaign to TruckersB2B's 16,500 fleets representing over 435,000 trucks. COMPETITION ASP-based businesses such as ours are characterized by rapidly advancing technologies, increasing competition and a strong emphasis on proprietary products. We compete with a number of companies including Elogex, Lean Logistics, NetTrans, Internet Truck Stop, Truck-Load Information Center and Link Logistics. Virtually all of our competitors have significantly greater financial resources, operating history and brand recognition than we do. Smaller companies may also prove to be significant competitors, particularly through the establishment of collaborative arrangements with large, established companies. Although various companies offer software or services to address certain portions of our MobileMarket(TM) solution, we do not believe any of these companies offer the comprehensive, end-to-end solution available to our customers. There is no assurance that we will be able to effectively compete within our market segment. OUR HISTORY Power2Ship, formerly known as Jaguar Investments, Inc., was formed in Nevada on October 28, 1987. In December 2001 we acquired 100% of the issued and outstanding shares of common stock of Premier Sports Media and Entertainment Group, Inc. in exchange for 1,000,000 shares of our common stock in a private transaction exempt from registration under the Securities Act of 1933. The shares of common stock issued by us to the Premier Sports Media and Entertainment Group shareholders in this transaction represented approximately 8% of our issued and outstanding common stock immediately after the transaction. Before this transaction we did not engage in any material business operations. On March 11, 2003, we consummated a merger with Freight Rate, Inc. d/b/a Power2Ship, under which Freight Rate became our wholly owned subsidiary. At the effective time of the merger, the holders of Freight Rate's common and preferred stock, warrants and options exchanged those securities for the following of our securities: - 11,907,157 shares of our common stock, - options to acquire an aggregate of 13,986,679 shares of common stock at exercise prices of $.38 to $.75 per share, - common stock purchase warrants to acquire 3,913,204 shares of our common stock at exercise prices of $.75 to $1.75 per share, 12 - 100,000 shares of our Series X Preferred Stock which are convertible on March 11, 2004 into shares of common stock based upon the degree to which a one-year funding schedule of up to $2.5 million is met. If the entire $2.5 million of funding is concluded, the Series X Preferred Stock will be cancelled. - 87,000 shares of our Series Y Preferred Stock issued to our CEO in exchange for an equal number of Freight Rate's Series C Convertible Preferred Stock owned by him at the time of the merger. In connection with the merger, R&M Capital Partners, Inc., a principal stockholder of our company prior to the merger with Freight Rate, agreed to cancel 2,650,000 shares of our common stock owned by them for no consideration. Prior to the merger, R&M Capital Partners, Inc. owned an aggregate of 6,500,000 shares of our common stock, which represented approximately 52% of our outstanding common stock immediately prior to the merger. A term of the merger agreement as negotiated by Freight Rate provided that the Freight Rate shareholders would own 70% of our securities on a fully diluted basis following the closing of the merger. R&M Capital Partners, Inc., whose sole shareholder had been a shareholder of Premier Sports Media and Entertainment Group, Inc., agreed to the cancellation at our request in order to facilitate the merger. We believe R&M Capital Partners, Inc. agreed to the cancellation in order to facilitate our merger with Freight Rate based upon its business judgment and since Freight Rate was not prepared to complete the merger and allow R&M Capital Partners, Inc. to retain as significant as a concentration of stock in our company. Following the cancellation of these shares, R&M Capital Partners, Inc. owned 3,850,000 shares of our common stock. For accounting purposes, the cancellation of the 2,650,000 shares was treated as part of the recapitalization. Under the terms of the merger agreement, we issued an aggregate of 100,000 shares of our Series X Convertible Preferred Stock to holders of Freight Rate's common stock and Series C Convertible Preferred Stock prior to the transaction, including to Mr. Gass, a former member of our board of directors and Mr. Richard Hersh, our Chairman and CEO. Simultaneous with closing the merger we entered into a stock purchase agreement under which we sold 95% of the issued and outstanding common stock of Premier Sports Media and Entertainment Group to The DAR Group, Inc., an unaffiliated third party, in consideration for the forgiveness by The DAR Group of all of our indebtedness to The DAR Group of approximately $2.0 million and the assumption by The DAR Group of all of our liabilities as of the closing date of the stock purchase agreement. GOVERNMENT REGULATION The transportation industry has been subject to legislative and regulatory changes that have affected the economics of the industry by requiring changes in operating practices or influencing the demand for, and cost of providing, transportation services. We cannot predict the effect, if any, that future legislative and regulatory changes may have on the transportation industry. We are subject to licensing and regulation as a transportation broker and are licensed by the U.S. Department of Transportation ("DOT"). In August 2002, Freight Rate, Inc. obtained a license from the DOT to engage in operations arranging or brokering transportation of freight (except household goods) by motor vehicle. Effective October 20, 2003 that license was transferred to Power2Ship, Inc. 13 INTELLECTUAL PROPERTY To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. Despite such protections, a third party could, without authorization, copy or otherwise obtain and use our intellectual property. We can give no assurance that our agreements with employees, consultants and others who participate in development activities will not be breached, or that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. In June 2004 we filed a provisional patent application with the United States Patent and Trademark Office entitled System and Method for Managing Logistics and Revenue Logistics for the Transportation of Freight. We also have filed applications to register certain of our trademarks and service marks in the United States. In general, there can be no assurance that our efforts to protect our intellectual property rights through copyright, trademark and trade secret laws will be effective, if granted, or if granted that these protections will be sufficient so as to prevent misappropriation of our intellectual property. Our failure or inability to protect our proprietary rights could materially adversely affect our business, financial condition and results of operations. EMPLOYEES As of August 31, 2004 we had 29 full-time employees. None of our employees are subject to collective bargaining agreements and we believe that we have satisfactory relationships with our employees. RISK FACTORS Before you invest in our common stock, you should be aware that there are various risks. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. You should consider carefully these risk factors, together with all of the other information included in this Report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose all of your investment in our company. 14 We have a limited operating history from which an evaluation of our future prospects can be made. If we are not successful in developing a wide market for our products, the future viability of our business could be at risk. We did not begin generating revenues until our fiscal year ended May 31, 2003. There is a limited financial history of operations from which to evaluate our future prospects, including our ability to develop a wide base of customers for our MobileMarket(TM) and to otherwise achieve our business objectives. We are subject to all the risks inherent in the establishment of a new business enterprise, including limited capital, possible delays in the development of our products and services, implementation of our business plan and uncertain markets. We may encounter unanticipated problems, expenses and delays in marketing our services and securing additional customers. If we are not successful in developing a wide market for our products and services, our ability to generate sufficient revenue to sustain our operations would be adversely affected. We have a history of losses and an accumulated deficit. We expect losses to continue for the foreseeable future and we may be unable to continue as a going concern. For the fiscal years ended June 30, 2004 and May 31, 2003 we reported total revenue of $2,091,965 and $1,019,883 and a net loss to common stockholders of $5,239,773 and $2,129,604, respectively. At June 30, 2004 we had an accumulated deficit of $12,410,773. Further, during the fiscal year ended June 30, 2004, we reported net cash used in operating activities of $2,258,017. Our revenue has not been sufficient to sustain our operations and we do not expect significant revenue or profitable operations for the foreseeable future. The report of our independent registered public accounting firm for the year ended June 30, 2004 on our financial statements includes an explanatory paragraph stating that our recurring losses from operations and negative operating cash flows raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. As described below, we will need to raise additional working capital in order to implement our business model and sustain our operations. Because we are subject to all of the business risks inherent in a new company with an unproven market, we cannot guarantee you that we will ever report profitable operations or generate sufficient revenue to sustain our company as a going concern. Our primary assets serve as collateral under outstanding debentures. If we should default on these debentures, the debenture holders could foreclose on our assets and we would be unable to continue our business and operations. We have granted the holders of our $1,747,000 principal amount 14.25% secured convertible debentures and our $2,000,000 principal amount Series B 5% secured convertible debentures a blanket security interest in all of our assets and properties. If we should default under the repayment provisions of either of these secured debentures, the debenture holders could seek to foreclose on our primary assets in an effort to seek repayment under the debentures. If the debenture holders were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected. 15 We will require additional capital to fund our ongoing operations. If we are unable to raise additional capital, we will not be able to continue operations. While we are attempting to increase sales, our revenue growth has not been significant enough to generate sufficient gross profits to fund our daily operations. We do not presently have sufficient financial resources and financing commitments to fund our ongoing operations beyond December 2004 and the report of our independent registered public accounting firm on our financial statements for the fiscal year ended June 30, 2004 contains an explanatory paragraph regarding our ability to continue as a going concern. While we believe in the viability of our strategy to improve sales volume, we cannot accurately predict when, or if, our sales and profits will increase to the level necessary to sustain our operations therefore we believe that we will need to raise additional capital to fully implement our business, operating and development plans and sustain our ongoing operations. A large part of our financing needs are expected to be provided from the Standby Equity Distribution Agreement with Cornell Capital Partners, L.P. Other than this Standby Equity Distribution Agreement, we do not presently have any additional sources of working capital. If we are unable to secure this funding by December 31, 2004 because the registration statement is not declared effective by the SEC prior to that date, and we are unable to obtain additional working capital from alternative sources, we may be required to curtail or discontinue some or all of our business and operations. Certain contractual limitations of the Standby Equity Distribution Agreement may adversely affect our needs for working capital in future periods. If we are unable to obtain working capital as needed in future periods, our ability to continue our business and operations would be in jeopardy. We are a party to a Standby Equity Distribution Agreement with Cornell Capital Partners, L.P. which permits us to sell up to $10,000,000 of our common stock. We recently filed a registration statement with the Securities and Exchange Commission to register $1.0 million of our common stock to be sold to Cornell Capital Partners, L.P. under the Standby Equity Distribution Agreement. The registration statement remains pending with the SEC and we do not know when, or if ever, that it will be declared effective by the SEC. We can issue and sell those shares to Cornell Capital Partners commencing upon the effective date of the registration statement. There are restrictions on our ability to request advances under the Standby Equity Distribution Agreement. For example, we may not request advances if the shares to be issued in connection with such advances would result in Cornell Capital Partners, L.P. owning more than 9.9% of our outstanding common stock. Even if we request advances the amount of each advance is limited to a maximum of $500,000 every seven trading days. As a result of these contractual limitations no assurances can be given that such financing will be available in sufficient amounts or at all when needed to sustain our working capital needs. The Standby Equity Distribution Agreement and our Series B 5% secured convertible debentures contain certain covenants prohibiting us from raising capital at less than the market price. These limitations may hamper our ability to raise working capital in future periods which could result in our ability to continue as a going concern. The Standby Equity Distribution Agreement and the purchase agreement for our Series B 5% secured convertible debentures contain covenants that restrict us from raising capital from the sale of stock or other securities convertible into stock at a price less than the market price of our common stock on the date of issuance. The existence of these covenants may severely limit our ability to raise capital from the sale of stock or convertible securities because any potential purchasers of our stock or convertible securities may want to pay a discount to the market price of our stock. 16 Historically we have been dependent on revenue from a limited number of customers and a significant portion of our revenue for fiscal 2003 is non-recurring revenue. If we were to be deprived of revenue from these key Customers, our future revenues and business operations could be materially and adversely effected. All of our revenue for the fiscal year ended May 31, 2003 was derived from two customers, The Great Atlantic & Pacific Tea Company and Tire Kingdom, which represented approximately 53% and 47%, respectively of our revenue. For the fiscal year ended June 30, 2004, Tire Kingdom represented approximately 64% of our revenue and The Great Atlantic & Pacific Tea Company represented approximately 15% of our revenue. Nearly all of the revenue from The Great Atlantic & Pacific Tea Company was derived under the terms of a license and customization agreement which was terminated in January 2004 and does not represent recurring revenues to us. We do not have an agreement with Tire Kingdom. We are seeking to expand our customer base in fiscal 2005 in order to eliminate our dependence upon revenues from a limited number of customers. Because of the significant nature of the revenue from Tire Kingdom to our results of operations, however, the loss of this customer, prior to our obtaining additional customers, could have a material adverse effect on our business operations and prospects. We are dependent on contracts, some of which are short term. If these contracts are terminated, our results of operations would be materially adversely affected. We have entered into agreements to provide transportation services with some of our shipper customers. These agreements, however, do not commit them to using us for any specific volume of transportation services and the agreements can be terminated on 30 days notice. The termination of any of these contracts could have a material adverse effect on our business operations and prospects. We rely on third party providers to provide support for our products and services. Failure by our third party providers to deliver services could adversely impact our services to our customers. We rely on several third party providers for support for our MobileMarket(TM). IBM provides us with dedicated hosting and support for our web site as well as network services. In addition, we purchase GPS locator devices which are included in wireless access packages we offer to carriers from a single source. Although we do not presently have alternative providers engaged for these products or services, we believe that we could engage other companies to provide these products or services upon substantially the same terms and conditions as our existing third party provides. In the event any of these third party providers are unable to deliver the services or products which we have contracted for, our ability to provide our products and services to our customers would be adversely impacted until such time as we were able to engage alternate sources. 17 We face risks related to rapidly evolving technologies. If we do not respond to these evolving technologies, we may have difficulty in retaining our customers or expanding our customer base. Our markets are subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. Our growth and future operating results will depend, in part, upon our ability to enhance existing applications and develop and introduce new applications or capabilities that: * meet or exceed technological advances in the marketplace; * meet changing customer requirements; * comply with changing industry standards; * achieve market acceptance; * integrate third party software effectively; and * respond to competitive offerings. We may not possess sufficient resources to continue to make the necessary investments in technology. In addition, we may not successfully identify new software opportunities or develop and bring new software to market in a timely and efficient manner. If we are unable, for technological or other reasons, to develop and introduce new and enhanced software in a timely manner, we may lose existing customers and fail to attract new customers, which may adversely affect our ability to generate revenues sufficient to provide for our ongoing operations. There is a limited ability to safeguard our proprietary information and we may be unable to prevent a third party from the unauthorized use of our propriety information. Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks. We seek to protect such intellectual property through a combination of confidentiality procedures, contractual provisions, copyright and trade secret laws and intend to apply for patents. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our software or obtain and use information that it regards as proprietary. Policing unauthorized use of our software is difficult, and software piracy could be a problem. Furthermore, potential competitors may independently develop technology similar to ours. While we have applied for a patent for our propriety software and applied for a trademark on our company name, Power2Ship, and on our brand-name "MobileMarket", we cannot provide any assurance that we will be granted either protection or, if granted, that third parties will not violate these protections. Any such violation of our intellectual property rights could prove costly to defend and funds devoted to these possible efforts would reduce the amount of working capital available to fund our ongoing operations. 18 Our Chairman and CEO is the sole holder of our Series Y Convertible Preferred Stock which may give him voting control of our company and the ability to solely influence its business and direction. Our voting securities consist of shares of our common stock and our Series Y Convertible Preferred Stock. Holders of shares of our common stock are entitled to one vote per share and holders of shares of our Series Y Convertible Preferred Stock are entitled to 200 votes per share on all matters submitted to a vote of our stockholders, and these classes of our voting securities vote together on all matters submitted to a vote of our stockholders. Mr. Hersh, our Chairman and CEO, is the sole holder of our Series Y Convertible Preferred Stock which, together with his common stock holdings, gives him voting rights at July 31, 2004 over approximately 36.4% of our voting securities. As a result of these voting rights, notwithstanding that our common stockholders are entitled to vote on matters submitted to our stockholders, Mr. Hersh may have the power to strongly influence the election of all of our directors and strongly influence the business and direction of our company. The exercise of outstanding options and warrants, the conversion of shares of our Series B, C, and Y Convertible Preferred Stock and the conversion of our 14.25% secured convertible debentures and our Series B 5% convertible secured debentures will be dilutive to our existing stockholders. As of August 31, 2004 we had the following securities which are convertible or exercisable into shares of our common stock outstanding: * options and warrants to purchase a total of 22,724,788 shares of our common stock at prices ranging between $0.31 to $2.00 per share; * 198,000 shares of our Series B Convertible Preferred Stock which is convertible into 3,960,000 shares of our common stock; * 10,832 shares of our Series C Convertible Preferred Stock which is convertible into 1,083,200 shares of our common stock; * 87,000 shares of our Series Y Convertible Preferred Stock which is convertible into 230,405 shares of our common stock; * approximately 4,939,214 shares of our common stock underlying our 14.25% secured convertible debentures based upon a conversion price of $0.3537 at August 23, 2004; and * 10,600,000 shares of our common stock underlying our Series B 5% secured convertible debentures. 19 The exercise of these warrants and options and the conversion of the debentures and shares of our preferred stock may materially adversely affect the market price of our common stock and will have a dilutive effect on our existing stockholders. We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters. Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and Nasdaq are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. We have not yet adopted any of these corporate governance measures and, since our securities are not yet listed on a national securities exchange or Nasdaq, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions. Provisions of our articles of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders. Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of Nevada law also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders. In addition, our articles of incorporation authorize the issuance of up to 1,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Our board of directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion or voting rights that could adversely affect the voting power or other rights of our common stockholders. 20 PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS 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. As a result the consolidated financial statements appearing elsewhere in this Report include consolidated financial statements for the years ended June 30, 2004 and May 31, 2003, and the transition period associated with the changed fiscal year which is the one month period ended June 30, 2003. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently 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 1 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 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. In these transactions, 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 and we have latitude in pricing decisions. 21 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 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. OVERVIEW We operate as an application service provider (ASP) that delivers supply chain, tracking and logistics information to the freight industry. We began reporting revenue in October 2002. We provide logistics information and services to shippers that need to have truckloads of goods transported to or from their facilities. 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 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(TM) 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 our shipper customers from whom we generated revenues from approximately five at the end of fiscal 2003 to approximately 17 at the end of fiscal 2004. 22 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 successfully build our company 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. During fiscal 2004 we spent $90,134 in the marketing of our company's services to potential carriers in an effort to increase our carrier base as compared with $9,981 spent in fiscal 2003. We currently have approximately 400 carriers who have entered into carrier agreements with us as compared with approximately 43 carriers at May 31, 2003. We intend to continue to increase our marketing efforts during fiscal 2005, including utilizing trade publications, transportation industry websites and direct mail as well as company participation in industry trade shows and trade organizations. We are pursuing opportunities to provide logistics information and services to government agencies responsible for ensuring the safe and secure transportation of goods in containers aboard ships coming to U.S. ports. We believe that our P2S MobileMarket(TM), which was designed to capture and display vast quantities of logistics information, will assist these agencies to accomplish their goals. The information available from our P2S MobileMarket (TM) is also useful to maritime companies, logistics companies, container leasing and manufacturing companies, freight forwarders, warehouse mangers and other companies that provide freight management services. We also are in discussions with several technology and defense companies that, in response to the Homeland Security Act and Operation Safe Commerce, are collaborating to develop solutions that address global transportation security issues. We believe 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 the companies we are in discussions with or that we will ever generate any significant revenues. RESULTS OF OPERATIONS REVENUE Total revenue generated during fiscal year 2004 increased by $1,072,082, or approximately 105% as compared with total revenue generated during fiscal year 2003. This increase consisted of the following: - Freight transportation revenue increased $1,295,203, or approximately 268%, in fiscal year 2004 from fiscal year 2003. Approximately 66%, or $860,738, of this increase was attributable to revenue from Tire Kingdom, our largest customer. The remainder of the revenue increase was attributable to an increase in the number of our shipper customers from approximately five in fiscal 2003 to approximately 17 in fiscal 2004, as well as our having generated revenue for an entire 12 month period during fiscal 2004 as compared to only eight months in fiscal 2003. We anticipate that revenue from freight transportation will increase in fiscal 2005 as discussed below. 23 - Revenue from access services increased $201,949 in fiscal 2004, or approximately 229%, from fiscal year 2003. This revenue is attributable to a single customer, The Great Atlantic and Pacific Tea Company, Inc., under a contract which was completed, paid in full and then terminated in January 2004. The increase was attributable to revenue from this contract for approximately 10 months during fiscal 2004 (until the date of termination of the contract) versus approximately two months in fiscal 2003. Access services provide unlimited use of the information available through the MobileMarket(TM) for a fixed monthly fee. While we market these services to our existing and potential customer base, we cannot predict if we will report significant revenue from access services in future periods. - Revenue from implementation services decreased $425,070, or approximately 95%, in fiscal 2004 from fiscal year 2003. This revenue was attributable to a single customer, The Great Atlantic and Pacific Tea Company, Inc., under a contract which was substantially completed by the end of fiscal year 2003. Implementation services include design, programming and testing of custom developed interfaces that permit the MobileMarket(TM) 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 implementation services in future periods. We anticipate that revenue will continue to increase in fiscal 2005. We expect that our increased sales and marketing efforts which were begun in fiscal 2004 will result in additional shipper customers which from whom we will generate increased revenues from freight transportation services. Our business model also includes, subject to the availability of sufficient financing, the acquisition of one or more truck transportation services companies which, if consummated, will also increase our revenue. We are not, however, a party to any acquisition agreements as of the date of this Report. Finally, we expect to enter into one or more research and development or similar agreements related to global transportation security with one or more technology and/or defense companies that will generate additional revenue during fiscal 2005. However, we have not entered into any such agreements as of the date of this Report. OPERATING EXPENSES Total operating expenses incurred during fiscal year 2004 increased by $3,412,225, or approximately 162%, as compared with total operating expenses incurred during fiscal year 2003. This increase consisted of freight transportation costs rising by almost the same percentage as the increase in freight transportation revenue, as well as to increases in selling, general and administrative expenses associated with the increase in the number of employees and consultants. 24 Freight transportation expenses, consist of charges from trucking companies for providing the transportation services we arranged for our shipper customers, increased by $1,107,815 or approximately 234%, in fiscal year 2004 as compared with fiscal year 2003. Freight transportation expenses are variable costs that are expected to increase relatively the same percentage as freight transportation revenue. The percentage increase during fiscal year 2004 was less than the 268% increase in freight transportation revenue due to an increase in our gross margin to approximately 11% in fiscal year 2004 from approximately 2% in fiscal year 2003. We were able to increase our gross margin by obtaining higher prices from our shipper customers in fiscal year 2004 than in fiscal year 2003 when we provided a significant amount of our services at cost to our largest customers while establishing and building our relationships with them. We expect freight transportation expenses to increase proportionately with the increase in freight transportation revenue in fiscal year 2005. Selling, general and administrative expenses increased by $2,379,583 or approximately 152%, to $3,941,350 in fiscal year 2004 from $1,561,767 in fiscal year 2003. Approximately 75% of this increase was attributable to increases in salaries, benefits and consulting fees and the remainder of the increase was attributable to increases in legal, accounting, rent, sales and marketing expenses. Salaries, benefits and consulting expenses increased by $1,771,894 or approximately 174% in fiscal year 2004 from fiscal year 2003. Included in this increase were the following: - Salaries and benefits increased by $836,283, or approximately 128%, in fiscal 2004 to $1,489,796 from $653,513 in fiscal year 2003, accounting for approximately 47% of the increase in total salaries, benefits and consulting expenses. This increase primarily was due to an increase in the number of our non-research and development employees to 23 at the end of fiscal year 2004 from 12 at the end of fiscal year 2003, of which 10 became employees during the fourth quarter of fiscal 2003. This increase was also due to higher compensation levels of many of these employees which was below industry average compensation levels in fiscal year 2003 while we were a development stage company. - Consulting fees increased by $935,611, or approximately 258%, in fiscal year 2004 to $1,298,396 from $362,785 in fiscal year 2003, accounting for approximately 53% of the increase in consulting fees. This increase was attributed to the larger number of financial advisors and technology and other consultants that we engaged in fiscal year 2004 versus fiscal year 2003. Non-cash compensation in the form of common stock, stock options or warrants valued at $1,053,965 represented approximately 82% of total consulting fees for fiscal year 2004. 25 We expect salaries, benefits and consulting expenses in fiscal year 2005 to remain relatively constant with fiscal year 2004, with increases in salaries and fringe benefits associated with additional employees are anticipated to be offset in part by a comparable decline in consulting expenses. The most significant expenses accounting for the remaining $607,689 increase in total selling, general and administrative expenses in fiscal year 2004 as compared with fiscal year 2003 were the following: - Legal and accounting fees increased by $143,177 or approximately 106% to $277,620 during fiscal year 2004 from $134,443 in fiscal year 2003. This increase resulted from higher legal and accounting fees related to public reporting requirements, litigation and other legal matters incurred in the ordinary course of business in fiscal year 2004 compared with fiscal year 2003. While we do not anticipate any legal expenses related to litigation settlements in fiscal 2005, we do expect overall legal and accounting expenses to continue to increase in fiscal year 2005, but at a lower rate than in fiscal year 2004. The most likely areas attributable to such projected increases are associated with our continued compliance with provisions of the Sarbanes-Oxley Act of 2002, including new provisions which will phase in during fiscal 2005 and beyond, fees and costs related to capital raising transactions, potential mergers and acquisitions, if any and preparation of a greater number of agreements with customers. - Rent expense increased by $89,230 or approximately 276% to $121,586 in fiscal year 2004 from $26,712 in fiscal year 2003 as we moved to a much larger facility in Boca Raton, Florida in June 2003 to accommodate our growth in personnel and operations. We expect rent expense for fiscal year 2005 to be approximately $190,000. - Travel, meals and entertainment expenses increased by $92,157 or approximately 103% to $181,791 in fiscal year 2004 from $89,634 in fiscal year 2003 as a result of additional travel to existing and potential shipper customers, trade shows and conventions, vendors and potential investors. We expect travel, meals and entertainment expenses in fiscal year 2005 to increase as we increase the amount of travel to attract and implement our services for new shipper customers, to evaluate non-asset based trucking companies that are potential acquisition candidates and to collaborate with technology and/or defense companies related to global transportation security. - Advertising and marketing expenses, including convention and trade show expenses, increased by $80,153 or approximately 803% to $90,134 in fiscal year 2004 from $9,981 in fiscal year 2003 as we began advertising and marketing, including participating in national and regional transportation industry conventions and trade shows, to introduce our products and services to our target markets during fiscal year 2004. We did very little marketing and did not participate in any trade shows in fiscal year 2003 as we were not ready for these types of promotional activities during that time period. We expect advertising and marketing expenses in fiscal year 2005 to continue to increase as we increase our advertising to shippers and carriers in trade publications, transportation industry websites and through direct mail, attend more conventions and trade shows and join more industry organization and associations. Research and development expenses decreased $75,173 or 100% in fiscal year 2004 as compared with fiscal year 2003. The decrease was due to the completion of our research and development efforts related to our internal use software and Web site in March 2003. From that time forward, pursuant to EITF 98-1 - Accounting for the Costs of Computer Software Developed of Obtained for Internal Use, we have capitalized all internal and external costs related to the development of our internal use software and Web site and have amortized completed modules or components of our internal use software and Web site on a straight-line basis over their estimated economic lives. We do not expect to have any significant amount of research and development expenses during the remainder of fiscal year 2005. 26 OTHER EXPENSES Total other income (expense) decreased by $577,018 or approximately 56%, in fiscal year 2004 as compared with fiscal year 2003. This decrease primarily consisted of: - Litigation settlement expenses decreased by $1,002,098, or 100%, in fiscal year 2004 versus fiscal year 2003. Expenses in fiscal year 2003 represented the value of 1,698,472 shares of our common stock issued to two former consulting firms in settlement of disputed agreements following mediation of the matter. We do not anticipate any further litigation settlement expenses in fiscal year 2005. - Interest expense increased by $329,269, or approximately 246%, in fiscal year 2004 versus fiscal year 2003. The fiscal year 2004 interest expense primarily consisted of interest of: - $130,173, including $81,383 of non-cash expense related to the issuance of shares of our common stock associated with $340,000 of short-term promissory notes issued in December 2003 and January 2004 that were repaid in March 2004, - $175,912 of interest on our $1,747,000 principal amount 14.25% secured convertible debentures issued in March and April 2004; and - $72,500 associated with a $125,000 short-term convertible promissory note issued in March 2003 that was repaid in September 2003 with shares of our Series B Convertible Preferred Stock. We expect interest expense to be approximately $850,000 in fiscal year 2005 assuming no conversions or redemptions of our Series B 5% or 14.25% secured convertible debentures and projected additional debt in the form of a revolving credit facility secured primarily by our accounts receivable averaging approximately $500,000 which we may seek to obtain during fiscal 2005. We do not, however, have any commitments for any accounts receivable financing as of the date of this Report. - Income from forgiveness of debt, which was associated with accrued salaries and notes in fiscal year 2003, decreased by $93,074 or 100% in fiscal year 2004. We do not expect to have any income from forgiveness of debt in fiscal year 2005. 27 LIQUIDITY AND CAPITAL RESOURCES We have experienced losses and negative cash flows from operations since our inception, and our independent auditors' report on our financial statements for fiscal 2004 contains an explanatory paragraph regarding our ability to continue as a going concern. As of June 30, 2004, we had an accumulated deficit of $12,410,773, a stockholders' deficit of $608,212, and cash and cash equivalents of $832,130. At June 30, 2004 we had a working capital surplus of $603,380 as compared with a working capital deficit of $216,783 at June 30, 2003. This $820,163 increase in working capital was attributed to a $742,989 increase in current assets and a $77,174 decrease in current liabilities. The increase in current assets during this period consisted of a $768,812 increase in cash, a $29,220 increase in prepaid insurance and a $55,044 decrease in accounts receivable, net of allowances for doubtful accounts. The decrease in current liabilities during this period consisted of a $308,000 decrease in short-term notes payable and a $21,513 decrease in accrued salaries partially offset by a $159,241 increase in accounts payable, and a $93,098 increase in accrued expenses. During fiscal year 2004 our cash balance increased by $768,812. This increase was attributed to $2,598,189 used in operating activities and $79,773 used in investing activities offset in part by $3,446,774 provided by financing activities. During fiscal year 2003 our cash balance decreased by $17,627. This decrease was attributed to $826,368 used in operating activities and $130,663 used in investing activities offset in part by $939,404 provided by financing activities. Net cash used in operating activities for fiscal 2004 of $2,258,017 consisted of our net loss of $3,892,729 partially offset by $1,471,862 of non-cash expenses and $162,850 provided by the net change in operating assets and liabilities. Non-cash expenses primarily consisted of $1,287,711 of expenses associated with the issuance of our common stock, options and warrants as payment for services, interest, compensation, conversions and litigation settlement. Net cash used in operating activities of $703,922 in fiscal 2003 consisted of our net loss of $2,129,604 partially offset by $1,372,468 of non-cash expenses and $53,214 of cash provided by the net changes in operating assets and liabilities. Non-cash expenses primarily consisted of $1,434,338 of expenses associated with the issuance of our common stock for services and pursuant to a litigation settlement. Net cash used in investing activities in fiscal years 2004 and 2003 consisted of $419,945 and $253,109, respectively, and was used to purchase various fixed assets including computers, furniture, fixtures and leasehold improvements and to develop our internal use software. Net cash provided by financing activities of $3,446,774 in fiscal year 2004 included $2,109,916 received from the issuance of our Series B 5% and 14.25% secured convertible debentures, $1,110,960 received from the issuance of shares of our Series B and Series C Convertible Preferred Stock, $340,000 received from issuance of promissory notes and $285,898 received from the issuance of shares of our common stock which was partially offset by $400,000 in repayments of promissory notes. 28 Net cash provided by financing activities of $939,404 in fiscal year 2003 included $217,000 received from the issuance of convertible promissory notes, $225,000 received from the exercise of stock options, $195,720 received from the issuance of convertible preferred stock and $328,500 received from the issuance of shares of our common stock which was partially offset by $26,816 in repayments of promissory notes. We estimate that our cash on hand at June 30, 2004 plus $900,000 in net proceeds we received from Cornell Capital Partners, LP on September 10, 2004 to fund our operating activities until approximately December 31, 2004. Our anticipated commitments for capital expenditures during fiscal year 2005 is $30,000 which we will fund from existing working capital. In addition, we entered into a Standby Equity Distribution Agreement with Cornell Capital Partners, LP on June 28, 2004 pursuant to which Cornell Capital has agreed to purchase from us, at our option, up to $10,000,000 of our common stock during the two years after the effectiveness of the registration statement registering such shares. We have included $1.0 million of those shares to be sold under the Standby Equity Distribution Agreement in the registration statement we filed with the SEC on September 3, 2004. The registration statement has not been declared effective by SEC as of the date of this Report and we do not know when, if ever, that it will be declared effective. We cannot sell Cornell Capital the $1.0 million of our common stock until such time as the SEC has declared the registration statement effective. In addition, we will be required to file additional registration statements with the Securities and Exchange Commission and those registration statements must be declared effective in order for us to issue and sell any additional shares of common stock to Cornell Capital Partners under the Standby Equity Distribution Agreement in excess of the $1.0 million. We will have the right to sell up to $500,000 of our shares to Cornell as frequently as every seven trading days. The share price for such sales will be calculated at 98% of the lowest price (using the daily volume weighted average price) of our common stock during the five trading days following the date on which we notify Cornell of our intent to sell them the shares. There are no assurances, however, that the Securities and Exchange Commission will declare our registration statement effective. In the event the registration statement does not become effective, prior to using all of our cash on hand we will be required to seek additional capital through equity and/or debt financing. There are no assurances that we will be able to find such capital on terms acceptable to us, or 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 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. 29 ITEM 7. FINANCIAL STATEMENTS The financial statements are included beginning at F-1 following Item 13 of this Report. See Index to the Financial Statements. 30 PART III ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit No. Description of Document 2.1 Merger Agreement between Jaguar Investments, Inc., Freight Rate, Inc., and Jag2 Corporation, dated March 10, 2003 (1) 3.1 Articles of Incorporation (2) 3.2 Certificate of Amendment to Articles of Incorporation (3) 3.3 Certificate of Amendment to the Articles of Incorporation (4) 3.4 Certificate of Voting Powers, Designations, Preferences and Right to Series B Convertible Preferred Stock (11) 3.5 Certificate of Voting Powers, Designations, Preferences and Rights to Series C Convertible Preferred Stock (11) 3.6 Certificate of Voting Powers, Designations, Preferences and Right to Series Y Preferred Stock, filed March 11, 2003 (5) 3.7 Certificate of Correction of Certificate of Voting Powers, Designations, Preferences and Right to Series Y Preferred Stock, filed April 9, 2003 (5) 3.8 Certificate of Amendment to Articles of Incorporation as filed on August 13, 2004 (10) 3.9 Bylaws (2) 3.10 Amended Bylaws dated March 31, 2003 (5) 4.1 Form of Common Stock Purchase to Newbridge Securities Corporation for Business Advisory Agreement (11) 4.2 $ 1,747,000 principal amount 14.25% secured convertible debenture (11) 4.3 $2,000,000 principal amount Series B 5% secured convertible debenture (6) 4.4 Form of non-plan option agreement (11) 4.5 Form of common stock purchase warrant (11) 4.6 Form of Common Stock Purchase Warrant re: 14.25% secured convertible debentures (11) 4.7 Form of Common Stock Purchase Warrant issued to Newbridge Securities Corporation as Placement Agent for 14.25% secured convertible debentures (11) 10.1 Securities Purchase Agreement (6) 10.2 Investor Registration Rights Agreement (6) 10.3 Standby Equity Distribution Agreement (6) 10.4 Placement Agent Agreement with Newbridge Securities Corporation (6) 10.5 2001 Employee Stock Compensation Plan (3) 10.6 Form of Registration Rights Agreement, dated as of December 21, 2001, by and between Jaguar Investments, Inc. and certain shareholders of Jaguar Investments, Inc. (7) 10.11 Stock Purchase Agreement between Jaguar Investments, Inc. and The D.A.R. Group, Inc., dated March 10, 2003. (1) 10.12 Employment Agreement with Richard Hersh (8) 10.13 Employment Agreement with Michael J. Darden (8) 10.14 Employment Agreement with John Urbanowicz (8) 10.15 Business Advisory Agreement with Newbridge Securities Corporation (11) 10.16 Vendor Agreement with TruckersB2B, Inc. (9) 10.17 Form of Intellectual Property Assignment Agreement between Power2Ship, Inc. and each of Richard Hersh, Michael J. Darden and John Urbanowicz (11) 31 10.18 Security Agreements for 14.25% secured convertible debentures(11) 10.19 Registration Rights Agreement for 14.25% secured convertible debentures (11) 22 Subsidiaries of Registrant (11) 31.1 Section 302 Certificate of Chief Executive Officer* 31.2 Section 302 Certificate of principal financial officer* 32.1 Section 906 Certificate of Chief Executive Officer and principal financial officer* ---------------------------------- * Filed herewith (1) Incorporated by reference to the registrant's Report on Form 8-K as filed on March 26, 2003. (2) Incorporated by reference to the registrant's registration statement on Form 10-SB, SEC file number 000-25753, as amended. (3) Incorporated by reference to the registrant's definitive Schedule 14C Information Statement as filed on February 2, 2001 (4) Incorporated by reference to the registrant's definitive Schedule 14C Information Statement as filed on April 22, 2003 (5) Incorporated by reference to the registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. (6) Incorporated by reference to the registrant's Report on Form 8-K as filed on July 8, 2004. (7) Incorporated by reference to the registrant's Report on Form 8-K as filed on January 3, 2002. (8) Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended March 31, 2003. (9) Incorporated by reference to the registrant's Report on Form 8-K as filed on May 11, 2004. (10) Incorporated by reference to the registrant's definitive Schedule 14C Information Statement as filed on July 27, 2004. (11) Incorporated by reference to the registrant's Registration Statement on Form SB-2, file number 333-118792, as filed on September 3, 2004. (b) REPORTS ON FORM 8-K On May 11, 2004 we filed a report on Form 8-K attaching a press release under Item 5. announcing that we had entered into an agreement with TruckersB2B. 32 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 12, 2005 POWER2SHIP, INC. By: /s/ Richard Hersh ----------------- Name: Richard Hersh Title: Chief Executive Officer and principal financial officer 33 POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheet June 30, 2004 F-3 Consolidated Statements of Operations, Years Ended June 30, 2004 and May 31, 2003 F-4 Consolidated Statement of Changes in Stockholders' Deficit for the Period from May 31, 2002 through June 30, 2004 F-5 Consolidated Statements of Cash Flows, Years Ended June 30, 2004 and May 31, 2003 F-6 Transition Period Ended June 30, 2003: Consolidated Statement of Operations, One Month Period Ended June 30, 2003 F-7 Consolidated Statement of Cash Flows, One Month Period Ended June 30, 2003 F-8 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Power2Ship, Inc. We have audited the accompanying consolidated balance sheet of Power2Ship, Inc. and Subsidiary as of June 30, 2004 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended June 30, 2004 and May 31, 2003, and the one month ended June 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Power2Ship, Inc. and Subsidiary, as of June 30, 2004 and the consolidated results of their operations and their cash flows for the years ended June 30, 2004 and May 31, 2003, and for the one month ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company had net losses and cash used in operations of $3,892,729 and $2,258,017, respectively, for the year ended June 30, 2004. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ SHERB & CO., LLP New York, New York Certified Public Accountants August 12, 2004 F-2

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET JUNE 30, 2004 ASSETS Current assets: Cash and cash equivalents $ 832,130 Receivables, net of allowance of $2,963 319,089 Prepaid insurance 59,039 ------------- Total current assets 1,210,258 Furniture and equipment 248,099 Less: accumulated depreciation (72,800) ------------- Net furniture and equipment 175,299 Software development costs, net of accumulated Amortization of $45,154 417,464 Deferred financing costs 766,609 Restricted cash for interest on debentures 124,474 Other assets 160,682 ------------- Total assets $ 2,854,786 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable - short term $ 60,000 Accounts payable 305,705 Accrued expenses 196,460 Accrued salaries 44,713 ------------- Total current liabilities 606,878 Long term debt: Long term notes payable 20,000 Convertible notes payable less discount of $94,920 2,721,120 Convertible note payable to related party 115,000 Stockholders' deficit : Preferred stock, $.01 par value, 1,000,000 authorized: Series B convertible preferred stock, $.01 par value, 200,000 shares authorized; 198,000 shares issued and outstanding 1,980 Series C convertible preferred stock, $.01 par value, 20,000 shares authorized; 10,832 shares issued and outstanding 108 Series Y convertible preferred stock, $.01 par value, 87,000 shares authorized; 87,000 shares issued and outstanding 870 Common stock, $.001 par value, 100,000,000 shares authorized; 38,248,146 shares issued and outstanding 38,248 Deferred compensation (208,410) Additional paid-in capital 11,969,765 Accumulated deficit (12,410,773) ------------- Total stockholders' deficit (608,212) ------------- Total liabilities and stockholders' deficit $ 2,854,786 =============

See accompanying notes F-3

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Year ended Year ended June 30, 2004 May 31, 2003 --------------- -------------- Revenue: Freight transportation $ 1,778,027 $ 482,824 Access services 290,013 88,064 Implementation services 23,925 448,995 --------------- -------------- Total revenue 2,091,965 1,019,883 Operating expenses: Freight transportation 1,581,119 473,304 Selling, general and administrative: Salaries, benefits and consulting fees 2,788,192 1,016,298 Other selling, general and administrative 1,153,158 545,469 Research and development - 75,173 --------------- -------------- Total operating expenses 5,522,469 2,110,244 --------------- -------------- Loss from operations (3,430,504) (1,090,361) --------------- -------------- Other income (expense): Litigation settlement - (1,002,098) Forgiveness of debt - 93,074 Interest income 854 821 Interest expense (463,079) (133,810) Other income - 2,770 --------------- -------------- Total other expense (462,225) (1,039,243) --------------- -------------- Net loss $ (3,892,729) $ (2,129,604) Less: Preferred stock dividend (1,347,044) - --------------- -------------- Loss available to common shareholders $ (5,239,773) $ (2,129,604) =============== ============== Loss per share-basic and diluted $ (0.16) $ (0.14) =============== ============== Weighted average shares outstanding - basic and diluted 32,947,559 14,957,590 =============== ==============

See accompanying notes F-4

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE PERIOD MAY 31, 2002 THROUGH JUNE 30, 2004 Series B Stock Series C Stock Series X Stock Series Y Stock ---------------------- ----------------------- ----------------- ----------------- Shares Amount Shares Amount Shares Amount Shares Amount ----------- --------- ---------- ----------- -------- ------- -------- ------- Balance, May, 31, 2002 - $ - 87,000 $ 870 - $ - - $ - Conversion of Series C preferred to series Y (87,000) (870) 87,000 870 Issuance of series X preferred 100,000 1,000 Retirement of Treasury stock Sale of common stock Conversion of notes and accrued salaries to stock options Common stock issued for services Options and warrants issued for services Common stock issued upon merger Beneficial conversion for convertible note payable Net loss - - - - - - - - ----------- --------- ---------- ----------- -------- ------- -------- ------- Balance, May 31, 2003 - $ - - $ - 100,000 $ 1,000 87,000 $ 870 =========== ========= ========== =========== ======== ======= ======== ======= Sale of Series B preferred stock 9,000 90 Common stock issued for services and compensation Common stock issued for rent deposit Warrants issued for interest Net loss - - - - - - - - ----------- --------- ---------- ----------- -------- ------- -------- ------- Balance, June 30, 2003 9,000 $ 90 - $ - 100,000 $ 1,000 87,000 $ 870 =========== ========= ========== =========== ======== ======= ======== ======== Conversion of Series X preferred stock to common stock (100,000) (1,000) Common stock issued for anti-dilution Sale of Series B preferred stock 163,200 1,632 Sale of Series C preferred stock net of costs of $30,000 10,832 108 Sale of common stock (Reg S) net of costs of $428,847 Conversion of notes and accrued interest to Series B stock 25,800 258 Common stock issued for Series B preferred dividend Common stock returned for rent deposit Common stock issued for services Common stock issued for interest Common stock issued for financing Common stock issued for services - financial consultant Warrants issued for services - financial consultant Options and warrants issued for discount on notes Options and warrants issued for services Options and warrants issued for financing Net loss - - - - - - - - ----------- --------- ---------- ----------- -------- ------- -------- ------- Balance, June 30, 2004 198,000 $ 1,980 10,832 $ 108 - $ - 87,000 $ 870 =========== ========= ========== =========== ======== ======= ======== ======== (CONTINUED) POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE PERIOD MAY 31, 2002 THROUGH JUNE 30, 2004 (CONTINUED) Treasury Stock Common Stock (at cost) Additional ------------------- ----------------- Deferred Paid-in Accumulated Shares Amount Shares Amount Compensation Capital Deficit Total ---------- ------- -------- -------- ------------ --------- ---------- ----------- Balance, May, 31, 2002 11,907,157 $11,907 (410,000) $(30,000) $ - $ 6,211,563 $ (6,133,292) $ 61,048 Conversion of Series C preferred to series Y - - Issuance of series X preferred (1,000) - Retirement of Treasury stock (410,000) (410) 410,000 30,000 (29,590) - Sale of common stock 657,000 657 327,843 328,500 Conversion of notes and accrued salaries to stock options 4,430 4,430 Common stock issued for services 2,101,027 2,101 1,400,452 1,402,553 Options and warrants issued for Services 31,785 31,785 Common stock issued upon merger 12,860,000 12,860 (12,860) - Beneficial conversion for convertible note payable 175,000 175,000 Net loss - - - - - - (2,129,604) (2,129,604) ---------- ------- -------- -------- ------------ --------- ---------- ----------- Balance, May 31, 2003 27,115,184 $27,115 - $ - $ - $ 8,107,623 $(8,262,896) $(126,288) ========== ======= ======== ======== ============ ========= ========== =========== Sale of Series B preferred stock 44,910 45,000 Common stock issued for services and compensation 180,000 180 151,020 151,200 Common stock issued for rent deposit 50,000 50 39,450 39,500 Warrants issued for interest 16,650 16,650 Net loss - - - - - - (167,416) (167,416) ---------- ------- -------- -------- ------------ --------- ---------- ----------- Balance, June 30, 2003 27,345,184 $27,345 - $ - $ - $ 8,359,653 $ (8,430,312) $ (41,354) ========== ======= ======== ======== ============ ========= ========== =========== Conversion of Series X preferred stock to common stock 5,700,000 5,700 (4,700) - Common stock issued for anti-dilution 948,275 948 (948) - Sale of Series B preferred stock 814,368 816,000 Sale of Series C preferred stock net of costs of $30,000 294,852 294,960 Sale of common stock (Reg S) net of costs of $428,847 1,128,400 1,128 284,770 285,898 Conversion of notes and accrued interest to Series B stock 128,742 129,000 Common stock issued for Series B preferred dividend 233,336 233 87,499 (87,732) - Common stock returned for rent deposit (50,000) (50) (39,450) (39,500) Common stock issued for services 1,085,208 1,085 299,557 300,642 Common stock issued for interest 441,483 441 208,729 209,170 Common stock issued for financing 816,260 816 309,363 310,179 Common stock issued for services - financial consultant 600,000 600 (150,000) 299,400 150,000 Warrants issued for services - financial consultant (58,410) 116,820 58,410 Options and warrants issued for discount on notes 108,160 108,160 Options and warrants issued for services 569,489 569,489 Options and warrants issued for financing 133,462 133,462 Net loss - - - - - - (3,892,729) (3,892,729) ---------- ------- -------- -------- ------------ --------- ---------- ----------- Balance, June 30, 2004 38,248,146 $38,248 - $ - $ (208,410) $11,969,765 $(12,410,773) $ (608,212) ========== ======= ======== ======== ============ ========= ========== ===========

See accompanying notes F-5

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended Year ended June 30, 2004 May 31, 2003 --------------- -------------- Cash flows from operating activities: Net loss $ (3,892,729) $ (2,129,604) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 37,656 7,659 Amortization of software development costs 40,621 4,533 Amortization of deferred financing costs 39,642 - Amortization of discount on notes payable 70,635 11,645 Increase (decrease) in allowance for doubtful accounts (4,403) 7,367 Gain on forgiveness of accrued salary - (93,074) Issuance of stock options and warrants for services and conversion 627,899 31,785 Issuance of stock for services, interest and litigation settlement 659,812 1,402,553 Changes in operating assets and liabilities: Decrease (increase) in receivables 59,447 (324,328) Increase in prepaid insurance (29,220) (33,026) Increase in other assets (117,313) (31,479) Increase in accounts payable and accrued expenses 249,936 442,047 --------------- -------------- Net cash used in operating activities (2,258,017) (703,922) --------------- -------------- Cash flows from investing activities: Purchases of property and equipment (79,773) (130,663) Capitalized costs of software development (340,172) (122,446) --------------- -------------- Net cash used in investing activities (419,945) (253,109) --------------- -------------- Cash flows from financing activities: Proceeds from convertible promissory notes net of costs of $487,084 and $0, respectively 2,109,916 217,000 Proceeds from promissory notes 340,000 - Repayments of promissory notes (380,000) (26,816) Repayments of promissory notes - related party (20,000) - Proceeds from conversion of options to common stock - 225,000 Proceeds from sale of preferred stock net of costs of $30,000 and $0, respectively 1,110,960 195,720 Proceeds from sale of common stock net of costs of $428,847 and $0, respectively 285,898 328,500 --------------- -------------- Net cash provided by financing activities 3,446,774 939,404 --------------- -------------- Net increase (decrease) in cash and cash equivalents 768,812 (17,627) Cash and cash equivalents, beginning of period 63,318 36,027 --------------- -------------- Cash and cash equivalents, end of period $ 832,130 $ 18,400 =============== ============== Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 14,790 $ - =============== ============== Cash paid for income taxes during the period $ - $ - =============== ============== Non-cash transactions affecting investing and financing activities: Conversion of bridge loan to convertible promissory notes $ 150,000 $ - =============== ============== Warrants issued for deferred financing costs $ 133,462 $ - =============== ============== Common stock issued for deferred financing costs $ 310,179 $ - =============== ============== Warrants issued for discount on notes payable $ 108,160 $ - =============== ============== Common stock cancelled for rent deposit $ (39,500) $ - =============== ============== Conversion of notes and accrued interest to preferred stock $ 129,000 $ - =============== ============== Conversion of notes and accrued interest to common stock $ 87,732 $ - =============== ============== Common stock and warrants for services to be rendered in future $ 208,410 $ - =============== ============== Common stock issued for anti-dilution $ 948 $ - =============== ============== Conversion of accrued salaries to note payable $ - $ 135,000 =============== ============== Retirement of treasury stock $ - $ (30,000) =============== ============== Conversion of accrued salaries and note payable to options $ - $ 4,430 =============== ============== Conversion of Series B preferred stock to common stock $ - $ 1,957 =============== ============== Conversion of Series C to Series Y preferred stock $ - $ 870 =============== ==============

See accompanying notes F-6

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS ONE MONTH TRANSITION PERIOD ENDED JUNE 30, 2003 Revenue: Freight transportation $ 77,895 Access services 35,000 ------------ Total revenue 112,895 Operating expenses: Freight transportation 39,254 Selling, general and administrative: Salaries, benefits and consulting fees 97,706 Other selling, general and administrative 106,274 Research and development 20,113 ------------ Total operating expenses 263,347 ------------ Loss from operations (150,452) ------------ Other income (expense): Interest income 401 Interest expense (17,365) ------------ Total other expense (16,964) ------------ Net loss $ (167,416) Less: Preferred stock dividend (45,000) ------------ Loss available to common shareholders $ (212,416) ============ Loss per share-basic and diluted $ (0.01) ============ Weighted average shares outstanding - basic and diluted 27,324,184 ============

See accompanying notes F-7

POWER2SHIP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS ONE MONTH TRANSITION PERIOD ENDED JUNE 30, 2003 Cash flows from operating activities: Net loss $(167,416) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 1,638 Issuance of warrants for interest 16,650 Issuance of stock for services and compensation 62,367 Changes in operating assets and liabilities: Increase in receivables (57,171) Decrease in prepaid insurance 3,207 Increase in accounts payable and accrued expenses 43,309 ---------- Net cash used in operating activities (97,416) ---------- Cash flows from investing activities: Purchases of property and equipment (2,666) ---------- Net cash used in investing activities (2,666) ---------- Cash flows from financing activities: Proceeds from convertible promissory notes 100,000 Proceeds from sale of preferred stock 45,000 ---------- Net cash provided by financing activities 145,000 ---------- Net increase in cash and cash equivalents 44,918 Cash and cash equivalents, beginning of period 18,400 ---------- Cash and cash equivalents, end of period $ 63,318 ========== Supplemental disclosure of cash flow information: Cash paid for interest during the period $ - ========== Cash paid for income taxes during the period $ - ========== Non-cash transactions affecting investing & financing activities: Common stock issued for rent deposit $ 39,500 ========== Conversion of convertible note to short term promissory note $ 125,000 ========== Common stock issued as payment for accounts payable $ 88,833 ==========

See accompanying notes F-8 POWER2SHIP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and is currently its sole operating entity. The Company's patent pending system delivers supply chain, tracking and other logistics information to freight carriers (currently trucking companies), shippers (companies sending or receiving freight) and their customers. This information, which instantly becomes accessible through the Company's password-protected, web-based MobileMarket(TM), enables users to make better-informed, cost-effective logistics decisions. 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. Since March 2003 the Company's primary source of revenue has been derived from assisting shippers in finding transportation to move their inbound and outbound freight and track the freight while in transit thereby enabling them to optimize their supply chain and reduce their transportation, warehousing and inventory carrying costs. Also, the Company provides carriers with free, unlimited use of a web-based asset management system which tracks the location, destination and availability of their transportation equipment. In addition to helping better manage the utilization of their assets and drivers, information about available transportation equipment that meets a shipper's requirements automatically is offered to shippers through the MobileMarket(TM). The Company receives a brokerage or transaction fee each time a shipper selects a carrier through the MobileMarket(TM) to move its freight. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS BASIS OF PRESENTATION --------------------- For accounting purposes, the 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 reported herein and accompanying notes thereto reflect the assets, liabilities and operations of Freight Rate, Inc. as if it had been the reporting entity since inception. On February 27, 2004, as reported in Form 8-K, the Company's board of directors authorized a change in the Company's fiscal year from May 31 to June 30 in order to align the Company's quarterly reporting obligations with calendar quarters, resulting in a more traditional reporting pattern and thereby reducing potential confusion in the marketplace. As a result, this Form 10-KSB includes consolidated financial statements for the years-ended June 30, 2004, May 31, 2003 and the transition period associated with the changed fiscal year which is the one month period ended June 30, 2003. PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. 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. FURNITURE AND EQUIPMENT ----------------------- Furniture and equipment is stated at cost. Depreciation on furniture 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. F-9 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. In these transactions, 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 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. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying amounts reported in the balance sheet for cash, receivables, accounts payable, notes payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments. 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 June 30, 2004, the Company had no assets which were considered to be impaired. F-10 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. 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 options, warrants and shares issuable upon conversion of outstanding convertible debt or preferred stock totaling 74,239,167 as of May 31, 2003, 74,614,282 as of June 30, 2003 and 36,859,100 as of June 30, 2004, that were not included in computing its diluted loss per share because their impact was anti-dilutive since the Company had net losses for the periods presented in its financial statements. 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:

Twelve Months One Month Twelve Months Ended Ended Ended June 30, 2004 June 30, 2003 May 31, 2003 ------------- ------------- ------------ Loss available to common shareholders, as reported $(5,539,324) $(212,416) $(2,247,517) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects 82,500 23,700 - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (326,052) (23,700) (150,009) ------------- ------------- ------------ Pro forma loss available to common shareholders $(5,782,876) $(212,416) $(2,397,526) ============= ============= ============ Loss per share: Basic and diluted - as reported $ (0.17) $ (0.01) $ (0.15) ============= ============= ============ Basic and diluted - pro forma $(0.18) $ (0.01) $ (0.16) ============= ============= ============

RESEARCH AND DEVELOPMENT ------------------------ Research and development costs are expensed as incurred. COMPUTER SOFTWARE AND WEBSITE DEVELOPMENT COSTS ----------------------------------------------- The Company uses SFAS No. 86,"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" to determine whether to expense or capitalize the costs associated with the development of its computer software and Web site. Any costs incurred by the Company in creating its computer software and Web site are charged to expense until it establishes the technological feasibility of the computer software and Web site and it completes all research and development activities for the other components of its process. Thereafter, all computer software and Web site productions costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value until the computer software and web site become available for general release to customers. F-11 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 June 30, 2004, the Company's cash balances exceeded the insured limits by approximately $700,000. 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 June 30, 2004. The Company maintains reserves for potential credit losses and such losses historically have been within management's expectations. ADVERTISING ----------- Advertising is expensed as incurred. Advertising expenses for the twelve months ended June 30, 2004 and May 31, 2003 totaled approximately $36,000 and $10,000 respectively. There was no advertising expense for the month of June, 2003. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. The Company does not have any variable interest entities created after January 31, 2003. For those arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company has not identified any variable interest entities to date and will continue to evaluate whether it has variable interest entities that will have a significant impact on its consolidated balance sheet and results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150 did not have a significant impact on the consolidated financial position or results of operations. NOTE 3 - GOING CONCERN The accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern. During the twelve months ended June 30, 2004 and May 31, 2003, the Company incurred losses from operations of $3,430,504 and $1,090,361, respectively and had negative cash flows from operations of $2,258,017 and $703,922, respectively. While the Company is attempting to increase sales, the growth has not been significant enough to support the Company's daily operations. Management intends to continue raising additional funds with private placements of its debt and equity securities to accredited investors. While the Company believes in the viability of its strategy to improve sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. NOTE 4 - CONCENTRATIONS During the twelve months ended June 30, 2004, six customers accounted for 95% of the Company's revenue. Their individual percentages ranged from 2% to 64% with one customer representing approximately 64% and one other customer representing 15%. Four of the same customers accounted for 79% of the Company's accounts receivable at June 30, 2004. F-12 NOTE 5 - RELATED PARTY TRANSACTIONS In November, 2002, the Chief Executive Officer received $20,000 from the Company in the form of a short-term demand note bearing interest at the rate of 6% per annum. As of May 31, 2003 the balance of the note and accrued interest was $20,985. This transaction occurred prior to the reverse merger when Freight Rate was a private company. In September, 2003, the note was paid in full. In March 2003, the Company issued its former Chairman 221,755 options (83,733 pre-merger equivalent) exercisable at $.38 per share with an expiration date of March 6, 2006 which were valued at $4,429 (approximately $.02 per option) using the Black-Scholes option pricing model. The options were issued in consideration for his forgiveness of $83,733 relating to accrued salary and services performed under a consulting agreement resulting in a gain of $79,304. In November, 2004, an employee received $6,000 from the Company in the form of a short-term demand note bearing interest at the rate of 18% per annum. As of June 30, 2004 the balance of the note and accrued interest was $4,250. NOTE 6 - FURNITURE AND EQUIPMENT At June 30, 2004, furniture and equipment consisted of the following:

Estimated Useful lives ------------- Computer Hardware & Software $ 166,024 5 years Equipment 54,396 5 years Furniture & Fixtures 24,651 7 years Leasehold Improvements 3,028 4 years -------------- 248,099 Less: accumulated depreciation (72,800) -------------- $ 175,299 ==============

Depreciation expense was $37,656 and $7,659 for the years ended June 30, 2004 and May 31, 2003, respectively. NOTE 7 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE In June, 2004, the Company issued $1,000,000 of its Series B Convertible Debentures to one accredited investor and paid commissions and expenses of $135,500 that were accounted for as deferred financing costs to be amortized over the terms of the Debentures. In addition, the company issued 816,260 common shares valued at $348,179 to the lender and placement agent that were also accounted for as deferred financing costs to be amortized over the terms of the Debentures. The Debentures mature on June 28, 2006, and earn interest of 5.00% per annum. The Debentures may be converted by the holder at any time into common stock at a conversion price equal to the lesser of an amount equal to 120% of the closing bid price of the common stock as of the closing date 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, with three days notice at any time, by paying a premium of up to 20% of their original purchase price in a combination of cash and common stock. For the twelve months ended June 30, 2004, there was no accrued interest on the Debentures and no amortization of deferred financing costs. 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. F-13 In March and April, 2004, the Company issued $1,747,000 of its Series A Convertible Debentures to 35 accredited investors and paid commissions and expenses of $227,110 that were accounted for as deferred financing costs to be amortized over the terms of the Debentures. In addition, the company issued 873,500warrants valued at $108,160 (see Note 11) and131,025 common shares valued at $55,031 to the lenders that were accounted for as additional interest costs. 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 equal to the lesser of $.80 per share or 90% of the average closing bid price of the common stock for the ten trading days immediately preceding the date that a registration statement registering the shares of common stock underlying the Debentures becomes effective. Since this security contains a conversion provision that makes the conversion price dependent upon the occurrence of a future event, EITF 98-5 specifies that a contingent beneficial conversion feature not be recognized in earnings until the contingency is resolved. Assuming that the contingency, the Company's registration statement becoming effective, is resolved on October 29, 2004, the Company would have recognized a beneficial conversion of $194,111 of interest expense. The actual amount of the beneficial conversion to be recognized is expected to vary from this amount since the actual conversion price is likely to be different on the date that the Company's registration statement becomes effective, if at all. The Company may redeem the Debentures, with fifteen days notice at any time, by paying a premium of up to 20% of their original purchase price in a combination of cash and common stock. For the twelve months ended June 30, 2004, the accrued interest on the Debentures was $66,867 (paid July 1, 2004) and amortization of deferred financing costs was $39,642. 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 required to set aside the equivalent of six months interest on the debentures in a separate account in the event of a default. At June 30, 2004, the Company had restricted cash of $124,474 for this purpose. In December 2003 and January 2004, the Company issued a total of $340,000 of 18% short-term promissory notes to six individuals, paid commissions associated with the placement of such notes of $34,000 and issued the lenders a total of 185,458 shares of the Company's restricted common stock valued at $81,383. Interest expense for the twelve months ended June 30, 2004 on the notes was $14,790. The total of commissions, value of the common stock and interest of $130,173 was recorded as interest expense for the twelve months ended June 30, 2004. In March, 2004, the Company repaid $190,000 of these notes and converted $150,000 into Series A Convertible Debentures discussed above. On July 15, 2003, the Company issued a promissory note in the amount of $170,000 for licenses to use certain logistics software. The note replaced a prior note for the licenses which was the subject of a lawsuit and other disputed claims by various parties. The lawsuit was initiated by the software vendor to enforce payment of the prior promissory note in the amount of $143,000 which had expired in May 2002. This prior note had been issued to the software vendor in September 2001 to reflect the balance we owed on software licenses purchased in March 2000. We did not made the required payments on the prior note and asserted counterclaims against the software vendor in the lawsuit for breach of contract, fraudulent inducement and declaratory relief. The new note was the result of a settlement agreement for all claims by all parties. The note bears no interest and 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 beginning on August 1, 2003 for a total of $140,000. The new note payable was recorded at the face value of $170,000 and the old note of $140,000 and accrued interest of $15,111 was written off. Prepaid interest in the amount of $11,889 was recorded. If all the aforementioned payments are made on or before their applicable due dates, or within their permitted grace periods, the $30,000 balance remaining of the note will be waived. The Company expects to receive the waiver in the fourth fiscal quarter of 2005 and will write off the note balance of $30,000 against the prepaid interest, leaving a gain of $18,101 that will be recorded at that time. At June 30, 2004, the outstanding balance on the note was $80,000 of which $20,000 was accounted for as long term notes payable and $60,000 as notes payable - short term. In March 2003, the Company issued a $125,000 convertible promissory note to a private investor that also was a non-affiliated Company shareholder. In June 2003, the Company and the shareholder cancelled the old note and issued a new promissory note for $225,000 as the Company received an additional $100,000. The new note had an interest rate of 5% per annum, had a maturity date of December 5, 2003 and had a conversion price of $.40 per share. Subsequent to its issuance, the conversion provision in the new note was amended to change the conversion price to $.79 per share which equaled the closing market price of our common stock on the issue date of the note. We also granted the note holder, in connection with the loan, warrants to purchase 75,000 shares of common stock at a price of $0.79 per share which expired on June 5, 2004. These warrants were valued at $16,650 and recorded as interest expense. In July 2003, the Company made a $100,000 principal payment on the $225,000 note and, in September 2003, repaid the $125,000 outstanding balance of the note, plus accrued interest of $4,000, with 25,800 shares of its Series B preferred stock convertible at $0.25 per share. This conversion provision represents a beneficial conversion feature, the value of which is calculated by subtracting the conversion price of $0.25 from the market price of the common stock on the date the preferred shares were issued. In this case, since the beneficial conversion feature is valued at more than the conversion price, the total value of the shares or $129,000 has been recognized as preferred dividends during the fiscal quarter ended November 30, 2003. F-14 On March 10, 2003, the Company issued an 8% convertible promissory note due June 30, 2006 in the amount of $135,000 to its Chief Executive Officer in exchange for his forgiveness of $147,520 of accrued salary. The outstanding principal balance of the note may be converted at any time into common stock at a conversion price equal to the lesser of $1.51 per share or 50% of the average closing bid prices of the Company's common stock for the five trading days immediately preceding the date of such conversion but no less than $0.75 per share. During the twelve months ended June 30, 2004, $20,000 was repaid leaving a balance of $115,000. On March 6, 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 had 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 results 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. As of June 30, 2004, the Company had accrued interest in the amount of $18,441 and amortized $69,040 of the discount as interest expense. NOTE 8 - COMMITMENTS AND CONTINGENCIES OPERATING LEASE --------------- The Company leases office space under an operating lease commencing May 15, 2003. The lease terminates on May 31, 2007. At June 30, 2004, minimum rental commitments are as follows: 2005 $ 119,475 2006 125,213 2007 52,813 ------------ $ 297,501 ============ Also required was an additional security deposit of $9,312 by June 1, 2004. This amount was secured by 50,000 shares of the Company's common stock valued at $39,500 which were deposited with the landlord in June, 2003 and returned in May, 2004 when the payment of the additional deposit was made. For the years ended June 30, 2004 and May 31, 2003, rent expense was $121,586 and $26,712, respectively. For the month of June, 2003, rent expense was $8,845. In addition, the Company leases a phone system and a copier with total rental commitments of $24,412 through March 31, 2007. At June 30, 2004, minimum rental commitments are as follows: 2005 $ 10,780 2006 10,780 2007 2,852 ----------- $ 24,412 =========== Total amounts expensed for the years ended June 30, 2004 and May 31, 2003, was $9,576 and $1,797, respectively. For the month of June, 2003, the amount expensed was $150. F-15 LICENSE AGREEMENT ----------------- The Company has entered into an agreement with a vendor for GPS devices which requires the company to pay the vendor a monthly royalty fee on each device once it is put into service with a customer. For the year ended June 30, 2004, the company paid $5,325 in connection with this agreement. CONTINGENCIES ------------- In January 2004, we were named as one of a number of defendants in a civil action filed in the U.S. District Court for the Southern District of New York titled Dale Sobek and Seema Bhagat vs. Joseph Quattrochi, Cardinal Capital Management, Inc., R&M Capital Partners, Inc., Power2Ship, Inc. and Madison Stock Transfer, Inc, case number 03CV10219. The lawsuit was filed by a stockholder of our company who purportedly acquired shares of our common stock from another of our stockholders in May 2002 and received additional shares as collateral from the selling stockholder. Following the transaction, the selling stockholder induced our transfer agent to issue it replacement shares for the shares of our common stock allegedly provided to the plaintiff as collateral. The plaintiff's are alleging breach of contract and racketeering and are seeking punitive damages from all defendants of $5,000,000 and $750,000 for conversion by certain of the defendants, including our company. We believe that the claim is without merit as it pertains to our company and we have filed motions to dismiss all claims with prejudice. The motions are pending judicial determination. In April 2004, we obtained an order for provisional relief from the Supreme Court of the State of New York, County of Kings, against Flow Capital Advisors et al in the matter of Power2Ship, Inc. vs. Flow Capital Advisors, Inc., Douglas F. Gass and Madison Stock Transfer, Inc. restraining Flow Capital from transferring or in any manner encumbering any securities of Power2Ship held by it. Flow Capital received 779,155 shares of our common stock and an option to purchase 200,000 shares of our common stock, in addition to other compensation, pursuant to two consulting agreements between Flow Capital and Power2Ship. In our compliant we alleged that the first consulting agreement represented a wrongful usurping of corporate opportunity by the principal shareholder of Flow Capital and that both consulting agreements were fraudulently obtained through material omissions and misrepresentations made prior to, and after, entering into the consulting agreements. In May 2004, we initiated an arbitration proceeding under the rules of the American Arbitration Association in Florida to resolve this dispute and discontinued our legal action in the Supreme Court of the State of New York. In July 2004, Mr. Gass and Flow Capital Advisors entered a motion in the Broward County, Florida 17th Judicial Circuit Court to stay the arbitration. We submitted our answer to the complaint and counterclaims to the court on August 12, 2004. The court granted the motion to stay the arbitration and the legal action remained pending as of the date of the audit report. The Company regularly assesses the potential impact of pending litigation on its financial statements. As of June 30, 2004, the Company's pending litigation is expected to have a negligible, if any, impact on its financial statements. NOTE 9 - EMPLOYMENT AGREEMENTS Effective January 1, 2003, the Company commenced a five-year employment agreement with its Chief Executive Officer, Richard Hersh. The term of employment may be automatically renewed for successive one year terms beginning on the five-year anniversary of the agreement unless previously terminated according to the termination provisions in the agreement or if the Company or Hersh elects to terminate the agreement by written notice at least ninety days prior to the expiration of the then-current term of employment. Under the terms of this agreement, Hersh will receive a base salary and became eligible to receive a bonus based on the financial performance of the Company. This summary of the employment agreement is qualified by reference to the complete text of the employment agreement which was filed on May 15, 2003 as an exhibit to the Company's Form 10-QSB for the period ended March 31, 2003. Effective January 1, 2003, the Company commenced a four-year employment agreement with its Vice President of Technology, John Urbanowicz. The term of employment may be automatically renewed for successive one year terms beginning on the four-year anniversary of the agreement unless previously terminated according to the termination provisions in the agreement or if the Company or Urbanowicz elects to terminate the agreement by written notice at least ninety days prior to the expiration of the then-current term of employment. Under the terms of this agreement, Urbanowicz will receive a base salary and became eligible to receive a discretionary bonus based on performance. This summary of the employment agreement is qualified by reference to the complete text of the employment agreement which was filed on May 15, 2003 as an exhibit to the Company's Form 10-QSB for the period ended March 31, 2003. F-16 Effective April 15, 2003, the Company commenced a four-year employment agreement with its President, Michael J. Darden. The term of employment may be automatically renewed for successive one year terms beginning on the four-year anniversary of the agreement unless previously terminated according to the termination provisions in the agreement or if the Company or Darden elects to terminate the agreement by written notice at least ninety days prior to the expiration of the then-current term of employment. Under the terms of this agreement, Darden will receive a base salary, be granted a certain number of stock options subject to a specified vesting period and became eligible to receive a bonus based on the financial performance of the Company. This summary of the employment agreement is qualified by reference to the complete text of the employment agreement which was filed on May 15, 2003 as an exhibit to the Company's Form 10-QSB for the period ended March 31, 2003. At June 30, 2004, the aggregate commitments pursuant to the employment agreements with our executive officers are as follows: 2005 $ 520,266 2006 600,987 2007 513,111 2008 155,520 ------- $1,789,884 ========== NOTE 10 - INCOME TAXES The Company had available at June 30, 2004, operating loss carryforwards for federal and state taxes of approximately $8,700,000, which could be applied against taxable income in subsequent years through 2024. Such amounts would be subject to the limitations contained under Section 382 of the Internal Revenue Code relating to changes in ownership. However, given that the realization of this tax effect is uncertain, a full valuation allowance was recorded. Reconciliation of the differences between income taxes computed at the federal statutory tax rates and the provision for income taxes is as follows:

2004 Percent 2003 Percent ------------ -------- ---------- -------- Income tax benefit computed at Federal statutory tax rate $ 1,488,000 34.0% $ 760,000 34.0% State tax, net of Federal benefits 145,000 3.5 78,000 3.5 Non-deductible non-cash expenses (457,000) (10.5) (79,000) (10.4) Reinstatement/change in deferred tax asset valuation allowance (1,176,000) (27.0) (759,000) (27.1) ------------ -------- ---------- -------- Provision for income taxes $ - -% $ - -% ============ ======== ========== ========

Temporary differences that give rise to significant deferred tax assets are as follows:

2004 2003 ------------ ------------ Net operating loss carryforward $ 3,266,000 $ 2,090,000 ============ ============ Total deferred tax assets 3,266,000 2,090,000 Valuation allowance (3,266,000) (2,090,000) ------------ ------------ Net deferred tax asset $ - $ - ============ ============

F-17 NOTE 11 - STOCKHOLDERS' EQUITY SERIES B CONVERTIBLE PREFERRED STOCK ------------------------------------ During June, 2003, the Company sold 9,000 shares of its Series B convertible preferred stock for $45,000. During the twelve months ended June 30, 2004, the Company sold 163,200 shares of its Series B convertible preferred stock for $816,000 and issued 25,800 shares as repayment of a promissory note and accrued interest thereon (see Note 7). The shares are convertible into the Company's common stock at a price of $0.25 per share and are entitled to receive annual dividends of 10% and have preferred registration rights. This conversion provision represents a beneficial conversion feature, the value of which is calculated by subtracting the conversion price of $0.25 from the market price of the common stock on the date the preferred shares were issued. The value of this beneficial conversion feature in the amount of $857,840 was recognized as preferred dividends, $45,000 in June, 2003 and $812,840 during the twelve months ended June 30, 2004. In addition, on June 30, 2004, 233,336 shares of common stock valued at $87,732, the fair value at the date of issuance, were issued as a dividend. This offering has been completed. SERIES C CONVERTIBLE PREFERRED STOCK ------------------------------------ During the twelve months ended June 30, 2004, the Company sold 10,832 shares of its Series C convertible preferred stock for $324,960 less commissions of $30,000. These shares are convertible into 1,083,200 shares of the Company's common stock at $0.30 per share, are entitled to receive annual dividends of 10%, include warrants to purchase 541,600 shares of common stock at $1.00 per share for a period of three years and have preferred registration rights. No expense was recognized for these warrants as both the charge and the credit were to additional paid in capital. This transaction was effected under Rule 506 of Regulation D of the Securities Act of 1933. The conversion provision for these securities represents a beneficial conversion feature, the value of which is calculated by subtracting the conversion price of $0.30 from the market price of the common stock on the date the preferred shares were issued. The value of this beneficial conversion feature in the amount of $317,472 was recognized as preferred dividends. SERIES X CONVERTIBLE PREFERRED STOCK ------------------------------------ The Series X convertible preferred stock had been issued on a pro rata basis to all of the preferred and common shareholders of Freight Rate, Inc. upon the reverse merger with the Company in March 2003. The preferred stock had a stated value and par value of $.01, paid no dividends, had no voting rights and no liquidity preference, and was convertible into shares of the Company's common stock based upon certain rights set forth in the merger agreement between Freight Rate, Inc. and the Company dated March 10, 2003. Under this provision, the shares of Series X Convertible Preferred Stock were required to be converted on March 11, 2004 into as many as an additional 85,740,000 shares of the Company's common stock based upon the occurrence of certain events. During November, 2003, all 100,000 shares of the Series X convertible preferred stock were converted into 5,700,000 shares of the Company's common stock and the shares of Series X convertible preferred stock have been cancelled. SERIES Y CONVERTIBLE PREFERRED STOCK ------------------------------------ In connection with the reverse merger in March 2003, 87,000 shares of Series C preferred stock of Freight Rate, Inc., all of which were owned by the Company's Chief Executive Officer, were converted to 87,000 shares of Series Y preferred stock of the Company. The preferred stock has a stated value and par value of $.01, pays no dividends and has no liquidity preference. Each share of Series Y convertible preferred stock has 200 votes per share and has the right to vote with the common shareholders in all matters. These voting rights provide the Company's Chief Executive Officer with voting control of approximately 36.4% the Company's shares. The shares are convertible into 230,405 shares of the Company's common stock at the holder's option. COMMON STOCK ------------ During fiscal year 2003, the Company: Retired all 410,000 shares of treasury stock, Issued 12,860,000 shares of its common stock, recorded at par value of $12,860, upon its reverse merger with Freight Rate, Inc. in March 2003 Sold 657,000 shares of common stock at $.50 per share during March and April 2003 raising $328,500, F-18 Recorded the issuance of 1,698,472 shares of common stock valued at $1,002,098 pursuant to a settlement agreement entered into with two former consulting firms related to disputed compensation arising from consulting agreements with them which expired in 2002, and Issued 402,555 shares of common stock to consultants for services and recorded the shares at their fair market value of $400,455 insalaries, benefits and consulting fees. During the one month period ended June 30, 2003, the Company: Issued 180,000 shares of common stock to vendors and employees and recorded the shares at their fair market value of $151,200 at an average price of $.84 per share. Of this amount, $88,833 had been accrued and expensed for services rendered in the year ended May 31, 2003 and $38,667 was expensed for services rendered in June, 2003, both of which were classified as other selling, general and administrative expenses. The balance of $23,700 was recorded as salaries, benefits and consulting fees in June, 2003, and Issued 50,000 shares of common stock valued at $39,500 to its landlord as security for $9,312 required to be paid as an additional security deposit by June 1, 2004 pursuant to its office lease agreement. During fiscal year 2004, the Company: Issued 600,000 shares of common stock valued at $300,000 pursuant to a consulting agreement entered into in March 2004, of which one-half of these shares, valued at $150,000, were earned and expensed upon issuance and the other half was recorded as $150,000 of deferred compensation to be earned on September 1, 2004 unless the agreement was terminated by either party prior to that date. In August, 2004, the Company notified the consultant that it was terminating the agreement, the shares were returned by the consultant and deferred compensation was reduced by $150,000, Issued 5,700,000 shares of common stock, recorded at par value of $5,700, in exchange for all 100,000 shares of its Series X convertible preferred stock, Issued 1,085,208 shares of common stock to vendors, employees and consultants and recorded the shares at their fair market value of $300,642 in salaries, benefits and consulting fees, Sold 1,128,400 shares of common stock to individual investors residing outside of the United States for $714,745 less offering costs and discounts of $428,847 netting $285,898, Issued 948,275 shares of common stock, recorded at par value of $948,pursuant to anti-dilution agreements with respect to the issuance of common stock to the holders of the Company's Series X convertible preferred stock which restates the 2,143,000 common shares reported as being issued related to anti-dilution provisions in the Company's 10-QSB for the period ended November 30, 2003, Issued 441,483 shares of common stock to various lenders and recorded interest expense of $209,170, Issued 233,336 shares of common stock, recorded at par value of $233, as a dividend to holders of its Series B convertible preferred stock, Cancelled the 50,000 shares issued to its landlord as an additional security deposit upon paying the required additional security deposit of $9,312 in May 2004, and On June 28, 2004, the Company entered into a Standby Equity Distribution Agreement with an institutional investor pursuant to which the investor granted the Company the right to put up to $10,000,000 of the Company's registered shares of common stock to it. This right commences on the date that the Company's registration statement, registering the resale of the shares that may be put to the investor, becomes effective and continues for up to the following two years. The Company may put up to $500,000 of its shares to the investor as frequently as every seven trading days at a price per share equal to 98% of the lowest price (using the daily volume weighted average price) of the common stock during the five trading days following the date on which the Company notifies the investor of its intent to put the shares. The Company issued 816,260 shares valued at $310,179 to the investor and the placement agent upon entering into this agreement and agreed to pay the investor 5% of the gross amount of any shares put to the investor. The value of these shares was treated as deferred financing costs to be amortized over the life of the agreement. F-19 OPTIONS AND WARRANTS -------------------- The Company's board of directors has the authority to determine when and to whom it grant 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. 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:

Twelve Months One Month Twelve Months Ended Ended Ended June 30,2004 June 30, 2003 May 31,2003 ------------ ------------- ----------- Loss available to common shareholders: As reported $(5,539,324) $(212,416) $(2,247,517) ============ ============= =========== Pro forma $(5,782,876) $(212,416) $(2,397,526) ============ ============= =========== Loss per share, basic and diluted: As reported $ (0.17) $ (0.01) $ (0.15) ============ ============= =========== Pro forma $(0.18) $ (0.01) $ (0.16) ============ ============= ===========

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: 2004 2003 ----------------- ---- ---- Dividend yield None None Expected volatility factor 55% 64% Approximate risk free interest rates 3% 3% Expected lives, in years 5 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. F-20 STOCK OPTIONS ------------- In March 2003, the Company granted options to purchase 200,000 shares of common stock exercisable at $.50 per share to a consultant. 100,000 of these option vested on their grant date, 100,000 vested on the six-month anniversary of their grant date and their expiration dates are three years after their respective vesting dates. Using the Black-Scholes option-pricing model, consulting expense in the amount of $15,465 was recorded for the year ended May 31, 2003 relating to these options. In April 2003, the Company granted options to purchase 300,000 shares of common stock to an officer of the Company. 150,000 of these options vest one year from the grant date, 150,000 vest two years from the grant date and their expiration dates are three years after their respective vesting dates. The options are exercisable at a price of $1.01 per share which was the fair market value of the common stock at the grant date. Accordingly, under APB 25, no compensation expense was recorded. In November 2003, in connection with a twelve-month Business Advisory Agreement, the Company granted a securities advisor an option to purchase 500,000 shares of its common stock at a price of $.01 per share. These options were exercised in June, 2004. Using the Black-Scholes option-pricing model, $270,000 was expensed as consulting fees. In December 2003 and April 2004, the Company granted options to purchase 71,500 and 250,000 shares of common stock to certain employees and directors of the Company. The options expire in three to five years from the grant date. The options are exercisable at prices ranging from $.31 to $.52 per share which were equal to or above the fair values of the common stock at the respective grant dates. Accordingly, under APB 25, no compensation was recognized. In April 2004, the Company granted options to purchase 320,334 shares of common stock to consultants and charged $85,683 to consulting fees for the fair value of the instruments granted using the Black-Scholes option-pricing model. The Company also cancelled 100,000 options for one of the consultants. A summary of the stock option activity is as follows:

Weighted Average Exercise Number Exercise Price Price of Options Per Option ------- ---------- ---------- Outstanding options at May 31, 2002 $0.38 13,986,679 $0.38 Granted $0.81 500,000 $0.50 - $1.01 Outstanding options at May 31, 2003 $0.40 14,486,679 $0.38 - $1.01 Granted - - - ---------- Outstanding options at June 30, 2003 $0.40 14,486,679 $0.38 - $1.01 Granted $0.19 1,141,834 $0.01 - $.052 Cancelled $0.56 (100,000) $0.56 Exercised $0.01 (500,000) $0.01 Expired $0.42 (274,764) $0.38 - $0.75 ---------- Outstanding options at June 30, 2004 $0.40 14,753,749 $0.31 - $1.01 ========== Exercisable options at June 30, 2004 $0.39 14,578,749 $0.31 - $0.75 ==========

F-21 The following table summarizes information concerning stock options outstanding at June 30, 2004:

Weighted Weighted average average Number of Options remaining exercise Range of Exercise Price Outstanding life in years price ------------------------ ----------- ------------- ------ 0.31 - 0.40 13,345,973 2.36 $ 0.37 0.50 - 0.56 1,107,776 1.29 $ 0.55 1.01 300,000 3.29 $ 1.01 ----------- 14,753,749 ==========

The following table summarizes information concerning stock options exercisable at June 30, 2004:

Weighted average exercise Range of Exercise Price Number of Options price ------------------------ ----------------- ------ 0.31 - 0.40 13,345,973 $ 0.37 0.50 - 0.56 1,082,776 $ 0.55 1.01 150,000 $ 1.01 14,578,749

For the fiscal years ended June 30, 2004 and May 31, 2003, the following tables show the weighted average exercise prices and corresponding weighted average grant-date fair values of options granted classified separately for options whose exercise price is less than, equals or exceeds the price of the stock on the grant date. Weighted Weighted average average exercise fair For the fiscal year ended June 30, 2004 price value ---------------------------------------------- ---------- --------- Exercise price is less than price on grant date $0.01 $0.54 Exercise price equals price on grant date $0.41 $0.20 Exercise price exceeds price on grant date $0.31 $0.15 Weighted Weighted average average exercise fair For the fiscal year ended May 31, 2003 price value ---------------------------------------------- ---------- --------- Exercise price is less than price on grant date $0.50 $0.10 Exercise price equals price on grant date $0.41 $0.06 Exercise price exceeds price on grant date $0.57 $0.00 F-22 WARRANTS -------- The Company charged to expense the fair value of the instruments granted for services using the Black-Scholes option-pricing model. During June, 2003, the Company granted 75,000 warrants to purchase shares of the Company's common stock at $0.79 per share which expired on June 5, 2004 to the lender in connection with receiving proceeds of a loan. The warrants were valued at $16,650 and expensed as interest. During fiscal year 2004, the Company granted 541,600 warrants to purchase shares of the Company's common stock at $1.00 per share of which 500,000 expire on July 14, 2006 and 41,600 expire on December 8, 2006 to the investors in the Company's Series C convertible preferred stock and 100,000 warrants at $2.00 per share that expire on July 14, 2006 to the sales agent responsible for the private placement. No expense was recognized on the transaction as both the charge and the credit were to additional paid in capital. During fiscal year 2004, the Company granted 395,200 warrants to purchase shares of the Company's common stock at prices ranging from $0.53 to $0.78 per share which expire three years from their grant dates to various employees. Accordingly, under APB 25, no compensation was recognized. During fiscal year 2004, the Company granted 323,715 warrants to purchase shares of the Company's common stock at prices ranging from $0.38 to $1.29 per share which expire three years from the date granted to vendors and consultants. The warrants were valued at $213,805 and expensed as consulting and legal fees. During fiscal year 2004, the Company granted 600,000 warrants to purchase shares of the Company's common stock at $0.75 per share which expire on March 31, 2007 to a consultant for providing the Company with financial services for a period of one year. Pursuant to the consulting agreement, 300,000 warrants, valued at $58,410, were earned and expensed as consulting fees upon issuance and the other 300,000 warrants were recorded as $58,410 of deferred compensation and will be earned on September 1, 2004 unless the agreement is terminated by either party prior to that date. In August, 2004, the Company notified the consultant that it was terminating the agreement, the 300,000 warrants were returned by the consultant and the previously recorded deferred compensation was eliminated. During fiscal year 2004, the Company granted 1,091,875 warrants to purchase shares of the Company's common stock at prices ranging from $0.45 to $0.80 per share which expire between March 9, 2007 and April 30, 2007 to the placement agent for the Series A Convertible Debentures. The warrants were valued at $133,462 and treated as deferred financing costs. During the twelve months ended June 30, 2004, the Company granted 873,500 warrants to purchase shares of the Company's common stock at $0.45 per share which expire between March 9, 2007 and April 30, 2007 to the holders of the Company's Series A Convertible Debentures (see Note 7). The warrants were valued at $108,160 and treated as discount on notes payable to be amortized over the life of the debentures as additional interest expense. At June 30, 2004, the remaining balance of the discount was $94,920. F-23 A summary of the warrant activity is as follows: Weighted Average Exercise Number of Exercise Price Price Warrants Per Warrant ------- -------- ----------- Outstanding warrants at May 31, 2002 $0.81 3,913,204 $0.75 - $1.51 Granted - - - Outstanding warrants at May 31, 2003 $0.81 3,913,204 $0.75 - $1.51 Granted $1.36 140,700 $0.79 - $2.00 ---------- Outstanding warrants at June 30, 2003 $0.82 4,053,904 $0.75 - $2.00 Granted $0.67 4,746,224 $0.38 - $2.00 Expired $0.85 (529,089) $0.75 - $1.51 ---------- Outstanding warrants at June 30, 2004 $0.73 8,271,039 $0.38 - $2.00 ========== Exercisable warrants at June 30, 2004 $0.74 7,771,038 $0.38 - $2.00 ========== The following table summarizes information concerning warrants outstanding at June 30, 2004:

Weighted Weighted Average average Remaining exercise Range of Exercise Price Number of Warrants life in years price ------------------------ ------------------ ------------- ------ 0.38 - 0.80 6,952,754 1.99 $ 0.64 1.00 - 1.30 1,050,769 1.75 $ 1.07 1.50 - 2.00 267,516 1.86 $ 1.81 ------------------ 8,271,039 ==================

The following table summarizes information concerning warrants exercisable at June 30, 2004:

Weighted average exercise Range of Exercise Price Number of Warrants price ------------------------ ------------------ ------ 0.38 - 0.80 6,452,753 $ 0.64 1.00 - 1.30 1,050,769 $ 1.07 1.50 - 2.00 267,516 $ 1.81 ------------------ 7,771,038 ==================

NOTE 12 - SUBSEQUENT EVENTS On August 16, 2004, the Company amended its articles of incorporation to increase its number of authorized shares of common stock from 100 million to 250 million. This action was approved unanimously by the Company's Board of Directors and consented to in writing by shareholders of the Company holding a majority of its issued and outstanding voting stock in lieu of having a special meeting of shareholders. F-24 In July and August 2004,the Company entered into Intellectual Property Assignment Agreements with three of its executives, Messrs. Hersh, Darden and Urbanowicz, 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 200,000 shares of the Company's common stock per executive that is to be issued to them 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 intellectual property has been incorporated into the Company's internal use software which is used in generating the Company's freight transportation revenue. In determining the value of the intellectual property, the Board of Directors made the assumption that the value of the Company, which had a market capitalization of approximately $15 million at the time, was based primarily on its unique intellectual property. The Board established an amount of $226,000 or approximately 1.5% of the market capitalization as an amount it decided was fair to the Company's shareholders and reasonable for the three executives. These shares will be recorded as an intangible asset in the Company's quarterly report for the three month period ending September 30, 2004 valued at their fair market value of $226,000. This intangible asset will be amortized over its estimated useful life of two years commencing on the effective dates of the Intellectual Property Assignment Agreements. F-25