Back to GetFilings.com
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT
ON
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-12401
- --------------------------------------------------------------------------------
ACTIVE IQ TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-2004369
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5720 SMETANA DRIVE, SUITE 101, MINNETONKA, MN 55343
(Address of Principal Executive Offices)
952.345.6600
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of August 9, 2002, there were 13,298,014 shares of common stock, $.01 par
value, outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements (as such term is defined in
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended) and information relating to us that
is based on the current beliefs of our management as well as assumptions made by
and information currently available to management, including statements related
to the markets for our products, general trends in our operations or financial
results, plans, expectations, estimates and beliefs. In addition, when used in
this Form 10-Q, the words "may," "could," "should," "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to us or our management, may identify
forward-looking statements. These statements reflect our judgment as of the date
of this Form 10-Q with respect to future events, the outcome of which is subject
to risks, which may have a significant impact on our business, operating results
or financial condition. Readers are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein. We
undertake no obligation to update forward-looking statements. The risks
identified in the section following Management's Discussion and Analysis of
Financial Condition and Results of Operations hereof entitled "RISK FACTORS,"
among others, may impact forward-looking statements contained in this Form 10-Q.
2
ACTIVE IQ TECHNOLOGIES, INC.
FORM 10-Q INDEX
JUNE 30, 2002
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
As of June 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Operations -
For the three months and six months ended
June 30, 2002 and June 30, 2001 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 2002 and June 30, 2001 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 28
3
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 866,600 $ 1,764,893
Accounts receivable, net 244,029 284,451
Note receivable -- 500,000
Inventories 48,450 60,121
Prepaid expenses 32,952 24,985
------------ ------------
Total current assets 1,192,031 2,634,450
PROPERTY and EQUIPMENT, net 357,315 520,489
ACQUIRED SOFTWARE DEVELOPED, net 714,679 933,407
PREPAID ROYALTIES 1,304,921 1,500,000
OTHER ASSETS, net 40,475 74,950
GOODWILL, net 3,785,533 5,916,924
OTHER INTANGIBLES, net 1,459,240 2,048,552
------------ ------------
$ 8,854,194 $ 13,628,772
============ ============
LIABILITIES and SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion notes payable - shareholders $ 1,583,077 $ 2,791,521
Accounts payable 466,398 443,212
Deferred revenue 1,803,178 1,481,750
Accrued expenses 325,579 597,421
------------ ------------
Total current liabilities 4,178,232 5,313,904
LONG-TERM SHAREHOLDERS NOTES PAYABLE,
Less current portion 44,693 307,551
------------ ------------
Total liabilities 4,222,925 5,621,455
------------ ------------
COMMITMENTS and CONTINGENCIES
SHAREHOLDERS' EQUITY
Series B Convertible Preferred Stock, $1.00 par value,
shares issued and outstanding are 0 and 365,000 at
June 30, 2002 and December 31, 2001 -- 365,000
Common stock, $.01 par value, 39,635,000 shares authorized;
13,298,014 and 10,731,345 shares issued and outstanding 132,980 107,313
Additional paid-in capital 22,659,311 19,335,027
Stock subscriptions receivable (2,025,000) (200,000)
Deferred compensation (247,489) (311,701)
Warrants 2,502,850 1,633,917
Accumulated deficit (18,391,383) (12,922,239)
------------ ------------
Total shareholders' equity 4,631,269 8,007,317
------------ ------------
$ 8,854,194 $ 13,628,772
============ ============
See accompanying notes to condensed consolidated financial statements
4
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES $ 1,063,107 $ 372,950 $ 2,287,421 $ 408,261
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods 468,497 18,135 965,762 18,135
Selling, general and administrative 1,918,554 1,455,521 3,540,052 2,237,830
Depreciation and amortization 477,332 514,586 900,141 703,570
Product development 37,805 192,068 82,674 390,264
Loss on disposal of assets 28,195 57,678 53,675 57,678
Loss on impairment of goodwill 2,131,391 -- 2,131,391 --
------------ ------------ ------------ ------------
Total operating expenses 5,061,774 2,237,988 7,673,695 3,407,477
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,998,667) (1,865,038) (5,386,274) (2,999,216)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income
19,834 24,485 61,298 48,343
Other income -- -- 20,000 --
Interest expense (152,485) (3,863) (164,168) (9,277)
------------ ------------ ------------ ------------
Total other income (expense) (132,651) 20,622 (82,870) 39,066
------------ ------------ ------------ ------------
NET LOSS $ (4,131,318) $ (1,844,416) $ (5,469,144) $ (2,960,150)
============ ============ ============ ============
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (0.34) $ (0.25) $ (0.46) $ (0.49)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
OUTSTANDING SHARES 12,206,694 7,499,353 11,794,150 5,994,188
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
2002 2001
-------------------- --------------------
OPERATING ACTIVITIES:
Net loss $(5,469,144) $(2,960,150)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 681,413 703,570
Deferred compensation expense 64,212 47,961
Loss on disposal of assets 53,675 57,678
Loss on impairment of goodwill 2,131,391 --
Software license in cost of goods 43,750 --
Warrants issued to non-employee and re-pricing of warrants 416,910 --
Interest expense related to common stock issued in excess of note payable 80,000 --
Amortization of debt discount 88,290 --
Amortization of acquired software developed 218,728 --
Changes in operating assets and liabilities:
Accounts receivable, net 40,422 (4,777)
Inventories 11,671 2,554
Prepaid expenses (7,967) 533,063
Prepaid royalties 145,079 --
Other assets 34,475 110,404
Accounts payable 23,186 (54,203)
Deferred revenue 321,428 (283,130)
Accrued expenses (270,829) (19,638)
----------- -----------
Net cash used in operating activities (1,393,310) (1,866,668)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of Edge Technologies Incorporated -- (308,016)
Acquisition of Red Wing Business Systems -- (291,228)
Payments received on note receivable 500,000 --
Purchases of property and equipment (31,447) (60,833)
Proceeds from sale of property and equipment 5,095 --
----------- -----------
Net cash provided by (used in) investing activities 473,648 (660,077)
----------- -----------
FINANCING ACTIVITIES:
Net decrease on bank line of credit -- (17,529)
Payments on obligations under capital lease -- (78,976)
Payments on short-term notes payable -- (2,133)
Payments on long-term debt (1,658,096) (2,730)
Common stock repurchased and retired (63,035) --
Cash proceeds from issuance of common stock 950,000 6,567,501
Cash proceeds from exercise of options and warrants 142,500 --
Cash proceeds from stock subscription receivable 200,000 --
Cash proceeds from short-term note payable 450,000 --
----------- -----------
Net cash provided by financing activities 21,369 6,466,133
----------- -----------
INCREASE (DECREASE) IN CASH and EQUIVALENTS (898,293) 3,939,388
CASH AND EQUIVALENTS, beginning of period 1,764,893 1,349,457
----------- -----------
CASH AND EQUIVALENTS, end of period $ 866,600 $ 5,288,845
=========== ===========
See accompanying notes to condensed consolidated financial statements
6
ACTIVE IQ TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
Active IQ Technologies, Inc. ("we," "us," "our" or the "Company") provides
industry-specific software solutions for managing, sharing and collaborating on
business information via the Web and accounting software. Through an exclusive
worldwide-hosted licensing agreement we develop and distribute web-based content
management solutions. Our hosted delivery model minimizes implementation
complexities by capturing paper and electronic documents, transforms them to
web-viewable formats, personalizes them based on security needs and delivers
them over the Web to a broad range of users. We also publish traditional
accounting and financial management software solutions through our accounting
subsidiaries of Red Wing Business Systems ("Red Wing"), Champion Business
Systems ("Champion") and FMS Marketing, Inc. ("FMS"). Effective December 31,
2001, we merged FMS into Red Wing.
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. On April 30, 2001, the Company, activeIQ
Technologies Inc. ("Old AIQ") and a wholly owned subsidiary of the Company
completed a triangular reverse merger transaction whereby Old AIQ merged with
and into the Company's subsidiary. Immediately prior to the merger, the Company
(i) sold all of its assets relating to its petroleum and gas distribution
business, (ii) was reincorporated under Minnesota law, and (iii) changed its
name to Active IQ Technologies, Inc. As a result of the sale of the Company's
petroleum and gas distribution assets, it discontinued all operations in the
petroleum and gas distribution business and has adopted the business plan of Old
AIQ. Because Old AIQ was treated as the acquiring company in the merger for
accounting purposes, all financial and business information contained herein
relating to periods prior to the merger is the business and financial
information of Old AIQ, unless otherwise indicated.
Old AIQ was incorporated in Minnesota on April 11, 1996, and was considered a
development stage company until January 2001, when it began to recognize
revenues as a result of its acquisition of Edge Technologies Incorporated
("Edge"). We branded the software technology of Edge as the Epoxy Network. On
March 28, 2002, we sold the customer contracts of Edge Technologies' to an
unrelated third party. We have retained the full ownership of the source code
required to operate the asset. Old AIQ was formed to develop and provide
eBusiness application software and services for small-to-medium sized accounting
software customers. Since its inception and up through the merger, Old AIQ's
efforts had been devoted to the development of its principal product and raising
capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America ("US GAAP"), for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by US GAAP for complete financial statements. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our Form 10-K/A. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year as a whole.
7
Revenue Recognition and Deferred Revenue
Through our hosted solutions, we recognize both license and service revenue. We
recognize monthly license revenues after all of the following criteria have been
met: (i) the subscriber executes a license agreement, typically twelve months
(ii) the license fee is fixed and payable monthly over the agreement term, and
(iii) the software has been delivered to the prescribed hosted server. If we do
not receive the monthly license fee as described in the agreement, we have the
right to terminate the agreement. Service revenues are billed separately as
completed and recognized when invoiced.
Through our subsidiaries of Red Wing and Champion, we recognize the revenues
derived from software sales after all of the following criteria have been met:
(i) there is an executed license agreement, (ii) the software has been delivered
to the customer, and (iii) collection is deemed probable. Historically, product
returns are approximately 1% of gross revenues. Revenues related to multiple
element arrangements are allocated to each element of the arrangement based on
the fair values of elements such as license fees, maintenance contracts and
professional services. Fair value is determined based on vendor specific
objective evidence. Maintenance contract revenue is recognized ratably over the
term of the agreement, which is typically one year. All maintenance contract
revenue invoiced in excess of revenue recognized is recorded as deferred
revenue.
Through March 28, 2002, we recognized revenues from our Epoxy Network, at which
time we sold the customer contracts of Edge to an unrelated third party. Epoxy
Network subscription revenue was recognized monthly after the customer accepted
the license agreement and we verified that the customer had a version of
software we interfaced with. After the initial period of set up and
configuration, customers were invoiced at the beginning of each month for all
services subscribed to.
Net Loss per Common Share
Basic and diluted net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the periods
presented. The impact of common stock equivalents has been excluded from the
computation of weighted average common shares outstanding, as the net effect
would be antidilutive. All stock options and warrants were antidilutive for all
periods presented for 2002 and 2001.
Use of Estimates
Preparing financial statements in conformity with US GAAP 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
We account for income taxes using the liability method to recognize deferred
income tax assets and liabilities. Deferred income taxes are provided for
differences between the financial reporting and tax bases of our assets and
liabilities at currently enacted tax rates.
We have recorded a full valuation allowance against the net deferred tax asset
due to the uncertainty of realizing the related benefits.
Software Development Costs
Effective January 1, 1999, we implemented Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Pursuant to SOP 98-1, expenditures for internal use software are expensed
during the preliminary project stage.
Segment Reporting
8
We sell software in the United States and Canada, within the business and
agricultural industries, providing similar products to similar customers. The
software packages also possess similar pricing structures specific to each
industry, resulting in similar long-term expected financial performance
characteristics. Management believes that the Company meets the criteria for
aggregating its operating segments into a single reporting segment.
NOTE 3 - ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations",
effective for acquisitions initiated on or after July 1, 2001, and SFAS No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations. SFAS No. 142
indicates that goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
We adopted the new rules effective January 1, 2002 and we performed our first
required goodwill impairment test at the close of the quarter ended June 30,
2002.
On December 31, 2001, the net carrying value of goodwill and other intangibles
associated with our acquired businesses (Red Wing, Champion, FMS and Edge) was
$7,965,476 (or 58% of total assets) and we had not recorded any impairment
losses. The acquired businesses of our accounting publisher subsidiaries
represent $7,148,203 of the total net carrying value. One of the reasons we made
these acquisitions of the accounting publishers, was to gain access to a stable,
loyal customer base. Our intent was to up-sell our existing products and
services to this base of customers, and as new products and services were
introduced, we could up-charge and up-sell these additional products and
services as well. We also believed that the consolidation of these fragmented
businesses into one operation would provide a return on the economies of scale.
The benefits of the consolidation strategy have not fully materialized to date
and we do not anticipate it to materialize in the foreseeable future. Although
the underlying businesses that we purchased remain operationally stable, the
realization of the future cash flows projected at the time of the acquisitions,
will not materialize as projected. Therefore, our results of the estimated
discounted cash flows of goodwill and other intangible assets, relating to the
accounting publishers, indicated that impairment charges should be recognized.
We recognized and recorded impairment against goodwill of $2,131,391 during the
second quarter ended June 30, 2002. We did not undertake the expense of an
independent appraisal for this valuation, as we believe that our estimate was
reasonably conservative with the known market trends.
Components of intangible assets are as follows:
June 30, 2002 December 31, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Intangible assets subject to amortization
Customer lists $1,737,248 $ 661,815 $1,737,248 $ 228,435
Non-compete agreements 620,000 236,193 620,000 80,261
---------- ---------- ---------- ----------
2,357,248 898,008 2,357,248 308,696
Intangible assets not subject to amortization
Goodwill $6,435,837 $2,650,304 $8,567,228 $2,650,304
The changes in the carrying value of goodwill for the six months ended June 30,
2002 are as follows:
Balance of goodwill (less accumulated depreciation) as of December 31, 2001 $ 5,916,924
Second quarter impairment loss (2,131,391)
--------------------
Balance as of June 30, 2002 $ 3,785,533
9
Amortization of intangible assets was $294,656 and $462,409 for the three months
ended June 30, 2002 and 2001, respectively, and $589,312 and $598,079 for the
six months ended June 30, 2002 and 2001, respectively. Amortization expense is
expected to be approximately $590,000 for the remainder of 2002 (a total of
approximately $1,180,000 for 2002). All remaining intangible assets subject to
amortization should be written off by the third quarter of 2003 (approximately
$869,000). Our net loss excluding goodwill amortization expense, for the three
months and six months ended June 30, 2001 would have been as follows had we
adopted SFAS No. 142 on January 1, 2001:
Three Months Ended Six Months Ended
June 30, 2001
Net loss--as reported $ (1,844,416) $ (2,960,150)
SFAS No. 142 amortization adjustment 462,409 598,079
Net loss--as adjusted $ (1,382,007) $ (2,362,071)
Basic and diluted net loss per share--as reported $ (0.25) $ (0.49)
Impact of SFAS No. 142 amortization adjustment 0.07 0.10
Basic and diluted net loss per share--adjusted $ (0.18) $ (0.39)
We did not have any goodwill prior to January 1, 2001.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." We believe the adoption of SFAS No. 145 will not have a material
effect on our consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We believe the adoption
of SFAS No. 146 will not have a material effect on our consolidated financial
position or results of operations.
NOTE 5 - NOTE RECEIVABLE
We completed our merger with Old AIQ on April 30, 2001 and we entered into a
note receivable in the amount of $500,000. The note was secured by a stock
pledge dated April 27, 2001, pledging 1,500,000 shares of common stock of Capco
Energy, Inc. We granted an extension of the due date to May 10, 2002. The note
receivable accrued interest at 10% per annum. We received the remaining
principal balance plus accrued interest in May 2002.
NOTE 6 - PREPAID ROYALTIES
We have entered into two application service provider software license
agreements with Stellent, Inc. The prepaid royalties at June 30, 2002 of
$1,304,921 relates to minimum royalty fees required under the agreements. On
December 28, 2001, we entered in an application service provider (ASP) software
license agreement (the "2001 ASP Agreement"). The 2001 ASP Agreement provides us
with a three-year worldwide exclusive license to be the hosted ASP solution for
Content Management software. We agreed to pay a royalty of 20% of net receipts,
as defined in the 2001 ASP License Agreement, or $500 per month per customer,
whichever is greater, with an aggregate minimum royalty payment of $2,000,000.
The minimum royalty was payable as follows: a credit of $500,000 from existing
prepaid royalties recorded at Stellent, a payment of $500,000 was paid with the
execution of the agreement and two $500,000 payments were due in September and
December 2002. On March 29, 2002 we paid the balance due on the
10
royalties and in consideration of the early payment, we received a 5% discount,
or $50,000.
On April 8, 2002 we entered into a three year, non-exclusive, non-transferable
worldwide license to use, copy, distribute, modify, and sell software for the
"SmartCabinet" suite of products. This license is renewable for an additional
three years, at our option, based on the payment of certain minimum royalties.
Further, we have an exclusive worldwide license to host this software on an ASP
basis in exchange for a 2% royalty on net revenue from this software.
Additionally, at our option, we can maintain this exclusivity if we pay the
minimum royalties noted above during the term of this license. For the calendar
year ending December 31, 2002, the minimum royalty payable will be $20,000 for
this new license.
NOTE 7 - DEBT
Notes Payable - Shareholders
On June 6, 2001, we acquired all of the outstanding capital stock of Red Wing
Business Systems, based in Red Wing, Minnesota. Red Wing develops, markets and
distributes accounting software applications to small to medium-sized
businesses, primarily in the agricultural industry. In exchange for all of the
outstanding shares of Red Wing's capital stock, we issued an aggregate of
400,000 shares of our common stock and paid at closing a total of $400,000.
Pursuant to the purchase agreement, we were obligated to make three additional
payments of $400,000 each to the former Red Wing shareholders on December 6,
2001, June 6, 2002 and December 6, 2002, respectively. We timely satisfied the
December 6, 2001 payment and have re-negotiated an extension of the June payment
with several of the former Red Wing shareholders, totaling $339,093. In
connection with the re-negotiation, we paid 10% of the June payment (totaling
$33,909) immediately in exchange for an extension of such payment until December
31, 2002. In addition, (i) we will pay interest at the rate of 12.5% per annum
on the unpaid balance of the June payment (monthly interest payments began July
1, 2002), (ii) for a period of 60 days, allow such shareholders to convert any
or all of the unpaid balance of the June payment into shares of our common stock
at a price equal to 90% of the average closing sale price for the 5 days
preceding conversion, and (iii) release such shareholders from their lock-up
agreements relating to the shares issued in the acquisition. To date, none of
these shareholders converted any of their principal into common stock. The
remaining former Red Wing shareholders were paid their June 2002 payment as
stated in the original notes. The remaining principal balance due all former Red
Wing shareholders as of June 30, 2002 is $706,823.
Two investors in Red Wing receive monthly principal and interest payments,
ranging from 7% to 8.5%, which were assumed by us when we acquired Red Wing. The
investors are current employees at Red Wing. Note balances as of June 30, 2002
were $11,705 and $46,821, requiring monthly principal and interest payments of
$317 and $1,267, both through December 2005.
On September 18, 2001, we acquired Champion Business Systems, a Denver,
Colorado-based accounting software company, in a merger transaction. Champion
develops, integrates and supports accounting and business management software,
focusing on small and growing businesses. As consideration for the merger, (i)
we paid at closing an aggregate of approximately $512,000 in cash to the former
Champion shareholders, (ii) issued 299,184 shares of our common stock, and (iii)
issued promissory notes in the aggregate amount of approximately $1 million. We
are recording an imputed interest expense of 7% per annum. The notes are payable
in equal installments of $250,000 on January 18, May 18, September 18, 2002, and
January 18, 2003, and to date, the first payment was made. In May 2002 several
of the note holders re-negotiated an extension of the May payment until December
31, 2002, in the amount of $159,041. In exchange for the extension, we paid 10%
of the amount owed to such note holders and agreed to pay monthly interest at
the rate of 12.5% per annum on the unpaid balance of the notes. In addition,
such note holders had the right for a period of 60 days to convert any or all of
the unpaid balance of the May payment into shares of our common stock at a price
equal to 90% of the average closing sale price for the 5 days preceding
conversion. None of these shareholders converted any of their principal into
common stock. Three shareholders (representing $78,229 of the May payment) have
not accepted the terms of the new notes as of July 31, 2002 and as such, we are
in default with the terms of their notes and continue to accrue interest. All
remaining former Champion shareholders were paid their May 2002 payment as
stated in the original notes. The remaining principal balance due all former
Champion shareholders as of June 30, 2002 is $734,772.
11
On October 10, 2001, we acquired FMS Marketing, Inc., a New Lennox, Illinois
accounting software provider doing business as "FMS/Harvest." Effective December
31, 2001, we merged FMS/Harvest with and into Red Wing. Like Red Wing,
FMS/Harvest also serves primarily users in the agricultural and farming
industries. In consideration for the purchase, we paid $300,000 in cash at
closing, issued promissory notes in the total amount of $300,000, and issued
250,000 shares of our common stock. The promissory notes were originally payable
in May 2002. In May we re-negotiated an extension of the due date with all
former shareholders of FMS/Harvest. In consideration for extending the due date
until December 15, 2002, we paid 10% of the May payment totaling $30,000 in
satisfaction of the notes and agreed to (i) pay interest at the rate of 12.5% on
the unpaid balance, (ii) until July 12, 2002, allow the note holders to convert
any or all of the unpaid balance of the notes into shares of our common stock at
a price equal to 90% of the average closing sales price for the 5 days preceding
conversion, and (iii) release such shareholders from their lock-up agreements
relating to the shares issued in the acquisition. In June, three of the FMS
shareholders converted $117,745 of principal and $1,013 of interest into 151,669
shares of common stock at $0.783 per share. The remaining principal balance due
all FMS shareholders as of June 30, 2002 is $152,255.
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. The proceeds were allocated to the fair value of
the securities issued (debt and warrant issued). On May 30, 2002, we allowed
Blake Capital Partners to convert $150,000 of outstanding principal under the
note into 200,000 shares of common stock at a price of $0.75 per share. We
satisfied the remaining outstanding principal and accrued interest in full on
June 10, 2002. We also recorded an $80,000 interest charge to reflect the
discount to market of the shares issued.
NOTE 8 - SHAREHOLDERS' EQUITY
Stock Subscription Receivable
In December 2000, we entered into a subscription receivable for the purchase of
100,000 shares of common stock at a price of $2.75 per share with a director of
the Company. In April 2002, the receivable was paid in full.
On January 1, 2002, we amended the employment agreement with D. Bradly Olah, our
President and Chief Executive Officer. Following the amendment of his employment
agreement, Mr. Olah was awarded an option to purchase an additional 500,000
shares at $4.00 per share. On January 14, 2002, Mr. Olah exercised his right to
acquire all 500,000 shares subject to the option, though none had yet vested, by
delivering a promissory note to us in the amount of $2,000,000 and pledging all
500,000 shares acquired as security for the repayment of the note, all in
accordance with the terms of the option agreement. Mr. Olah cannot sell or
otherwise transfer any of the shares acquired under this option agreement until
such time as the shares would have vested in accordance with the vesting
schedule provided in the option agreement and the note has been repaid.
On May 27, 2002, we sold 500,000 shares of our common stock and a warrant in a
private placement to Boston Financial Partners, Inc., at a price of $0.75 per
share, for total proceeds of $375,000. Proceeds were allocated to the fair value
of the securities issued (common stock and warrant). As of June 30, 2002, we
recorded a stock subscription receivable in the amount of $25,000 still
outstanding in connection with the private placement.
Warrant Grants
As consideration for the purchase of the 500,000 shares on May 27, 2002, as
noted above, Boston Financial Partners also received a warrant to purchase an
additional 500,000 shares of our common stock at an exercise price of $1.00 per
share, and we further agreed to reduce to $1.00 the exercise price on all other
warrants to purchase shares of our common stock held by Boston Financial
Partners and its affiliates. Such warrants represent the right to purchase 1
million shares of common stock and had exercise prices ranging from $5.50 to
$7.50 per share. We recorded an expense of $343,390 (related to the reduction of
price of the 1 million warrants) using the Black-Scholes pricing model.
12
Also in May 2002, we sold to two investors in a private placement an aggregate
of 800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of common stock at an exercise price of $1.25 per share. The warrants may
be redeemed by us any time after January 30, 2003 and following a period of at
least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. Proceeds were
allocated to the fair value of the securities issued (common stock and warrant).
One of the investors was Wyncrest Capital, Inc., a wholly-owned affiliate of
Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired
half of the shares and warrants issued in this private placement.
Information regarding the Company's warrants is summarized below:
Weighted average Range of
Number exercise price exercise price
Outstanding at December 31,2001 7,779,456 $ 5.28 $ 1.00 - 60.00
Granted 2,433,000 1.23 1.00 - 5.50
Cancelled or expired 1,067,500 6.00 2.43 - 7.50
Exercised 54,000 2.00 2.00
-------------- ---------- ------------------
Outstanding at June 30, 2002 9,090,956 $ 4.12 $ 1.00 - 60.00
============== ========== ==================
NOTE 9 - RELATED PARTY TRANSACTIONS
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. The proceeds were allocated to the fair value of
the securities issued (debt and warrant issued). On May 30, 2002, we allowed
Blake Capital Partners to convert $150,000 of outstanding principal under the
note into 200,000 shares of common stock at a price of $0.75 per share. We
satisfied the remaining outstanding principal and accrued interest in full on
June 10, 2002. We also recorded an $80,000 interest charge to reflect the
discount to market of the shares issued.
On May 27, 2002, we sold 500,000 shares of its common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for
total proceeds of $375,000. As consideration for its purchase of such shares,
Boston Financial Partners also received a warrant to purchase an additional
500,000 shares of our common stock at an exercise price of $1.00 per share, and
we further agreed to reduce to $1.00 the exercise price on all other warrants to
purchase shares of our common stock held by Boston Financial Partners and its
affiliates. Such warrants represent the right to purchase 1 million shares of
common stock and had exercise prices ranging from $5.50 to $7.50 per share.
Prior to this private placement, Boston Financial Partners beneficially owned
more than 5% of our common stock.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of its common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of our common stock at an exercise price of $1.25 per share. The warrants
may be redeemed by us any time after January 30, 2003 and following a period of
at least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. One of the
investors was Wyncrest Capital, Inc., a wholly-owned affiliate of Ronald E.
Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement.
13
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six months ended June 30,
2002 2001
-------------------- --------------------
Cash paid for interest $ 13,162 $ 9,277
Non-cash financing and investing activities:
Common stock issued in exchange for stock subscriptions receivable 2,025,000 --
Conversion of preferred stock into common stock 365,000 --
Notes payable converted into common stock 348,757 --
Common stock issued in acquisitions -- 3,290,500
NOTE 11 - SUBSEQUENT EVENTS
On July 29, 2002, we received a letter from Nasdaq indicating that we were not
in compliance with Nasdaq's rules requiring issuers to maintain a sufficient
number of "independent" directors on our board and audit committees. On August
12, 2002, at Nasdaq's request, we submitted our plan and timetable for
addressing Nasdaq's concerns and achieving compliance with its requirements for
continued listing. Specifically, we indicated to Nasdaq that we have extended an
offer to one candidate to join our board and audit committee. That candidate,
who would qualify as an "independent" director, is currently considering our
offer, although we expect the candidate to join our board within the next
30 days. In addition, we informed Nasdaq that we expected to recruit a second
"independent" director within the next 90 days. With respect to the second
director, we are seeking a person who is not only "independent," but who will
also qualify as a "financial expert," as will be required under the
recently-enacted Sarbanes-Oxley Act of 2002. Finally, our board of directors
will also be searching for additional "independent" directors in the next
several months so that the composition of our board will comply with the
proposed Nasdaq rules requiring a majority of our directors to be independent.
We expect that process to take approximately 6-9 months. Although we have
submitted a plan to Nasdaq as to how and when we expect to achieve compliance
with its independence rules, we cannot be certain that our plan will satisfy
Nasdaq's concerns. Even if our plan is satisfactory to Nasdaq, there is no
assurance that we will be able to obtain any additional "independent" directors
necessary to achieve compliance with Nasdaq's rules. If Nasdaq is not satisfied
with our plan to achieve compliance or if we are not able to find at least 2
more "independent" directors, our common stock could be delisted from the Nasdaq
Small Cap Market.
Pursuant to an agreement dated August 13, 2002, we sold our Epoxy Network
software for $400,000 in cash. See "Liquidity and Capital Resources" under Item
2 of Part I of this Report for a further discussion.
14
ACTIVE IQ TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations should be read in connection with the accompanying
unaudited condensed consolidated financial statements and related notes thereto
included elsewhere in this report and the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K/A for the
fiscal year ended December 31, 2001.
OVERVIEW
Active IQ Technologies, Inc. ("we," "us," "our" or the "Company") provides
industry-specific software solutions for managing, sharing and collaborating on
business information via the Web and accounting software. Through an exclusive
worldwide-hosted licensing agreement with Stellent, Inc., we develop and
distribute web-based content management solutions. Our hosted delivery model
minimizes implementation complexities by capturing paper and electronic
documents, transforms them to web-viewable formats, personalizes them based on
security needs and delivers them over the Web to a broad range of users. We also
publish traditional accounting and financial management software solutions
through our accounting subsidiaries of Red Wing Business Systems ("Red Wing"),
Champion Business Systems ("Champion").
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. On April 30, 2001, the Company, activeIQ
Technologies Inc. ("Old AIQ") and a wholly owned subsidiary of the Company
completed a triangular reverse merger transaction whereby Old AIQ merged with
and into the Company's subsidiary. Immediately prior to the merger, the Company
(i) sold all of its assets relating to its petroleum and gas distribution
business, (ii) was reincorporated under Minnesota law, and (iii) changed its
name to Active IQ Technologies, Inc. As a result of the sale of the Company's
petroleum and gas distribution assets, it discontinued all operations in the
petroleum and gas distribution business and has adopted the business plan of Old
AIQ. Because Old AIQ was treated as the acquiring company in the merger for
accounting purposes, all financial and business information contained herein
relating to periods prior to the merger is the business and financial
information of Old AIQ, unless otherwise indicated.
Old AIQ was incorporated in Minnesota on April 11, 1996, and was considered a
development stage company until January 2001, when it began to recognize
revenues as a result of its acquisition of Edge Technologies Incorporated
("Edge"). We branded the software technology of Edge as the Epoxy Network. On
March 28, 2002, we sold the customer contracts of Edge Technologies' to an
unrelated third party. We have retained the full ownership of the source code
required to operate the asset. Old AIQ was formed to develop and provide
eBusiness application software and services for small-to-medium sized accounting
software customers. Since its inception and up through the merger, Old AIQ's
efforts had been devoted to the development of its principal product and raising
capital.
We are still developing and implementing our business plan, which will require
additional financing that may not be available on acceptable terms or even at
all. See Liquidity and Capital Resources. We are also subject to risks and
uncertainties common to developing technology-based companies, including but not
limited to: our limited operating history, the rapid technological changes,
acceptance of our products, dependence on our current personnel, the ability to
form and maintain strategic relationships with third-party manufacturers,
security and privacy issues.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2001.
Revenues
15
Revenues for the three months ended June 30, 2002 were $1,063,107 compared to
$372,950 for the same period in 2001. Our revenues by product line were as
follows: our hosted solutions generated $165,771 and $897,336 from Red Wing and
Champion. The increase of $690,157 is primarily due to the acquisitions of the
accounting publishers of Red Wing and Champion. We anticipate that revenues for
the third and forth quarters of 2002 should be modestly higher versus the second
quarter of 2002 due to increased seasonality in the accounting software market
plus new revenue from our hosting solutions.
Revenues for the six months ended June 30, 2002 were $2,287,421 compared to
$408,261 for the same period in 2001. Our revenues by product line were as
follows: our hosted solutions generated $222,785, the Epoxy Network generated
$46,774, and $2,017,862 from Red Wing and Champion. The increase of $1,879,160
is primarily due to the acquisitions of the accounting publishers of Red Wing
and Champion.
Through March 28, 2002, we recognized revenues from our Epoxy Network. On that
date, however, we sold the Epoxy Network customer contracts to an unrelated
third party. We have retained the full ownership of the Epoxy Network
technology.
Our ability to continue our present operations and successfully implement our
expansion plans is contingent upon our ability to increase our revenues and
ultimately attain and sustain profitable operations. Without additional
financing, the cash generated from our current operations will not be adequate
to fund operations and service our indebtedness during the next four quarters of
operations.
Operating Expenses
Cost of goods sold for the three months ended June 30, 2002 were $468,497
compared to $18,135 for the same period in 2001. The increase of $450,362 is
primarily related to our accounting publishers operations. Cost of goods sold
for the six months ended June 30, 2002 were $965,762 compared to $18,135 for the
same period in 2001. The increase of $947,627 is primarily related to our
accounting publishers operations. These costs include hosting fees, wages,
compact discs and manuals, overhead allocation and shipping and packaging costs.
We anticipate that our third and forth quarter cost of goods sold will be lower,
as a percentage of revenue, than the second quarter due to higher seasonal
revenue from the sale of new and renewal software licenses that have a lower
cost of goods component.
Selling, general and administrative expenses for the three months ended June 30,
2002 were $1,918,554 compared to $1,455,521 for the same period in 2001. The
$463,033 increase in selling, general and administrative expenses was primarily
related to our accounting publishers operations. Selling, general and
administrative expenses for the six months ended June 30, 2002 were $3,540,052
compared to $2,237,830 for the same period in 2001. The $1,302,222 increase in
selling, general and administrative expenses was primarily related to our
accounting publishers operations. We anticipate the rate of spending for the
third and forth quarters selling, general and administrative expenses will
continue to grow slightly due to increased spending on our data facility and
sales costs related to our hosting business.
Depreciation expense of property and equipment for the three months ended June
30, 2002 was $42,608 compared to $52,178 for the same period in 2001.
Depreciation expense of property and equipment for the six months ended June 30,
2002 was $92,101 compared to $95,075 for the same period in 2001. The decreases
of $9,570 and $2,974 reflect the overall decrease in our fixed asset base.
Amortization expense for the three months ended June 30, 2002 was $434,724
compared to $462,408 for the same period in 2001. Amortization expenses for the
three months ended June 30, 2002, are as such: $140,068 of acquired software
developed and $294,656 of other intangibles. Amortization expense for the same
period in 2001 of goodwill was $462,408. Amortization expense for the six months
ended June 30, 2002 was $808,040 compared to $608,495 for the same period in
2001. Amortization expenses for the six months ended June 30, 2002, are as such:
$218,728 of acquired software developed and $589,312 of other intangibles.
Amortization expense for the same period in 2001 of goodwill was
16
$608,495. Based on the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangibles" on January 1, 2002,
amortization of goodwill was $0 for the three and six months ended June 30,
2002. The expenses are primarily goodwill and other intangible assets recorded
under purchase accounting rules, related to the acquisitions of our accounting
publishers and amortization of acquired software developed.
Product development expenses for the three months ended June 30, 2002 were
$37,805 as compared to $192,068 for the same period in 2001. Product development
expenses for the six months ended June 30, 2002 were $82,674 as compared to
$390,264 for the same period in 2001. The decreases of $154,263 and $307,590
relate to the reduction in the number of software engineers we employed during
2001. As we further develop our hosted solutions business model, we anticipate
that product development costs for the remainder of 2002 should remain at
current levels.
During the three months ended June 30, 2002, we recorded a loss on disposal of
assets of $28,195. This loss primarily represents computer hardware that we
sold. As we develop our hosted solutions model, we anticipate that we will rely
more on leased equipment than on owned assets.
In accordance with SFAS No. 142, beginning with our 2002 fiscal year, goodwill
is no longer amortized but is subject to an annual impairment test. We did our
testing for impairment in the quarter ended June 30, 2002 which resulted in an
estimated goodwill impairment charge of $2,131,391. We forecasted future
operating cash flows applicable to our accounting software customer base of
small-to-medium sized general businesses and the agri-business sector. We looked
at new product opportunities, pricing flexibility, competition from
significantly larger companies and the current business economic conditions. We
determined that the current business prospects have changed from those factors
assumed in 2001. We used a number of financial estimating techniques, including
net present value of future cash flows and market valuations using revenue and
EBITDA multiples, to arrive at our estimated impairment charge. As a result of
this analysis, we determined that an estimated impairment charge to goodwill
should be recognized. See Note 3 - Adoption of New Accounting Standards.
Other Income and Expenses
Our other income and expense consists of interest income, other income and
interest expense. Interest income for the three months ended June 30, 2002 was
$19,834 compared to $24,485 for the same period in 2001. The $4,651 decrease is
due primarily to the interest we were receiving from excess cash reserve
balances in 2001. Interest income for the six months ended June 30, 2002 was
$61,298 compared to $48,343 for the same period in 2001. This increase of
$12,955 is due to the $2,000,000 stock subscription receivable. We expect
interest income to remain at similar levels in the near future.
Interest expense for the three months ended June 30, 2002 was $152,485 compared
to $3,863 for the same period in 2001. Interest expense for the six months ended
June 30, 2002 was $164,168 compared to $9,277 for the same period in 2001. These
increases of $148,622 and $154,891 relate primarily to the amortization of the
debt discount on the non-interest bearing notes payable to the former
shareholders of Red Wing, Champion and FMS. We recorded a 7% imputed interest
expense against the notes. Additionally, we have re-negotiated some of the notes
with these former shareholders and as such, we will continue to record
additional interest during the last two quarters of 2002.
We also recorded $20,000 of other income for the quarter ended March 31, 2002,
when we entered into an asset purchase agreement for the customer base of Epoxy
Network to an unrelated third party. In addition, we are entitled to monthly
royalty payments of 7.5% of all fees or charges accrued or received by the
grantee. There are no guaranteed minimum royalties and we are entitled to
receive an aggregate of no more than $100,000 in royalty payments. No receivable
has been recorded against the future royalties. No royalties were recorded for
the three months ended June 30, 2002.
Critical Accounting Policies
Regarding our goodwill and other intangibles, (See Note 3 - Adoption of New
Accounting Standards) we evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment
17
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause us to conclude
that impairment indicators exist and that goodwill and other intangibles
associated with our acquired businesses are impaired. Any resulting impairment
loss could have a material adverse impact on our financial condition and results
of operations
Adoption of New Accounting Standards
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." We believe the adoption of SFAS No. 145 will not have a material
effect on our consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We believe the adoption
of SFAS No. 146 will not have a material effect on our consolidated financial
position or results of operations.
Liquidity and Capital Resources
We have funded our operations and satisfied our capital expenditure requirements
primarily through the sale of our common stock in private placements and the
exercise of employee stock options, in addition to the cash received from our
merger with Meteor Industries. Net cash used by operating activities was
$1,393,310 for the six months ended June 30, 2002, compared to net cash used by
operating activities of $1,866,668 for the same period in 2001.
We had a working capital deficit of $2,986,201 at June 30, 2002, compared to a
working capital deficit of $2,679,454 at December 31, 2001. Cash and equivalents
were $866,600 at June 30, 2002, representing a decrease of $898,293 from the
cash and equivalents of $1,764,893 at December 31, 2001. Our principal
commitment consists of payments to the former shareholders at Red Wing, Champion
and FMS.
The remaining notes payable to the former shareholders of Red Wing of $706,823
are due in two payments: December 6, 2002 of $400,000 and December 31, 2002 of
$306,823. The remaining notes payable to the former Champion shareholders of
$734,772 are due in three payments: September 14, 2002 of $256,164, December 31,
2002 of $222,444 and January 14, 2003 of $256,164. The remaining notes payable
to the former FMS shareholders of $152,255 are due December 15, 2002.
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. The proceeds were allocated to the fair value of
the securities issued (debt and warrant issued). On May 30, 2002, we allowed
Blake Capital Partners to convert $150,000 of outstanding principal under the
note into 200,000 shares of common stock at a price of $0.75 per share. We
satisfied the remaining outstanding principal and accrued interest in full on
June 10, 2002. We also recorded an $80,000 interest charge to reflect the
discount to market of the shares issued.
On May 27, 2002, we sold 500,000 shares of its common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for
total proceeds of $375,000. As consideration for its purchase of such shares,
Boston Financial Partners also received a warrant to purchase an additional
500,000 shares of our common stock at an exercise price of $1.00 per share, and
we further agreed to reduce to $1.00 the exercise price on all other warrants to
purchase shares of our common stock held by Boston Financial Partners and its
affiliates. Such warrants represent the right to purchase 1 million shares of
common stock and had exercise prices ranging from $5.50 to $7.50 per share.
Prior to this private placement, Boston Financial Partners beneficially owned
more than 5% of our common
18
stock.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of its common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of our common stock at an exercise price of $1.25 per share. The warrants
may be redeemed by us any time after January 30, 2003 and following a period of
at least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. One of the
investors was Wyncrest Capital, Inc., a wholly-owned affiliate of Ronald E.
Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement.
As previously stated, we have shifted towards a hosted solutions business model
and away from our storefront software business, known as the Epoxy Network. We
had recognized revenues from this software product through March 28, 2002 only,
at which time we sold the customer contracts relating to the Epoxy Network.
Pursuant to an agreement dated August 13, 2002, we sold the Epoxy Network
source code to an unaffiliated third party. We received cash of $400,000 for
the sale of the source code. The net book value of the Epoxy Network is
approximately $817,000 and we anticipate recording a loss on this sale of
approximately $400,000 during the third quarter of 2002.
We anticipate that we will continue to experience growth in our operating
expenses for the foreseeable future and that our operating expenses will be a
material use of our cash resources. Additionally, we have significant debt
payments due over the next six months as described above. We may incur
significant commitments for capital expenditures related to our managed hosting
facility plus continued capital expenditures consistent with our anticipated
growth in operations, infrastructure and personnel. We believe that the existing
sources of liquidity and projected revenue from our operations will not provide
sufficient cash to fund operations for the next twelve months. We will continue
our attempt to raise additional capital although the current economic conditions
and receptivity of the financial markets are not favorable. Some of the
possibilities available to us are through the sale of assets, private equity
transactions, and/or the exercise of options and warrants. There can be no
assurance that additional capital will be available on terms acceptable to us or
on any terms whatsoever. In the event that we are unable to obtain additional
capital, we would be forced to reduce operating expenditures which may very well
slow our growth prospects and/or cease operations altogether.
RISK FACTORS
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
For the six months ended June 30, 2002, we had a net loss of $5.47 million, and
since our inception as Old AIQ in April 1996 through June 30, 2002, we have
incurred an aggregate net loss of $18.39 million. As of June 30, 2002, we had
total assets of $8.85 million. We expect operating losses to continue for the
foreseeable future and there can be no assurance that we will ever be able to
operate profitably. Furthermore, to the extent our business strategy is
successful, we must manage the transition to higher volume operations, which
will require us to control overhead expenses and add necessary personnel.
WE WILL REQUIRE FUTURE FINANCINGS IN ORDER TO COMPLETE THE DEVELOPMENT OF OUR
PRODUCTS AND SERVICES AND TO IMPLEMENT OUR BUSINESS PLAN. THERE IS NO ASSURANCE
THAT SUCH FINANCINGS WILL BE AVAILABLE ON ACCEPTABLE TERMS OR EVEN AT ALL.
Further financing will be needed in order to complete development of our
products, to develop our brand and services and to otherwise implement our
business plan. Product development, brand development and other aspects of
Internet-related businesses are extremely expensive, and there is no precise way
to predict when further financing will be needed or how much will be needed.
Moreover, we cannot guarantee that the additional financing will be available
when needed. If it is not available, we may be forced to discontinue our
business, and your investment in our securities may be lost. If the financing is
available only at a low valuation of our company, an investment in our common
stock may be substantially diluted. The continued health of the market for
technology related securities and other factors beyond our control will have a
major impact on the valuation of our company if we raise capital in the future.
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ SMALL CAP MARKET, IT WILL
SIGNIFICANTLY HINDER YOUR ABILITY TO DISPOSE OF OUR COMMON STOCK IN THE
SECONDARY MARKET.
19
By letter dated July 29, 2002, the Nasdaq Stock Market informed us that we do
not have the requisite number of "independent" directors, as required by
Nasdaq's Marketplace Rules to maintain listing on the Small Cap Market. Although
we are currently recruiting candidates for our board of directors in order to
achieve compliance with this rule, there can be no assurance that we are able to
find the additional "independent" directors necessary to satisfy Nasdaq's
continued listing requirements. In the event we cannot achieve compliance with
this rule, our common stock may be de-listed from the Nasdaq Small Cap Market.
In addition, in order for our common stock to remain listed on the Nasdaq Small
Cap Market, we must comply with certain other of Nasdaq's continued listing
requirements. These requirements mandate, among other things, that our common
stock maintain a minimum closing bid price of at least $1.00 per share. We have
failed to maintain a minimum bid price of $1.00 for a period of 30 consecutive
business days. Although Nasdaq has not yet notified us, we expect Nasdaq will do
so soon, after which we will then have a period of 180 calendar days in which to
achieve compliance with the bid price requirement. Nasdaq rules provide that
compliance is achieved when the minimum bid price is at least $1.00 for a
minimum of 10 consecutive business days. However, Nasdaq may impose even
stricter requirements for demonstrating that compliance with its continued
listing requirements will be achieved. The closing bid price of our common stock
on August 12, 2002 was $0.60 per share. We cannot guarantee that our common
stock will achieve the minimum closing bid price required to remain listed on
the Nasdaq Small Cap Market.
Nasdaq's continued listing requirements also provide that we must have a total
market capitalization of at least $35 million, have had net income of at least
$500,000 in two of the last three years or maintain stockholder's equity of at
least $2.5 million. We do not meet the market capitalization or net income
tests, although our stockholders' equity is currently $4.6 million. There is no
assurance that we will be able to maintain our stockholders' equity above $2.5
million, however.
If our securities are delisted from Nasdaq, trading in our common stock could
thereafter be conducted in the over-the-counter markets in the so-called "pink
sheets" or the National Association of Securities Dealer's "Electronic Bulletin
Board." In such a case, the liquidity of our common stock would likely be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of transactions, reduction in the coverage of
our company by security analysts and the news media, and lower prices for our
securities than might otherwise prevail. This impaired liquidity may in turn
hinder our ability to raise additional capital to fund operations. In addition,
our common stock would become subject to the rules of the Securities and
Exchange Commission relating to "penny stocks." These rules require
broker-dealers to make special suitability determinations for purchasers other
than established customers and certain institutional investors, and to receive
the purchasers' prior written consent for a purchase transaction prior to sale.
Consequently, these penny-stock rules may adversely affect the ability of
broker-dealers to sell our common stock and may adversely affect your ability to
sell shares of our common stock in the secondary market.
WE HAVE NO MEANINGFUL OPERATING HISTORY ON WHICH TO EVALUATE OUR BUSINESS OR
PROSPECTS.
We were a development stage company until January 2001 when we acquired Edge
Technologies. Accordingly, we do not have a significant operating history on
which you can base an evaluation of our business and prospects. Our business
prospects must therefore be considered in the light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets using new and unproven business models. These risks include our:
- - substantial dependence on products with only limited market acceptance;
- - need to create sales and support organizations;
- - competition;
- - need to manage changing operations;
- - customer concentration;
- - reliance on strategic relationships; and
- - dependence on key personnel.
20
We also depend heavily on the growing use of the Internet for commerce and
communication and on general economic conditions. Our management cannot be
certain that our business strategy will be successful or that it will
successfully address these risks.
BECAUSE WE ARE DEPENDENT UPON THIRD-PARTY SYSTEMS AND STRATEGIC RELATIONSHIPS,
OUR BUSINESS MAY BE HARMED IF WE DO NOT MAINTAIN THOSE RELATIONSHIPS.
We license key elements of our hosted solutions offerings from third parties,
including Content Management software and the SmartCabinet suite of products. We
believe that our success in penetrating our target markets depends in part on
our ability to develop and maintain strategic relationships with key software
vendors, distribution partners and customers. We believe these relationships are
important in order to validate our technology, facilitate broad market
acceptance of our products, and enhance our sales, marketing and distribution
capabilities. If we are unable to develop key relationships or maintain and
enhance existing relationships, we may have difficulty selling our products and
services.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO SUCCESSFULLY OPERATE AND GROW
OUR ACCOUNTING SOFTWARE PUBLISHER BUSINESSES.
From June 2001 to October 2001, we acquired Red Wing Business Systems, Inc.,
Champion Business Systems, Inc. and FMS Marketing, Inc. (which we later merged
into Red Wing Business Systems) and we are currently integrating those
businesses and products. Our ability to successfully operate and grow this
business involves the following risks:
- - failure to effectively coordinate product development efforts;
- - failure to successfully manage operations that are geographically diverse;
- - failure to maintain the customer relationships of the acquired businesses;
- - failure to retain the key employees of the acquired businesses; and
- - diversion of our management's time and attention from other aspects of our
business.
We cannot be sure that we will be successful in growing the businesses and
products of Red Wing Business Systems, Champion Business Systems and FMS
Marketing as part of our core business and products. If we are not, our
business, operating results and financial condition may be materially adversely
affected. See Note 3 - Adoption of New Accounting Standards regarding the
impairment charge.
POTENTIAL FLUCTUATIONS IN OUR OPERATING RESULTS AND DIFFICULTY IN PREDICTING OUR
OPERATING RESULTS MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR SECURITIES.
We expect our anticipated revenues and operating results to vary significantly
from quarter to quarter. As a result, quarter-to-quarter comparisons of our
revenues and operating results may not be meaningful. In addition, due to the
fact that we have little or no operating history with our new and unproven
technology, we may be unable to predict our future revenues or results of
operations accurately.
Our current and future expense levels are based largely on our investment plans
and estimates of future revenues and are, to a large extent, fixed. Accordingly,
we may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, and any significant shortfall in revenues relative
to its planned expenditures could have an immediate adverse effect on our
business and results of operations.
Lack of operating history and rapid growth makes it difficult for us to assess
the effect of seasonality and other factors outside our control. Nevertheless,
we expect our business to be subject to fluctuations, reflecting a combination
of various technology related factors.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO EFFECTIVELY
21
COMPETE.
We compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing. We face competition in the overall Internet, Corporate
Intranet and Extranet infrastructure market. We will experience increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources.
We compete with a number of companies to provide intelligent software-based
solutions, many of which have operated services in the market for a longer
period, have greater financial resources, have established marketing
relationships with leading online software vendors, and have secured greater
presence in distribution channels.
Our business does not depend on significant amounts of proprietary rights and,
therefore, our technology does not pose a significant entry barrier to potential
competitors. Additionally, our competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements than we
can. In addition, our current and potential competitors may bundle their
products with other software or hardware, including operating systems and
browsers, in a manner that may discourage users from purchasing services and
products offered by us. Also, current and potential competitors have greater
name recognition, more extensive customer bases that could be leveraged, and
access to proprietary content. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share.
BECAUSE THE MARKETS IN WHICH WE COMPETE ARE RAPIDLY CHANGING AND HIGHLY
COMPETITIVE, OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO DEVELOP AND
INTRODUCE SUCCESSFUL NEW APPLICATIONS AND SERVICES IN A TIMELY MANNER.
Our markets are characterized by rapid technological change, frequent new
product introductions, changes in customer requirements and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards could render our existing products obsolete.
Our future success will depend upon our ability to develop and introduce a
variety of new products and product enhancements to address the increasingly
sophisticated needs of our customers. We may be unable to develop any products
on a timely basis, or at all, and we may experience delays in releasing new
products and product enhancements. Material delays in introducing new products
and enhancements may cause our customers to forego purchases of our products and
purchase those of our competitors.
IF WE ARE UNABLE TO DEVELOP AND GROW OUR SALES AND SUPPORT ORGANIZATIONS, OUR
BUSINESS WILL NOT BE SUCCESSFUL.
We will need to create and substantially grow our direct and indirect sales
operations in order to create and increase market awareness and sales. Our
products and services will require a sophisticated sales effort targeted at
several people within our prospective customers. Competition for qualified sales
personnel is intense, and we might not be able to hire the kind and number of
sales personnel we are targeting. In addition, we believe that our future
success is dependent upon establishing successful relationships with a variety
of distribution partners, including value added resellers. We cannot be certain
that we will be able to reach agreement with additional distribution partners on
a timely basis or at all, or that these distribution partners will devote
adequate resources to selling our products. There is also no assurance that the
pricing model relating to our hosted solution product will be accepted by our
customers.
Similarly, the anticipated complexity of our products and services and the
difficulty of customizing them require highly trained customer service and
support personnel. We will need to hire staff for our customer service and
support organization. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING THE DEMAND FOR OUR PRODUCTS.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market
22
requires an effective planning and management process. Rapid growth will place a
significant strain on our management systems and resources. We expect that we
will need to continually improve our financial and managerial controls and
reporting systems and procedures, and will need to continue to expand, train and
manage our work force. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties.
POTENTIAL ACQUISITIONS MAY CONSUME SIGNIFICANT RESOURCES.
We may continue to acquire businesses that we feel will complement or further
our business plan. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees of acquired businesses. No assurance can be
given as to our ability to consummate any acquisitions or integrate successfully
any operations, personnel, services or products that might be acquired in the
future, and our failure to do so could have a material adverse effect on our
business, financial condition and operating results.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL.
Our products and technologies are complex and we are substantially dependent
upon the continued service of our existing engineering personnel. We also expect
to continue to add other important personnel in the near future. The loss of any
of those individuals may have a material adverse impact on our business. We
intend to hire a significant number of sales, support, marketing, and research
and development personnel in fiscal 2002 and beyond. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain
additional highly qualified personnel in the future. Further, some of these
individuals may be either unable to begin or continue working for us because
they may be subject to non-competition agreements with their former employers.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition may
be materially adversely affected. Any steps we take to protect our intellectual
property may be inadequate, time consuming and expensive. We currently have no
patents, registered trademarks or service marks, or pending patent, trademark or
service mark applications. Without significant patent, trademark, service mark
or copyright protection, we may be vulnerable to competitors who develop
functionally equivalent products and services. We may also be subject to claims
that our products infringe on the intellectual property rights of others. Any
such claim may have a material adverse effect on our business, operating results
and financial condition.
Our success and ability to compete are substantially dependent upon our
internally developed products and services, which we intend to protect through a
combination of patent, copyright, trade secret and trademark law. We generally
enter into confidentiality or license agreements with our employees, consultants
and corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. As with any knowledge-based
product, we anticipate that policing unauthorized use of our products will be
difficult, and we cannot be certain that the steps we intend to take to prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States,
will be successful. Other businesses may also independently develop
substantially equivalent information.
OUR TECHNOLOGY MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS.
We anticipate that software product developers will be increasingly subject to
infringement claims due to growth in the number of products and competitors in
our industry, and the overlap in functionality of products in different
industries. We also believe that many of our competitors in the intelligent
applications business have filed or intend to file patent applications covering
aspects of their technology that they may claim our technology infringes. We
cannot be certain that these competitors or other third parties will not make a
claim of infringement against us with
23
respect to our products and technology. Any infringement claim, regardless of
its merit, could be time-consuming, expensive to defend, or require us to enter
into royalty or licensing agreements. Such royalty and licensing agreements may
not be available on commercially favorable terms, or at all. We are not
currently involved in any intellectual property litigation.
Our products and services operate in part by making copies of material available
on the Internet and other networks and making this material available to end
users. This creates the potential for claims to be made against us (either
directly or through contractual indemnification provisions with customers) for
defamation, negligence, copyright or trademark infringement, personal injury,
invasion of privacy or other legal theories based on the nature, content or
copying of these materials. These claims have been brought, and sometimes
successfully pressed, against online service providers in the past. Although we
carry general liability insurance, that insurance may not cover potential claims
of this type or may not be adequate to protect us from all liability that may be
imposed.
GOVERNMENT REGULATION OF E-COMMERCE IS INCREASING AND THERE ARE MANY
UNCERTAINTIES RELATING TO THE LAWS OF THE INTERNET.
Laws and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. Recent sessions of the United States
Congress have resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet. In addition, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, that may impose additional burdens on
companies conducting business online. The adoption or modification of laws or
regulations relating to the Internet could adversely affect our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitivity
We do not enter into contracts for speculative purposes, nor are we a party to
any leveraged instruments. There has been no material change in our market risks
associated with debt obligations during the period ended June 30, 2002.
24
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with our October 2001 acquisition of FMS Marketing, Inc., we were
required to pay to the 4 former shareholders of FMS Marketing an aggregate of
$300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In
May 2002 we re-negotiated the terms of those notes in order to provide that we
would immediately pay an aggregate of $30,000 and the remaining $270,000 would
be payable by December 15, 2002, with interest accruing at the rate of 12.5% per
annum. In addition, the re-negotiated notes allowed the former FMS shareholders
to convert the outstanding balance into shares of our common stock until July
12, 2002 at a price equal to 90% of the average closing sales price for the 5
days preceding conversion. On April 10, 2002, three of the former FMS
shareholders exercised the conversion option with respect to their notes,
converting an aggregate of $118,758 of outstanding principal and interest into
151,669 shares of our common stock (at a conversion price of $0.783 per share).
In connection with the re-negotiation of these notes and the shares into which
such notes were convertible, we relied on the exemption from registration
provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as
Rule 506 of Regulation D based on (i) our belief that the issuances did not
involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the noteholders were either accredited or otherwise had sufficient knowledge and
sophistication, either alone or with a purchaser representative, to appreciate
and evaluate the risks and merits associated with their investment decision.
In May 18, 2002, we renegotiated one of the payments we were required to pay in
satisfaction of certain notes payable issued to the former shareholders of
Champion Business Systems, Inc. in connection with our acquisition of that
company. Specifically, in exchange for extending until December 31, 2002 the due
date relating to an aggregate of installment of approximately $159,041 required
to be paid on May 18, 2002 (the "May Installment") in satisfaction of such
notes, we agreed to pay interest at the rate of 12.5% per annum on the entire
unpaid balance and granted such noteholders a 60-day right to convert the May
Installment, including accrued interest, into shares of our common stock at a
price equal to 90% of the average closing sale price for the 5 days preceding
conversion. None of such noteholders exercised their right to convert. In
connection with the amendment of these notes, we relied on the exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933,
as well as Rule 506 of Regulation D based on (i) our belief that the issuances
did not involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the noteholders were either accredited or otherwise had sufficient knowledge and
sophistication, either alone or with a purchaser representative, to appreciate
and evaluate the risks and merits associated with their investment decision.
In connection with our June 2001 acquisition of Red Wing Business Systems, Inc.,
we were required to make an aggregate payment of $400,000 to the former
shareholders of such company on June 6, 2002 (the "June Payment"). With respect
to former Red Wing shareholders representing $339,093 of the June Payment, such
shareholders agreed to extend the due date of the June Payment until December
31, 2002. In exchange for the extension, we agreed to pay interest on the unpaid
portion of the June Payment at the rate of 12.5% per annum (commencing July 1,
2002) and granted such shareholders a 60-day right to convert any or all of the
June Payment (including accrued interest) into shares of our common stock at a
price equal to 90% of the average closing sale price of our common stock during
the 5 days preceding conversion. To date, none of the former Red Wing
shareholders who agreed to the amended payment terms have exercised their right
to convert the outstanding balance of the June Payment. In connection with the
amending the terms of the June Payment, we relied on the exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933,
as well as Rule 506 of Regulation D based on (i) our belief that the issuances
did not involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) we had a reasonable basis to conclude that each of the
noteholders were either "accredited investors" or otherwise had sufficient
knowledge and sophistication, either alone or with a purchaser representative,
to appreciate and evaluate the risks and merits associated with their investment
decision.
On May 27, 2002, we sold 500,000 shares of our common stock in a private
placement to one accredited investor at a price of $0.75 per share, for a total
purchase price of $375,000, of which $25,000 remains outstanding under a
25
subscription receivable. Also, as consideration for its purchase of such shares,
the investor also received a warrant to purchase an additional 500,000 shares of
our common stock at an exercise price of $1.00 per share. We further agreed to
reduce to $1.00 the exercise price on all other warrants to purchase shares of
our common stock held by this investor and its affiliates. Such warrants
represent the right to purchase 1 million shares of common stock and had
exercise prices ranging from $5.50 to $7.50 per share. In connection with this
offering, we relied on the exemption from registration provided by Sections 4(2)
and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D
because we had a reasonable basis to believe that the purchaser was an
accredited investor.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of common stock at an exercise price of $1.25 per share. The warrants may
be redeemed by us any time after January 30, 2003 and following a period of at
least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. One of the
investors was Wyncrest Capital, Inc., a wholly-owned affiliate of Ronald E.
Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement. In connection with this
offering, we relied on the exemption from registration provided by Sections 4(2)
and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D
because we had a reasonable basis to believe that both purchasers were
accredited investors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment agreement by and between Jeffrey M. Traynor
and the Company dated as of May 8, 2002.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
On April 17, 2002, the Company filed a Current Report on Form 8-K/A, dated
September 18, 2001, under items 2 and 7. The Company previously filed an 8-K on
September 21, 2001 to disclose the Company's acquisition of Champion Business
Systems and on November 13, 2001, the Company filed an amendment to Form 8-K to
include the financial statements and pro forma financial information required by
item 7 of Form 8-K. The Company filed this April 17, 2002 Amendment to Form 8-K
to revise to the financial statements and the related notes.
On April 17, 2002, the Company filed a Current Report on Form 8-K/A dated June
6, 2001, under items 2 and 7. The Company previously filed a current report on
Form 8-K on June 15, 2001 to disclose the Company's acquisition of Red Wing
Business Systems, Inc., and on August 13, 2001 the Company filed an amendment to
Form 8-K to include financial statements and pro forma financial information
required by Item 7 of Form 8-K. The Company filed this April 17, 2002 Amendment
to Form 8-K to revise to the financial statements and the related notes.
On April 17, 2002, the Company filed a Current Report on Form 8-K/A dated April
30, 2001, under Items 2, 4, 5 and 7. The Company filed a current report on Form
8-K on May 14, 2001, to (1) disclose the completion of the merger by and between
Meteor Industries, Inc., active IQ Technologies, Inc., and MI Merger, Inc.; (2)
disclose the disposition of the assets of Meteor Industries, Inc. to Capco
Energy, Inc.; (3) disclose a change of accountants; (4) disclose the extension
of the expiration date of the Company's outstanding public warrants; and (5)
file the Audited Financial Statements of active IQ Technologies, Inc. for the
fiscal year ended December 31, 2000. The Company filed this April 17, 2002
Amendment to Form 8-K to revise to the financial statements and the related
notes.
26
On June 5, 2002, the Company filed a Current Report on Form 8-K dated May 20,
2002, under Items 5 and 7 to disclose that our balance sheet as of December 31,
2000 and its related statements of operations, stockholders' equity and cash
flows for the two years in the period ended December 31, 2000 were audited by
Arthur Andersen LLP ("Andersen"), independent public accountants. The report of
Andersen dated March 23, 2001 concerning such financial statements were included
in our Annual Report on Form 10-K for the year ended December 31, 2001,
including Amendment No. 1 to such report. In May 2002, Andersen ceased
operations at its Minneapolis, Minnesota office, from which we were primarily
serviced. As a result of the closing of Andersen's Minneapolis office, we are
unable to obtain signed, re-issued reports from Andersen regarding our audited
financial statements.
On June 12, 2002, the Company filed a Current Report on Form 8-K dated May 27,
2002, under Items 5 and 7 to disclose that we have made a number of issuances of
its common stock and other securities in connection with certain financing
transactions.
27
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACTIVE IQ TECHNOLOGIES, INC.
By: /s/ D. Bradly Olah
--------------------
D. Bradly Olah
Chief Executive Officer
By: /s/ Jeffrey M. Traynor
---------------------
Jeffrey M. Traynor
Chief Financial Officer
Date: August 13, 2002
28