ACTIVE IQ TECHNOLOGIES INC - 10-Q Quarterly Report

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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 SEPTEMBER 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 November 11, 2002, there were 13,298,014 shares of common stock, $.01 par
value, outstanding.

ACTIVE IQ TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

INDEX

2

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.

3

ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements

4

ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

5

ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

6

ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements

7

ACTIVE IQ TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. In
August 2002, we sold all of our rights and interests Epoxy Network to a third
party. 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 three and/or nine months ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the year as a
whole.

Revenue Recognition and Deferred Revenue

Through our hosted solutions, we recognize both license and service revenue. We
recognize monthly license

8

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 2% 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 storefront software
business, known as the Epoxy Network, at which time we sold the customer
contracts of Edge to a 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. In August 2002, we sold
all of our rights and interests in the Epoxy Network to a different third party.

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

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

9

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 (the remaining $817,273 is
the carrying amount of our Epoxy Network technology). 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.

In August 2002, we sold all of our rights and interests in our Epoxy Network
technology to a third party for cash of $400,000. As a result, we recorded an
impairment charge of $417,273 relating to this transaction.

Components of intangible assets are as follows:

10

The changes in the carrying value of goodwill for the nine months ended
September 30, 2002 are as follows:

Balance of goodwill (less accumulated depreciation) as of December 31, 2001 $ 5,916,924
Second quarter impairment loss recorded June 30, 2002 (2,131,391)
Sale of Epoxy Network technology asset recorded in August 2002 (817,273)
-----------
Balance as of September 30, 2002 $ 2,968,260
===========

Amortization of intangible assets was $294,656 and $823,301 for the three months
ended September 30, 2002 and 2001, respectively, and $883,969 and $1,431,796 for
the nine months ended September 30, 2002 and 2001, respectively. Amortization
expense is expected to be approximately $295,000 for the remainder of 2002 (a
total of approximately $1,180,000 for 2002). All remaining intangible assets
subject to amortization should be fully amortized by the third quarter of 2003
(approximately $870,000). Our net loss excluding goodwill amortization expense,
for the three months and nine months ended September 30, 2001 would have been as
follows had we adopted SFAS No. 142 on January 1, 2001:

We did not have any goodwill prior to January 1, 2001.

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENT

In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 is effective October 1, 2002. The
Company believes the adoption of SFAS No. 147 will not have a material effect on
the Company's consolidated financial position or results of operations.

NOTE 5 - PREPAID ROYALTIES

We have entered into two application service provider software license
agreements with Stellent, Inc. The prepaid royalties at September 30, 2002 of
$1,140,255 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. The minimum royalty commitments for the exclusive ASP
license are as follows: $1,000,000 for 2002, $2,000,000 for year 2003 and
$3,000,000 for year 2004. If the minimum royalties have been paid for all three
years, an additional three-year exclusive option is provided, otherwise, we have
the option to renew for an additional three years under a non-exclusive right.
The 2001 ASP Agreement required a minimum royalty to be paid 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 2001 ASP Agreement and
two $500,000 payments were due in September and December 2002. On March 29, 2002
we prepaid the September and December payments and in consideration of the early
payment, we received a 5% discount, or $50,000. Based on our current and
projected revenue model for the year 2002, we will not fully utilize the minimum
royalty fee of $1,000,000, but we will recognize the full amount of expense and
finish the year with a remaining balance of approximately $975,000. At the end
of 2002, we may elect to maintain exclusivity in defined

11

vertical markets of our choice and terminate all other exclusive rights of any
other vertical markets. With this change to a nonexclusive license, we would
also renegotiate the remaining $1,000,000 of prepaid royalties and how it would
be applied to future revenues.

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. 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. We maintain this exclusivity if we pay the minimum royalties as
follows: $20,000 for year 2002, $40,000 for year 2003 and $60,000 for year 2004.
This license is renewable for an additional three years, at our option, based on
the payment of certain minimum royalties. If we choose to convert this license
to a nonexclusive license, we will pay royalties of 1% on net revenue on
subsequent sales.

NOTE 6 - 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. 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 outstanding principal balance due all former Red Wing
shareholders as of September 30, 2002 is $701,016.

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 September 30,
2002 were $10,999 and $43,995, 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 $256,164 on January 18, May 18, September 18, 2002, and
January 18, 2003, and to date, the first payment was made. In May 2002 we
re-negotiated an extension of the May payment with several of the note holders
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. All remaining former Champion shareholders were
paid their May 2002 payment as stated in the original notes. In September 2002
we re-negotiated an extension of the September payment with several of the note
holders until December 15, 2002, in the

12

amount of $159,041. In exchange for the extension, we paid 25% 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. As consideration for their
agreeing to another deferral, each such note holder received one warrant for
every dollar deferred until December 15, 2002. We issued 5-year warrants to
purchase 119,285 shares of our common stock at an exercise price of $1.00 per
share. All remaining former Champion shareholders were paid their September 2002
payment as stated in the original notes. One shareholder (representing $54,061
of the May and September payment) has not accepted the terms of the new notes
and as such, we are in default with the terms of the note and continue to accrue
interest. The outstanding principal balance due all former Champion shareholders
as of September 30, 2002 is $681,562.

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 outstanding principal balance
due all FMS shareholders as of September 30, 2002 is $152,255.

NOTE 7 - SHAREHOLDERS' EQUITY

Stock Subscription Receivable

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 non-recourse 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). Also in May 2002, we
recorded a stock subscription receivable in the amount of $25,000 in connection
with the private placement and as of September 30, 2002 the amount remains
outstanding.

Warrant Grants

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. In conjunction
with this transaction, we also issued a warrant to purchase 50,000 shares of
common stock in September 2002 to Ronald E. Eibensteiner as consideration for
the placement. This warrant has a term of 5 years and is exercisable at a price
of $1.00 per share.

13

On September 18, 2001, we acquired Champion Business Systems in a merger
transaction. 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 $256,164 on January 18, May 18, September 18, 2002, and January
18, 2003. In September 2002 several of the note holders re-negotiated an
extension of the September payment until December 15, 2002, in the amount of
$159,041. In exchange for the extension, we paid 25% 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. As consideration for their agreeing to
another deferral, each such note holder also received one common stock purchase
warrant for every dollar deferred until December 15, 2002. We issued warrants to
purchase an aggregate of 119,285 shares of our common stock to 9 persons. The
warrants have a term of 5 years and have an exercise price of $1.00 per share.
The value of these warrants totaled $82,199, using a Black-Scholes pricing model
and a non-cash interest expense is being charged ratably throughout December 15,
2002.

Information regarding the Company's warrants is summarized below:

NOTE 8 - RELATED PARTY TRANSACTIONS

In May 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. In conjunction with this
transaction, we also issued an additional 50,000 warrants in September 2002 to
Ronald E. Eibensteiner as consideration for the placement. These are 5-year
warrants to purchase 50,000 shares of our common stock at an exercise price of
$1.00 per share.

NOTE 9 - SUBSEQUENT EVENTS

In October we received a $200,000 referral fee from a third party for our sales
efforts in connection with three customers that were not candidates for our ASP
solution. As we continue to market our hosted product, SmartCabinet, we may have
other opportunities to earn such referral fees, although it is not our intent to
alter our business model to generate revenue in this manner.

On November 7, 2002, the Company appointed Jack Johnson as President and Chief
Operating Officer. Mr. Johnson has a background in managing and growing software
service companies with extensive experience in hosted vertical market solutions.
Mr. Johnson was also elected to our board of directors.

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 through our "SmartCabinet"
product line. 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 Red Wing Business Systems ("Red
Wing")and Champion Business Systems ("Champion") our subsidiaries.

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 partners, security
and privacy issues.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 2001.

Revenues

Revenues for the three months ended September 30, 2002 were $1,072,721 compared
to $645,182 for the same period in 2001. Our 2002 revenues by product line were
as follows: our hosted solutions generated $108,232, or

15

10% of total revenues, and $964,489, or 90% of total revenues from Red Wing and
Champion. The increase of $427,539 is primarily due to the acquisitions of the
accounting publishers of Red Wing and Champion. We anticipate that revenues for
the fourth quarter of 2002 should be minimally higher versus the third quarter
of 2002 due to increased seasonality in the accounting software market. Revenue
from our hosting solutions should remain relatively flat to slightly higher in
the fourth quarter as we continue to build our new customer base.

Revenues for the nine months ended September 30, 2002 were $3,360,142 compared
to $1,053,443 for the same period in 2001. Our 2002 revenues by product line
were as follows: our hosted solutions generated $331,017, or 10% of total
revenues, the Epoxy Network generated $46,774, or 1% of total revenues (through
March 28, 2002), and $2,982,351, or 89% of total revenues from Red Wing and
Champion. The increase of $2,306,699 is primarily due to the acquisitions of the
accounting publishers of Red Wing and Champion during 2001.

Our ability to continue our present operations and successfully implement our
expansion plans, which centers around expanding our "SmartCabinet" product line
plus adding additional products and services based on our hosted solutions
business model, 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 sales for the three months ended September 30, 2002 was $430,410
compared to $123,749 for the same period in 2001. Our cost of sales by product
line for 2002 was as follows: the hosted solutions amount was $177,738, all of
which was non-cash prepaid royalty fees and $252,672 was accounting publisher
expense. The increase of $306,661 is primarily related to the acquisition of our
accounting publisher operations. We completed the Red Wing acquisition during
June 2001 and the Champion acquisition during September 2001. Therefore, the
three months ended September 30, 2001 cost of sales expenses only reflect
partial periods of our ownership when compared to the same period of 2002, which
reflect three complete months of ownership in addition to three complete months
of ownership of FMS, which was acquired in October 2001. Cost of sales for the
nine months ended September 30, 2002 was $1,396,172 compared to $141,884 for the
same period in 2001. Our cost of sales by product line for 2002 was as follows:
the hosted solutions amount was $422,431 (of which $387,668 was non-cash prepaid
royalty fees) and $973,741 was accounting publisher expense. The increase of
$1,254,288 is primarily related to the acquisition of our accounting publisher
operations and this increase is again related to our time of ownership as stated
for the three months period. These costs include hosting fees, wages, compact
discs and manuals, overhead allocation and shipping and packaging costs. We
anticipate that our fourth quarter cost of sales will be higher, as a percentage
of revenue, than the third quarter due to increased spending in expanding of our
"SmartCabinet" product line.

Selling, general and administrative expenses for the three months ended
September 30, 2002 were $1,163,720 compared to $2,661,488 for the same period in
2001. The $1,497,768 decrease in selling, general and administrative expenses
was primarily related to our recording as expense the exercising of employee
stock options of former Meteor Industries employees. Selling, general and
administrative expenses for the nine months ended September 30, 2002 were
$4,703,772 compared to $4,899,829 for the same period in 2001, or a decrease of
$196,057. We anticipate the rate of spending for the fourth quarter selling,
general and administrative expenses should remain at the same rate as the third
quarter.

Depreciation expense of property and equipment for the three months ended
September 30, 2002 was $38,076 compared to $79,076, for the same period in 2001.
Depreciation expense of property and equipment for the nine months ended
September 30, 2002 was $130,177 compared to $174,151 for the same period in
2001. The decreases of $41,000 and $43,974 reflect the overall decrease in our
depreciable asset base.

Amortization expense for the three months ended September 30, 2002 was $409,673
($115,017 of acquired software developed and $294,656 of other intangibles)
compared to $823,301 (goodwill amortization only) for the same period in 2001.
Amortization expense for the nine months ended September 30, 2002 was $1,217,713
($333,744 of acquired software developed and $883,969 of other intangibles)
compared to $1,431,796 (goodwill amortization only) for the same period in 2001.
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

16

software developed. 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 nine months ended September
30, 2002.

Product development expenses for the three months ended September 30, 2002 were
$194,156 as compared to $172,498 for the same period in 2001. Product
development expenses for the nine months ended September 30, 2002 were $276,830
as compared to $562,762 for the same period in 2001. The $194,156 and $276,830
amounts from 2002 are related to the accounting publishers, as they continue to
implement software modules to unify the product base. The $172,498 and $562,762
amounts from 2001 are primarily related to our old business model of the Epoxy
Network and the number of software engineers we employed during 2001. To date,
we have had relatively few product development expenses related to our hosted
solutions model since we received an established customer base with the ASP
license agreement. During the fourth quarter we anticipate that product
development costs of the accounting publishers will be higher than the third
quarter due to updates that must be created to deal with the approaching new
years payroll changes and tax law changes.

During the three months ended September 30, 2002, we recorded an impairment loss
of $421,167 on goodwill. This loss primarily represents the write off of the
Epoxy Network technology asset sale. We had an unamortized balance in goodwill
of $817,273 in August 2002, when we sold the asset for $400,000 in cash.

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 (Earnings Before Interest, Taxes, Depreciation and Amortization)
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 in the quarter ended June 30, 2002. Additionally, we recorded an
impairment charge of $417,273 in the quarter ended September 30, 2002, which
relates to the sale of our Epoxy Network technology to a third party in August
2002. 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 September 30, 2002
was $24,384 compared to $77,451 for the same period in 2001. Interest income for
the nine months ended September 30, 2002 was $85,682 compared to $126,305 for
the same period in 2001. The $24,384 and $85,682 amounts recorded in 2002 relate
primarily to the non-recourse promissory note described under Stock Subscription
Receivable. See Note 7 - Shareholder Equity. The $53,067 and $40,623 decreases
are due primarily to the interest we were receiving from excess cash reserve
balances in 2001. We anticipate that interest income should remain at the same
level as the third quarter.

Interest expense for the three months ended September 30, 2002 was $76,844
compared to $30,419 for the same period in 2001. Interest expense for the nine
months ended September 30, 2002 was $241,012 compared to $39,696 for the same
period in 2001. These increases of $46,425 and $201,316 relate primarily to the
former shareholders of Red Wing, Champion and FMS. We have re-negotiated some of
the notes with these former shareholders during the course of the year, and as
such we have had to recognized additional interest expense, and we will continue
to record further interest during the fourth quarter of 2002 and the first
quarter of 2003. In addition to these cash interest expenses, we also have
amortization of the debt discount on the original non-interest bearing notes
payable as we recorded a 7% imputed interest expense.

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 the
Epoxy Network to a third party. In August 2002, we sold all of our rights and
interests to a different third party of this technology and therefore, will
derive no further income from it.

17

Critical Accounting Policies

We evaluate acquired businesses for potential impairment indicators of our
goodwill and other intangibles. See Note 3 - Adoption of New Accounting
Standards. Our judgments regarding the existence of impairment 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
$2,123,371 for the nine months ended September 30, 2002, compared to net cash
used by operating activities of $4,009,921 for the same period in 2001.

We had a working capital deficit of $3,073,278 at September 30, 2002, compared
to working capital deficit of $2,679,454 at December 31, 2001. Cash and
equivalents were $463,721 at September 30, 2002, representing a decrease of
$1,301,172 from the cash and equivalents of $1,764,893 at December 31, 2001. Our
principal cash 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 $701,016
are due in two payments: December 6, 2002 of $400,000 and December 31, 2002 of
$301,016. The remaining notes payable to the former Champion shareholders of
$681,562 are due in three payments: December 15, 2002 of $120,631, December 31,
2002 of $196,644 and January 14, 2003 of $364,287. 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 our 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

18

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 period 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,
known as SmartCabinet and away from our storefront software business, known as
the Epoxy Network. We had recognized revenues from the Epoxy Network product
through March 28, 2002. Pursuant to an agreement dated August 13, 2002, we sold
the Epoxy Network technology source code to a third party. We received cash
proceeds of $400,000 from the sale of our remaining rights and interests in this
technology.

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. Specifically, we expect that operating
expenses will continue to greatly exceed revenue of our hosted solutions
products in the foreseeable future as we focus on growing this business. 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. Additionally, we
have significant debt payments due over the next four months as described above
related to the acquisitions of Red Wing, Champion and FMS. We do not believe
that the existing sources of liquidity and projected revenue from our operations
will 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 nine months ended September 30, 2002, we had a net loss of $7.11
million, and since our inception as Old AIQ in April 1996 through September 30,
2002, we have incurred an aggregate net loss of $20.03 million. As of September
30, 2002, we had total assets of $7.06 million and negative net working capital
of $3.07 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

19

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 may 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.

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. In
September 2002, we notified Nasdaq that we added one new independent board
member. In November 2002, we notified Nasdaq that we added a second independent
board member and a third board member with the appointment of Jack Johnson as
President and COO. Nasdaq has granted us an extension until December 12, 2002 to
achieve compliance with this rule. There can be no assurance that these added
members will satisfy Nasdaq's continued listing requirements. In the event we
cannot achieve compliance with this rule, our common stock may be delisted 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. By a
letter dated August 14, 2002, the Nasdaq Stock Market informed us that we had
failed to maintain a minimum bid price of $1.00 for a period of 30 consecutive
trading days. Therefore, we have a period of 180 calendar days, until February
10, 2003, 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 trading days. However, Nasdaq may impose
even stricter requirements for demonstrating that compliance with its continued
listing requirements is achieved. 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 shareholder's equity of at
least $2.5 million. We do not meet the market capitalization or net income
tests, although our shareholders' equity is currently $3.1 million. However,
there is no assurance that we will be able to maintain our shareholders' equity
above $2.5 million, however. If we seek additional capital through the sale of
assets, it is likely that total shareholder's equity could go below the $2.5
million threshold.

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 and the underlying

20

Epoxy Network technology. In August 2002, we sold all of our rights and interest
in the Epoxy Network technology. We acquired our exclusive ASP hosting rights at
the end of 2001 and our rights to the "SmartCabinet" product line in April 2002.
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:

o substantial dependence on products with only limited market
acceptance;

o need to create sales and support organizations;

o competition;

o need to manage changing operations;

o customer concentration; and

o reliance on strategic relationships.

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 THOSE RELATIONSHIPS ARE NOT MAINTAINED.

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.

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 and customer acceptance related factors.

OUR MARKETS ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO EFFECTIVELY
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

21

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 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.

22

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 2003. 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 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.

23

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

There has been no material change in our market risks associated with debt
obligations during the period ended September 30, 2002. Our long-term debt is
not subject to interest rate risk because all of our long-term debt has fixed
rates of interest. We do not enter into contracts for speculative purposes, nor
are we a party to any leveraged instruments.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in alerting them in a timely basis to
material information relating to the Company required to be disclosed in the
Company's periodic SEC reports. There have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.

24

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On September 18, 2002, we renegotiated one of the payments we were required to
make 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 15, 2002 the due
date relating to an aggregate of installment of approximately $159,041 required
to be paid on September 18, 2002 in satisfaction of such notes, we agreed to pay
interest at the rate of 12.5% per annum on the entire unpaid balance. As
consideration for their agreeing to the deferral, each such note holder also
received one common stock purchase warrant for every dollar deferred until
December 15, 2002. We issued warrants to purchase an aggregate of 119,285 shares
of our common stock to 9 persons. The warrants have a term of 5 years and have
an exercise price of $1.00 per share. In connection with the issuance of these
warrants, we relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.

In conjunction with a transaction we completed in May 2002, (which 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) we
also issued a warrant to purchase 50,000 shares of common stock in September
2002 to Ronald E. Eibensteiner, a director of the Company, as consideration for
the placement. This warrant has a term of 5 years and is exercisable at a price
of $1.00 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, since Mr. Eibensteiner is an
accredited investor.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 Form of Warrant

4.2 Schedule identifying material details of warrants issued

99.1 Certification of Chief Executive Officer and Chief Financial
Officer

(b) Reports on Form 8-K

None.

25

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: November 13, 2002

26

CERTIFICATION

I, D. Bradly Olah, the Chief Executive Officer of Active IQ Technologies, Inc.,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of Active IQ Technologies,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

By: /s/ D. Bradly Olah
--------------------------------
D. Bradly Olah
Chief Executive Officer

27

CERTIFICATION

I, Jeffrey M. Traynor, the Chief Financial Officer of Active IQ Technologies,
Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Active IQ Technologies,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

d) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

e) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

f) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

c) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

d) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

By: /s/ Jeffrey M. Traynor
-----------------------------
Jeffrey M. Traynor
Chief Financial Officer

28