| Q COMM INTERNATIONAL INC Item 1A Risk Factors You should carefully consider the risks described below, our financial statements and the notes to those statements, before you purchase any of our securities |
| 12 _________________________________________________________________ [81]Table of Contents We have no history of profitable operations |
| Continuing losses could exhaust our capital resources and force us to discontinue operations |
| From the date on which we became a C corporation in 1998 through December 31, 2005, we incurred cumulative losses of dlra28dtta4 million |
| For the years ended December 31, 2004 and 2003 we had cumulative losses of dlra19dtta8 million, and dlra13dtta3 million, respectively |
| Our independent auditors stated in their auditors &apos report for the year ended December 31, 2005 that our recurring losses raise substantial doubt about our ability to continue as a going concern (see Item 8—“Financial Statements and Supplementary Data” for a more detailed discussion) |
| Unless we can significantly increase the number of our POS terminals in use, we will continue to incur losses for the foreseeable future |
| Our working capital, which totaled dlra4dtta8 million as of December 31, 2005, may not be sufficient to sustain us until we reach profitability |
| We expect to raise additional capital in 2006, but there is no assurance that we will raise the capital needed to support our growth |
| Control by Management and Certain Major Shareholders As of March 22, 2006, the current executive officers and directors of Q Comm beneficially own or have voting control over approximately 24prca of the outstanding common stock of Q Comm |
| William Jurika, the Chairman of our Board of Directors, beneficially owns or has voting control over approximately 22prca of the outstanding common stock of Q Comm |
| Our largest shareholder, Pike Capital Partners, LP, beneficially owns or has voting control over 38prca of the outstanding common stock of Q Comm |
| Accordingly, these individuals and entities have the ability to influence the election of Q Comm’s directors and most corporate actions |
| This concentration of ownership, together with other provisions in Q Comm’s charter and applicable corporate law, may also have the effect of delaying, deterring, or preventing a change in control of Q Comm |
| Our margins have historically been low, which makes it difficult to achieve profitability |
| We had negative margins, after taking into account the cost of the products sold through the Q Comm system, the fees and commissions payable to distributors, brokers and retailers, and including depreciation and software amortization expenses |
| As a consequence, for us to be profitable to any meaningful extent, we must do one or more of the following: · increase our revenue per terminal; · increase the number of revenue generating terminals; · add new products with higher profit margins to our portfolio; or · develop new revenue models |
| The future success of our business will require a substantial ongoing marketing effort on our part, including expending significant amounts of capital that could otherwise be used to purchase or develop new products |
| Our future success depends on our ability to successfully market our POS activation system as the preferred distribution method |
| This will require us to allocate a significant amount of our working capital to sales and marketing |
| This will reduce the amount of working capital available to develop new products and services |
| There is no assurance that our marketing efforts will be successful |
| Most of our revenue growth is derived primarily from a single class of product—prepaid wireless—which makes us particularly vulnerable to changes in consumer preferences and market saturation |
| Although we currently offer a variety of prepaid products, approximately 93prca, 87prca and 79prca of revenue was generated from the sale of prepaid wireless products for the years ended December 31, 2005, 2004 and 2003, respectively |
| The market for prepaid wireless has experienced substantial growth in past years |
| Our revenues have grown as this market has developed and expanded in the United States |
| We cannot assure you that this market will continue to grow |
| If it does not and we do not develop new products, our rate of revenue growth could decline rapidly, resulting in higher net losses |
| The loss of any one of these accounts could reduce our revenues |
| A small number of brokers and their associated merchant customers account for a large percentage of our revenue |
| One aspect of our growth strategy is to increase the breadth of our broker-account base |
| However, a high level of broker concentration could continue for the foreseeable future |
| In 2005, our three largest brokers accounted for approximately 22dtta5prca of revenue |
| We cannot assure you that the level of revenue to these brokers will be sustained from year to year, and there is a risk that these principal brokers may not continue to sell our products in the future |
| To the extent that any significant broker reduces its reliance on us, terminates its relationship with us, or defaults on payments, our revenues in the relevant fiscal period could decline substantially, which would result in lower net profits or increased net losses |
| The following table outlines the concentration of revenue by broker |
| Percent of Revenue For the Year Ended December 31, 2005 Top broker 9dtta6prca Top three brokers 22dtta5prca Top ten brokers 45dtta8prca We derive a significant amount of revenue from a single MVNO For the year ended December 31, 2005, approximately 38prca of our revenue was derived from a single MVNO, any disruption in PIN sale or pricing changes related to this MVNO could result a substantial reduction in revenue and margin dollars |
| We derive a significant amount of revenue in our business from service contracts signed with merchants to operate our terminals |
| Certain contacts have been, and in the future may be, terminated by the merchants, resulting in a substantial reduction in revenue and margin |
| We currently depend upon a single PIN provider for the majority of our PIN supply |
| Although we can obtain PINs from sources other than our single largest PIN supplier, a sudden disruption in PIN supply from such supplier could potentially interrupt service or leave us with no choice but to acquire PINs at a higher cost, which would have a negative financial impact on us |
| The industry in which we operate is highly competitive, has low barriers to entry and has rapidly changing technology |
| Increased competition could result in margin erosion, which would make profitability even more difficult to achieve |
| The market for prepaid transaction processing and information management services is becoming increasingly competitive and is highly fragmented |
| This market includes companies that provide either merchant processing terminals only, or information management services only, such as, PreSolutions and InComm |
| In addition to companies that are focused solely on the prepaid transactions market, we also face potential competition from companies, such as First Data Corporation, that provide merchant processing and information management services to the postpaid market |
| We could also face competition from e-commerce solution providers |
| Finally, we may in the future face competition from suppliers, such as telecommunication companies who may decide to provide electronic solutions directly to brokers, merchants or consumers |
| 14 _________________________________________________________________ [83]Table of Contents The industry in which we compete is characterized by low barriers to entry, rapidly changing technology, frequent new product and service introductions, and changing customer demands |
| Some of our competitors have substantially greater financial resources and/or pre-existing market share that may enable them to establish a stronger competitive position than we have, in part through better marketing opportunities |
| Current competitors or new market entrants could introduce products with features that may render our system uncompetitive |
| To be competitive and serve our customers effectively, we must respond on a timely and cost-efficient basis to changes in technology, industry standards, and customer preferences |
| The cost to modify our products, services or infrastructure in order to adapt to these changes could be substantial and we cannot assure you that we will have the financial resources to fund these expenses |
| Increased competition could result in reduced operating margins, as well as a loss of market share and brand recognition |
| We depend on brokers and other intermediaries to distribute our POS terminals |
| We generally rely on independent brokers, distributors, wholesalers and other intermediaries to distribute our POS activation system to retail merchants |
| Currently, we distribute through approximately 90 brokers |
| Our contractual relationships with these brokers are nonexclusive arrangements for terms of two years |
| As a result, we cannot prevent them from selling competitive products or discontinuing their relationship with us at the end of their two-year broker-contract term |
| We are not able to offer exclusive products to our brokers |
| Rather, we rely on the quality of the Q Comm system to induce brokers to contract with us |
| If we do not continue to offer performance and service advantages, our brokers may not aggressively market our system to their retail networks or may terminate their relationship with us |
| We cannot assure you that we will continue to derive revenue, at current levels, or at all, from our existing brokers, or that we will be able to successfully establish relationships with new brokers |
| We have no control over the prices suppliers charge us for their products |
| As a result, price increases could have a negative impact on our margins and profitability |
| We depend on suppliers to provide us with prepaid products that we can resell |
| We have no control over the prices they charge us |
| Depending on the competitive environment, increases in the costs of our products may reduce our margins |
| If we do not protect our proprietary technology and intellectual property rights against infringement or misappropriation, and defend against third parties assertions that we have infringed on their intellectual party rights, we may lose our competitive position in the markets in which we operate |
| We believe that our proprietary software and hardware provide us with a competitive advantage |
| While we have filed patent applications relating to various features of the Q Xpress terminal and proprietary technology, we cannot assure you that these applications will be approved, or that even if approved, they will provide us with meaningful protection |
| Other than our patent applications described above, we rely on trade secret laws and common law principles to protect our proprietary rights |
| For example, we have not registered or applied to register either “Q Xpress” or “Q Xpress 200” or any other trademarks, trade names, service marks, service names or copyrights that we may own or use |
| Despite our efforts to protect our rights, unauthorized parties may attempt to copy aspects of our POS terminals or the source code to our software or to obtain or use information that we regard as proprietary |
| The scope of any proprietary rights that we may have is uncertain and is not sufficient to prevent others from developing and selling competing products and services, which could have a material adverse effect on our business |
| In addition, third parties may assert infringement claims against us or claim that we have violated their intellectual property rights |
| While we know of no basis for any claims of this type, the existence of and ownership of intellectual property can be difficult to verify and we have not made an exhaustive search of all patent filings |
| If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we may have to incur substantial costs |
| We may not have the financial resources to prosecute any infringement claims we may have or defend any infringement claims that are brought against us |
| Even if we do, defending or prosecuting our proprietary rights will divert valuable working capital and management’s attention from business and operational issues |
| 15 _________________________________________________________________ [84]Table of Contents Retaining certain key personnel may be important to our continued success |
| Our strategy and its implementation depend in large part on certain key personnel of our company and their continued involvement in Q Comm in the future |
| Our success also depends in part on our ability to hire and retain highly skilled and qualified management, operating, marketing, financial and technical personnel |
| The competition for qualified personnel is intense and, accordingly, we cannot assure you that we will be able to continue to hire or retain the required personnel |
| The loss of our key personnel could have a material adverse effect on our business, growth, financial condition or results of operations |
| If we cannot raise capital at a time when we need to do so, we may not be able to adequately and timely respond to competitive developments |
| In the future, we will need to raise additional capital to meet the capital requirements of our business or to take advantage of expansion or acquisition opportunities |
| If we are unable to do so, we may not be able to increase our revenues or achieve profitability |
| Even if we are able to secure additional capital by selling equity or equity-linked securities, these securities could dilute the ownership percentage of our existing stockholders |
| The securities that we might sell could also have rights, preferences or privileges senior to those of our common stock |
| We cannot assure you that we will be able to obtain additional financing when needed on acceptable terms or at all |
| In December 2005, we raised dlra3 million through the issuance of 1cmam000cmam001 shares of restricted common stock at dlra3dtta00 per share |
| If we are unable to obtain additional financing on terms satisfactory to us when needed, our operations could be substantially curtailed and the price of our common stock could decline significantly |
| Rapid growth could strain our internal resources, which could lead to a lower quality of customer service, reporting problems and delays in meeting important deadlines |
| If we do not upgrade our internal systems and controls we may not be able to manage this growth properly |
| Any significant revenue growth will strain our existing financial and operating resources |
| For example, the accounting system we currently use is limited in its financial reporting and we may need to purchase new accounting software and to hire additional qualified people for our accounting department as we grow |
| Expanding our operations will increase the demands on our senior management and our customer service departments |
| We will need to continually improve our management, operational, financial and other departments to manage our growth properly and any failure to do so may lead to inefficiencies and/or redundancies and may impair our ability to provide accurate and timely information and reports to our stockholders |
| The market price of our common stock has been volatile and may continue to fluctuate significantly because of various factors, some of which are beyond our control |
| Our stock price has been extremely volatile, fluctuating over the last two years between dlra3dtta00 as of the year ended December 31, 2003, and dlra6dtta39 as of the year ended December 31, 2005 |
| These fluctuations have been unrelated to or disproportionately affected by our operating performance |
| The market price of our common stock could continue to fluctuate significantly in response to a variety of factors, some of which may be beyond our control |
| These factors may include one or more of the following: · Quarterly operating results falling below or exceeding expectations in any given period; · Changes in economic conditions generally or in the telecommunications; · Market fluctuations relating to markets generally or market sectors that include our competitors, which may or may not be based on earnings or other announcements by us or our competitors; · Fluctuations in our revenue which may or may not be related to changes in the way we conduct our business; · Announcements by our competitors of new technological innovations, service offerings, contracts, acquisitions or strategic relationships; · Departures of key personnel; and · Changes in business or regulatory conditions |
| 16 _________________________________________________________________ [85]Table of Contents In the past, following periods of market volatility, stockholders of some companies have instituted securities class action litigation against such companies |
| While we have not been involved in securities litigation to date, if we were to be involved in securities litigation, we could incur a substantial cost and experience diversion of resources and the attention of management away from our business |
| We cannot predict the future performance of the capital markets in general and stocks in our market sector in particular, and we cannot assure you that the price for our common stock will not drop significantly in the future |
| The existence of outstanding options, warrants and convertible securities may preclude us from obtaining additional equity financing |
| The existence of outstanding options, warrants and convertible securities could make it more difficult to obtain or increase the cost of additional equity financing |
| The holders of these options and warrants have the opportunity to profit from a rise in the value or market price of our common stock and to exercise them at a time when we could obtain equity capital on more favorable terms than those contained in these securities |
| We have a limited number of stockholders and our stock is thinly traded |
| As of March 14, 2006, there were approximately 68 record holders of our common stock as recorded by American Stock Transfer & Trust Company, and our average daily share volume for the year ended December 31, 2005 was approximately 7cmam500 shares |
| The relatively low number of stockholders and trading volume may create significant volatility in our share price or other adverse market conditions that negatively affect stockholders |