Data Call Technologies - Annual Report: 2008 (Form 10-K)

In the years since those early days of digital signage, the market has taken care of weeding out the weaker providers of hardware and software. Companies now have a clearer understanding of what digital signage is, what is needed for a successful implementation and the best use of content space given their more-defined and attainable goals. In the past two years, as the cost of platforms, supporting infrastructure and displays has fallen dramatically; digital signage has become more accessible to a wider range of companies. And those companies are realizing that the initial, one-time cost of getting into the game is far outweighed by the cost of staying in the game, in the form of ongoing content development. As the cost of deployment decreased, companies began focusing on attention-grabbing content. Whether the goal of the presentation was product branding, marketing or assisted selling, content became king. Active content is on everyone’s “needs” list because it is proven to draw customers to the core message and keep customers engaged throughout the presentation, And DataCall stands ready to serve this exploding market.

However, by integrating DataCall’s active content alongside their presentations, companies can provide the entertainment content so necessary in dwell-time retention without disrupting the core message of the presentation. Information categories provided by DataCall include news, weather, sports, financial data and the latest traffic alerts. With such a broad range of offerings, companies have access to the active content they need, regardless of the market they are addressing.

Over the past four years, DataCall has worked with the industry leaders in digital signage to develop the data formats and communication methods to allow DataCall’s active content to be easily integrated into their hardware and software products.

Already, DataCall is actively developing the next generation in digital signage content. Delivering active content video is an opportunity that is in the immediate future, as well as implementation of interactive digital signage. Whether it is the use of radio frequency identification (RFID) to delivery active content directly to customers via their cell phone or engaging the customer to create their own digital signage experience via text messaging, DataCall will be at the forefront of the evolution of digital signage--just as DataCall was at the forefront of the revolution of digital signage. DataCall is poised to ride this explosive growth in digital signage not just as a service provider, but as a partner providing a key component to the most successful implementations of digital signage,

DataCall understood that digital signage implementers had larger issues to tackle than the multitude of licenses that would need to be managed and the varying formats of the source data to be dealt with if active content was obtained from multiple vendors. DataCall offers a “one stop shop” for all of their active content requirements covered by a single license. Ease of implementation also would require that the multiple formats of all DataCall’s data providers be distilled into a single format. Because active content may be displayed in a multitude of ways (banners, tickers, scrolls or artistically integrated with the overall presentation), DataCall produced a set of common data layouts in the industry-standard XML (extensible markup language) format. Many partners find these formats to be easily integrated into their products, but in several cases, DataCall has produced customized data formats to the exact requirements of their partners. This customization ensures the highest level of reliable and ease of integration possible.

In addition to the above information categories and the client-generated messages, we may, at our discretion, include a Public Service Announcement, third-party advertisement (for additional revenue streams) and/or a Data Call tag line to our streaming text advertising in the future.

In March 2006, we entered into a two-year agreement with a platform developer, Mindmatics LLC, a company which merges various software applications for use on related existing applications and devices, which allows us to transfer our Direct Lynk System streaming text feed to cell phones equipped with Internet access. The platform developer in turn has agreements with various cell phone companies, which allows us to provide our streaming text feed to cell phones equipped with Internet access both in the United States and Europe. Revenue pursuant to this contract may be generated two different ways, (i) the cell phone carrier may choose to bill the end user directly for this service, which monthly fee will be split between the carrier, the platform developer and us; or (ii) the cell phone carrier may choose to contract with the platform developer and broadcast a small piece of information to all of its subscribers at a small per customer cost, which fee would then be split between the platform developer and us. Pursuant to the agreement, we receive 45% of the revenue generated by the use of our technology by Mindmatics.

Effective April 2, 2006, we entered into a one-year End-User Agreement with Arena Media Networks, which provides television and advertising displays and content to various sports arenas nationally, including Shea Stadium, Yankee Stadium, US Cellular Field, Comerica Field, Fenway Park, Joe Robbie Stadium, Conseco Fieldhouse, the SBC Center in San Antonio, the Target Center in Minnesota and the Toyota Center in Houston, among others. Two additional arenas were added in 2007. Pursuant to the agreement, which is renewable for subsequent one-year terms, we provide our Direct Lynk System to Arena.

On September 6, 2006, we entered into a two-year services agreement with 3M Digital Signature, pursuant to which we agreed to supply 3M the use of our Direct Lynk Messenger technology. Pursuant to the agreement, all materials made available to us by 3M in connection with the services we will provide will remain the property of 3M.

At December 31, 2008 we had 90 customers who pay to subscribe to our Direct Lynk System, which represents an increase of 40 customers at the end of 2007. We also have several companies which are testing the Direct Lynk System, and expect that several of them may become future customers. We are dependent upon our major customers, which include: AMX, 3M Digital Signage, Leightronix, Inc., Zero in Media, LLC and Adtekmedia, Inc.

During 2008, our five largest customers accounted for 60% of our revenues.

At December 31, 2008, we had 5 full time employees. Depending upon our level of our growth, we expect that we will be required to hire additional personnel in the areas of sales and marketing, software design, research and development, etc.

Estimate Of The Amount Spent On Research And Development Activities

Since our inception in April 2002, the majority of our expenditures have been on research and development of our Direct Lynk Messenger System, including software and hardware development and testing. The amount spent on this research and development since inception through December 31, 2008 is approximately $2,000,000.

ITEM 1A. RISK FACTORS RELATED TO OUR BUSINESS

Investing in our common stock will provide an investor with an equity ownership interest. Shareholders will be subject to risks inherent in our business. The performance of our shares will reflect the performance of our business relative to, among other things, general economic and industry conditions, market conditions and competition. The value of the investment may increase or decrease and could result in a loss. An investor should carefully consider the following factors as well as other information contained in this annual report on Form 10-K.

This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risk factors described below and the other factors described elsewhere in this Form 10-K.

Additional financing is expected to be required in 2009, but there can be no assurance that such financing will be available at terms and conditions acceptable to the Company.  Further, there can be no assurance that unforeseen events, such as the length of time necessary to generate increasing market acceptance of our Direct Lynk System, or any unexpected material increased development costs, or the general economy in the markets where we offer our Direct Lynk System, may result in an inability to secure necessary additional financing at satisfactory terms and conditions, if at all. Since inception, we have been dependent upon financing raised through the sale of restricted shares of our common stock to support our operations. We expect that we will be required to raise additional funding through the issuance of restricted shares of our common stock, but there can be no assurance that we will be able to raise sufficient capital in a timely manner to continue our business plan at anticipated levels of growth.

We do not have any commitments or identified sources of additional capital from third parties or from our officers, directors or principal shareholders. There is no assurance that additional financing will be available on favorable terms in the future, if at all or that our Direct Lynk System will generate sufficient revenues in order for us to continue to grow our operations. If we are unable to raise additional financing in a timely manner, it would have a material adverse effect upon our ability to fully implement our business plan and/or to continue with our current level of operations.

We have generated only limited revenues from subscriptions to our Direct Lynk System to date. In order to attract new customers for our Direct Lynk System, we have offered free trials to numerous companies in the past and continue to offer free trials to companies, which we believe provides those companies an opportunity to gain experience with our products and determine the benefit of implementing our Direct Lynk System into their businesses. While we believe that we offer a unique product which has many beneficial marketing uses for potential customers, we cannot provide any assurances that there will be significant future demand for our products. If we are unable to generate significant revenues through the sale of subscriptions for our Direct Lynk System in the future and are unsuccessful in our sales and marketing efforts, we may have to revise our business plan in order to continue our operations.

We face significant competition in our efforts to market our Direct Lynk System. Many of our competitors are well-established entities and possess far greater financial, technical, human and other resources than does the Company. We must compete against many companies in fragmented, highly competitive markets and we have fewer resources than many of those companies. Our Direct Lynk System competes principally on the basis of the following factors: product quality and ability to custom design content to a customer’s specifications; and price. Competitive pressures, including those described above, and other factors could cause us additional difficulties in acquiring a sufficient number of customers and generating a level of subscription sales to grow and become profitable, of which there can be no assurance..

We have no patents, patent applications, trademarks, trademark applications or licenses covering our Direct Lynk System. We may choose to file patent applications in the future, if our management believes it is in our best interests. In the event that our Direct Lynk System infringes the patent or proprietary rights of others, we may be required to modify our process or obtain a license. There can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do so would have a material adverse effect on our business. In addition, there can be no assurance that we will have the financial or other resources necessary to prosecute or defend a patent infringement or proprietary rights action. Moreover, if any of our products infringe patents or proprietary rights of others, we could, under certain circumstances, become liable for damages, which could have a material adverse effect on our operations and financial condition.

We are highly dependent upon the services and efforts of key management personnel including: Timothy Vance, our Chief Executive Officer, Chief Operating Officer and Director; and James Tevis our Chief Technology Officer. Our ability to operate and implement our business plan is heavily dependent upon the continued service of Messrs. Vance and Tevis, as well as our ability to attract, retain and motivate other qualified personnel. Messrs. Vance and Tevis entered into three-year employment contracts on October 1, 2005, which are renewable upon the mutual acceptance of both parties. The loss of Messrs. Vance or Tevis, or our inability to hire and retain qualified sales and marketing, software engineers and management personnel would have a material adverse effect on our business and operations and would likely result in a decrease in the value of our securities.

We are dependent on the abilities of our sales and marketing department, which currently consists of 4 persons, to continue to generate subscriptions for our Direct Lynk System and to broaden our customer base. While the number of paying subscribers for our Direct Lynk System increased to 90 at December 31, 2008 compared to 38 at year-end 2007, there can be no assurance that our sales and marketing department will be able to continue to achieve market acceptance for our Direct Lynk System and increase our customer base to a level that will permit profitable operations. If our sales and marketing department is unable to continue to generate new customers and attract trial customers to test our Direct Lynk System and experience what we believe are our advantages and learn of their potential uses, we may not be able to generate sufficient revenues to continue with planned research and development on new products and improve our current products.

During the period from October 2003 to December 2005, we sold unregistered shares of common stock that were to certain person, some of whom were non-accredited investors. The restricted shares were not registered under federal or state securities laws, and exemptions from registration provided by these securities laws may not have been available or may not have been perfected due to that fact that some non-accredited shareholders may not have been provided audited financial statements, and adequate disclosure of a description of business and risk factors associated with our business and results of operations, among other disclosure. In December 2005 and January 2006, we offered rescission to 22 shareholders who had subscribed for 2,044,000 shares at $.10 per share, and provided each shareholder pursuant to applicable state laws, at least thirty days to decide whether to accept or reject the rescission offer. All of the shareholders elected to reject the recession offer and reaffirm their purchases. In connection with the rescission offer, we provided every non-accredited shareholder, who we believed that that time may not have been provided full disclosure documents, the disclosure contained in our Registration Statement on Form SB-2 that was filed with the SEC. Although all of the shareholders elected to reject rescission, certain state securities laws do not expressly provide that a rescission offer will terminate a purchaser's right to rescind a sale of securities that was not registered under the relevant securities laws as required. As a result, we may continue to be potentially liable under certain securities laws for such sales of common stock even after completing our rescission offer.

We are dependent upon the Internet in connection with our business operations and the delivery of content for our Direct Lynk System. The United States Federal Communications Commission (the "FCC") does not currently regulate companies that provide services over the Internet, as it does common carriers or tele-communications service providers. Notwithstanding the current state of the FCC's rules and regulations, the potential jurisdiction of the FCC over the Internet is broad and if the FCC should determine in the future to regulate the Internet, our operations, as well as those of other Internet service providers, could be adversely. Compliance with future government regulation of the Internet could result in increased costs and because of our limited resources, it would have a material adverse effect on our business operations and operating results and financial condition.

As a development stage company we have only begun to generate revenues from our Direct Lynk System during the past two years. As a result of our relatively limited operating history, our historical financial and operating information is of limited value in predicting our future operating results. We may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and estimates of future revenue. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could then force us to curtail or cease our business operations.

Because we offer the majority of our services through our Internet website (www.datacalltech.com), the secure transmission of confidential information over public networks is a critical element of our operations. A party who is able to circumvent security measures ( hacker) could misappropriate proprietary information or cause interruptions in our operations. If we are unable to prevent unauthorized access to our users' information and transactions, our customer relationships could be irreparably harmed. Although we currently have in place security measures that we feel are adequate to protect our business and those of our customers, these measures may not prevent future security breaches. Additionally, heavy stress placed on our systems could cause our systems to fail or cause our systems to operate at speeds unacceptable to our users, in which event we could lose customers and experience a material impact on our financial condition.

Our future success depends, in large part, on other companies maintaining the Internet system infrastructure, including maintaining a reliable network backbone that provides adequate speed, data capacity and security. If the Internet continues to experience anticipated significant growth in the number of users, frequency of use and amount of data transmitted, as well as the number of malicious viruses and worms introduced onto the Internet by hackers and others, the infrastructure of the Internet may be unable to support the demands placed on it at any particular time or from time-to-time. Because we rely heavily on the Internet and our limited capital, any disruption of the Internet could adversely affect us to a greater degree than our competitors and other users of the Internet.

Our website and systems are hosted by a third party. We are dependent on our systems’ ability to stream information over the Internet to customers. If our systems fail or become unavailable, it would harm our reputation, result in a loss of current and potential future customers and could cause us to breach existing agreements. Our success depends, in part, on the performance, reliability and availability of our services, which in turn are dependent on our third-party provider. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, break-in, earthquake and similar events. We would face significant damage as a result of these events. For these reasons, we may be unable to develop or successfully manage the infrastructure necessary to meet current or future demands for reliability and scalability of our systems, which would have a negative impact on our business and financial conditions.

Our Direct Lynk System uses sophisticated software which could be found to contain bugs or could be compromised by viruses. While we have not experienced any material bugs or viruses to date, if such event could occur, such event(s) could be costly for us to identify and repair, and until such bugs or viruses, if any, are fixed, they could cause interruptions in our service, which could cause our reputation to decline and/or cause us to lose clients.

Our auditors, in our audited financial statements expressed a concern about our ability to continue as a going concern. We had negative working capital of $161,764 and an accumulated deficit of $8,385,509 as of December 31, 2008, and have generated limited revenues to date. These factors raise substantial doubt as to whether we will be able to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.

The market prices of our common stock may change significantly in response to various factors and events beyond our control, including the following:

- the other risk factors described in this Form 10-K;
- changing demand for our products and services and ability to develop and generate sufficient revenues;
- any delay in our ability to generate operating revenue or net income;
- general conditions in markets we operate in;
- general conditions in the securities markets;
- issuance of a significant number of shares, whether for compensation under employee stock options, conversion of debt, potential acquisitions, additional financing or otherwise.

Our Common Stock is subject to quotation on the NASD Bulletin Board. There has only been limited trading activity in our common stock. There can be no assurance that a more active trading market will commence in our securities as a result of the increasing operations of Data Call. Further, in the event that an active trading market commences, there can be no assurance as to the level of any market price of our shares of common stock, whether any trading market will provide liquidity to investors, or whether any trading market will be sustained.

State blue sky registration; potential limitations on resale of our securities

Our common stock, the class of the Company’s securities that is registered under the Exchange Act, has not been registered for resale under the Securities Act of 1933 or the "blue sky" laws of any state. The holders of such shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state blue-sky law restrictions upon the ability of investors to resell our securities. Accordingly, investors should consider the secondary market for the Company's securities to be a limited one.

 It is the intention of the management to seek coverage and publication of information regarding the Company in an accepted publication which permits a manual exemption. This manual exemption permits a security to be distributed in a particular state without being registered if the Company issuing the security has a listing for that security in a securities manual recognized by the state. However, it is not enough for the security to be listed in a recognized manual. The listing entry must contain (1) the names of issuers, officers, and directors, (2) an issuer's balance sheet, and (3) a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations. Furthermore, the manual exemption is a nonissuer exemption restricted to secondary trading transactions, making it unavailable for issuers selling newly issued securities.

Most of the accepted manuals are those published in Standard and Poor's, Moody's Investor Service, Fitch's Investment Service, and Best's Insurance Reports, and many states expressly recognize these manuals. A smaller number of states declare that they "recognize securities manuals" but do not specify the recognized manuals. The following states do not have any provisions and therefore do not expressly recognize the manual exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana, Montana, South Dakota, Tennessee, Vermont and Wisconsin.

Dividends unlikely on our common stock

We do not expect to pay dividends for the foreseeable future. The payment of dividends, if any, will be contingent upon our future revenues and earnings, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors. It is our intention to retain all earnings for use in our business operations and accordingly, we do not anticipate that the Company will declare any dividends in the foreseeable future.

Our securities will initially be considered a "penny stock" as defined in the Exchange Act and the rules thereunder, since the price of our shares of common stock is less than $5. Unless our common stock is otherwise excluded from the definition of "penny stock," the penny stock rules apply with respect to that particular security. The penny stock rules require a broker-dealer prior to a transaction in penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that the broker-dealer, not otherwise exempt from such rules, must make a special written determination that the penny stock is suitable for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure rules have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. So long as the common stock is subject to the penny stock rules, it may become more difficult to sell such securities. Such requirements, if applicable, could additionally limit the level of trading activity for our common stock and could make it more difficult for investors to sell our common stock.

As of December 31, 2008, the Registrant had 83,213,100 shares of common stock issued and outstanding 34,186,350 shares are "restricted" as that term is defined under the Securities Act, and in the future may be sold in compliance with Rule 144 under the Securities Act. Rule 144 generally provides that a person holding restricted securities for a period of one year may sell every three months in brokerage transactions and/or market-maker transactions an amount equal to the greater of one (1%) percent of (a) the Company's issued and outstanding common stock or (b) the average weekly trading volume of the common stock during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity limitation by a person who has not been an affiliate of the Company during the three months preceding the sale and who has satisfied a two-year holding period. However, all of the current shareholders of the Company owning 5% or more of the issued and outstanding common stock are subject to Rule 144 limitations on selling.

Pursuant to our Articles of Incorporation, as amended and restated, we have authorized capital stock of 200,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of the December 31, 2008, we have 83,213,100 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. Our Board of Directors has the ability, without shareholder approval, to issue a significant number of additional shares of common stock without shareholder approval, which if issued would cause substantial dilution to our then common shareholders. Additionally, shares of preferred stock may be issued by our Board of Directors at their sole discretion and without shareholder approval, in such classes and series, having such rights, including voting rights and super-majority voting rights, and such preferences and relative, participating, optional or other special rights, powers and privileges as determined by our Board of Directors from time-to-time. If shares of preferred stock are issued by our Board of Directors having super-majority voting rights, or having conversion rights to convert their preferred stock into a number of shares of common stock at a ratio of greater that one-for-one, holders of our common stock would be subject to dilution that may be significant.

Our current officers and directors can vote an amount of common stock equal to approximately twenty-five percent of our outstanding common stock. As a result, our officers and directors do not have majority voting control over us and our shareholders who are not officers and directors may be able to obtain a sufficient number of votes to choose who serves as our members of our Board of Directors. As a result, the current composition of our Board of Directors may change in the future, which could in turn have an effect on those individuals who currently serve in management positions with us. In such event, our new management could affect a change in our business focus and/or curtail or abandon our business operations, which in turn could cause the value of our securities to decline.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

Effective April 1, 2005, we entered into a three-year lease for our principal offices consisting of approximately 2,240 square feet located at 600 Kenrick, Suite B-12, Houston, Texas 77060, with First Industrial Development Services, Inc., an unaffiliated third-party. The lease provides for a monthly rental of $1,164.80.

On January 1, 2006, we entered into a three-year lease with an unaffiliated third-party for approximately 1,875 square feet of office space used by our sales and marketing and development departments. The facility is located at 14683 Midway Road, Suite 150, Addison, Texas 75001 and provides for a monthly rental fee of the lease is $1,719. We believe that our present facilities are sufficient for the foreseeable future.

None.

None.

Market Information

As of December 31, 2008, our shares of common stock were held by approximately 192 stockholders of record.

No equity compensation plan or agreements under which our common stock is authorized for issuance has been adopted during the fiscal year ended December 31, 2008.

Recent Sales Of Unregistered Securities

The Company believes that the issuances and sale of the restricted shares were exempt from registration pursuant to Section 4(2) of the Act as privately negotiated, isolated, non-recurring transactions not involving any public solicitation. The recipients in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate restrictive legends are affixed to the stock certificates issued in such transactions. This offering was done with no general solicitation or advertising by the Registrant. The investors in the 2006, 2007 and 2008 private placements were business acquaintances of management and and the private sale transactions were negotiated between the investors and management individually. All recipients of restricted shares either received adequate information about the Company or had access, through employment, relation and/or business relationships with the Company to such information. Based on an analysis of the above factors, the Registrant has met the requirements to qualify this offering and sale for exemption under Section 4(2) of the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA