Data Call Technologies - Quarter Report: 2008 June (Form 10-Q)

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.

The following discussion should be read in conjunction with our financial statements.

Since our filing of our annual report, we have implemented numerous cost management measurements to reduce monthly expenditures. Our current rate of monthly cash expenditures are now averaging approximately $57,000 per month, compared to an approximate monthly average of $104,000 for the six-month period ended June 30, 2007. This represents a 5% reduction in expenses over six months of the prior year. Furthermore, this is a 5% reduction from the previous quarter. We will continue to maintain these efforts to streamline operations, as we focus on increasing sales and gross revenues over the next 12 months. We currently have no initial plans to increase the number of employees we employ. However, as new opportunities present themselves, we may find it necessary to bring human resources on staff to accommodate the preparations for those opportunities.

Recent partner, marketing and/or customer agreements have allowed us to expand our product line into the Public Access Broadcast arena (i.e. Leightronix), as well as providing our product line to an industry leader in the ad-revenue based model of digital signage (i.e., AdTek Media). Additionally, we recently engaged Lamar Advertising, to provide Data Call content to their digital billboard solutions being implemented throughout the country. Moving forward, we feel these three vertical market opportunities will provide strong positive growth over the next 36 months.

Assuming we have sufficient working capital moving forward, we plan to continue to grow our business and market our Direct Lynk System to potential customers over the course of the next twelve months by marketing our technology to digital signage manufacturers, trade magazines, trade shows and call centers. We will also continue, on a limited basis, our practice of providing potential customers free trials of the Direct Lynk System, for which we will receive no revenue, in an attempt to build both product awareness for the Direct Lynk System and to potentially drive sales in the future, which in the opinion of management, has been successful in building brand awareness for the Direct Lynk System and in bringing in new clients for subscriptions.

We are planning and negotiating with current vendors and partners, to expand our offering to other lateral markets. Hardware, software, and sales processes are currently being modified and/or developed. Additionally, we are negotiating with a national broadcast news group to provide localized and repurposed video clips, through a Data Call Technologies licensing agreement, to the digital signage space.

Projected revenue for Q3-2008 is $107,000. This represents a 27% increase over the previous quarter. Projected cash expenses for Q3-2008 is $109,000. Projected revenue for the next twelve (12) months of operations is $1,100,000, with projected cash expenses of $770,000. The Company’s operations are projected to enter a cash flow positive position in the fourth quarter of 2008.

Sales revenue for the three and six months ended June 30, 2008 were $83,745 and $154,372, respectively, compared to $47,373 and $55,413, respectively, for the three and six-month periods ended June 30, 2007 representing an increase of 76.78% and 178.58%, respectively, from the prior period. The increase in sales revenue was mainly due to an increase subscriptions from current customers and new customer subscriptions.

Costs of sales for the three and six months ended June 30, 2008 were $9,952 and $23,869, respectively, compared to $13,462 and $20,207, respectively, for the three and six-month periods ended June 30, 2007. Costs of sales do not increase in director proportion to an increase in sales revenue because costs of sales are related to the amount bandwidth required to provide the subscription services.

Gross margins for the three and six months ended June 30, 2008 were 88.1% and 84.5%, respectively, compared to 71.6% and 63.5%, respectively, for the three and six-month periods ended June 30, 2007. The increase in gross margin is directly related to the explanation of decreases in costs of sales in the paragraph directly above.

Operating expenses for the three and six months ended June 30, 2008 were $179,253 and $463,959, respectively, compared to $288,800 and $889,375, respectively, for the three and six-month periods ended June 30, 2007 representing a decrease of $109,547 or 37.9% and $425,416 or 47.8% decrease from the prior period. The significant decrease in operating expenses is due to a decrease in employee compensation. Employee compensation were 46.8% and 50.4% of total operating expenses for the three and six months ended June 30, 2008, respectively, compared to 70.7% and 66.5%, respectively, for the three and six-month periods ended June 30, 2007.

Net losses for the three and six months ended June 30, 2008 were $105,460 and $333,456, respectively, compared to $254,889 and $854,169, respectively, for the three and six-month periods ended June 30, 2007. The significant decrease net losses are due to the increase in sale revenues and a decrease in operating expenses as noted above.

We had total current assets of $45,382, consisting of $3,820 of cash, $40,273 of accounts receivable and $1,289 if prepaid expenses. We had total current liabilities of $176,002 as of June 30, 2008, which represented $57,655 of accounts payable and $118,347 in accrued salaries.

We had total non-current liabilities of $204,400 as of June 30, 2008, consisting of redeemable common stock. Redeemable common stock consisted of shares of common stock sold to certain investors from 2003-2006, which investors may have ongoing rescission rights, even though those investors previously rejected our rescission offer to them to return their shares of our common stock for their original subscription cost plus statutory interest. While we are obligated to carry the $204,400 in redeemable common stock on our balance sheet as a liability, we believe that the likelihood of any of the shareholders who hold those shares exercising their remaining rescission rights, if any, is very small.

We had working capital of $130,620 and a deficit accumulated during the development stage of $8,092,751 as of June 30, 2008.

Data Call Technologies, Inc. (the "Company") was incorporated under the laws of the State of Nevada in 2002. The Company's mission is to integrate cutting-edge information delivery solutions that are currently deployed by the media, and put them within the control of retail and commercial enterprises. The Company's software and services put its clients in control of real-time advertising, news, and other content, including emergency alerts, within one building or 10,000, local or thousands of miles away. The Company is as development stage company.

The accompanying unaudited financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2008 are not indicative of the results that may be expected for the year ending December 31, 2008.

As contemplated by the Securities and Exchange Commission (SEC) under Rules of Regulation S-B, the accompanying financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company's annual financial statements and footnotes thereto. For further information, refer to the Company's audited consolidated financial statements and related footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2007.

The preparation of financial statements in conformity with U. S. 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 vary from those estimates.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115,” which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings.

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". SFAS 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS 141R also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date.

In December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.

Management has reviewed these new standards and believes that they have no impact on the financial statements of the Company at this time; however, they may apply in the future.

The Company is authorized to issue up to 10,000,000 shares of Preferred Stock, $.001 par value per share, of which none are presently outstanding. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, redemption rights and sinking fund provisions.

The Company is authorized to issue up to 200,000,000 shares of Common Stock, of which 76,243,100 shares were issued and outstanding at June 30, 2008, and 17,600,000 shares were reserved for issuance pursuant to the exercise of outstanding stock options and warrants as of June 30, 2008.

In addition to the amount of common shares issued and outstanding as noted above, 2,044,000 shares were issued and are in the hands of shareholders at June 30, 2008; however, these shares are not included in the Company’s permanent equity at June 30, 2008. These shares are considered “Redeemable Common Stock” and are included in the financial statements as a long-term liability.

The following table summarizes information about options and warrants outstanding at June 30, 2008 and 2007: