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Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended March 31, 2008
 Commission file number 000-20699
 DATATRAK International, Inc.
  Ohio
    
    34-1685364(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)6150 Parkland BoulevardMayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
  
 
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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TABLE OF CONTENTS  Part I. Financial InformationItem 1  Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 Part I. Financial Information
 
 Item 1  Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,445,342
    
    
    $
    1,919,316Short-term investments
    
    
    2,505,518
    
    
    
    6,595,045Accounts receivable, net
    
    
    1,395,989
    
    
    
    1,070,688Deferred tax asset  current
    
    
    71,200
    
    
    
    71,200Prepaid expenses and other current assets
    
    
    378,204
    
    
    
    451,222Total current assets
    
    
    7,796,253
    
    
    
    10,107,471Property and equipmentEquipment
    
    
    2,657,580
    
    
    
    2,663,021Software
    
    
    6,327,162
    
    
    
    6,325,496Leasehold improvements
    
    
    696,571
    
    
    
    696,5719,681,313
    
    
    
    9,685,088Less accumulated depreciation
    
    
    6,467,244
    
    
    
    6,150,2893,214,069
    
    
    
    3,534,799Other assetsRestricted cash
    
    
    93,349
    
    
    
    87,021Deferred tax asset
    
    
    1,230,500
    
    
    
    1,327,800Deposit
    
    
    39,549
    
    
    
    39,549Other intangible assets, net of accumulated amortization
    
    
    333,808
    
    
    
    520,458Goodwill
    
    
    10,856,113
    
    
    
    10,856,11312,553,319
    
    
    
    12,830,941Total assets
    
    $
    23,563,641
    
    
    $
    26,473,211LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    594,314
    
    
    $
    415,415Notes payable
    
    
    251,541
    
    
    
    246,627Current portion of long-term debt
    
    
    3,000,000
    
    
    
    425,304Accrued expenses
    
    
    1,599,717
    
    
    
    1,607,261Deferred revenue
    
    
    1,007,121
    
    
    
    1,277,276Total current liabilities
    
    
    6,452,693
    
    
    
    3,971,883Long-term liabilitiesLong-term debt
    
    
    182,541
    
    
    
    3,252,962Deferred revenue  long-term
    
    
    1,575,000
    
    
    
    1,680,000Deferred tax liability
    
    
    916,700
    
    
    
    999,000Total long-term liabilities
    
    
    2,674,241
    
    
    
    5,931,962Shareholders equitySerial Preferred Shares, without par value, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common Shares, without par value, authorized 25,000,000 shares; issued 17,016,901
shares as of March 31, 2008 and 17,016,901 shares as of December 31, 2007;
outstanding 13,716,901 shares as of March 31, 2008 and 13,716,901 shares as of
December 31, 2007
    
    
    79,723,600
    
    
    
    79,618,366Treasury Shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Common Share warrants
    
    
    1,191,284
    
    
    
    1,191,284Accumulated deficit
    
    
    (46,002,087
    )
    
    
    (43,769,202
    )Foreign currency translation
    
    
    (287,782
    )
    
    
    (282,775
    )Total shareholders equity
    
    
    14,436,707
    
    
    
    16,569,366Total liabilities and shareholders equity
    
    $
    23,563,641
    
    
    $
    26,473,211
 
 Note A:
    
    The condensed consolidated balance sheet at December 31, 2007 has been derived from the
audited consolidated financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenue
    
    $
    2,088,229
    
    
    $
    3,542,095Direct costs
    
    
    933,879
    
    
    
    1,337,471Gross profit
    
    
    1,154,350
    
    
    
    2,204,624Selling, general and administrative expenses
    
    
    2,856,600
    
    
    
    3,422,671Depreciation and amortization
    
    
    522,426
    
    
    
    622,403Loss from operations
    
    
    (2,224,676
    )
    
    
    (1,840,450
    )Interest income
    
    
    59,740
    
    
    
    70,192Interest expense
    
    
    66,567
    
    
    
    98,669Other loss
    
    
    1,382
    
    
    
    Loss before income taxes
    
    
    (2,232,885
    )
    
    
    (1,868,927
    )Income tax expense
    
    
    
    
    
    
    26,300Net loss
    
    $
    (2,232,885
    )
    
    $
    (1,895,227
    )Net loss per share:Basic:Net loss per share
    
    $
    (0.16
    )
    
    $
    (0.16
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    11,858,949Diluted:Net loss per share
    
    $
    (0.16
    )
    
    $
    (0.16
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    11,858,949
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (2,232,885
    )
    
    $
    (1,895,227
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    522,426
    
    
    
    622,403Stock-based compensation
    
    
    105,231
    
    
    
    136,057Accretion of discount on investments
    
    
    (42,031
    )
    
    
    (35,282
    )Other
    
    
    1,382
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (321,597
    )
    
    
    351,551Prepaid expenses and other current assets
    
    
    75,280
    
    
    
    106,320Deferred taxes, net
    
    
    15,000
    
    
    
    26,300Accounts payable and accrued expenses
    
    
    141,424
    
    
    
    (284,839
    )Deferred revenue
    
    
    (375,155
    )
    
    
    63,120Net cash used in operating activities
    
    
    (2,110,925
    )
    
    
    (909,597
    )Investing activitiesPurchases of property and equipment
    
    
    (7,350
    )
    
    
    (47,787
    )Maturities of short-term investments
    
    
    18,600,000
    
    
    
    4,500,000Purchases of short-term investments
    
    
    (14,468,443
    )
    
    
    (11,820,028
    )Net cash provided by (used in) investing activities
    
    
    4,124,207
    
    
    
    (7,367,815
    )Financing activitiesProceeds from exercise of stock option and warrants
    
    
    
    
    
    
    30,384Proceeds from issuance of common shares, net of paid issuance costs
    
    
    
    
    
    
    8,916,105Payments of long-term debt
    
    
    (490,811
    )
    
    
    (364,747
    )Net cash provided by (used in) financing activities
    
    
    (490,811
    )
    
    
    8,581,742Effect of exchange rate changes on cash
    
    
    3,555
    
    
    
    (21,241
    )Increase in cash and cash equivalents
    
    
    1,526,026
    
    
    
    283,089Cash and cash equivalents at beginning of period
    
    
    1,919,316
    
    
    
    3,019,184Cash and cash equivalents at end of period
    
    $
    3,445,342
    
    
    $
    3,302,273Unpaid share issuance costs
    
    $
    
    
    
    $
    189,028
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
 1. Basis of Presentation
   2. Risks and Uncertainties
  3. Fair Value Measurements
 Fair Value Measurements
  
    
    Level 1 (the highest priority)  inputs to the valuation methodology are quoted market
prices (unadjusted) for identical financial assets or liabilities in active markets.
    
    Level 2   inputs to the valuation methodology include quoted market prices for similar
assets and liabilities in active markets, and inputs that are
observable for an asset or
liability, either directly or indirectly, for substantially the full
term of a financial
instrument.
    
    Level 3 (the lowest priority)  inputs to the valuation methodology are unobservable and
significant to the fair value measurement. These inputs reflect managements own assumptions
about the assumptions a market participant would use in pricing a financial instrument.
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Cash equivalents
 Short-term investments 
  Fair Value Measurements atReporting Date UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableDescription
    
    March 31, 2008
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Equivalents -
Money Market Funds
    
    $
    1,992,000
    
    
    $
    1,992,000
    
    
    $
    
    
    
    $
    Short-term
Investments -
Corporate
Obligations
(Commercial Paper)
and Corporate Stock
    
    
    2,506,000
    
    
    
    2,506,000
    
    
    
    
    
    
    
    Total
    
    $
    4,498,000
    
    
    $
    4,498,000
    
    
    $
    
    
    
    $
    
 4. Net Loss Per Share
  Three Months Ended March 31,2008
    
    
    2007Net loss used in the calculation of basic and diluted earnings per share
    
    $
    (2,232,885
    )
    
    $
    (1,895,227
    )Denominator for basic net loss per share  weighted-average common shares outstanding
    
    
    13,681,901
    
    
    
    11,858,949Effect of dilutive common share options and warrants
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,681,901
    
    
    
    11,858,949Basic net loss per share
    
    $
    (0.16
    )
    
    $
    (0.16
    )Diluted net loss per share
    
    $
    (0.16
    )
    
    $
    (0.16
    )Weighted-average common share options and warrants excluded from the computation of
diluted net loss per share because they would have an anti-dilutive effect on net
loss per share
    
    
    1,486,933
    
    
    
    1,548,463
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5. Comprehensive Loss
  Three Months Ended March 31,2008
    
    
    2007Net loss
    
    $
    (2,232,885
    )
    
    $
    (1,895,227
    )Foreign currency translation
    
    
    (5,007
    )
    
    
    (18,464
    )Comprehensive loss
    
    $
    (2,237,892
    )
    
    $
    (1,913,691
    )
 6. Shareholders Equity
      7. Operating Leases
  Twelve Months ended March 31,
    
    Amount2009
    
    $
    930,0002010
    
    
    610,0002011
    
    
    555,0002012
    
    
    561,0002013
    
    
    334,000Subsequent
to March 31, 2013
    
    
    $
    2,990,000
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8. Income Taxes
  Three Months Ended March 31,2008
    
    
    2007Current  U.S.
    
    $
    (15,000
    )
    
    $
    Deferred  foreign
    
    
    15,000
    
    
    
    26,300$
    
    
    
    $
    26,300
  Three Months Ended March 31,2008
    
    
    2007Income tax benefit at the United States statutory rate
    
    $
    (759,200
    )
    
    $
    (635,400
    )Change in valuation allowance
    
    
    886,600
    
    
    
    587,800Foreign tax credit
    
    
    (115,600
    )
    
    
    Change in FIN No. 48 liability
    
    
    (15,000
    )
    
    
    Foreign taxes
    
    
    (1,900
    )
    
    
    26,300Non-deductible permanent differences
    
    
    5,100
    
    
    
    47,600$
    
    
    
    $
    26,300
   9. Long-Term Debt
  March 31,
    
    
    December 31,2008
    
    
    2007Notes payable  the ClickFind Notes
    
    $
    3,000,000
    
    
    $
    3,425,000Financing agreement with Oracle Credit Corporation (the Oracle Agreement)
    
    
    119,000
    
    
    
    143,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    315,000
    
    
    
    357,0003,434,000
    
    
    
    3,925,000Less current maturities
    
    
    3,251,000
    
    
    
    672,000$
    183,000
    
    
    $
    3,253,000
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10. Employee Terminations
  Accrued SeveranceReconciliationDescription
    
    2008
    
    
    2007Accrued severance at 12/31
    
    $
    523,000
    
    
    $
    7,000First quarter charges
    
    
    29,000
    
    
    
    First quarter payments
    
    
    (224,000
    )
    
    
    (7,000
    )Accrued severance at 3/31
    
    $
    328,000
    
    
    $
    
  11. Restricted Cash
  12. Software Development Costs
   13. Goodwill and Finite-Lived Tangible and Intangible Assets
  14. Reclassification
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15. Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
   Revenue
Recognition Revenue Arrangements with
Multiple Deliverables.
 
    
    Enterprise license revenue is recognized ratably over the life of the license
agreement.
    
    Project management and data management (design, report and export) service revenue
is recognized proportionally over the life of a contract as services are performed,
based on the contractual billing rate per hour for those services.
    
    Data items revenue is earned based on a price per data unit as data items are
entered into our hosting facility.
    
    Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program.
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
    
    Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed.
    
    Help desk revenue is recognized based on a monthly price per registered user or
site under the contract.
   Critical Accounting Policies
   Results of Operations
 Three months ended March 31, 2008 compared with three months ended March 31, 2007
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Liquidity and Capital Resources
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®
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®
  Fair Value Measurements
 Fair Value Measurements. Fair Value Measurements
 Inflation
  Information About Forward-Looking Statements
  14




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Foreign Currency Risk
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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our common shares
could be delisted. If delisting occurs, it would adversely affect the market liquidity of our
common shares and harm our businesses.
  
    
    a $1.00 minimum closing bid price;
    
    shareholders equity of $2.5 million, market value of publicly-held shares of $35
million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
    
    500,000 shares of publicly-held common stock with a market value of at least $1 million;
    
    300 round-lot shareholders; and
    
    compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Employment Agreement between the Company and Raymond J. Merk effective April 14, 200810.2
    
    Form of Nonqualified Stock Option Agreement for Outside Directors31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
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DATATRAK International, Inc.RegistrantDate: May 12, 2008
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director
      (Principal Executive Officer)Date: May 12, 2008
    /s/ Raymond J. MerkRaymond J. MerkVice President of Finance, Chief Financial Officer
      (Principal Financial and Accounting Officer) 18