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, 2009
 Commission file number 1-33688
 DATATRAK International, Inc.
  Ohio
    
    34-1685364(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)6150 Parkland Boulevard 
Mayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
 
  
  þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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Part I. Financial Information
 Item 1. Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,077,513
    
    
    $
    1,872,358Restricted cash  current
    
    
    
    
    
    
    218,276Short-term investments
    
    
    
    
    
    
    499,936Accounts receivable, net
    
    
    1,187,661
    
    
    
    927,490Deferred tax asset, net
    
    
    136,500
    
    
    
    61,700Prepaid expenses and other current assets
    
    
    193,266
    
    
    
    158,582Total current assets
    
    
    3,594,940
    
    
    
    3,738,342Property and equipmentEquipment
    
    
    1,933,841
    
    
    
    2,120,621Software, net of impairment
    
    
    4,560,322
    
    
    
    4,588,781Leasehold improvements
    
    
    655,467
    
    
    
    660,3217,149,630
    
    
    
    7,369,723Less accumulated depreciation
    
    
    6,469,827
    
    
    
    6,584,174Property and equipment, net
    
    
    679,803
    
    
    
    785,549Other assetsDeferred tax asset
    
    
    
    
    
    
    83,700Deposit
    
    
    39,549
    
    
    
    39,549Total other assets
    
    
    39,549
    
    
    
    123,249Total assets
    
    $
    4,314,292
    
    
    $
    4,647,140LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilitiesAccounts payable
    
    $
    477,723
    
    
    $
    525,293Notes payable
    
    
    138,511
    
    
    
    195,858Accrued expenses
    
    
    1,391,915
    
    
    
    1,104,584Deferred revenue
    
    
    1,103,807
    
    
    
    1,053,096Total current liabilities
    
    
    3,111,956
    
    
    
    2,878,831Long-term liabilitiesAccrued severance
    
    
    196,109
    
    
    
    Long-term debt
    
    
    20,250
    
    
    
    41,523Deferred revenue
    
    
    1,316,964
    
    
    
    1,260,000Deferred tax liability
    
    
    136,500
    
    
    
    145,400Total long-term liabilities
    
    
    1,669,823
    
    
    
    1,446,923Shareholders equity (deficit)Serial Preferred Shares, without par value, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common Shares, without par value, authorized 25,000,000 shares; issued 17,006,901
shares as of March 31, 2009 and 17,051,901 shares as of December 31, 2008;
outstanding 13,706,901 shares as of March 31, 2009 and 13,751,901 shares as of
December 31, 2008
    
    
    79,939,503
    
    
    
    79,940,507Treasury Shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Common Share warrants
    
    
    1,134,993
    
    
    
    1,134,993Accumulated deficit
    
    
    (61,353,675
    )
    
    
    (60,565,806
    )Total shareholders equity (deficit)
    
    
    (467,487
    )
    
    
    321,386Total liabilities and shareholders equity (deficit)
    
    $
    4,314,292
    
    
    $
    4,647,140
 
 Note A:
    
    The condensed consolidated balance sheet at December 31, 2008 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.
 2




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##### 



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Revenue
    
    $
    2,086,176
    
    
    $
    2,088,229Direct costs
    
    
    473,862
    
    
    
    933,879Gross profit
    
    
    1,612,314
    
    
    
    1,154,350Selling, general and administrative expenses
    
    
    1,643,577
    
    
    
    2,830,757Severance expense
    
    
    633,625
    
    
    
    25,843Depreciation and amortization
    
    
    121,976
    
    
    
    522,426Loss from operations
    
    
    (786,864
    )
    
    
    (2,224,676
    )Interest income
    
    
    3,003
    
    
    
    59,740Interest expense
    
    
    4,008
    
    
    
    66,567Other loss
    
    
    
    
    
    
    1,382Loss before income taxes
    
    
    (787,869
    )
    
    
    (2,232,885
    )Income tax expense
    
    
    
    
    
    
    Net loss
    
    $
    (787,869
    )
    
    $
    (2,232,885
    )Net loss per share:Basic:Net loss per share
    
    $
    (0.06
    )
    
    $
    (0.16
    )Weighted-average shares outstanding
    
    
    13,741,401
    
    
    
    13,681,901Diluted:Net loss per share
    
    $
    (0.06
    )
    
    $
    (0.16
    )Weighted-average shares outstanding
    
    
    13,741,401
    
    
    
    13,681,901
 See
notes to condensed consolidated financial statements.
 3




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##### 



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Operating activitiesNet loss
    
    $
    (787,869
    )
    
    $
    (2,232,885
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    121,976
    
    
    
    522,426Stock-based compensation
    
    
    (1,005
    )
    
    
    105,231Accretion of discount on investments
    
    
    (449
    )
    
    
    (42,031
    )Other
    
    
    
    
    
    
    1,382Changes in operating assets and liabilities:Accounts receivable
    
    
    (260,171
    )
    
    
    (321,597
    )Prepaid expenses and other current assets
    
    
    183,592
    
    
    
    75,280Deferred taxes, net
    
    
    
    
    
    
    15,000Accounts payable and accrued expenses
    
    
    426,334
    
    
    
    141,424Deferred revenue
    
    
    107,675
    
    
    
    (375,155
    )Net cash used in operating activities
    
    
    (209,917
    )
    
    
    (2,110,925
    )Investing activitiesPurchases of property and equipment
    
    
    (16,230
    )
    
    
    (7,350
    )Maturities of short-term investments
    
    
    3,000,000
    
    
    
    18,600,000Purchases of short-term investments
    
    
    (2,499,615
    )
    
    
    (14,468,443
    )Net cash provided by investing activities
    
    
    484,155
    
    
    
    4,124,207Financing activitiesPayments of long-term debt
    
    
    (78,620
    )
    
    
    (490,811
    )Net cash used in financing activities
    
    
    (78,620
    )
    
    
    (490,811
    )Effect of exchange rate changes on cash
    
    
    9,537
    
    
    
    3,555Increase in cash and cash equivalents
    
    
    205,155
    
    
    
    1,526,026Cash and cash equivalents at beginning of period
    
    
    1,872,358
    
    
    
    1,919,316Cash and cash equivalents at end of period
    
    $
    2,077,513
    
    
    $
    3,445,342
 See notes to condensed consolidated financial statements.
 4




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##### 



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
 1. Basis of Presentation
   2. Risks and Uncertainties
    5




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##### 



3. 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.
   Cash equivalents
 Short-term investments
 6




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##### 



Fair Value Measurements at Reporting Date Using
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantDescription
    
    March 31, 2009
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Equivalents 
Money Market Funds
    
    $
    995,000
    
    
    $
    995,000
    
    
    $
    
    
    
    $
    Short-term
Investments 
Corporate
Obligations (i.e.
Commercial Paper)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    995,000
    
    
    $
    995,000
    
    
    $
    
    
    
    $
    
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantDescription
    
    December 31, 2008
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Equivalents 
Money Market Funds
    
    $
    1,219,000
    
    
    $
    1,219,000
    
    
    $
    
    
    
    $
    Short-term
Investments 
Corporate
Obligations (i.e.
Commercial Paper)
    
    
    500,000
    
    
    
    500,000
    
    
    
    
    
    
    
    Total
    
    $
    1,719,000
    
    
    $
    1,719,000
    
    
    $
    
    
    
    $
    
 4. Recently Issued Accounting Pronouncements
 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock.
 Noncontrolling Interests in Consolidated
Financial Statements
 Disclosures about Derivative Instruments and Hedging
Activities
 The Hierarchy of Generally Accepted Accounting
Principles
 7




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##### 



Determination of the Useful Life of Intangible
Assets
 5. Net Loss Per Share
  Three Months Ended March 31,2009
    
    
    2008Net loss used in the calculation of basic and diluted earnings per share
    
    $
    (788,000
    )
    
    $
    (2,233,000
    )Denominator for basic net loss per share  weighted-average common shares outstanding
    
    
    13,741,000
    
    
    
    13,682,000Effect of dilutive common share options and warrants
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,741,000
    
    
    
    13,682,000Basic net loss per share
    
    $
    (0.06
    )
    
    $
    (0.16
    )Diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (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
    
    
    1,519,000
    
    
    
    1,487,000
 6. Comprehensive Loss
  Three Months Ended March 31,2009
    
    
    2008Net loss
    
    $
    (788,000
    )
    
    $
    (2,233,000
    )Foreign currency translation
    
    
    
    
    
    
    (5,000
    )Comprehensive loss
    
    $
    (788,000
    )
    
    $
    (2,238,000
    )
 7. Shareholders Equity
   8




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##### 



8. Operating Leases
  Twelve Months ended March 31,
    
    Amount2010
    
    $
    264,0002011
    
    
    242,0002012
    
    
    247,0002013
    
    
    180,000Subsequent to 2013
    
    
    Total
    
    $
    933,000
 9. Income Taxes
  Three Months Ended March 31,2009
    
    
    2008Current  U.S.
    
    $
    
    
    
    $
    (15,000
    )Deferred  foreign
    
    
    
    
    
    
    15,000$
    
    
    
    $
    
  Three Months Ended March 31,2009
    
    
    2008Income tax benefit at the United States statutory rate
    
    $
    (268,000
    )
    
    $
    (759,000
    )Change in valuation allowance
    
    
    263,000
    
    
    
    887,000Foreign tax credit
    
    
    
    
    
    
    (116,000
    )Change in FIN No. 48 liability
    
    
    
    
    
    
    (15,000
    )Foreign taxes
    
    
    
    
    
    
    (2,000
    )Non-deductible permanent differences
    
    
    5,000
    
    
    
    5,000$
    
    
    
    $
    
   (Remainder Of This Page Intentionally Left Blank)
 9




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##### 



10. Long-Term Debt
  March 31,
    
    
    December 31,2009
    
    
    2008Financing agreement with Oracle Credit Corporation (the Oracle Agreement)
    
    $
    18,000
    
    
    $
    44,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    141,000
    
    
    
    185,000Insurance Notes payable
    
    
    
    
    
    
    8,000159,000
    
    
    
    237,000Less current maturities
    
    
    139,000
    
    
    
    196,000$
    20,000
    
    
    $
    41,000
    11. Restructuring Costs
  Accrued Severance ReconciliationDescription
    
    2009
    
    
    2008Accrued severance at Jan 1
    
    $
    245,000
    
    
    $
    523,000Charges
    
    
    634,000
    
    
    
    26,000Payments
    
    
    (151,000
    )
    
    
    (221,000
    )Accrued severance at Mar 31
    
    $
    728,000
    
    
    $
    328,000
 Accounting for the Cost of Exit or Disposal Activities,
 12. Restricted Cash
  10




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##### 



13. Software Development Costs
    14. Goodwill and Finite-Lived Tangible and Intangible Assets
    15. Reclassification
  16. Contingencies
  11




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
 ®
   Financial Performance Improvement
  German Office Closure
  12




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##### 



Strategic Alternatives
  Restructured Senior Management Team
  Litigation
   Revenue Recognition and Deferred Revenue
 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 for those services.
    
    Data items revenue is earned based on a price per data unit as data items are entered
into DATATRAKs hosting facility.
    
    Classroom training services revenue is recognized as classroom training is completed,
at rates based on the length of the training program.
 13




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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 contract.
   Backlog
  Possible Delisting of Companys Common Shares
   14




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Critical Accounting Policies
   Results of Operations
 Three months ended March 31, 2009 compared with three months ended March 31, 2008
       15




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##### 



Liquidity and Capital Resources
      16




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##### 



Fair Value Measurements
 Fair Value Measurements.
 17




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##### 



Fair Value Measurements
 Inflation
  Information About Forward-Looking Statements
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  18




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##### 



Foreign Currency Risk
  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
  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
  19




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##### 



Item 5. Other Information
   20




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##### 



Item 6. Exhibits
 31.1
    
    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
 21




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DATATRAK International, Inc.RegistrantDate: May 13, 2009
    /s/ Laurence P. BirchLaurence P. Birch,Interim Chief Executive Officer and Chairman of the
Board of  Directors
(Principal Executive Officer)Date: May 13, 2009
    /s/ Raymond J. MerkRaymond J. MerkVice President of Finance, Chief Financial Officer,
Chief Operating Officer and Treasurer
(Principal Financial and Accounting Officer) 22