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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, 2006
 Commission file number 000-20699
 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 þ o
 o þ




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TABLE OF CONTENTS  Part I. Financial InformationItem 1  Financial StatementsItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Changes in 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-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification    Table of Contents  
 Part I. Financial Information
 
 Item 1  Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,291,176
    
    
    $
    4,407,431Short-term investments
    
    
    2,034,730
    
    
    
    4,955,491Accounts receivable, less allowances
    
    
    3,025,233
    
    
    
    2,853,823Deferred tax asset
    
    
    266,000
    
    
    
    287,000Prepaid expenses and other current assets
    
    
    680,756
    
    
    
    702,075Total current assets
    
    
    9,297,895
    
    
    
    13,205,820Property and equipment, at cost
net of accumulated depreciation and amortization
    
    
    5,099,683
    
    
    
    1,878,404Other assetsRestricted cash
    
    
    71,347
    
    
    
    69,976Deferred tax asset
    
    
    913,000
    
    
    
    913,000Deposit
    
    
    39,549
    
    
    
    39,549Intangible assets, net of accumulated amortization
    
    
    2,591,706
    
    
    
    Goodwill
    
    
    12,940,977
    
    
    
    16,556,579
    
    
    
    1,022,525Total assets
    
    $
    30,954,157
    
    
    $
    16,106,749LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    350,344
    
    
    $
    549,886Current portion of long-term debt
    
    
    500,745
    
    
    
    Accrued expenses
    
    
    1,933,122
    
    
    
    832,860Deferred revenue
    
    
    906,994
    
    
    
    1,027,015Total current liabilities
    
    
    3,691,205
    
    
    
    2,409,761Long term liabilitiesLong-term debt
    
    
    3,500,000
    
    
    
    Deferred tax liability
    
    
    2,053,600
    
    
    
    5,553,600
    
    
    
    Shareholders equitySerial preferred shares, without par value, 1,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common share warrants
    
    
    700,176
    
    
    
    711,872Common shares, without par value, authorized 25,000,000
shares; issued 14,661,754 shares as of March 31, 2006 and
13,613,161 shares as of December 31, 2005; outstanding
11,361,754 shares as of March 31, 2006 and 10,313,161 shares
as of December 31, 2005
    
    
    69,928,598
    
    
    
    61,810,321Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Accumulated deficit
    
    
    (28,506,359
    )
    
    
    (28,425,289
    )Foreign currency translation
    
    
    (224,755
    )
    
    
    (211,608
    )Total shareholders equity
    
    
    21,709,352
    
    
    
    13,696,988Total liabilities and shareholders equity
    
    $
    30,954,157
    
    
    $
    16,106,749
 
 Note A:
    
    The balance sheet at December 31, 2005 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 31,2006
    
    
    2005Revenue
    
    $
    4,500,868
    
    
    $
    3,635,352Direct costs
    
    
    1,171,876
    
    
    
    914,768Gross profit
    
    
    3,328,992
    
    
    
    2,720,584Selling, general and administrative expenses
    
    
    2,981,212
    
    
    
    2,045,303Depreciation and amortization
    
    
    438,682
    
    
    
    175,640(Loss) income from operations
    
    
    (90,902
    )
    
    
    499,641Other income (expense):Interest income
    
    
    81,101
    
    
    
    44,742Interest (expense)
    
    
    (50,269
    )
    
    
    (Loss) income before income taxes
    
    
    (60,070
    )
    
    
    544,383Income tax expense
    
    
    21,000
    
    
    
    12,273Net (loss) income
    
    $
    (81,070
    )
    
    $
    532,110Net (loss) income per share:Basic:Net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.05Weighted average shares outstanding
    
    
    10,845,627
    
    
    
    10,034,632Diluted:Net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.05Weighted average shares outstanding
    
    
    10,845,627
    
    
    
    11,282,052
 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 31,2006
    
    
    2005Operating ActivitiesNet (loss) income
    
    $
    (81,070
    )
    
    $
    532,110Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    438,682
    
    
    
    175,640Stock based compensation
    
    
    193,283
    
    
    
    16,527Accretion of discount on investments
    
    
    (36,558
    )
    
    
    (35,469
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (21,150
    )
    
    
    (633,508
    )Prepaid expenses and other current assets
    
    
    41,921
    
    
    
    (216,946
    )Deferred tax assets
    
    
    21,000
    
    
    
    Accounts payable and accrued expenses
    
    
    (127,254
    )
    
    
    (184,844
    )Deferred revenue
    
    
    (306,817
    )
    
    
    55,817Net cash provided by (used in) operating activities
    
    
    122,037
    
    
    
    (290,673
    )Investing activitiesAcquisition of ClickFind, less cash acquired
    
    
    (3,901,381
    )
    
    
    Purchases of property and equipment
    
    
    (209,721
    )
    
    
    (164,864
    )Maturities of short-term investments
    
    
    3,000,000
    
    
    
    1,750,000Purchases of short-term investments
    
    
    (42,681
    )
    
    
    (1,726,814
    )Net cash used in investing activities
    
    
    (1,153,783
    )
    
    
    (141,678
    )Financing activitiesProceeds from issuance of common shares and stock option exercises
    
    
    50,139
    
    
    
    505,824Repayment of long-term debt
    
    
    (118,184
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (68,045
    )
    
    
    505,824Effect of exchange rate on cash
    
    
    (16,464
    )
    
    
    (47,769
    )(Decrease) increase in cash and cash equivalents
    
    
    (1,116,255
    )
    
    
    25,704Cash and cash equivalents at beginning of period
    
    
    4,407,431
    
    
    
    2,232,276Cash and cash equivalents at end of period
    
    $
    3,291,176
    
    
    $
    2,257,980Unpaid Acquisition Costs
    
    $
    824,486
    
    
    $
    
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
 1. Basis of Presentation
    2. ClickFind Acquisition
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
  Cash, accounts receivable and other current assets
    
    $
    254,000Amortizable intangible assets
    
    
    6,040,000Goodwill
    
    
    12,941,000Accounts payable and other current liabilities
    
    
    (391,000
    )Long-term debt
    
    
    (118,000
    )Deferred tax liability
    
    
    (2,054,000
    )Total acquisition cost
    
    $
    16,672,000
    Three Months Ended March 31,2006
    
    2005Pro forma revenue
    
    $
    4,709,000
    
    
    $
    4,096,000Pro forma net (loss) income
    
    $
    (359,000
    )
    
    $
    175,000Pro forma basic (loss) income per share
    
    $
    (0.03
    )
    
    $
    0.02Pro forma diluted (loss) income per share
    
    $
    (0.03
    )
    
    $
    0.01
 3. Stock Based Compensation
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
  Weighted average risk free interest rate
    
    4.2
    %Weighted average volatility of the expected market price of the
common shares
    
    1.01Dividend yield
    
    0.0
    %Weighted-average expected life of the option
    
    7 yearsWeighted-average fair value per share of options granted
    
    $9.90
   Net income recorded
    
    $
    532,000Plus: stock compensation expense recognized
    
    
    17,000Less: stock compensation expense that would have
been recognized under SFAS No. 123
    
    
    267,000Pro forma net income
    
    $
    282,000Pro forma basic income per share
    
    $
    0.03Pro forma diluted income per share
    
    $
    0.03
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
  WeightedWeighted
    
    
    
    
    
    
    AverageAverage
    
    
    Aggregate
    
    
    RemainingExercise
    
    
    Intrinsic
    
    
    ContractualOptions
    
    
    Price
    
    
    Value
    
    
    LifeOutstanding at January 1, 2006
    
    
    1,619,891
    
    
    $
    3.52Granted
    
    
    
    
    
    
    Exercised
    
    
    (10,886
    )
    
    
    3.65Cancelled
    
    
    (501
    )
    
    
    6.40Outstanding at March 31, 2006
    
    
    1,608,504
    
    
    $
    3.52
    
    
    $
    6,147,000
    
    
    5.6 YearsVested or expected to vest at March 31, 2006
    
    
    1,608,504
    
    
    $
    3.52
    
    
    $
    6,147,000
    
    
    5.6 YearsExercisable at March 31, 2006
    
    
    1,269,476
    
    
    $
    3.00
    
    
    $
    5,514,000
    
    
    4.9 Years
  4. Net (Loss) Income per Share
  Three Months Ended March 31,2006
    
    
    2005Net (loss) income used in the calculation of basic and
diluted earnings per share
    
    $
    (81,070
    )
    
    $
    532,110Denominator for basic net (loss) income per share 
weighted average common shares outstanding
    
    
    10,845,627
    
    
    
    10,034,632Effect of dilutive common share options and warrants
    
    
    
    
    
    
    1,247,420Denominator for diluted net (loss) income per share
    
    
    10,845,627
    
    
    
    11,282,052Basic net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.05Diluted net (loss) income per share
    
    $
    (0.01
    )
    
    $
    0.05Weighted average common share options and warrants
excluded from the computation of diluted net
(loss) income per share because they would have an
anti-dilutive effect on net (loss) income per share
    
    
    1,774,825
    
    
    
    17,483
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
 5. Comprehensive (Loss) Income
  Three Months Ended March 31,2006
    
    
    2005Net (loss) income
    
    $
    (81,070
    )
    
    $
    532,110Foreign currency translation
    
    
    (13,147
    )
    
    
    (59,452
    )Comprehensive (loss) income
    
    $
    (94,217
    )
    
    $
    472,658
 6. Shareholders Equity
    7. Operating Leases
  Twelve Months ended March 31,
    
    Amount2007
    
    $
    876,0002008
    
    
    866,0002009
    
    
    872,0002010
    
    
    575,0002011
    
    
    567,000Subsequent to March 31, 2011
    
    
    913,000$
    4,669,000
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
 8. Income Taxes
  Three Months Ended March 31,2006
    
    
    2005Current:Federal
    
    $
    
    
    
    $
    12,000State and local
    
    
    
    
    
    
    
    
    
    
    12,000DeferredFederal
    
    
    21,000
    
    
    
    State and local
    
    
    
    
    
    
    21,000
    
    
    
    $
    21,000
    
    
    $
    12,000
  Three Months Ended March 31,2006
    
    
    2005Income tax (benefit) provision at the
United States statutory rate
    
    $
    (21,000
    )
    
    $
    185,000Reversal of valuation allowance
    
    
    
    
    
    
    (173,000
    )Non-deductible permanent differences
    
    
    42,000
    
    
    
    $
    21,000
    
    
    $
    12,000
 9. Reclassification
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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  General
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
    
    Project management and data management (design, report and export) services are
recorded as revenue 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 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.
    
    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
under the contract.
    Critical Accounting Policies
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Results of Operations
 Three months ended March 31, 2006 compared with three months ended March 31, 2005
      Liquidity and Capital Resources
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Inflation
  Information About Forward-Looking Statements
  16




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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
  
 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
  18




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Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger among DATATRAK International, Inc.,
CF Merger Sub, Inc., ClickFind, Inc., each of the shareholders of ClickFind, Inc
and Jim Bob Ward, dated February 13, 2006 *4.1
    
    Form of Promissory Note*10.1
    
    Limited Software License Agreement between DATATRAK International, Inc.
and Jim Bob Ward, dated February 13, 2006*10.2
    
    Employment Agreement between DATATRAK International, Inc.
and Jim Bob Ward, dated February 13, 2006*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
 
 *
    
    Incorporated herein by reference to the Companys current report on Form 8-K
dated February 13 2006 (File No. 000-20699). 19




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SIGNATURES
  DATATRAK International, Inc.RegistrantDate: May 10, 2006
    
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director(Principal Executive Officer)Date: May 10, 2006
    
    /s/ Terry C. BlackTerry C. Black,Vice President of Finance, Chief Financial Officer,Treasurer and Assistant Secretary(Principal Financial and Accounting Officer)
 20