| DATATRAK INTERNATIONAL INC Item 1A Risk Factors 7 ITEM 1A RISK FACTORS Certain statements made in this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) |
| All statements that address operating performance, events or developments that we anticipate will occur in the future, including statements related to future revenue, profits, expenses, income and earnings per share or statements expressing general optimism about future results, are forward-looking statements |
| In addition, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are intended to identify forward-looking statements |
| Forward-looking statements are subject to the safe harbors created in the Exchange Act |
| Forward-looking statements are subject to numerous assumptions and risks and uncertainties that may cause our actual results or performance to be materially different from any future results or performance expressed or implied by the forward-looking statements |
| We have identified the following important factors, which could cause our actual operational or financial results to differ materially from any projections, estimates, forecasts or other forward-looking statements made by or on our behalf |
| Under no circumstances should the factors listed below be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements |
| We undertake no obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to 7 _________________________________________________________________ forward-looking statements contained herein to take into account events or circumstances that occur after the date of this Annual Report on Form 10-K In addition, we do not undertake any responsibility to update publicly the occurrence of unanticipated events, which may cause actual results to differ from those expressed or implied by the forward-looking statements contained herein |
| We have a limited operating history and we have not until recently had profitable operations |
| We began providing EDC services in 1997 and have a limited operating history upon which our performance may be evaluated |
| Although we were profitable in 2004 and 2005, we had previously recognized operating losses in each year since 1997 |
| Our cumulative operating loss since 1997 from EDC operations totaled dlra37cmam411cmam000 at December 31, 2005 |
| However, any number of factors, including, but not limited to, termination or delays in contracts, inability to grow and convert backlog into revenue or being unable to quickly reduce costs if required, could cause us to record losses in 2006 and in future periods |
| Although our proprietary DATATRAK EDC® and DATATRAK eClinical™ software solutions have been used in clinical trials, continued enhancement is necessary to provide additional functions and services to meet the ever-changing needs and expectations of our customers |
| To date we have had limited EDC revenue from which to support the costs of this continued software enhancement |
| Our potential future revenue may not be sufficient to absorb corporate overhead and other fixed operating costs that will be necessary for our future success |
| Our quarterly results fluctuate significantly |
| We are subject to significant fluctuations in quarterly results caused by many factors, including • our success in obtaining new contracts, • the size and duration of the clinical trials in which we participate, and • the timing of clinical trial sponsor decisions to conduct new clinical trials or cancel or delay ongoing trials |
| Our expense levels are based in part on our expectations as to future revenue and to a certain extent are fixed |
| We cannot make assurances as to our revenues in any given period, and we may be unable to adjust expenses in a timely manner to compensate for any unexpected revenue shortfall |
| As a result of our relatively small revenue base, any significant shortfall in revenue recognized during a particular period could have an immediate adverse effect on our income from operations and financial condition |
| Volatility in our quarterly results may adversely affect the market price of our common shares |
| Our business strategies are unproven and we are in an early stage of development |
| Our efforts to establish a standardized EDC process for collection and management of clinical research data represent a significant departure from the traditional clinical research practices of clinical trial sponsors |
| The long-term viability of our business remains unproven |
| Our strategy may not gain acceptance among sponsors of clinical research, research sites or investigators |
| Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets |
| We may lose revenue if we experience delays in clinical trials or if we lose contracts |
| Although our contracts provide that we are entitled to receive revenue earned through the date of termination, our customers generally are free to delay or terminate a clinical trial or our contract related to 8 _________________________________________________________________ the trial at any time |
| The length of a typical clinical trial contract varies from several months to several years |
| Clinical trial sponsors may delay or terminate clinical trials for several reasons, including • unexpected results or adverse patient reactions to a potential product, • inadequate patient enrollment or investigator recruitment, • manufacturing problems resulting in shortages of a potential product, or • sponsor decisions to de-emphasize or terminate a particular trial or drug |
| We may lose revenues if a clinical trial sponsor decides to delay or terminate a trial in which we participate |
| We may lose future revenue if our major customers decrease their research and development expenditures, or if we lose any of our major customers |
| Our primary customers are companies in the pharmaceutical industry |
| Our business is substantially dependent on the research and development expenditures of companies in this industry |
| The extent to which we rely on revenue from one customer varies from period to period, depending upon, among other things, our ability to generate new business and the timing and size of clinical trials |
| In light of our small revenue base, we are more dependent on major customers than many of the larger participants in the EDC industry |
| During 2005, one customer accounted for 59prca of our total revenue for the year |
| Our operations could be materially and adversely affected by, among other things, • any economic downturn or consolidations in the pharmaceutical or biotechnology industries, • any decrease in these industries’ research and development expenditures, or • changes in the regulatory environment in which companies in these industries operate |
| Changes in government regulations relating to the health care industry could have a material adverse effect on the demand for our services |
| Demand for our services is largely a function of the regulatory requirements associated with the approval of a New Drug Application by the FDA These requirements are more stringent and thus more burdensome than those imposed by many other developed countries |
| In recent years, efforts have been made to streamline the drug approval process and coordinate US standards with those of other developed countries |
| Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures could reduce the demand for our services |
| Several competing proposals to reform the system of health care delivery in the United States have been considered by Congress from time to time |
| To date, none of these proposals have been adopted |
| The FDA’s guidelines and rules related to the use of computerized systems in clinical trials are still in the early stages of development |
| Our software may not continue to comply with these guidelines and rules as they develop, and corresponding changes to our product may be required |
| Any release of FDA guidance that is significantly inconsistent with the design of DATATRAK EDC® or DATATRAK eClinical™ may cause us to incur substantial costs to remain in compliance with FDA guidance and regulations |
| The EDC market, which is still developing, and must compete with the traditional paper method of collecting clinical trial data, is highly fragmented |
| The major competitors in the EDC market include • EDC software vendors, • clinical trial data service companies that use paper for data collection, • vendors offering single component solutions and • in-house development efforts within large pharmaceutical companies |
| Our current and potential future competitors have or may have substantially greater resources, greater name recognition and more extensive customer bases that could be leveraged, thereby gaining market share or product acceptance to our detriment |
| We may not be able to capture or establish the market presence necessary to effectively compete in this emerging sector of the clinical research industry |
| We may be subject to liability for potential breaches of contracts or losses relating to the unauthorized release of clinical trial data |
| Our services are supported by telecommunications equipment, software, operating protocols and proprietary applications for high-speed transmission of large quantities of data among multiple locations |
| In addition, clinical pharmaceutical and medical device research requires the review and handling of large amounts of patient data |
| Potential liability may arise from a breach of contract or a loss of or unauthorized release of clinical trial data |
| If we were forced to undertake the defense of, or were found financially responsible for, claims based upon these types of losses, our financial resources could be diminished |
| We maintain a dlra5cmam000cmam000 errors and omissions professional liability insurance policy to cover claims that may be brought against us |
| This coverage may not be adequate, and insurance may not continue to be available to us, in the future |
| Our competitive position and business may be adversely affected if we are unable to protect our intellectual property rights or infringe upon the intellectual property rights of others |
| Intellectual property rights, including patent rights, are significant to our ongoing operations and future opportunities |
| Our success will depend, in part, on our ability to secure our own intellectual property rights (eg, patents, copyrights, trademarks, trade secrets), obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing on the proprietary rights of others |
| There can be no assurance, however, that our proprietary rights will provide us significant protection or commercial advantage or that measures taken to protect our confidential information will adequately prevent the disclosure or misuse of such confidential information |
| In addition, there can be no assurance that, in the future, a third party will not assert that we are violating their proprietary rights, including that our technologies, products or services infringe their patents |
| In that event, we could incur substantial costs and diversion of the time and attention of management and technical personnel in defending ourselves against any such claims |
| Any meritorious claim of intellectual property infringement against us could have a material adverse effect on our competitive position and business |
| We may not be able to successfully integrate our recently acquired business into our current business operations |
| We recently completed an acquisition of ClickFind and its product suite |
| This new product suite, now called DATATRAK eClinical™, will play a significant role in our efforts to continue to be a leading ASP for the EDC industry |
| We may not be able to successfully integrate and profitably manage ClickFind and our new software offering without substantial costs, delays or other problems |
| Acquisitions also may involve a number of special risks, including adverse short-term effects on our reported operating results, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, diversion of management’s attention, dependence on retention hiring and training of key personnel and risks associated with unanticipated problems or legal liabilities some or all of which could have a material adverse effect on our business, results of operations and financial condition |
| We will incur increased costs associated with the integration of our new product suite |
| All clinical trials currently being performed with DATATRAK EDC® will continue through conclusion with that product suite |
| At this time, it is anticipated that the DATATRAK EDC® platform will be utilized in these, and perhaps some new, clinical trials until the end of 2009 |
| As such, we will provide two different architectures for the use of technology in clinical trials until current trials, and perhaps future trials, using the previous platform are finished |
| We will incur additional costs by continuing to support and provide, as needed, appropriate service packs for the maintenance of DATATRAK EDC® as well as supporting and providing appropriate service packs for the maintenance of DATATRAK eClinical™ |
| We will also incur additional costs to integrate the DATATRAK eClinical™ product into our current operating systems |
| 10 _________________________________________________________________ Furthermore, our two product offerings will run on parallel systems, as such we will incur additional costs of maintaining two parallel production systems |
| DATATRAK eClinical™, which has been used in many clinical trails in nineteen separate countries, has never been utilized in a large multi-national clinical trial with over 1cmam000 patients |
| As such, we are investing in additional infrastructure, so that DATATRAK eClinical™ can be scaled to meet the needs of clinical trials with such large volumes of data and the software performs to the level of satisfaction that our customers have come to expect |
| We may incur unforeseen costs if significant modification and testing become necessary to ensure the scalability of DATATRAK eClinical™ |
| The price of our common shares could be adversely affected by the dilution caused by the common shares issued in our recently completed acquisition |
| In February 2006, we issued 1cmam026cmam522 of our unregistered common shares to the former shareholders of ClickFind as part of the acquisition of the outstanding stock of ClickFind |
| These 1cmam026cmam522 common shares represent approximately 9dtta0prca of our outstanding common shares, as of February 28, 2006 |
| Sales of a substantial number of these common shares in the public market could depress the market price of our common shares |
| The perceived risk resulting from the sale of these common shares could cause some of our shareholders to sell their common shares, thus causing the price of our common shares to further decline |
| In addition, the downward pressure on the price of our common shares could cause some of our shareholders to engage in short sales of our common shares, which may cause the price of our common shares to decline even further |
| We have Anti-takeover Provisions and Preferred Share Purchase Rights Our Articles of Incorporation and By-Laws contain provisions that may discourage a third party from acquiring, or attempting to acquire us |
| These provisions could limit the price that certain investors might be willing to pay for our common shares |
| In addition preferred shares of our stock can be issued by our Board of Directors, without shareholder approval, whether under our shareholder rights plan or for other uses determined by the Board |
| The issuance of preferred shares may adversely affect the rights of common shareholders, the market price of our common shares and may make it more difficult for a third party to acquire a majority of our outstanding common shares |