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Securities and Exchange Commission  Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2004 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 BoulevardMayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
 (440) 443-0082 
  
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes[  ] No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [  ] Yes [X] No Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date. The number of Common Shares, without par value, outstanding as of July 31, 2004
was 6,089,382.




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TABLE OF CONTENTS  Part I. Financial InformationItem 1  Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED 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 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. Exhibits and Reports on Form 8-KSIGNATURESEX-10.1 Amended and Restated Outside Director Stock OptionEX-31.1 302 Certification for CEOEX-31.2 302 Certification for CEOEX-32.1 906 Certification for CEOEX-32.2 906 Certification for CFO    Table of Contents  
 Part I. Financial Information 
 Item 1 - Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note A)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,708,490
    
    
    $
    1,727,335Short-term investments
    
    
    1,998,065
    
    
    
    2,533,849Restricted cash
    
    
    
    
    
    
    23,979Accounts receivable, less allowances
    
    
    1,295,750
    
    
    
    788,342Prepaid expenses and other current assets
    
    
    458,970
    
    
    
    170,552Total current assets
    
    
    5,461,275
    
    
    
    5,244,057Property and equipment, at cost
net of accumulated depreciation and amortization
    
    
    863,233
    
    
    
    1,018,739Other assetsRestricted cash
    
    
    71,400
    
    
    
    74,189Deposit
    
    
    39,549
    
    
    
    39,549110,949
    
    
    
    113,738Total assets
    
    $
    6,435,457
    
    
    $
    6,376,534LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    148,076
    
    
    $
    170,740Capital lease obligation
    
    
    
    
    
    
    23,979Accrued expenses
    
    
    791,029
    
    
    
    683,846Deferred revenue
    
    
    655,749
    
    
    
    897,138Total current liabilities
    
    
    1,594,854
    
    
    
    1,775,703Shareholders equity:Serial preferred shares, without par value, 1,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common share warrants
    
    
    68,049
    
    
    
    135,424Common shares, without par value, authorized 25,000,000
shares; issued 9,389,382 shares as of June 30, 2004 and
9,306,053 shares as of December 31, 2003; outstanding
6,089,382 shares as of June 30, 2004 and 6,006,053 shares
as of December 31, 2003
    
    
    56,813,886
    
    
    
    56,458,996Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Accumulated deficit
    
    
    (31,786,581
    )
    
    
    (31,780,670
    )Foreign currency translation
    
    
    (66,443
    )
    
    
    (24,611
    )Total shareholders equity
    
    
    4,840,603
    
    
    
    4,600,831Total liabilities and shareholders equity
    
    $
    6,435,457
    
    
    $
    6,376,534
  Note A:
    The balance sheet at December 31, 2003 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    2,629,335
    
    
    $
    1,734,641
    
    
    $
    4,917,793
    
    
    $
    3,191,225Direct costs
    
    
    603,893
    
    
    
    345,343
    
    
    
    1,137,517
    
    
    
    699,225Gross profit
    
    
    2,025,442
    
    
    
    1,389,298
    
    
    
    3,780,276
    
    
    
    2,492,000Selling, general and administrative expenses
    
    
    1,791,471
    
    
    
    1,349,206
    
    
    
    3,450,038
    
    
    
    2,688,339Depreciation and amortization
    
    
    138,362
    
    
    
    231,028
    
    
    
    333,294
    
    
    
    493,096Income (loss) from operations
    
    
    95,609
    
    
    
    (190,936
    )
    
    
    (3,056
    )
    
    
    (689,435
    )Other income (expense):Interest income
    
    
    7,286
    
    
    
    4,656
    
    
    
    15,348
    
    
    
    10,103Interest expense
    
    
    
    
    
    
    (1,970
    )
    
    
    (203
    )
    
    
    (4,510
    )Other income (expense)
    
    
    
    
    
    
    (179
    )
    
    
    
    
    
    
    516Income (loss) before income taxes
    
    
    102,895
    
    
    
    (188,429
    )
    
    
    12,089
    
    
    
    (683,326
    )Income tax expense
    
    
    14,300
    
    
    
    
    
    
    
    18,000
    
    
    
    Net income (loss)
    
    $
    88,595
    
    
    $
    (188,429
    )
    
    $
    (5,911
    )
    
    $
    (683,326
    )Net income (loss) per share:Basic:Net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    (0.13
    )Weighted average shares outstanding
    
    
    6,075,510
    
    
    
    5,297,964
    
    
    
    6,062,133
    
    
    
    5,280,994Diluted:Net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    (0.13
    )Weighted average shares outstanding
    
    
    6,865,988
    
    
    
    5,297,964
    
    
    
    6,062,133
    
    
    
    5,280,994
 See notes to condensed consolidated financial statements. 3




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2004
    
    2003Operating ActivitiesNet loss
    
    $
    (5,911
    )
    
    $
    (683,326
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    333,294
    
    
    
    493,096Stock compensation
    
    
    11,914
    
    
    
    51,199Other
    
    
    16,226
    
    
    
    5,187Changes in operating assets and liabilities:Accounts receivable
    
    
    (535,008
    )
    
    
    151,260Prepaid expenses and other current assets
    
    
    (289,221
    )
    
    
    (259,804
    )Accounts payable and accrued expenses
    
    
    84,519
    
    
    
    (139,619
    )Deferred revenue
    
    
    (241,389
    )
    
    
    (156,316
    )Net cash used in operating activities
    
    
    (625,576
    )
    
    
    (538,323
    )Investing activitiesDecrease in restricted cash
    
    
    23,979
    
    
    
    68,035Purchases of property and equipment
    
    
    (182,479
    )
    
    
    (14,997
    )Maturities of short-term investments
    
    
    4,786,021
    
    
    
    2,289,965Purchases of short-term investments
    
    
    (4,238,863
    )
    
    
    (1,948,476
    )Net cash provided by investing activities
    
    
    388,658
    
    
    
    394,527Financing activitiesProceeds from issuance of common shares and stock option exercises
    
    
    275,601
    
    
    
    Payments under capital lease obligation
    
    
    (23,979
    )
    
    
    (68,035
    )Repayment of notes receivable, net
    
    
    803
    
    
    
    3,365Net cash provided by (used in) financing activities
    
    
    252,425
    
    
    
    (64,670
    )Effect of exchange rate on cash
    
    
    (34,352
    )
    
    
    (23,145
    )Decrease in cash and cash equivalents
    
    
    (18,845
    )
    
    
    (231,611
    )Cash and cash equivalents at beginning of period
    
    
    1,727,335
    
    
    
    1,620,707Cash and cash equivalents at end of period
    
    $
    1,708,490
    
    
    $
    1,389,096
 See notes to condensed consolidated financial statements. 4




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
DATATRAK International, Inc. and subsidiaries (DATATRAK or the Company)
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
June 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Companys Form 10-K for the year ended December 31, 2003 (File No. 000-20699). The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that might affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. 2. Net Loss per Share The following table sets forth the computation of basic and diluted loss
per share. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income
(loss) used in the calculation of basic and diluted loss per share
    
    $
    88,595
    
    
    $
    (188,429
    )
    
    $
    (5,911
    )
    
    $
    (683,326
    )Denominator
for basic net income (loss) per share  weighted average common shares outstanding
    
    
    6,075,510
    
    
    
    5,297,964
    
    
    
    6,062,133
    
    
    
    5,280,994Effect of
dilutive common share options and warrants
    
    
    790,478
    
    
    
    
    
    
    
    
    
    
    
    Denominator
for diluted net income (loss) per share
    
    
    6,865,988
    
    
    
    5,297,964
    
    
    
    6,062,133
    
    
    
    5,280,994Basic net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    (0.13
    )Diluted net income (loss) per share
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    (0.13
    )Weighted
average common share options and warrants excluded from the
computation of diluted net income (loss) per share because they
would have an antidilutive effect on net income (loss) per share
    
    
    14,385
    
    
    
    1,240,836
    
    
    
    1,291,883
    
    
    
    1,229,398
 5




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
 3. Comprehensive Loss The following table sets forth comprehensive loss. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    88,595
    
    
    $
    (188,429
    )
    
    $
    (5,911
    )
    
    $
    (683,326
    )Foreign currency translation
    
    
    (8,007
    )
    
    
    2,387
    
    
    
    (41,832
    )
    
    
    (479
    )Comprehensive income (loss)
    
    $
    80,588
    
    
    $
    (186,042
    )
    
    $
    (47,743
    )
    
    $
    (683,805
    )
 4. Shareholders Equity During January 2004, the holders of 12,500 common share warrants, with an
exercise price of $4.80 per share, surrendered the warrants along with the
exercise price in exchange for 12,500 common shares. In addition during the
six months ended June 30, 2004, the holders of 70,829 common share options, at
a weighted average exercise price of $3.04 per share, exercised the options and
purchased 70,829 common shares. On June 2, 2004, the Companys shareholders voted to approve and adopt an
amendment and restatement to the Companys Amended and Restated Outside
Director Stock Option Plan (f/k/a Amended and Restated 1999 Outside Director
Stock Option Plan) (the Director Plan). As part of this amendment and
restatement, the number shares reserved for stock option grants to outside
directors of the Company, under the Director Plan, increased from 400,000 to
550,000. 5. Income Taxes During the six months ended June 30, 2004, the Company had U.S. federal
alternative minimum tax of $18,000 due to income earned by its U.S. based
operations. Due to its U.S. and non-U.S. consolidated net loss and net loss
carryforwards, the Company had no other income tax expense during the six
months ended June 30, 2004. 6. Stock Based Compensation The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations in accounting for its employee and director stock options.
Under APB No. 25 compensation expense has been recognized for all options
granted at less than the fair market value of the common shares on the date of
grant. The alternative fair value accounting provided for under Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation requires use of
option valuation models that were not developed for use in valuing employee
stock options. SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, requires disclosure of compensation expense under
both APB No. 25 and SFAS No. 123. SFAS No. 123 requires that stock
compensation be determined as if the Company has accounted for its stock
options granted subsequent to December 31, 1994 under the fair value method of
SFAS 123. 6




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
 For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options vesting period. The pro forma
results are not necessarily indicative of what would have occurred had the
Company adopted SFAS No. 123. The following table sets forth stock based compensation and pro forma
information for each period presented. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) recorded
    
    $
    89,000
    
    
    $
    (188,000
    )
    
    $
    (6,000
    )
    
    $
    (683,000
    )Plus: stock compensation
expense recognized
    
    
    6,000
    
    
    
    48,000
    
    
    
    12,000
    
    
    
    51,000Less: stock compensation
expense that would
have been recognized under
SFAS No. 123
    
    
    155,000
    
    
    
    85,000
    
    
    
    311,000
    
    
    
    167,000Pro forma net loss
    
    $
    (60,000
    )
    
    $
    (225,000
    )
    
    $
    (305,000
    )
    
    $
    (799,000
    )Pro forma basic loss per share
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )Pro forma diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
  7.
    
    Reclassification Certain prior year amounts have been reclassified to conform to the
current year presentation. 7




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Item 2.
    Managements Discussion and Analysis of Results of Operations and
Financial Condition The information set forth and discussed below for the three and six month
periods ended June 30, 2004 is derived from, and should be read in conjunction
with, the Condensed Consolidated Financial Statements included elsewhere
herein. The financial information set forth and discussed below is unaudited,
but in the opinion of management, reflects all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of such
information. The Companys results of operations for a particular quarter may
not be indicative of results expected during the other quarters or for the
entire year. General DATATRAK is a provider of software and other related services, commonly
referred to as an application service provider, or ASP. DATATRAKs customers
use the software known as DATATRAK EDC® to collect and transmit clinical trial
data, commonly referred to as electronic data capture, or EDC. The Companys
services assist companies in the clinical pharmaceutical, biotechnology,
contract research organization and medical device research industries, in
accelerating the completion of clinical trials. Approximately 58% of the
Companys assets, or approximately $3,707,000, is held in cash, cash
equivalents and short-term investments. During the three months ended June 30,
2004, and for the first time since commencing EDC operations in 1997, the
Company has recorded net income from operations. The Company is continuing to
enhance and commercialize its business and the DATATRAK EDC® software, and
anticipates that its operating results may fluctuate significantly from period
to period. There can be no assurance of the Companys long-term future
prospects. The Companys standard contracts provide a fixed unit price for each
component or service to be delivered, and revenue is recognized as these
components or services are delivered. Services provided by DATATRAK that are
in addition to those provided for in its contracts are billed on a fee for
service basis as services are completed. Generally, these contracts range in
duration from one to three years. The ultimate contract value is dependent
upon the length of the customers use of DATATRAK EDC® and the services
DATATRAK provides. As services are performed over the life of the contract,
revenue is recognized per the specific terms of each contract. Costs
associated with contract revenue are recognized as incurred. Pass-through
costs that are paid directly by DATATRAKs customers, and for which the Company
does not bear the risk of economic loss, are excluded from revenue. The
termination of a standard contract will not result in a material adjustment to
the revenue or costs previously recognized. In some instances, DATATRAK offers volume discounts to customers over
multiple contracts. DATATRAK estimates the volume discounts to be earned over
the life the contracts to which the discount applies. As contracts progress,
revenue is recorded using rates that reflect the anticipated volume discount to
be achieved by the customer. The termination of a contract subject to a volume
discount could result in a material adjustment to revenue previously
recognized, in order to reflect the true economic value of the contract at the
time of cancellation. For the six months ended June 30, 2004, DATATRAK has
deferred $30,000 of revenue as a result of its contacts subject to volume
discounts. Since its purchase of the DATATRAK EDC software in January 1998, DATATRAK
has recorded revenue related to approximately ninety contracts. Backlog
consists of anticipated revenue from authorization letters to commence services
and signed contracts yet to be completed. Potential contracts or authorization
letters that have passed the verbal stage, but have not yet been signed, are
excluded from backlog. At June 30, 2004, DATATRAKs backlog was $15,071,000.
DATATRAKs contracts can be cancelled or delayed at anytime and, therefore, the
Companys backlog, at any point in time, is not an accurate predictor of future
levels of revenue. 8




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Critical Accounting Policies In response to the SECs Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, the Company has identified the
most critical accounting principles upon which its financial status depends.
Critical principles were determined by considering accounting policies that
involve the most complex or subjective decisions or assessments. The most
critical accounting policies were identified to be those related to revenue
recognition, software development costs and stock based compensation. A summary of these critical accounting policies can be found in the
Companys Annual Report on Form 10-K, filed on March 19, 2004, under the
heading Critical Accounting Policies in Managements Discussion and Analysis
of Financial Condition and Results of Operations. Results of Operations Three months ended June 30, 2004 compared with three months ended June 30,
2003 Revenue for the three months ended June 30, 2004 increased 51.5% to
$2,629,000, as compared to $1,735,000 for the three months ended June 30, 2003.
Included in revenue for the three months ended June 30, 2003, was a one-time
consulting fee of $150,000 that was outside of a traditional EDC contract.
During the second quarter of 2004, DATATRAK recorded revenue related to 56
contracts compared to 39 contracts during 2003. Additionally, for the three
months ended June 30, 2004, $2,240,000 of revenue was the result of contracts
that were in backlog at December 31, 2003 and $389,000 was the result of new
business. For the second quarter of 2003, $1,268,000 of revenue was generated
from contracts that were in backlog at December 31, 2002 and $467,000 of
revenue was the result of new business. Direct costs of revenue, mainly personnel costs, were $604,000 and
$345,000 during the three months ended June 30, 2004 and 2003, respectively.
Additional staff and other payroll cost increases accounted for $183,000 of the
$259,000 increase. Other direct costs, primarily travel and other costs billed
directly to DATATRAKs customers, increased by $76,000 during the three months
ended June 30, 2004. The increase in staff was necessitated by the growth in
revenue and the increase in the number of contracts DATATRAK has been managing
over the past year. DATATRAKs gross margin decreased to 77.0% for the three
months ended June 30, 2004 compared to 80.1% for the three months ended June
30, 2003. The $150,000 one-time revenue item caused a 1.9% increase in gross
margin during the second quarter of 2003. Selling, general and administrative expenses (SG&A) include all
administrative personnel costs, business and software development costs, and
all other expenses not directly chargeable to a specific contract. SG&A
expenses increased by 32.8% to $1,791,000 from $1,349,000 for the three months
ended June 30, 2004 and 2003, respectively. Payroll cost increases and the
Companys new sales incentive plan accounted for $148,000 of the $442,000
increase. Cost increases in other areas, primarily due to the increased
marketing of DATATRAK EDC® and development of the Companys corporate
infrastructure, resulted in additional expenses of $294,000 during the three
months ended June 30, 2004. Depreciation and amortization expense decreased to $138,000 during the
three months ended June 30, 2004 from $231,000 during the three months ended
June 30, 2003. The decrease was the result of aging assets not being replaced
as indicated by the low level of capital expenditures during 2003. During
2004, DATATRAK spent $182,000 for new equipment. The Company expects increased
capital expenditure activity throughout the remainder of 2004. 9




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Six months ended June 30, 2004 compared with six months ended June 30,
2003 Revenue for the six months ended June 30, 2004 increased 54.1% to
$4,918,000, as compared to $3,191,000 for the six months ended June 30, 2003.
Included in revenue for the six months ended June 30, 2003, was a one-time
consulting fee of $150,000 that was outside of a traditional EDC contract.
During the six months ended June 30, 2004, DATATRAK recorded revenue related to
61 contracts compared to 43 contracts during 2003. For the six months ended
June 30, 2004, $4,482,000 of revenue was the result of contracts that were in
backlog at December 31, 2003 and $436,000 was the result of new business. For
the six months ended June 30, 2003, $2,493,000 of revenue was generated from
contracts that were in backlog at December 31, 2002 and $698,000 of revenue was
the result of new business. Direct costs of revenue, mainly personnel costs, were $1,138,000 and
$699,000 during the six months ended June 30, 2004 and 2003, respectively.
Additional staff and other payroll cost increases accounted for $352,000 of
this increase. Other direct costs, primarily travel and other costs billed
directly to DATATRAKs customers, increased by $87,000 during the six months
ended June 30, 2004. The increase in staff was necessitated by the growth in
revenue and the increase in the number of contracts DATATRAK has been managing
over the past year. DATATRAKs gross margin decreased to 76.9% for the six
months ended June 30, 2004 compared to 78.1% for the six months ended June 30,
2003. The $150,000 one-time revenue item caused a 1.1% increase in gross
margin during the first six months of 2003. SG&A expenses increased by 28.3% to $3,450,000 from $2,688,000 for the six
months ended June 30, 2004 and 2003, respectively. Payroll cost increases and
the Companys new sales incentive plan accounted for $287,000 of the $762,000
increase. Expenses related to equipment maintenance and software licensing
increased $65,000 compared to the prior year. The increase in these expenses
is related to the growth of DATATRAKs information technology infrastructure,
and are necessary to ensure that this environment is properly maintained. Cost
increases in other areas, primarily due to the increased marketing of DATATRAK
EDC® and development of the Companys corporate infrastructure, resulted in
additional expenses of $410,000 during the six months ended June 30, 2004. Depreciation and amortization expense decreased to $333,000 during the six
months ended June 30, 2004 from $493,000 during the six months ended June 30,
2003. The decrease was the result of aging assets not being replaced as
indicated by the low level of capital expenditures during 2003. Other income increased to $15,000 during the six months ended June 30,
2004 from $6,000 during the six months ended June 30, 2003. Other income
includes interest income which increased $5,000 for the six months ended June
30, 2004 compared to June 30, 2003, as a result of the Companys increase in
cash and cash equivalents due to its August 2003 private placement of common
shares. Outlook Primarily due to its growth in revenue, DATATRAK reported net income for
the first time in its EDC history during the three months ended June 30, 2004.
Backlog at June 30, 2004 of $15,071,000 has remained comparable to backlog
reported at December 31, 2003 of $14,600,000 because new contract signings and
modifications to existing contracts have kept pace with revenue recognized on
contracts in backlog. The Companys management believes that its earlier reported guidance of
$11,000,000 to $13,000,000 of revenue for the year ended December 31, 2004
continues to remain appropriate, however it recommends that shareholders focus
on the lower end of this guidance. This assumes that there will be no contract
delays or cancellations to current projects and the Company achieves its
internal projections for additional new business. Of the Companys projected
revenue for the second half of 2004, approximately $4,600,000 will come from
contracts that were in backlog at June 30, 2004, and the remainder will be from
contracts signed and anticipated to be signed throughout the remainder of 2004.
Based on its anticipated 10




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levels of revenue and current cost structure, DATATRAK believes that
shareholders should focus on the lower end of its earlier reported guidance of
fully diluted earnings per share of $0.13 to $0.27. Liquidity and Capital Resources Since its inception, the Companys principal sources of cash have been
cash flow from operations and proceeds from the sale of equity securities. The
Companys investing activities primarily reflect capital expenditures and sales
and purchases of short-term investments. In August 2003, the Company raised
approximately $2,239,000 in cash with the completion of a private placement of
its common shares. The Companys contracts usually require a portion of the contract amount
to be paid at the time the contract is initiated. Additional payments are
generally received monthly as work on the contract progresses. All amounts
received are recorded as a liability (deferred revenue) until work has been
completed and revenue is recognized. Cash receipts do not necessarily
correspond to costs incurred or revenue recognized. The Company typically
receives a low volume of large-dollar receipts. DATATRAKs accounts receivable
will fluctuate due to the timing and size of cash receipts. Contracting and
collection practices are designed to maintain an average collection period for
accounts receivable of one to three months. Any increase in the Companys
normal collection period for accounts receivable could negatively impact its
cash flow from operations and working capital. At June 30, 2004, the
average collection period for accounts receivable was 42 days compared to 43
days at December 31, 2003. Accounts receivable (net of allowance for doubtful
accounts) was $1,296,000 at June 30, 2004 and $788,000 at December 31, 2003.
DATATRAKs increased revenue has caused the accounts receivable balance to
increase during 2004, however the accounts receivable collection period has
remained consistent with prior periods. Deferred revenue was $656,000 at June
30, 2004 compared to $897,000 at December 31, 2003. Cash and cash equivalents decreased $19,000 during the six months ended
June 30, 2004. This was the result of $626,000 used for operating activities
and $641,000 provided by investing and financing activities. Foreign currency
fluctuations caused a $34,000 decrease in cash and cash equivalents. Cash used
in operating activities was primarily the result of a $535,000 increase in
accounts receivable caused by the Companys growth in revenue during 2004.
Investing activities included $182,000 used to purchase property and equipment,
offset by net maturities of investments and a decrease in restricted cash
totaling $571,000. Financing activities included proceeds from the issuance of
common shares totaling $275,000 as the result of exercises of common share
options and warrants, which was partially offset by capital lease payments
totaling $24,000. At June 30, 2004, the Company had working capital of $3,866,000 and its
cash, cash equivalents and short-term investments totaled $3,707,000. The
Companys working capital increased by $398,000 since December 31, 2003. The
increase was primarily the result of a $749,000 increase in net accounts
receivable (accounts receivable less deferred revenue), which was offset by a
$555,000 decrease in cash, cash equivalents and short-term investments. Other
current assets increased $265,000 and other liabilities increased by $61,000. The Company is responsible for funding the future enhancement and testing
of the DATATRAK EDC® software. The Company will continue to invest in the
development of the DATATRAK® process. The Companys operations and the EDC
market are still in a developmental stage. DATATRAK has experienced revenue
growth, and anticipates recording net income and positive cash flow from
operations for the year ended December 31, 2004, as it continues to build its
customer base, increase its backlog and convert existing backlog into revenue.
During the six months ended June 30, 2004, the Company expended $182,000 for
capital expenditures, and had expenditures totaling $233,000 for equipment
maintenance and related items. The Company anticipates capital and related
expenditures of approximately $763,000 through the end of 2004 for continued
commercialization, product development and maintenance of DATATRAK EDC® and the
anticipated growth of DATATRAKs business and information technology
infrastructure. DATATRAK expects to fund these working capital requirements,
from existing cash and 11




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cash equivalents, cash flow from operations and maturities of short-term
investments. The Company believes that, with its continued anticipated growth
in revenue, its cash and cash equivalents, maturities of short-term investments
and cash flow from operations will be sufficient to meet its working capital
and capital expenditure requirements for the foreseeable future. However,
DATATRAK may need to raise additional funds to support expansion, respond to
competitive pressures, acquire complementary businesses or technology or take
advantage of unanticipated opportunities. Additional funds may be raised by
selling debt or equity securities, by entering into strategic relationships or
through other arrangements. Additional capital may not be available on
acceptable terms, if at all. To the extent that additional equity capital is
raised, it could have a dilutive effect on existing shareholders. Inflation To date, the Company believes the effects of inflation have not had a
material adverse effect on its results of operations or financial condition. Information About Forward-Looking Statements Certain statements made in this Form 10-Q, other SEC filings or written
materials or orally by the Company or its representatives may constitute
forward-looking statements that are based on managements current beliefs,
estimates and assumptions concerning the operations, future results and
prospects of the Company and the clinical pharmaceutical research industry in
general. All statements that address operating performance, events or
developments that management anticipates 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 within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). 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. Factors that may cause actual results to
differ materially from those in the forward-looking statements include the
ability of the Company to absorb corporate overhead and other fixed costs in
order to successfully market the DATATRAK EDC software; the development of and
fluctuations in the market for electronic data capture technology; the degree
of the Companys success in obtaining new contracts; the timing of payments
from customers and the timing of clinical trial sponsor decisions to conduct
new clinical trials or cancel or delay ongoing trials; governmental regulation;
the early stage of the Companys ASP operations; and general economic
conditions such as the rate of employment, inflation, interest rates and the
condition of capital markets. This list of factors is not all inclusive. In
addition, the Companys success depends on the outcome of various strategic
initiatives it has undertaken, all of which are based on assumptions made by
the Company concerning trends in the clinical research market and the health
care industry. Any forward-looking statement speaks only as of the date on
which such statement is made and the Company does not undertake any obligation
to update any statements whether as a result of new information, future events
or otherwise. 
  Item 3.
    Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates since it funds its operations through
short-term investments and has business transactions in Euros. A summary of
the Companys market risk exposures is presented below. Interest Rate Risk DATATRAK has fixed income investments consisting of cash equivalents and
short-term investments, which may be affected by changes in market interest
rates. The Company does not use derivative financial instruments in its
investment portfolio. The Company places its cash equivalents and short-term
investments with high-quality financial institutions, limits the amount of
credit exposure to any one institution and has established investment
guidelines relative to diversification and maturities designed 12




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to maintain safety and liquidity. Investments are reported at amortized cost,
which approximates fair value. A 1.0% change in interest rates during the six
months ended June 30, 2004, would have resulted in a $20,000 change in
DATATRAKs interest income during the period. Foreign Currency Risk DATATRAKs foreign results of operations are subject to the impact of
foreign currency fluctuations through both foreign currency transaction and
foreign currency translation adjustments. The Company manages its risk to
foreign currency transaction adjustments by maintaining foreign currency bank
accounts in currencies in which we regularly transact business. DATATRAK does
not currently hedge against the risk of exchange rate fluctuations. DATATRAKs financial position and results of operations are impacted by
translation adjustments caused by the conversion of foreign currency accounts
and operating results into U.S. dollars for financial reporting purposes. A
1.0% fluctuation in the exchange rate between the U.S. dollar and the Euro at
June 30, 2004, would have resulted in a $36,000 change in the foreign currency
translation amount recorded on the Companys balance sheet, due to foreign
currency translations. A 1.0% fluctuation in the average exchange rate between
the U.S. dollar and the Euro for the six months ended June 30, 2004 would have
resulted in a $12,000 change in the Companys net loss for the six months ended June 30,
2004 due to foreign currency translations. During the six months ended June
30, 2004, the average exchange rate between the Euro and the U.S. dollar
increased by approximately 10% compared to the six months ended June 30, 2003.
The conversion of Companys foreign operations into U.S. dollars upon consolidation
resulted in a net loss that was approximately $118,000 higher than would have
been recorded had the exchange rate between the Euro and the U.S. dollar
remained consistent with the first half of 2003 rates. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the chief executive
officer and chief financial officer, of the design and operation of the
Companys disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-14(e)) as of the end of the period covered by this report.
Based upon that evaluation the Companys management, including the chief
executive officer and chief financial officer, have concluded that, as of June
30, 2004, the Companys disclosure controls and procedures were effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities, so
that information required to be disclosed by the Company in the reports it
files and submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. Changes in Internal Controls There were no significant changes in the Companys internal controls over
financial reporting that occurred during the fiscal quarter covered by this
report that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting. 
 Part II. Other Information 
  Item 1.
    Legal Proceedings  None. 
  Item 2.
    Changes in Securities and Use of Proceeds  None 13




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Item 3.
    Defaults Upon Senior Securities  None. 
  Item 4.
    Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders held on June 2, 2004
(the Annual Meeting), the Companys shareholders voted to
approve and adopt an amendment and restatement to the Companys
Amended and Restated Outside Director Stock Option Plan (f/k/a
Amended and Restated 1999 Outside Director Stock Option Plan). The following is a summary of the voting: For
    
    Against
    
    Abstain3,234,902
    
    
    433,391
    
    
    
    2,807
 Also at the Annual Meeting, the Companys shareholders voted
to elect Seth B. Harris and Mark J. Ratain each to an additional
two-year term as a director of the Company. The following is a summary of the voting: Votes
    
    Seth B. Harris
    
    Mark J. RatainFor
    
    
    5,568,721
    
    
    
    5,557,771Withheld
    
    
    90,687
    
    
    
    101,637
 
  Item 5.
    Other Information  None. 
  Item 6.
    Exhibits and Reports on Form 8-K  (a)
    
    Exhibits 10.1
    
    Amended and Restated Outside Director Stock Option Plan31.1
    
    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
  (b)
    
    Reports on Form 8-K No reports were filed on form 8-K during the three months ended
June 30, 2004, other than the following: Current Report on Form 8-K dated May 17, 2004, furnishing under
Item 12, a press release and a conference call transcript. 14




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DATATRAK International, Inc.RegistrantDate: 8/13/04
    
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director(Principal Executive Officer)Date: 8/13/04
    
    /s/ Terry C. BlackTerry C. Black,Vice President of Finance, Chief Financial Officer,Treasurer and Assistant Secretary(Principal Financial and Accounting Officer)g
 15