##### Table of Contents



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 September 30, 2008
 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 BoulevardMayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS  Part I. Financial InformationItem 1 Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 Part I. Financial Information
 
 Item 1 Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,924,859
    
    
    $
    1,919,316Short-term investments
    
    
    506,852
    
    
    
    6,595,045Accounts receivable, net
    
    
    1,801,491
    
    
    
    1,070,688Deferred tax asset  current
    
    
    74,400
    
    
    
    71,200Prepaid expenses and other current assets
    
    
    273,663
    
    
    
    451,222Total current assets
    
    
    4,581,265
    
    
    
    10,107,471Property and equipmentEquipment
    
    
    2,144,721
    
    
    
    2,663,021Software, net
    
    
    4,626,806
    
    
    
    6,325,496Leasehold improvements
    
    
    665,460
    
    
    
    696,5717,436,987
    
    
    
    9,685,088Less accumulated depreciation
    
    
    6,484,901
    
    
    
    6,150,289952,086
    
    
    
    3,534,799Other assetsRestricted cash
    
    
    
    
    
    
    87,021Deferred tax asset
    
    
    79,900
    
    
    
    1,327,800Deposit
    
    
    39,549
    
    
    
    39,549Other intangible assets, net of accumulated amortization
    
    
    
    
    
    
    520,458Goodwill
    
    
    
    
    
    
    10,856,113119,449
    
    
    
    12,830,941Total assets
    
    $
    5,652,800
    
    
    $
    26,473,211LIABILITIES
AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilitiesAccounts payable
    
    $
    404,579
    
    
    $
    415,415Notes payable
    
    
    298,554
    
    
    
    246,627Current portion of long-term debt
    
    
    3,000,000
    
    
    
    425,304Accrued expenses
    
    
    1,780,802
    
    
    
    1,607,261Deferred revenue
    
    
    1,154,839
    
    
    
    1,277,276Total current liabilities
    
    
    6,638,774
    
    
    
    3,971,883Long-term liabilitiesAccrued expenses  long-term
    
    
    490,079
    
    
    
    Long-term debt
    
    
    64,734
    
    
    
    3,252,962Deferred revenue  long-term
    
    
    1,365,000
    
    
    
    1,680,000Deferred tax liability
    
    
    154,300
    
    
    
    999,000Total long-term liabilities
    
    
    2,074,113
    
    
    
    5,931,962Shareholders 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 17,051,901
shares as of September 30, 2008 and 17,016,901 shares as of December 31, 2007;
outstanding 13,751,901 shares as of September 30, 2008 and 13,716,901 shares as of
December 31, 2007
    
    
    79,816,646
    
    
    
    79,618,366Treasury Shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Common Share warrants
    
    
    1,191,284
    
    
    
    1,191,284Accumulated deficit
    
    
    (63,600,494
    )
    
    
    (43,769,201
    )Foreign currency translation
    
    
    (279,215
    )
    
    
    (282,775
    )Total shareholders equity (deficit)
    
    
    (3,060,087
    )
    
    
    16,569,366Total liabilities and shareholders equity (deficit)
    
    $
    5,652,800
    
    
    $
    26,473,211
 
 Note A:
    
    The condensed consolidated balance sheet at December 31, 2007 has been derived from the
audited consolidated financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. 2




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    2,367,031
    
    
    $
    2,116,333
    
    
    $
    6,704,165
    
    
    $
    8,723,138Direct costs
    
    
    568,020
    
    
    
    1,061,088
    
    
    
    2,400,663
    
    
    
    3,617,858Gross profit
    
    
    1,799,011
    
    
    
    1,055,245
    
    
    
    4,303,502
    
    
    
    5,105,280Selling, general and administrative expenses
    
    
    3,135,004
    
    
    
    3,282,508
    
    
    
    9,044,221
    
    
    
    10,326,314Severance expense
    
    
    46,701
    
    
    
    386,368
    
    
    
    651,750
    
    
    
    723,429Depreciation and amortization
    
    
    183,863
    
    
    
    669,941
    
    
    
    1,208,152
    
    
    
    2,178,986Impairment loss
    
    
    
    
    
    
    213,209
    
    
    
    12,763,145
    
    
    
    213,209Loss from operations
    
    
    (1,566,557
    )
    
    
    (3,496,781
    )
    
    
    (19,363,766
    )
    
    
    (8,336,658
    )Interest income
    
    
    17,717
    
    
    
    128,623
    
    
    
    106,723
    
    
    
    350,328Interest expense
    
    
    (54,362
    )
    
    
    (91,121
    )
    
    
    (175,489
    )
    
    
    (285,616
    )Other gain (loss)
    
    
    4,317
    
    
    
    
    
    
    
    (13,761
    )
    
    
    (1,700
    )Loss before income taxes
    
    
    (1,598,885
    )
    
    
    (3,459,279
    )
    
    
    (19,446,293
    )
    
    
    (8,273,646
    )Income tax expense
    
    
    
    
    
    
    47,000
    
    
    
    385,000
    
    
    
    93,600Net loss
    
    $
    (1,598,885
    )
    
    $
    (3,506,279
    )
    
    $
    (19,831,293
    )
    
    $
    (8,367,246
    )Net loss per share:Basic:Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.26
    )
    
    $
    (1.45
    )
    
    $
    (0.64
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    13,634,075
    
    
    
    13,681,901
    
    
    
    13,014,534Diluted:Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.26
    )
    
    $
    (1.45
    )
    
    $
    (0.64
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    13,634,075
    
    
    
    13,681,901
    
    
    
    13,014,534
 See notes to condensed consolidated financial statements.
 2




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (19,831,293
    )
    
    $
    (8,367,246
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,208,152
    
    
    
    2,178,986Impairment loss
    
    
    12,763,145
    
    
    
    213,209Stock-based compensation
    
    
    198,280
    
    
    
    302,004Accretion of discount on investments
    
    
    (55,485
    )
    
    
    (264,206
    )Other
    
    
    13,761
    
    
    
    1,700Changes in operating assets and liabilities:Accounts receivable
    
    
    (731,164
    )
    
    
    747,900Prepaid expenses and other current assets
    
    
    327,549
    
    
    
    (53,313
    )Deferred taxes, net
    
    
    400,000
    
    
    
    93,600Accounts payable and accrued expenses
    
    
    685,416
    
    
    
    659,241Deferred revenue
    
    
    (437,437
    )
    
    
    (145,615
    )Net cash used in operating activities
    
    
    (5,459,076
    )
    
    
    (4,633,740
    )Investing activitiesDecrease in restricted cash
    
    
    89,951
    
    
    
    Purchases of property and equipment
    
    
    (26,605
    )
    
    
    (68,803
    )Maturities of short-term investments
    
    
    36,099,851
    
    
    
    26,750,000Purchases of short-term investments
    
    
    (29,956,173
    )
    
    
    (31,474,557
    )Net cash provided by (used in) investing activities
    
    
    6,207,024
    
    
    
    (4,793,360
    )Financing activitiesProceeds from exercise of stock options and warrants
    
    
    
    
    
    
    273,760Proceeds from issuance of common shares, net of paid issuance costs
    
    
    
    
    
    
    8,647,852Payments of long-term debt
    
    
    (710,148
    )
    
    
    (807,411
    )Net cash provided by (used in) financing activities
    
    
    (710,148
    )
    
    
    8,114,201Effect of exchange rate changes on cash
    
    
    (32,257
    )
    
    
    (14,221
    )Increase (decrease) in cash and cash equivalents
    
    
    5,543
    
    
    
    (1,327,120
    )Cash and cash equivalents at beginning of period
    
    
    1,919,316
    
    
    
    3,019,184Cash and cash equivalents at end of period
    
    $
    1,924,859
    
    
    $
    1,692,064
 See notes to condensed consolidated financial statements.
 5




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 1. Basis of Presentation
   2. Risks and Uncertainties
    3. Fair Value Measurements
 Fair Value Measurements
 6




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
    
    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 
  Fair Value Measurements at Reporting Date Using
 Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantDescription
    
    September 30, 2008
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Equivalents 
Money Market Funds
    
    $
    1,413,000
    
    
    $
    1,413,000
    
    
    $
    
    
    
    $
    Short-term
Investments 
Corporate
Obligations

(Commercial Paper)
and Corporate Stock
    
    
    507,000
    
    
    
    507,000
    
    
    
    
    
    
    
    Total
    
    $
    1,920,000
    
    
    $
    1,920,000
    
    
    $
    
    
    
    $
    
 7




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4. Net Loss Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss used in the calculation of basic and
diluted earnings per share
    
    $
    (1,598,885
    )
    
    $
    (3,506,279
    )
    
    $
    (19,831,293
    )
    
    $
    (8,367,246
    )Denominator for basic net loss per share 
weighted-average common shares outstanding
    
    
    13,681,901
    
    
    
    13,634,075
    
    
    
    13,681,901
    
    
    
    13,014,534Effect of dilutive common share options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,681,901
    
    
    
    13,634,075
    
    
    
    13,681,901
    
    
    
    13,014,534Basic net loss per share
    
    $
    (0.12
    )
    
    $
    (0.26
    )
    
    $
    (1.45
    )
    
    $
    (0.64
    )Diluted net loss per share
    
    $
    (0.12
    )
    
    $
    (0.26
    )
    
    $
    (1.45
    )
    
    $
    (0.64
    )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
    
    
    1,580,888
    
    
    
    1,702,709
    
    
    
    1,540,149
    
    
    
    1,688,347
 5. Comprehensive Loss
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,598,885
    )
    
    $
    (3,506,279
    )
    
    $
    (19,831,293
    )
    
    $
    (8,367,246
    )Foreign currency translation
    
    
    37,007
    
    
    
    39,653
    
    
    
    3,560
    
    
    
    6,155Comprehensive loss
    
    $
    (1,561,878
    )
    
    $
    (3,466,626
    )
    
    $
    (19,827,733
    )
    
    $
    (8,361,091
    )
 6. Shareholders Equity
       8




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7. Operating Leases
  Twelve Months ended September 30,
    
    Amount2009
    
    $
    744,0002010
    
    
    555,0002011
    
    
    556,0002012
    
    
    544,0002013
    
    
    73,000Subsequent to September 30, 2013
    
    
    $
    2,472,000
 8. Income Taxes
  Nine Months Ended September 30,2008
    
    
    2007Deferred  foreign
    
    $
    385,000
    
    
    $
    94,000
  Nine Months Ended September 30,2008
    
    
    2007Income tax benefit at the United States statutory rate
    
    $
    (6,612,000
    )
    
    $
    (2,813,000
    )Change in valuation allowance
    
    
    3,427,000
    
    
    
    2,016,000Goodwill impairment
    
    
    3,691,000
    
    
    
    Foreign tax credit
    
    
    (115,000
    )
    
    
    Foreign tax rate change
    
    
    
    
    
    
    806,000Change in FIN No. 48 liability
    
    
    (15,000
    )
    
    
    State and local taxes
    
    
    
    
    
    
    7,000Foreign taxes
    
    
    (8,000
    )
    
    
    7,000Non-deductible permanent differences
    
    
    17,000
    
    
    
    71,000$
    385,000
    
    
    $
    94,000
   9




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9. Long-Term Debt
  September 30,
    
    
    December 31,2008
    
    
    2007Notes payable  the ClickFind Notes
    
    $
    3,000,000
    
    
    $
    3,425,000Financing agreement with Oracle Credit Corporation (the
Oracle Agreement)
    
    
    70,000
    
    
    
    143,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    230,000
    
    
    
    357,000Insurance Notes payable
    
    
    64,000
    
    
    
    3,364,000
    
    
    
    3,925,000Less current maturities
    
    
    3,299,000
    
    
    
    672,000$
    65,000
    
    
    $
    3,253,000
       10




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10. Restructuring Costs
  Accrued Severance ReconciliationDescription
    
    2008
    
    
    2007Accrued severance at Jan 1
    
    $
    523,000
    
    
    $
    7,000Charges
    
    
    652,000
    
    
    
    723,000Payments
    
    
    (948,000
    )
    
    
    (135,000
    )Accrued severance at Sep 30
    
    $
    227,000
    
    
    $
    595,000
 Accounting for the Cost of Exit or Disposal Activities
  11. Restricted Cash
  12. Software Development Costs
   11




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13. Goodwill and Finite-Lived Tangible and Intangible Assets
   14. Reclassification
  15. Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
 ®
  12




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Strategic Alternatives
  Restructured Senior Management Team
  Litigation
   Impairment of Certain Assets
  13




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Revenue Recognition
 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 our 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 or
site under the contract.
  Backlog
  Critical Accounting Policies
   14




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Results of Operations
 Three months ended September 30, 2008 compared with three months ended September 30, 2007
        15




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Nine months ended September 30, 2008 compared with nine months ended September 30, 2007
    16




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17




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Liquidity and Capital Resources
       18




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®
    Fair Value Measurements
 Fair Value Measurements. Fair Value Measurements
 Inflation
  Information About Forward-Looking Statements
  19




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Foreign Currency Risk
   20




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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
  DATATRAK International, Inc. v. Ward, et al.
  
 Item 1A. Risk Factors
  21




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If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our common shares
could be delisted. If delisting occurs, it would adversely affect the market liquidity of our
common shares and harm our businesses.
  
    
    a $1.00 minimum closing bid price;
    
    shareholders equity of $2.5 million, market value of publicly-held shares of $35
million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
    
    500,000 shares of publicly-held common stock with a market value of at least $1 million;
    
    300 round-lot shareholders; and
    
    compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
     22




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Disruptions in the financial and credit markets may adversely impact the availability and cost of
credit and the spending of our customers as well as our ability to raise additional capital, which
could adversely affect our business, results of operations and financial condition.
  If we do not continue to attract and retain key personnel, we will be unable to effectively conduct
our business.
  23




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Amendment No. 2 to the 2005 Omnibus Equity Plan10.2
    
    Form of Nonqualified Stock Option Agreement for Employees31.1
    
    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
 24




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DATATRAK International, Inc.
  Date: November 10, 2008
    /s/ Jeffrey A. GreenJeffrey A. Green,Chief Executive Officer and a Director
          (Principal Executive Officer)Date: November 10, 2008
    /s/ Raymond J. MerkRaymond J. MerkVice President of Finance, Chief Financial Officer and Treasurer   

          (Principal Financial and Accounting Officer) 25