##### 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 June 30, 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 BoulevardMayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  o þ o
 o þ




---



TABLE OF CONTENTS  Part I. Financial InformationItem 1  Financial StatementsDATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETSDATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSDATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006 (Unaudited)Item 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. 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-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
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,175,925
    
    
    $
    4,407,431Short-term investments
    
    
    1,998,220
    
    
    
    4,955,491Accounts receivable, less allowances
    
    
    3,249,287
    
    
    
    2,853,823Deferred tax asset
    
    
    584,000
    
    
    
    287,000Prepaid expenses and other current assets
    
    
    908,704
    
    
    
    702,075Total current assets
    
    
    8,916,136
    
    
    
    13,205,820Property and equipment, at costnet of accumulated depreciation and amortization
    
    
    4,866,007
    
    
    
    1,878,404Other assetsRestricted cash
    
    
    74,153
    
    
    
    69,976Deferred tax asset
    
    
    913,000
    
    
    
    913,000Deposit
    
    
    39,549
    
    
    
    39,549Intangible assets, net of accumulated amortization
    
    
    2,365,873
    
    
    
    Goodwill
    
    
    12,957,069
    
    
    
    Total other assets
    
    
    16,349,644
    
    
    
    1,022,525Total assets
    
    $
    30,131,787
    
    
    $
    16,106,749LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    115,764
    
    
    $
    549,886Notes payable
    
    
    217,190
    
    
    
    Current portion of long-term debt
    
    
    500,000
    
    
    
    Accrued expenses
    
    
    1,538,495
    
    
    
    832,860Deferred revenue
    
    
    959,736
    
    
    
    1,027,015Total current liabilities
    
    
    3,331,185
    
    
    
    2,409,761Long-term liabilitiesLong-term debt
    
    
    3,500,000
    
    
    
    Deferred tax liability
    
    
    2,053,600
    
    
    
    Total long-term liabilities
    
    
    5,553,600
    
    
    
    Total liabilities
    
    
    8,884,785
    
    
    
    2,409,761Shareholders 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 14,690,344 shares as of June 30, 2006 and
13,613,161 shares as of December 31, 2005; outstanding
11,390,344 shares as of June 30, 2006 and 10,313,161 shares
as of December 31, 2005
    
    
    70,152,449
    
    
    
    61,810,321Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Accumulated deficit
    
    
    (29,207,949
    )
    
    
    (28,425,289
    )Foreign currency translation
    
    
    (209,366
    )
    
    
    (211,608
    )Total shareholders equity
    
    
    21,247,002
    
    
    
    13,696,988Total liabilities and shareholders equity
    
    $
    30,131,787
    
    
    $
    16,106,749
 
 Note A:
    
    The condensed consolidated 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.


2



---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    4,829,445
    
    
    $
    3,724,072
    
    
    $
    9,330,313
    
    
    $
    7,359,424Direct costs
    
    
    1,377,998
    
    
    
    926,766
    
    
    
    2,549,874
    
    
    
    1,841,534Gross profit
    
    
    3,451,447
    
    
    
    2,797,306
    
    
    
    6,780,439
    
    
    
    5,517,890Selling, general and administrative expenses
    
    
    3,538,358
    
    
    
    2,375,663
    
    
    
    6,519,570
    
    
    
    4,420,966Severance expense
    
    
    294,974
    
    
    
    
    
    
    
    294,974
    
    
    
    Depreciation and amortization
    
    
    596,362
    
    
    
    201,041
    
    
    
    1,035,044
    
    
    
    376,681(Loss) income from operations
    
    
    (978,247
    )
    
    
    220,602
    
    
    
    (1,069,149
    )
    
    
    720,243Other income (expense):Interest income
    
    
    50,268
    
    
    
    52,416
    
    
    
    131,369
    
    
    
    97,158Interest expense
    
    
    (91,611
    )
    
    
    
    
    
    
    (141,880
    )
    
    
    (Loss) income before income taxes
    
    
    (1,019,590
    )
    
    
    273,018
    
    
    
    (1,079,660
    )
    
    
    817,401Income tax (benefit) expense
    
    
    (318,000
    )
    
    
    12,285
    
    
    
    (297,000
    )
    
    
    24,558Net (loss) income
    
    $
    (701,590
    )
    
    $
    260,733
    
    
    $
    (782,660
    )
    
    $
    792,843Net (loss) income per share:Basic:Net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.07
    )
    
    $
    0.08Weighted-average shares outstanding
    
    
    11,371,919
    
    
    
    10,181,763
    
    
    
    11,113,677
    
    
    
    10,121,826Diluted:Net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.02
    
    
    $
    (0.07
    )
    
    $
    0.07Weighted-average shares outstanding
    
    
    11,371,919
    
    
    
    11,407,206
    
    
    
    11,113,677
    
    
    
    11,358,258
 See notes to condensed consolidated financial statements.
 3




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Operating ActivitiesNet (loss) income
    
    $
    (782,660
    )
    
    $
    792,843Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,035,044
    
    
    
    376,681Stock based compensation
    
    
    318,875
    
    
    
    33,054Accretion of discount on investments
    
    
    (58,788
    )
    
    
    (75,607
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (249,204
    )
    
    
    (534,433
    )Prepaid expenses and other current assets
    
    
    31,163
    
    
    
    (427,789
    )Deferred tax assets
    
    
    (297,000
    )
    
    
    Accounts payable and accrued expenses
    
    
    3,971
    
    
    
    (2,969
    )Deferred revenue
    
    
    (270,075
    )
    
    
    121,773Net cash (used in) provided by operating activities
    
    
    (268,674
    )
    
    
    283,553Investing ActivitiesAcquisition of ClickFind, less cash acquired
    
    
    (4,659,594
    )
    
    
    Purchases of property and equipment
    
    
    (337,786
    )
    
    
    (598,092
    )Maturities of short-term investments
    
    
    4,811,616
    
    
    
    4,250,000Purchases of short-term investments
    
    
    (1,795,557
    )
    
    
    (4,188,443
    )Net cash used in investing activities
    
    
    (1,981,321
    )
    
    
    (536,535
    )Financing ActivitiesProceeds from issuance of common shares and stock option exercises
    
    
    140,398
    
    
    
    881,789Gross tax benefits from share based awards
    
    
    8,000
    
    
    
    Share issuance costs
    
    
    
    
    
    
    (103,125
    )Repayment of long-term debt
    
    
    (117,241
    )
    
    
    Net cash provided by financing activities
    
    
    31,157
    
    
    
    778,664Effect of exchange rate on cash
    
    
    (12,668
    )
    
    
    (130,051
    )(Decrease) increase in cash and cash equivalents
    
    
    (2,231,506
    )
    
    
    395,631Cash and cash equivalents at beginning of period
    
    
    4,407,431
    
    
    
    2,232,276Cash And Cash Equivalents At End Of Period
    
    $
    2,175,925
    
    
    $
    2,627,907Unpaid Acquisition Costs
    
    $
    61,780
    
    
    $
    
 See notes to condensed consolidated financial statements.
 4




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
 1. Basis of Presentation
    2. ClickFind Acquisition
    5




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
  Cash, accounts receivable and other current assets
    
    $
    254,000Amortizable intangible assets
    
    
    6,040,000Goodwill
    
    
    12,957,000Accounts payable and other current liabilities
    
    
    (408,000
    )Long-term debt
    
    
    (117,000
    )Deferred tax liability
    
    
    (2,054,000
    )Total acquisition cost
    
    $
    16,672,000
   ,
   Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Pro forma revenue
    
    $
    4,829,000
    
    
    $
    3,920,000
    
    
    $
    9,538,000
    
    
    $
    8,016,000Pro forma net (loss) income
    
    $
    (702,000
    )
    
    $
    (359,000
    )
    
    $
    (1,060,000
    )
    
    $
    (184,000
    )Pro forma basic (loss) income per share
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.02
    )Pro forma diluted (loss) income per share
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.02
    )
 3. Stock Based Compensation
  6




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
      7




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 options
    
    7 yearsWeighted-average fair value per share of options granted
    
    $
    9.90
   Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income recorded
    
    $
    261,000
    
    
    $
    793,000Plus: stock compensation expense recognized
    
    
    17,000
    
    
    
    33,000Less: stock compensation expense that would have
been recognized under SFAS No. 123
    
    
    290,000
    
    
    
    565,000Pro forma net income (loss)
    
    $
    (12,000
    )
    
    $
    261,000Pro forma basic income (loss) per share
    
    $
    (0.00
    )
    
    $
    0.03Pro forma diluted income (loss) per share
    
    $
    (0.00
    )
    
    $
    0.02
  8




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
   Weighted AverageWeighted Average
    
    
    Aggregate Intrinsic
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Value
    
    
    Contractual LifeOutstanding at January 1, 2006
    
    
    1,619,891
    
    
    $
    3.52Granted
    
    
    
    
    
    
    Exercised
    
    
    (34,882
    )
    
    
    3.71Cancelled
    
    
    (1,485
    )
    
    
    4.23Outstanding at June 30, 2006
    
    
    1,583,524
    
    
    $
    3.51
    
    
    $
    5,820,000
    
    
    5.3 YearsVested or expected to vest at June 30, 2006
    
    
    1,536,321
    
    
    $
    3.42
    
    
    $
    5,788,000
    
    
    5.2 YearsExercisable at June 30, 2006
    
    
    1,322,625
    
    
    $
    2.94
    
    
    $
    5,628,000
    
    
    4.8 Years
  9




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
 4. Net (Loss) Income Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income used in the calculation
of basic and diluted net (loss) income
per share
    
    $
    (701,590
    )
    
    $
    260,733
    
    
    $
    (782,660
    )
    
    $
    792,843Denominator for basic net (loss) income
per share  weighted-average common
shares outstanding
    
    
    11,371,919
    
    
    
    10,181,763
    
    
    
    11,113,677
    
    
    
    10,121,826Effect of dilutive common share options
and warrants
    
    
    
    
    
    
    1,225,443
    
    
    
    
    
    
    
    1,236,432Denominator for diluted net (loss) income
per share
    
    
    11,371,919
    
    
    
    11,407,206
    
    
    
    11,113,677
    
    
    
    11,358,258Basic net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.07
    )
    
    $
    0.08Diluted net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.02
    
    
    $
    (0.07
    )
    
    $
    0.07Weighted-average common share options and
warrants excluded from the computation
of
diluted net (loss) income per share
because they would have an antidilutive
effect on net (loss) income per share
    
    
    1,756,729
    
    
    
    9,450
    
    
    
    1,756,777
    
    
    
    13,467
 5. Comprehensive (Loss) Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (701,590
    )
    
    $
    260,733
    
    
    $
    (782,660
    )
    
    $
    792,843Foreign currency translation
    
    
    15,389
    
    
    
    (95,372
    )
    
    
    2,242
    
    
    
    (154,824
    )Comprehensive (loss) income
    
    $
    (686,201
    )
    
    $
    165,361
    
    
    $
    (780,418
    )
    
    $
    638,019
 6. Shareholders Equity
   10




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
 7. Operating Leases
  Twelve Months ended June 30,
    
    Amount2007
    
    $
    884,0002008
    
    
    880,0002009
    
    
    834,0002010
    
    
    584,0002011
    
    
    580,000Subsequent to June 30, 2011
    
    
    783,000$
    4,545,000
 8. Income Taxes
  Six Months Ended June 30,2006
    
    
    2005Current:Federal
    
    $
    (297,000
    )
    
    $
    25,000State and local
    
    
    
    
    
    
    (297,000
    )
    
    
    25,000DeferredFederal
    
    
    
    
    
    
    State and local
    
    
    
    
    
    
    
    
    
    
    $
    (297,000
    )
    
    $
    25,000
  Six Months Ended June 30,2006
    
    
    2005Income tax (benefit) provision at the
United States statutory rate
    
    $
    (367,000
    )
    
    $
    278,000Increase (reversal) of valuation allowance
    
    
    
    
    
    
    (253,000
    )Non-deductible permanent differences
    
    
    70,000
    
    
    
    $
    (297,000
    )
    
    $
    25,000
  11




---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
  9. Notes Payable
   10. Severance Expense
   11. Reclassification
  12. Contingencies
  13. Subsequent Events
   12




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  General
 ®
   13




---



##### Table of Contents




    
    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 per hour for those services.
    
    Data items revenue is recognized 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
  14




---



##### Table of Contents



,
  Results of Operations
 Three months ended June 30, 2006 compared with three months ended June 30, 2005
    15




---



##### Table of Contents



Six months ended June 30, 2006 compared with six months ended June 30, 2005
     16




---



##### Table of Contents



Liquidity and Capital Resources
     17




---



##### Table of Contents



®
 ®
 ®
  18




---



##### Table of Contents



Inflation
  Information About Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  19




---



##### Table of Contents



Foreign Currency Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  20




---



##### Table of Contents



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
   Votes
    
    Jeffrey A. Green
    
    
    Seth B. Harris
    
    
    Mark J. RatainFor
    
    
    10,213,460
    
    
    
    10,212,572
    
    
    
    10,213,575Withheld
    
    
    19,532
    
    
    
    20,420
    
    
    
    19,417
 
 Item 5. Other Information
  21




---



##### Table of Contents



Item 6. Exhibits
 31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    
    Section 1350 Certification of Chief Financial Officer
 22




---



##### Table of Contents



SIGNATURES
  DATATRAK International, Inc.RegistrantDate:      August 7, 2006
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director
(Principal Executive Officer)Date:      August 7, 2006
    /s/ Terry C. BlackTerry C. Black,Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer) 23