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Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2007
 Commission file number 000-20699
 DATATRAK
International, Inc.
  Ohio
    
    34-1685364(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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
 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-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 31,2007
    
    
    2006(Unaudited)
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,692,064
    
    
    $
    3,019,184Short-term investments
    
    
    6,985,156
    
    
    
    1,996,393Accounts receivable, net
    
    
    1,478,417
    
    
    
    2,226,317Deferred tax assets
    
    
    113,100
    
    
    
    113,100Prepaid expenses and other current assets
    
    
    541,425
    
    
    
    488,112Total current assets
    
    
    10,810,162
    
    
    
    7,843,106Property and equipment, net of accumulated depreciation and amortization
    
    
    3,881,371
    
    
    
    4,736,233Other assetsRestricted cash
    
    
    84,262
    
    
    
    78,005Deferred tax assets
    
    
    1,120,300
    
    
    
    1,745,700Deposit
    
    
    39,549
    
    
    
    39,549Goodwill
    
    
    10,863,383
    
    
    
    10,863,383Other intangible assets, net of accumulated amortization
    
    
    707,107
    
    
    
    1,914,206Total other assets
    
    
    12,814,601
    
    
    
    14,640,843Total assets
    
    $
    27,506,134
    
    
    $
    27,220,182LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    659,735
    
    
    $
    568,697Current portion of long-term debt
    
    
    665,908
    
    
    
    733,548Accrued expenses
    
    
    1,991,463
    
    
    
    1,419,065Deferred revenue
    
    
    842,560
    
    
    
    988,175Total current liabilities
    
    
    4,159,666
    
    
    
    3,709,485Long-term liabilitiesLong-term debt
    
    
    3,316,949
    
    
    
    3,811,903Deferred tax liability
    
    
    1,103,000
    
    
    
    1,634,800Total long-term liabilities
    
    
    4,419,949
    
    
    
    5,446,703Shareholders equitySerial preferred shares, without par value, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common shares, without par value, authorized 25,000,000 shares; issued 17,016,901
shares as of September 30, 2007 and 14,862,473 shares as of December 31, 2006;
outstanding 13,716,901 shares as of September 30, 2007 and 11,562,473 shares as of
December 31, 2006
    
    
    78,830,757
    
    
    
    70,742,073Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Common share warrants
    
    
    1,835,108
    
    
    
    700,176Accumulated deficit
    
    
    (41,282,945
    )
    
    
    (32,915,699
    )Foreign currency translation
    
    
    (268,093
    )
    
    
    (274,248
    )Total shareholders equity
    
    
    18,926,519
    
    
    
    18,063,994Total liabilities and shareholders equity
    
    $
    27,506,134
    
    
    $
    27,220,182
 
 Note A:
    
    The condensed consolidated balance sheet at December 31, 2006 has
been derived from the audited consolidated financial statements at
that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in
the United States for complete financial statements.
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    2,116,333
    
    
    $
    4,374,360
    
    
    $
    8,723,138
    
    
    $
    13,704,673Direct costs
    
    
    1,061,088
    
    
    
    1,327,173
    
    
    
    3,617,858
    
    
    
    3,877,047Gross profit
    
    
    1,055,245
    
    
    
    3,047,187
    
    
    
    5,105,280
    
    
    
    9,827,626Selling, general and administrative expenses
    
    
    3,282,508
    
    
    
    3,391,522
    
    
    
    10,326,314
    
    
    
    9,911,092Severance expense
    
    
    386,368
    
    
    
    
    
    
    
    723,429
    
    
    
    294,974Depreciation and amortization
    
    
    669,941
    
    
    
    628,648
    
    
    
    2,178,986
    
    
    
    1,663,692Impairment loss
    
    
    213,209
    
    
    
    
    
    
    
    213,209
    
    
    
    Loss from operations
    
    
    (3,496,781
    )
    
    
    (972,983
    )
    
    
    (8,336,658
    )
    
    
    (2,042,132
    )Interest income
    
    
    128,623
    
    
    
    50,047
    
    
    
    350,328
    
    
    
    181,416Interest expense
    
    
    (91,121
    )
    
    
    (106,208
    )
    
    
    (285,616
    )
    
    
    (248,088
    )Other expense
    
    
    
    
    
    
    
    
    
    
    (1,700
    )
    
    
    Loss before income taxes
    
    
    (3,459,279
    )
    
    
    (1,029,144
    )
    
    
    (8,273,646
    )
    
    
    (2,108,804
    )Income tax expense
    
    
    47,000
    
    
    
    297,000
    
    
    
    93,600
    
    
    
    Net loss
    
    $
    (3,506,279
    )
    
    $
    (1,326,144
    )
    
    $
    (8,367,246
    )
    
    $
    (2,108,804
    )Net loss per share:Basic:Net loss per share
    
    $
    (0.26
    )
    
    $
    (0.12
    )
    
    $
    (0.64
    )
    
    $
    (0.19
    )Weighted-average shares outstanding
    
    
    13,634,075
    
    
    
    11,400,675
    
    
    
    13,014,534
    
    
    
    11,205,113Diluted:Net loss per share
    
    $
    (0.26
    )
    
    $
    (0.12
    )
    
    $
    (0.64
    )
    
    $
    (0.19
    )Weighted-average shares outstanding
    
    
    13,634,075
    
    
    
    11,400,675
    
    
    
    13,014,534
    
    
    
    11,205,113
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (8,367,246
    )
    
    $
    (2,108,804
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,178,986
    
    
    
    1,663,692Impairment loss
    
    
    213,209
    
    
    
    Stock-based compensation
    
    
    302,004
    
    
    
    444,373Accretion of discount on investments
    
    
    (264,206
    )
    
    
    (84,347
    )Loss from disposal of equipment
    
    
    1,700
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    747,900
    
    
    
    (301,176
    )Prepaid expenses and other current assets
    
    
    (53,313
    )
    
    
    296,377Deferred taxes, net
    
    
    93,600
    
    
    
    Accounts payable and accrued expenses
    
    
    659,241
    
    
    
    470,887Deferred revenue
    
    
    (145,615
    )
    
    
    (252,104
    )Net cash (used in) provided by operating activities
    
    
    (4,633,740
    )
    
    
    128,898Investing activitiesAcquisition of business, less cash acquired
    
    
    
    
    
    
    (4,668,926
    )Purchases of property and equipment
    
    
    (68,803
    )
    
    
    (483,276
    )Maturities of short-term investments
    
    
    26,750,000
    
    
    
    6,319,116Purchases of short-term investments
    
    
    (31,474,557
    )
    
    
    (3,288,664
    )Net cash used in investing activities
    
    
    (4,793,360
    )
    
    
    (2,121,750
    )Financing activitiesProceeds from exercise of stock options and warrants
    
    
    273,760
    
    
    
    167,094Gross excess tax benefits from share-based awards
    
    
    
    
    
    
    8,000Proceeds from issuance of common shares
    
    
    8,647,852
    
    
    
    Payments of long-term debt
    
    
    (807,411
    )
    
    
    (215,614
    )Net cash provided by (used in) financing activities
    
    
    8,114,201
    
    
    
    (40,520
    )Effect of exchange rate changes on cash
    
    
    (14,221
    )
    
    
    (103,595
    )Decrease in cash and cash equivalents
    
    
    (1,327,120
    )
    
    
    (2,136,967
    )Cash and cash equivalents at beginning of period
    
    
    3,019,184
    
    
    
    4,407,431Cash and cash equivalents at end of period
    
    $
    1,692,064
    
    
    $
    2,270,464Unpaid acquisition costs
    
    $
    
    
    
    $
    52,448
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
 1. Basis of Presentation
   2. ClickFind Acquisition
      Cash, accounts receivable and other current assets
    
    $
    254,000Amortizable intangible assets
    
    
    6,040,000Goodwill
    
    
    10,863,000Accounts payable and other current liabilities
    
    
    (421,000
    )Long-term debt
    
    
    (117,000
    )Total acquisition cost
    
    $
    16,619,000
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Nine Months EndedSeptember 30, 2006Pro forma revenue
    
    $
    13,913,071Pro forma net loss
    
    $
    (2,386,468
    )Pro forma basic loss per share
    
    $
    (0.21
    )Pro forma diluted loss per share
    
    $
    (0.21
    )
 3. Change in Accounting Estimate
  4. Net Loss per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss used in the calculation of basic and
diluted earnings 
per share
    
    $
    (3,506,279
    )
    
    $
    (1,326,144
    )
    
    $
    (8,367,246
    )
    
    $
    (2,108,804
    )Denominator for basic net loss per share 
weighted-average common shares outstanding
    
    
    13,634,075
    
    
    
    11,400,675
    
    
    
    13,014,534
    
    
    
    11,205,113Effect of dilutive common share options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,634,075
    
    
    
    11,400,675
    
    
    
    13,014,534
    
    
    
    11,205,113Basic net loss per share
    
    $
    (0.26
    )
    
    $
    (0.12
    )
    
    $
    (0.64
    )
    
    $
    (0.19
    )Diluted net loss per share
    
    $
    (0.26
    )
    
    $
    (0.12
    )
    
    $
    (0.64
    )
    
    $
    (0.19
    )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
    
    
    1,702,709
    
    
    
    1,723,437
    
    
    
    1,688,347
    
    
    
    1,751,664
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5. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (3,506,279
    )
    
    $
    (1,326,144
    )
    
    $
    (8,367,246
    )
    
    $
    (2,108,804
    )Foreign currency translation
    
    
    39,653
    
    
    
    (88,282
    )
    
    
    6,155
    
    
    
    (86,040
    )Comprehensive loss
    
    $
    (3,466,626
    )
    
    $
    (1,414,426
    )
    
    $
    (8,361,091
    )
    
    $
    (2,194,844
    )
 6. Shareholders Equity
     7. Operating Leases
  Twelve Months ended September 30,
    
    Amount2008
    
    $
    960,0002009
    
    
    831,0002010
    
    
    630,0002011
    
    
    622,0002012
    
    
    601,000Subsequent to September 30, 2012
    
    
    73,000$
    3,717,000
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8. Income Taxes
  Nine Months Ended Sept. 30,2007
    
    
    2006Deferred  foreign
    
    $
    94,000
    
    
    $
    
  Nine Months Ended Sept. 30,2007
    
    
    2006Income tax benefit at the United States statutory rate
    
    $
    (2,813,000
    )
    
    $
    (715,000
    )Increase in valuation allowance
    
    
    2,016,000
    
    
    
    615,000Foreign tax rate change
    
    
    806,000
    
    
    
    State and local taxes
    
    
    7,000
    
    
    
    Foreign taxes
    
    
    7,000
    
    
    
    Non-deductible permanent differences
    
    
    71,000
    
    
    
    100,000$
    94,000
    
    
    $
    
   Accounting for
Uncertainty in Income Taxes Accounting for
Income Taxes
 9. Long-term Debt
  September 30,
    
    
    December 31,2007
    
    
    2006Insurance note payable
    
    $
    
    
    
    $
    74,000Notes payable  ClickFind (the ClickFind Notes)
    
    
    3,425,000
    
    
    
    4,000,000Financing agreement with Oracle Credit Corporation (the Oracle Agreement)
    
    
    167,000
    
    
    
    234,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    391,000
    
    
    
    238,0003,983,000
    
    
    
    4,546,000Less current maturities
    
    
    666,000
    
    
    
    734,000$
    3,317,000
    
    
    $
    3,812,000
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10. Employee Terminations
    11. Restricted Cash
  12. Software Development Costs
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13. Reclassification
  14. Contingencies
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
     Revenue
Recognition Revenue Arrangements with
Multiple Deliverables.
 
    
    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 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 under
the contract.
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Critical Accounting Policies
   Results of Operations
 Three months ended September 30, 2007 compared with three months ended September 30, 2006
   13




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Nine months ended September 30, 2007 compared with nine months ended September 30, 2006
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Liquidity and Capital Resources
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Inflation
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Information About Forward-Looking Statements
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Foreign Currency Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
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Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We may need to raise additional funds to meet our working capital requirements, and there can be no
assurance that we will be able to raise such additional funds.
  We may lose future revenue if our major customers decrease their research and development
expenditures, if we lose any of our major customers, or if our business with any of our major
customers declines.
    
    
    any economic downturn or consolidation in the pharmaceutical or biotechnology
industries;
    
    any decrease in these industries research and development expenditures;
    
    changes in the regulatory environment in which we operate; or
    
    any decline in business with any of our major customers.
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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
 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
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DATATRAK International, Inc.RegistrantDate: November 9, 2007
    
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director(Principal Executive Officer)Date: November 9, 2007
    
    /s/ Raymond J. MerkRaymond J. MerkVice President of Finance, Chief Financial Officer(Principal Financial and Accounting Officer)
 22