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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 June 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)
 
  
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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
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,336,776
    
    
    $
    3,019,184Short-term investments
    
    
    9,442,557
    
    
    
    1,996,393Accounts receivable, net
    
    
    1,838,043
    
    
    
    2,226,317Deferred tax asset  current
    
    
    113,100
    
    
    
    113,100Prepaid expenses and other current assets
    
    
    671,287
    
    
    
    488,112Total current assets
    
    
    13,401,763
    
    
    
    7,843,106Property and equipment, at cost net of accumulated depreciation and amortization
    
    
    4,183,678
    
    
    
    4,736,233Other assetsRestricted cash
    
    
    79,612
    
    
    
    78,005Deferred tax asset
    
    
    1,375,300
    
    
    
    1,745,700Deposit
    
    
    39,549
    
    
    
    39,549Other intangible assets, net of accumulated amortization
    
    
    1,199,724
    
    
    
    1,914,206Goodwill
    
    
    10,863,383
    
    
    
    10,863,383Total other assets
    
    
    13,557,568
    
    
    
    14,640,843Total assets
    
    $
    31,143,009
    
    
    $
    27,220,182LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    610,382
    
    
    $
    568,697Current portion of long-term debt
    
    
    648,123
    
    
    
    733,548Accrued expenses
    
    
    1,883,261
    
    
    
    1,419,065Deferred revenue
    
    
    1,303,525
    
    
    
    988,175Total current liabilities
    
    
    4,445,291
    
    
    
    3,709,485Long-term liabilitiesLong-term debt
    
    
    3,299,140
    
    
    
    3,811,903Deferred tax liability
    
    
    1,311,000
    
    
    
    1,634,800Total long-term liabilities
    
    
    4,610,140
    
    
    
    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 16,913,303
shares as of June 30, 2007 and 14,862,473 shares as of December 31, 2006;
outstanding 13,613,303 shares as of June 30, 2007 and 11,562,473 shares as of
December 31, 2006
    
    
    78,525,190
    
    
    
    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
    
    
    (37,776,666
    )
    
    
    (32,915,699
    )Foreign currency translation
    
    
    (307,746
    )
    
    
    (274,248
    )Total shareholders equity
    
    
    22,087,578
    
    
    
    18,063,994Total liabilities and shareholders equity
    
    $
    31,143,009
    
    
    $
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    3,064,710
    
    
    $
    4,829,445
    
    
    $
    6,606,805
    
    
    $
    9,330,313Direct costs
    
    
    1,219,298
    
    
    
    1,377,998
    
    
    
    2,556,769
    
    
    
    2,549,874Gross profit
    
    
    1,845,412
    
    
    
    3,451,447
    
    
    
    4,050,036
    
    
    
    6,780,439Selling, general and administrative expenses
    
    
    3,621,138
    
    
    
    3,538,358
    
    
    
    7,043,809
    
    
    
    6,519,570Severance expense
    
    
    337,061
    
    
    
    294,974
    
    
    
    337,061
    
    
    
    294,974Depreciation and amortization
    
    
    886,641
    
    
    
    596,362
    
    
    
    1,509,044
    
    
    
    1,035,044Loss from operations
    
    
    (2,999,428
    )
    
    
    (978,247
    )
    
    
    (4,839,878
    )
    
    
    (1,069,149
    )Interest income
    
    
    151,513
    
    
    
    50,268
    
    
    
    221,705
    
    
    
    131,369Interest expense
    
    
    (95,825
    )
    
    
    (91,611
    )
    
    
    (194,494
    )
    
    
    (141,880
    )Other expense
    
    
    (1,700
    )
    
    
    0
    
    
    
    (1,700
    )
    
    
    0Loss before income taxes
    
    
    (2,945,440
    )
    
    
    (1,019,590
    )
    
    
    (4,814,367
    )
    
    
    (1,079,660
    )Income tax (benefit) expense
    
    
    20,300
    
    
    
    (318,000
    )
    
    
    46,600
    
    
    
    (297,000
    )Net loss
    
    $
    (2,965,740
    )
    
    $
    (701,590
    )
    
    $
    (4,860,967
    )
    
    $
    (782,660
    )Net loss per share:Basic:Net loss per share
    
    $
    (0.22
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.07
    )Weighted-average shares outstanding
    
    
    13,584,037
    
    
    
    11,371,919
    
    
    
    12,726,259
    
    
    
    11,113,677Diluted:Net loss per share
    
    $
    (0.22
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.07
    )Weighted-average shares outstanding
    
    
    13,584,037
    
    
    
    11,371,919
    
    
    
    12,726,259
    
    
    
    11,113,677
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (4,860,967
    )
    
    $
    (782,660
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,509,044
    
    
    
    1,035,044Stock-based compensation
    
    
    193,705
    
    
    
    318,875Accretion of discount on investments
    
    
    (157,405
    )
    
    
    (58,788
    )Loss from disposal of equipment
    
    
    1,700
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    388,274
    
    
    
    (249,204
    )Prepaid expenses and other current assets
    
    
    (183,175
    )
    
    
    31,163Deferred taxes, net
    
    
    46,600
    
    
    
    (297,000
    )Accounts payable and accrued expenses
    
    
    474,496
    
    
    
    3,971Deferred revenue
    
    
    315,350
    
    
    
    (270,075
    )Net cash used in operating activities
    
    
    (2,272,378
    )
    
    
    (268,674
    )Investing activitiesAcquisition of business, less cash acquired
    
    
    
    
    
    
    (4,659,594
    )Purchases of property and equipment
    
    
    (99,744
    )
    
    
    (337,786
    )Maturities of short-term investments
    
    
    11,500,000
    
    
    
    4,811,616Purchases of short-term investments
    
    
    (18,788,759
    )
    
    
    (1,795,557
    )Net cash used in investing activities
    
    
    (7,388,503
    )
    
    
    (1,981,321
    )Financing activitiesProceeds from exercise of stock options and warrants
    
    
    76,492
    
    
    
    140,398Gross tax benefits from share-based awards
    
    
    
    
    
    
    8,000Proceeds from issuance of common shares, net of paid issuance costs
    
    
    8,667,852
    
    
    
    Payments of long-term debt
    
    
    (726,485
    )
    
    
    (117,241
    )Net cash provided by financing activities
    
    
    8,017,859
    
    
    
    31,157Effect of exchange rate changes on cash
    
    
    (39,386
    )
    
    
    (12,668
    )Decrease in cash and cash equivalents
    
    
    (1,682,408
    )
    
    
    (2,231,506
    )Cash and cash equivalents at beginning of period
    
    
    3,019,184
    
    
    
    4,407,431Cash and cash equivalents at end of period
    
    $
    1,336,776
    
    
    $
    2,175,925Unpaid acquisition costs
    
    $
    
    
    
    $
    61,780Unpaid share issuance costs
    
    $
    20,000
    
    
    $
    
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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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Six MonthsEnded June 30, 2006Pro forma revenue
    
    $
    9,538,000Pro forma net loss
    
    $
    (1,060,000
    )Pro forma basic loss per share
    
    $
    (0.09
    )Pro forma diluted loss per share
    
    $
    (0.09
    )
 3. Change in Accounting Estimate
  4. Net Loss per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss used in the calculation of basic and
diluted earnings per share
    
    $
    (2,965,740
    )
    
    $
    (701,590
    )
    
    $
    (4,860,967
    )
    
    $
    (782,660
    )Denominator for basic net loss per share 
weighted-average common shares outstanding
    
    
    13,584,037
    
    
    
    11,371,919
    
    
    
    12,726,259
    
    
    
    11,113,677Effect of dilutive common share options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,584,037
    
    
    
    11,371,919
    
    
    
    12,726,259
    
    
    
    11,113,677Basic net loss per share
    
    $
    (0.22
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.07
    )Diluted net loss per share
    
    $
    (0.22
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.07
    )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
    
    
    1,811,469
    
    
    
    1,756,729
    
    
    
    1,680,937
    
    
    
    1,756,777
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5. Comprehensive Loss
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (2,965,740
    )
    
    $
    (701,590
    )
    
    $
    (4,860,967
    )
    
    $
    (782,660
    )Foreign currency translation
    
    
    (15,034
    )
    
    
    15,389
    
    
    
    (33,498
    )
    
    
    2,242Comprehensive loss
    
    $
    (2,980,774
    )
    
    $
    (686,201
    )
    
    $
    (4,894,465
    )
    
    $
    (780,418
    )
 6. Shareholders Equity
      7




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7. Operating Leases
  Twelve Months ended June 30,
    
    Amount2008
    
    $
    938,0002009
    
    
    889,0002010
    
    
    618,0002011
    
    
    602,0002012
    
    
    608,000Subsequent to June 30, 2012
    
    
    200,000$
    3,855,000
 8. Income Taxes
  Six Months Ended June 30,2007
    
    
    2006Current:Federal
    
    $
    
    
    
    $
    (374,000
    )State and local
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    $
    
    
    
    $
    (374,000
    )Deferred:Federal
    
    $
    
    
    
    $
    State and local
    
    
    
    
    
    
    Foreign
    
    
    47,000
    
    
    
    77,000$
    47,000
    
    
    $
    (297,000
    )
  Six Months Ended June 30,2007
    
    
    2006Income tax benefit at the United States statutory rate
    
    $
    (1,636,000
    )
    
    $
    (367,000
    )Increase in valuation allowance
    
    
    1,619,000
    
    
    
    Foreign taxes
    
    
    5,000
    
    
    
    Non-deductible permanent differences
    
    
    59,000
    
    
    
    70,000$
    47,000
    
    
    $
    (297,000
    )
  Accounting for
Uncertainty in Income Taxes Accounting for
Income Taxes
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9. Long-term Debt
  June 30,
    
    
    December 31,2007
    
    
    2006Insurance note payable
    
    $
    
    
    
    $
    74,000Notes payable  ClickFind (the ClickFind Notes)
    
    
    3,445,000
    
    
    
    4,000,000Financing agreement with Oracle Credit Corporation (the Oracle Agreement)
    
    
    189,000
    
    
    
    234,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    313,000
    
    
    
    238,0003,947,000
    
    
    
    4,546,000Less current maturities
    
    
    648,000
    
    
    
    734,000$
    3,299,000
    
    
    $
    3,812,000
      9




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10. Severance Expense
    11. Restricted Cash
  12. Software Development Costs
   13. Reclassification
  14. Contingencies
   10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
     11




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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.
   Critical Accounting Policies
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Results of Operations
 Three months ended June 30, 2007 compared with three months ended June 30, 2006
        13




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Six months ended June 30, 2007 compared with six months ended June 30, 2006
        14




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Liquidity and Capital Resources
        15




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®
 ®
  16




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Inflation
  Information About Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   17




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Foreign Currency Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  18




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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
   Votes
    
    Laurence P. Birch
    
    Timothy G. Biro
    
    Jerome H. Kaiser
    
    Robert M. StoteFor
    
    
    10,958,835
    
    
    
    10,984,642
    
    
    
    11,014,127
    
    
    
    11,014,142Withheld
    
    
    231,930
    
    
    
    206,123
    
    
    
    176,638
    
    
    
    176,623
 
 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
 
 SIGNATURES
  DATATRAK International, Inc.RegistrantDate: August 9, 2007
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director
(Principal Executive Officer)Date: August 9, 2007
    /s/ Terry C. BlackTerry C. BlackVice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer) 19