10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO

Commission File Number: 000-19960

DATAWATCH CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	02-0405716
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

271 MILL ROAD

QUORUM OFFICE PARK

CHELMSFORD, MASSACHUSETTS 01824

(978) 441-2200

(Address and telephone number of principal executive office)

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.

Yes   þNo   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   þNo   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o    Accelerated filer o

Non-accelerated filer   o (Do not check if a smaller reporting company)

Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes   o    No  þ

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of August 8, 2013 was 6,551,503.

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DATAWATCH CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2013

TABLE OF CONTENTS

			Page #
PART I.	FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
a)		Condensed Consolidated Balance Sheets: June 30, 2013 and September 30, 2012	3
b)		Condensed Consolidated Statements of Operations: Three and Nine Months Ended June 30, 2013 and 2012	4
c)		Condensed Consolidated Statements of Comprehensive Income (Loss): Three and Nine Months Ended June 30, 2013 and 2012	5
d)		Condensed Consolidated Statements of Cash Flows: Nine Months Ended June 30, 2013 and 2012	6
e)		Notes to Condensed Consolidated Financial Statements	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.		Controls and Procedures	27
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings	28
Item 1A.		Risk Factors	28
Item 6.		Exhibits	28
SIGNATURES			29
CERTIFICATIONS			30

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PART I. FINANCIAL INFORMATION

Item 1:  FINANCIAL STATEMENTS

DATAWATCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)

	June 30,			September 30,
	2013			2012
ASSETS
CURRENT ASSETS:
Cash and equivalents	$	10,424		$	8,722
Accounts receivable, less allowances for doubtful accounts and sales		5,085			4,391
returns of $112 and $212, respectively
Inventories		55			59
Prepaid expenses		803			532
Total current assets		16,367			13,704
Property and equipment, net		286			281
Acquired intellectual property, net		6,453			7,745
Other intangible assets, net		852			792
Other long-term assets		228			283
Total assets	$	24,186		$	22,805
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving line of credit	$	900		$	900
Current portion of note payable		267			-
Accounts payable		1,183			676
Accrued expenses		2,107			1,792
Deferred revenue		6,283			6,295
Total current liabilities		10,740			9,663
LONG-TERM LIABILITIES:
Note payable, net of unamortized debt discount of $899 and
$1,017, respectively		2,834			2,983
Deferred revenue		203			265
Other liabilities		213			200
Total long-term liabilities		3,250			3,448
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock, par value $.01; 20,000,000 shares authorized;		65			64
issued, 6,543,918 shares and 6,372,465 shares, respectively;
outstanding, 6,529,672 shares and 6,358,219 shares, respectively
Additional paid-in capital		28,772			26,710
Accumulated deficit		(17,338	)		(15,824	)
Accumulated other comprehensive loss		(1,163	)		(1,116	)
		10,336			9,834
Less treasury stock, at cost, 14,246 shares		(140	)		(140	)
Total shareholders’ equity		10,196			9,694
Total liabilities and shareholders’ equity	$	24,186		$	22,805

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share amounts)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
REVENUE:
Software licenses	$	5,007		$	4,699		$	13,634		$	13,182
Maintenance		2,409			2,106			7,042			5,683
Professional services		411			368			803			1,126
Total revenue		7,827			7,173			21,479			19,991
COSTS AND EXPENSES:
Cost of software licenses		549			509			1,602			1,743
Cost of maintenance and services		602			668			1,697			2,019
Sales and marketing		4,398			3,244			12,391			9,041
Engineering and product development		759			730			2,361			2,048
General and administrative		2,038			1,289			4,475			3,469
Total costs and expenses		8,346			6,440			22,526			18,320
INCOME (LOSS) FROM OPERATIONS		(519	)		733			(1,047	)		1,671
Interest expense and other income (expense), net		(148	)		(176	)		(465	)		(285	)
INCOME (LOSS) BEFORE INCOME TAXES		(667	)		557			(1,512	)		1,386
Provision (benefit) for income taxes		(1	)		9			2			75
NET INCOME (LOSS)	$	(666	)	$	548		$	(1,514	)	$	1,311
Net income (loss) per share—Basic	$	(0.10	)	$	0.09		$	(0.24	)	$	0.21
Net income (loss) per share—Diluted	$	(0.10	)	$	0.08		$	(0.24	)	$	0.20
Weighted-Average Shares Outstanding—Basic		6,495			6,288			6,434			6,224
Weighted-Average Shares Outstanding—Diluted		6,495			6,775			6,434			6,653

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 (In thousands)

	Three Months Ended June 30,					Nine Months Ended June 30,
	2013			2012		2013			2012
Net Income (Loss)	$	(666	)	$	548	$	(1,514	)	$	1,311
Other Comprehensive Income (Loss):
Foreign currency translation adjustments		(29	)		18		(47	)		108
Comprehensive income (Loss)	$	(695	)	$	566	$	(1,561	)	$	1,419

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 (In thousands)

	Nine Months Ended
	June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,514	)	$	1,311
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization		1,590			698
Provision for (recovery of) doubtful accounts and sales returns		(99	)		26
Loss on disposition of fixed assets		2			1
Share-based compensation		1,922			560
Non-cash interest expense on warrants		117			40
Amortization of debt issuance costs		24			-
Changes in operating assets and liabilities:
Accounts receivable		(632	)		(1,995	)
Inventories		4			(2	)
Prepaid expenses and other assets		(221	)		(185	)
Accounts payable, accrued expenses and other liabilities		868			333
Deferred revenue		(8	)		1,705
Cash provided by operating activities		2,053			2,492
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and fixtures		(114	)		(117	)
Proceeds from sale of equipment		-			1
Purchase of intellectual property		-			(8,616	)
Capitalized software development costs		(278	)		(54	)
Increase in other assets		-			(4	)
Cash used in investing activities		(392	)		(8,790	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		142			235
Advances on line of credit		-			1,500
Proceeds from issuance of long-term debt		-			4,000
Debt issuance costs		-			(80	)
Cash provided by financing activities		142			5,655
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS		(101	)		95
INCREASE (DECREASE) IN CASH AND EQUIVALENTS		1,702			(548	)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD		8,722			8,384
CASH AND EQUIVALENTS, END OF PERIOD	$	10,424		$	7,836
SUPPLEMENTAL INFORMATION:
Income taxes paid	$	9		$	51
Interest paid	$	334		$	120

See notes to condensed consolidated financial statements.

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DATAWATCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2012, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts and disclosures reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 37% and 34%, respectively, of total sales for the three months ended June 30, 2013 and 2012, and 32% and 31%, respectively, of total sales for the nine months ended June 30, 2013 and 2012. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and

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there are no significant obligations remaining. All of the Company’s software product offerings are considered to be “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and generally do not involve modification or customization of the software or any unusual acceptance clauses or terms. The Company has established VSOE of fair value for the majority of its professional services using the bell-shaped curve method. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets. The Company has established VSOE of fair value for the majority of its post-contract customer support based on stated renewal rates only if the rate is determined to be substantive and falls within the Company’s customary pricing practices. VSOE of fair value for post-contract customer support through the Company’s distribution channel was established using the bell-shaped curve method. VSOE calculations are updated and reviewed quarterly.

The Company also licenses its enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription, the customer is invoiced for an initial 90 day service period and an account receivable and deferred revenue are recorded. Beginning on the date the software is installed at the customer site and available for use by the customer, and provided that all other criteria for revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The customer is then invoiced every 90 days and revenue is recognized ratably over the period of the subscription. The subscription arrangement includes software, maintenance and unspecified future upgrades on a when and if available basis including major version upgrades. The subscription renewal rate is the same as the initial subscription rate. Subscriptions can be cancelled by the customer at any time by providing 90 days prior written notice following the first year of the subscription term.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

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Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Three customers, Lifeboat Distribution, ASG and Unysis Belgium, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

	Percentage of total						Percentage of total
	revenue for the three						revenue for the nine						Percentage of total
	months ended						months ended						accounts receivable at
	June 30,						June 30,						June 30,			September 30,
	2013			2012			2013			2012			2013			2012
Lifeboat Distribution		24	%		22	%		22	%		13	%		30	%		19	%
ASG		10	%			*			*			*		12	%			*
Unisys Belgium			*			*			*			*			*		24	%

* - Amounts represent less than 10% for indicated periods.

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory and historical trends.

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 12 to 24 months. The net amount of capitalized software development costs was approximately $244,000 and $30,000 at June 30, 2013 and September 30, 2012, respectively. The Company capitalized approximately $278,000 and $54,000 of software development costs related to new products in development during the nine months ended June 30, 2013 and June 30, 2012, respectively.

Intangible Asset – Intellectual Property

On March 30, 2012, the Company acquired intellectual property which consisted primarily of the source code underlying its Monarch Professional and Datawatch Data Pump products for a purchase price of $8,541,000. Additionally, the Company capitalized approximately $75,000 in closing costs and adjustments related to the acquisition. The intellectual property assets are being amortized to cost of software licenses using the straight-line method over the estimated life of the asset, which is five years. Amortization expense related to the intellectual

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property assets was $431,000 and $1,292,000, respectively, for the three and nine months ended June 30, 2013. Amortization expense related to the intellectual property assets was $431,000 and $440,000, respectively, for the three and nine months ended June 30, 2012. The estimated future amortization expense related to the intellectual property is as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	431
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	6,453

Other Intangible Assets, Net

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. The values allocated to loan acquisition costs are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in interest expense and other income (expense), net. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less.

Fair Value Measurements

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy. 

· Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities; 

· Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and 

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● Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and September 30, 2012 (in thousands): 

	June 30, 2013										September 30, 2012
								Estimated										Estimated
	Fair Value Measurement							Fair			Fair Value Measurement							Fair
	Using Input Types							Value			Using Input Types							Value
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets:
Money market funds	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Total assets at fair value	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Liablities:
Line of credit	$	900	$	-		$	-	$	900		$	900	$	-		$	-	$	900
Note payable		4,000		-			-		4,000			4,000		-			-		4,000
Debt discount		-		(899	)		-		(899	)		-		(1,017	)		-		(1,017	)
Total liabilities at fair value	$	4,900	$	(899	)	$	-	$	4,001		$	4,900	$	(1,017	)	$	-	$	3,883

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this standard in its fiscal quarter ended December 31, 2012 by including a new separate consolidated statement of comprehensive income (loss).

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in its fiscal quarter ended December 31, 2012.

Note 2 – Acquisition

On June 14, 2013, the Company entered into a Stock Purchase Agreement under which it has agreed to acquire Panopticon Software AB, a privately-held Swedish company specializing in the delivery of real-time data visualization solutions (“Panopticon”). Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of the transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter ending September 30, 2013. 

Note 3 – Other Intangible Assets, Net

Other intangible assets, net, were comprised of the following as of June 30, 2013 and September 30, 2012:

	Weighted		June 30, 2013						September 30, 2012
	Average		Gross						Gross
Identified Intangible	Useful Life		Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
Asset	in Years		Amount		Amortization		Amount		Amount		Amortization		Amount
							(in thousands)
Capitalized software		1	$	1,468	$	1,224	$	244	$	1,190	$	1,160	$	30
Patents		20		160		71		89		160		65		95
Customer lists		10		1,790		1,320		470		1,790		1,195		595
Loan acquisition costs		4		88		39		49		88		16		72
Total			$	3,506	$	2,654	$	852	$	3,228	$	2,436	$	792

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For the three months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $87,000 and $52,000, respectively. For the nine months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $218,000 and $167,000, respectively.

The estimated future amortization expense related to amortizing intangible assets as of June 30, 2013 is as follows (in thousands):

Fiscal Years Ending September 30,
Remainder of fiscal 2013	$	107
2014		380
2015		179
2016		110
2017		13
2018		13
Thereafter		50
Total estimated future amortization expense	$	852

Note 4 – Financing Arrangements

Revolving Line of Credit

In connection with the acquisition of intellectual property disclosed in Note 1 to the Company’s condensed consolidated financial statements, on March 30, 2012, the Company entered into a $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1.5 million under this revolving credit facility. The Company repaid $600,000 under the line of credit in September 2012. The revolving line of credit under the SVB facility terminates on March 29, 2014. On that date, the principal amount of all advances then outstanding under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under the SVB agreement of 3.25%. The Company can borrow under the SVB revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the SVB facility requires that the Company maintain certain net asset and net income ratios. The Company was in compliance with the covenants under its Loan and Security Agreement at June 30, 2013. The Company’s obligations under the SVB facility are secured by substantially all of the Company’s assets other than intellectual property. The principal amount outstanding under the revolving line of credit at June 30, 2013 was $900,000.

Note Payable

Also in connection with the intellectual property acquisition, on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), the terms of which include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The subordinated note also contains interest rate premiums on any optional redemption of principal payments during the first three years of the note agreement. The Company is also required under the MCRC agreement to maintain certain interest coverage and leverage ratios. The Company was in compliance with the covenants under its Note and Warrant Purchase Agreement at June 30, 2013.

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Future principal payments related to the subordinated note are as follows (in thousands):

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	-
2014		467
2015		800
2016		800
2017		800
2018		800
Thereafter		333
Total future principal payments	$	4,000

The warrants issued to MCRC are exercisable at any time prior to the later of the repayment in full of the MCRC note or February 28, 2019 at a purchase price per share of $11.54, which is equal to the average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March 30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any anti-dilution protection.

The Company accounted for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in the FASB Accounting Standard Codification Topic 470-20, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“ASC 470-20”). In accordance with ASC 470-20, the value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized over the life of the note as interest expense with a corresponding credit to note payable.  The fair value of the warrants on March 30, 2012, as determined under the Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) was approximately $1.1 million which is included in Additional Paid-in Capital in the Company’s condensed consolidated balance sheets at June 30, 2013. The Company used the Black-Scholes pricing model to calculate the fair value of the warrants which included the following key assumptions: the contractual life of the warrants (7 years), stock price volatility (68.18%), risk-free interest rate (1.61%) and dividend yield (0%).

The unamortized debt discount at June 30, 2013 was $899,000 which will be amortized to interest expense over the life of the subordinated note which is seven years. Interest expense related to the warrants during the three and nine months ended June 30, 2013 was $39,000 and $117,000, respectively. Interest expense related to the warrants during the three and nine months ended June 30, 2012 was approximately $39,000 and $40,000, respectively.

Note 5 – Income Taxes

During the three months ended June 30, 2013, the Company recorded a tax benefit of $1,000 primarily related to adjustments to estimated federal alternative minimum taxes and estimated state taxes. During the nine months ended June 30, 2013, the Company recorded $2,000 in tax expense related to uncertain tax positions relative to foreign taxes net of these adjustments. During the three and nine months ended June 30, 2012, the Company recorded $9,000 and $75,000, respectively, related to estimated federal alternative minimum taxes, estimated state taxes and uncertain tax positions relative to foreign taxes.

Deferred Tax Assets

The Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until 2031. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. Management does not believe the deferred tax

13

assets are more likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets at June 30, 2013 and September 30, 2012. 

Provision for Uncertain Tax Positions

At September 30, 2012, the Company had a cumulative tax liability of $200,000 related to foreign tax exposure that could result in cash payments, of which approximately $6,000 and $19,000, respectively, were recorded during the three and nine months ended June 30, 2012. The Company increased its tax liability by $6,000 during each of the three month periods ended December 31, 2012 and March 31, 2013. During the nine months ended June 30, 2013, the Company released a portion of its reserve for uncertain tax positions and recorded a benefit of $4,000. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. To date, the Company has not accrued any amounts for interest and penalties associated with this liability as such amounts have been de minimis.

The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June 30, 2013 was as follows (in thousands):

Balance at October 1, 2012	$	866
Additions for prior year tax positions	8
Balance at June 30, 2013	$	874

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Singapore, Australia and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2010 through September 30, 2012 are generally still open to examination in the jurisdictions listed above.

Note 6 – Shareholders’ Equity

Share-based compensation expense for the three months ended June 30, 2013 and 2012 was $760,000 and $227,000, respectively, and $1,922,000 and $560,000 for the nine months ended June 30, 2013 and 2012, respectively, as included in the following expense categories:

	Three months Ended				Nine months Ended
	June 30,				June 30,
	2013		2012		2013		2012
	(In thousands)
Sales and marketing	$	523	$	118	$	1,451	$	317
Engineering and product development		21		20		64		29
General and administrative		216		89		407		214
	$	760	$	227	$	1,922	$	560

The Company’s stock compensation plans provide for the granting of restricted stock units and either incentive or non-qualified stock options to employees and non-employee directors. Options and restricted stock units are subject to terms and conditions determined by the Compensation and Stock Committee of the Board of Directors. Options generally vest over a three year period beginning three months from the date of grant and expire either seven or ten years from the date of grant. Restricted stock units vest annually over a three year period.

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Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of options on the date of grant. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. The weighted-average fair value of options granted under the stock option plans for the three and nine months ended June 30, 2013 was $7.61 per share. No options were granted under the stock option plans for the three or nine months ended June 30, 2012. The total intrinsic value of options exercised during the three months ended June 30, 2013 and 2012 was approximately $51,000 and $61,000, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2013 and 2012 was approximately $612,000 and $670,000, respectively. Total cash received from option exercises during the three and nine months ended June 30, 2013 was $9,000 and $142,000, respectively. As of June 30, 2013, there was $648,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 2.63 years.

Many of the assumptions used in the determination of share-based compensation expense are judgmental and highly volatile. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended June 30, 2013:

	2013
Expected life	5 Years
Expected volatility		72.95	%
Weighted-average volatility		72.95	%
Risk-free interest rate		0.71	%
Dividend yield		0.0	%

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The Company uses a dividend yield of zero which is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.

The following table summarizes information about the Company’s stock option plans for the nine months ended June 30, 2013.

						Weighted -
				Weighted-		Average
	Number of			Average		Remaining		Aggregate
	Options			Exercise		Contractual		Intrinsic
	Outstanding			Price		Term		Value $(000)
Outstanding, October 1, 2012		355,334		$	3.71
Granted		75,000			12.92
Canceled		-			-
Exercised		(49,000	)		2.87
Outstanding, June 30, 2013		381,334		$	5.63		4.41	$	4,732
Vested or expected to vest, June 30, 2013		367,898		$	5.51		4.33	$	4,611
Exercisable, June 30, 2013		246,975		$	3.80		3.57	$	3,516

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Restricted Stock Units

The Company periodically grants awards of restricted stock units (“RSU”) to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at June 30, 2013 was 660,630. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting of the most recent grants scheduled to occur in May 2016. Included in the total number of RSUs unvested at June 30, 2013 are certain RSUs that are subject to a further vesting condition that the Company’s common stock must trade at a price greater than the following market prices per share on a national securities exchange for a period of twenty consecutive days on or prior to certain anniversaries of the grant date as follows:

		Number of
		Unvested RSUs
$10.00 per share prior to the fifth anniversary of the grant date	*		103,513
$10.00 per share prior to the fourth anniversary of the grant date	*		189,273
$17.50 per share prior to the fifth anniversary of the grant date			30,000
$17.50 per share prior to the fourth anniversary of the grant date	*		112,171
$17.50 per share prior to the third anniversary of the grant date			166,500
$20.00 per share prior to the fourth anniversary of the grant date			8,500
$22.50 per share prior to the fourth anniversary of the grant date			19,000
No vesting condition			31,673
Unvested RSUs, June 30, 2013			660,630

The Company’s common stock has satisfied both the $10 per share market price vesting condition and the $17.50 per share market price vesting condition for the grants denoted with an asterisk above totaling 404,957 RSUs. For all of the RSUs containing a market price vesting condition, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in the nine months ended June 30, 2013 and 2012, respectively, were approximately $4,619,795 (or $14.77 weighted-average fair value per share) and $1,198,000 (or $6.77 weighted-average fair value per share). The Company recorded compensation expense related to RSUs of approximately $683,000 and $185,000 for the three months ended June 30, 2013 and 2012, respectively, and $1,765,000 and $431,000 for the nine months ended June 30, 2013 and 2012, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of June 30, 2013, there was approximately $7.0 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.31 years.

The following table presents RSU information for the nine months ended June 30, 2013:

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2012		464,584
Granted		339,000
Canceled		(6,667	)
Vested		(136,287	)
Outstanding, June 30, 2013		660,630

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Note 7 - Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of stock options and the vesting of restricted stock units using the treasury stock method. Diluted net loss per share for the nine months ended June 30, 2013 is the same as basic net loss per share as the potentially dilutive securities are all anti-dilutive.

There were no potentially dilutive common stock options for either the three or nine months ended June 30, 2013 or the three or nine months ended June 30, 2012. Potentially dilutive restricted stock units aggregating 228,336 shares and 225,743 shares for the three and nine months ended June 30, 2013, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. Potentially dilutive restricted stock units aggregating 25,599 shares and 9,560 shares for the three and nine months ended June 30, 2012, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. There were no potentially dilutive warrants for the three or nine months ended June 30, 2013. There were no potentially dilutive warrants for the three months ended June 30, 2012. Potentially dilutive warrants aggregating 62,792 shares for the nine months ended June 30, 2012 have been excluded from the computation of diluted net income per share because their inclusion would be anti-dilutive.

Note 8 - Commitments and Contingencies

Prior to the acquisition of intellectual property on March 30, 2012, as disclosed in Note 1 to these condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Additionally, the Company pays royalties under arrangements with vendors related to sales of its Datawatch Report Manager on Demand and Datawatch Dashboards products. Royalty expense included in cost of software licenses was approximately $35,000 and $21,000, respectively, for the three months ended June 30, 2013 and 2012 and $102,000 and $1,116,000, respectively, for the nine months ended June 30, 2013 and 2012. The Company is not obligated to pay any minimum amounts for royalties. As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Professional and Datawatch Data Pump products.

From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.

Note 9 - Segment Information

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.

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The following table presents information about the Company’s revenue by product lines:

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server - Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards and iMergence)		97	%		96	%		97	%		95	%
Business Service Management Solutions (including Visual QSM and Visual HD)		3	%		4	%		3	%		5	%
Total		100	%		100	%		100	%		100	%

The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations:

						Intercompany
	Domestic		International			Eliminations			Total
	(In thousands)
Total Revenue
Three months ended June 30, 2013	$	7,054	$	984		$	(211	)	$	7,827
Three months ended June 30, 2012	$	6,491	$	869		$	(187	)	$	7,173
Nine months ended June 30, 2013	$	19,130	$	2,996		$	(647	)	$	21,479
Nine months ended June 30, 2012	$	17,728	$	2,881		$	(618	)	$	19,991
Total Operating Income (Loss)
Three months ended June 30, 2013	$	2	$	(521	)	$	-		$	(519	)
Three months ended June 30, 2012	$	1,030	$	(297	)	$	-		$	733
Nine months ended June 30, 2013	$	377	$	(1,424	)	$	-		$	(1,047	)
Nine months ended June 30, 2012	$	2,231	$	(560	)	$	-		$	1,671
Non-current Assets
At June 30, 2013	$	7,747	$	72		$	-		$	7,819
At September 30, 2012	$	9,018	$	83		$	-		$	9,101

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain “forward looking” information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date they are made. The Company disclaims any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in the Company’s expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward looking statements. The Company’s actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed in Item 1A of the Company’s

18

Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on August 5, 2013, as well as the accuracy of the Company’s internal estimates of revenue and operating expense levels. 

Datawatch is engaged in the design, development, manufacture, marketing, and support of business computer software primarily by providing information optimization products and software solutions that allow organizations to deliver an extensive variety of data into their big data and business analytic applications.

The Company’s principal product lines are Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server – Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards, and iMergence) and Business Service Management Solutions (including Visual QSM and Visual HD). Included in the above categories are:

● Monarch Professional, a desktop reporting and data analysis application that lets users extract and manipulate data from ASCII report files, PDF files or HTML files produced on any mainframe, midrange, client/server or PC system;

● Datawatch Data Pump, a data replication and migration tool that offers a shortcut for populating and refreshing data marts and data warehouses, for migrating legacy data into new applications and for providing automated delivery of reports in a variety of formats, such as Excel, via email;

● Datawatch Enterprise Server, an enterprise solution that provides web-enabled report storage, transformation and distribution including data analysis, visualization and MS Excel integration for easy to use and cost effective self-serve reporting and analytics;

● Datawatch Enterprise Server – Cloud, a cloud-based application that provides the same functionality as Datawatch Enterprise Server and which allows faster deployment with less expense and overhead;

● Datawatch RMS, a web-based report analysis solution that integrates with any existing enterprise report management or content management archiving solution;

● Datawatch Report Manager on Demand, a system for high-volume document capture, archiving, and online presentation;

● Datawatch Dashboards, an interactive dashboard solution that provides a visual overview of operational performance as well as the ability to monitor specific business processes and events;

● iMergence, an enterprise report mining system;

● Visual QSM, a fully internet-enabled IT service management solution that incorporates workflow and network management capabilities and provides web access to multiple databases via a standard browser; and

● Visual Help Desk or Visual HD, a web-based help desk and call center solution operating on the IBM Lotus Domino platform.

CRITICAL ACCOUNTING POLICIES

In the preparation of financial statements and other financial data, management applies certain accounting policies to transactions that, depending on choices made by management, can result in different outcomes. In order for a reader to understand the following information regarding the financial performance and condition of the Company, an understanding of those accounting policies is important. Certain of those policies are comparatively more important to the Company’s financial results and condition than others. The policies that the Company believes are most important for a reader’s understanding of the financial information provided in this report are described below.

● Revenue Recognition, Allowance for Bad Debts and Returns Reserve

● Income Taxes

● Capitalized Software Development Costs

● Valuation of Intangible Assets and Other Long-Lived Assets

● Accounting for Share-Based Compensation

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During the nine months ended June 30, 2013, there were no significant changes in the Company’s critical accounting policies. See Note 1 to the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in its Annual Report on Form 10-K for the year ended September 30, 2012 for additional information about these critical accounting policies, as well as a description of the Company’s other significant accounting policies.

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
REVENUE:
Software licenses		64%		66%		63%		66%
Maintenance		31%		29%		33%		28%
Professional services		5%		5%		4%		6%
Total revenue		100%		100%		100%		100%
COSTS AND EXPENSES:
Cost of software licenses		7%		7%		7%		9%
Cost of maintenance and services		8%		10%		8%		10%
Sales and marketing		56%		45%		58%		45%
Engineering and product development		10%		10%		11%		10%
General and administrative		26%		18%		21%		18%
Total costs and expenses		107%		90%		105%		92%
INCOME (LOSS) FROM OPERATIONS		-7%		10%		-5%		8%
Interest expense and other income (expense), net		-2%		-2%		-2%		-1%
INCOME (LOSS) BEFORE INCOME TAXES		-9%		8%		-7%		7%
Provision (benefit) for income taxes		0%		0%		0%		0%
NET INCOME (LOSS)		-9%		8%		-7%		7%

Three Months Ended June 30, 2013 Compared to

Three Months Ended June 30, 2012

Total Revenues

The following table presents total revenue, revenue increase and percentage change in revenue for the three months ended June 30, 2013 and 2012:

	Three Months Ended
	June 30,						Percentage
	2013		2012		Increase		Change
	(In thousands)
Software licenses	$	5,007	$	4,699	$	308		7	%
Maintenance		2,409		2,106		303		14	%
Professional Services		411		368		43		12	%
Total revenue	$	7,827	$	7,173	$	654		9	%

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Software license revenue for the three months ended June 30, 2013 was $5,007,000 or approximately 64% of total revenue, as compared to $4,699,000, or approximately 66% of total revenue for the three months ended June 30, 2012. The increase in software license revenue of $308,000 for the three months ended June 30, 2013 consists of a $317,000 increase in Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server – Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards, and iMergence products) offset by a $9,000 decrease in Business Service Management Solutions (including Visual QSM and Visual HD products). Included in software license revenue for the three months ended June 30, 2013 was $600,000 related to a royalty payment from one customer.

Maintenance revenue for the three months ended June 30, 2013 was $2,409,000 or approximately 31% of total revenue, as compared to $2,106,000, or approximately 29% of total revenue for the three months ended June 30, 2012. The increase in maintenance revenue of $303,000 consists of a $356,000 increase in Information Optimization Solutions offset by a $53,000 decrease in Business Service Management Solutions. The Company attributes the increase in maintenance revenue to higher overall sales and higher renewal rates of Monarch Professional.

Professional services revenue for the three months ended June 30, 2013 was $411,000 or approximately 5% of total revenue, as compared to $368,000, or approximately 5% of total revenue for the three months ended June 30, 2012. The increase in professional services revenue of $43,000 consists of a $33,000 increase in Information Optimization Solutions and a $10,000 increase in Business Service Management Solutions.

Costs and Operating Expenses

The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the three months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Increase				Percentage
	2013			2012			(Decrease)				Change
				(In thousands)
Cost of software licenses		$	549		$	509		$	40			8	%
Cost of maintenance and services			602			668			(66	)		-10	%
Sales and marketing			4,398			3,244			1,154			36	%
Engineering and product development			759			730			29			4	%
General and administrative			2,038			1,289			749			58	%
Total costs and operating expenses		$	8,346		$	6,440		$	1,906			30	%

The increase in cost of software licenses of $40,000, or approximately 8%, is primarily due to increased software amortization costs pertaining to development costs capitalized in fiscal year 2013 as well as increased royalty costs related to the Company’s Report Manager on Demand product.

The decrease in cost of maintenance and services of $66,000, or approximately 10%, is primarily due to lower commissions due to decreased consulting sales and decreased other employee-related costs as compared to the same period last year.

The increase in sales and marketing expenses of $1,154,000, or approximately 36%, is due to higher wages and employee-related costs, including share-based compensation, attributable to increased headcount and increased promotional and lead generation costs as compared to the same period last year. These increases reflect the Company’s significant investment in a new sales and marketing team during the last several quarters to accelerate revenue generation. The Company does not expect increases of this magnitude to continue beyond fiscal year 2013.

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The increase in engineering and product development expenses of $29,000, or approximately 4%, is primarily attributable to higher wages and other employee-related costs due to increased headcount offset by lower external consulting costs.

The increase in general and administrative expenses of $749,000, or 58%, is primarily attributable to acquisition costs incurred during the quarter in connection with the Company’s planned acquisition of a privately-held software company as well as higher external consulting costs and higher share-based compensation costs as compared to the same period last year. In June 2013, the Company announced the signing of a definitive agreement under which it has agreed to acquire Panopticon Software AB (“Panopticon”), a privately-held Swedish company specializing in the delivery of real-time data visualization solutions. Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of this transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter of 2013. Total acquisition-related costs in the three months ended June 30, 2013 were approximately $563,000.

Interest expense and other income (expense), net for the three months ended June 30, 2013 was $148,000 which included $158,000 of interest expense related to both the Company’s $4.0 million subordinated note with a private investment company and borrowings under a $2.0 million revolving credit facility with a bank, offset by a gain on foreign currency transactions of $10,000. Both of these debt financings were issued in connection with the Company’s acquisition of the intellectual property underlying its Monarch Professional and Datawatch Data Pump product offerings. Interest expense and other income (expense), net for the three months ended June 30, 2012 was $176,000, which included $165,000 of interest expense related to the Company’s debt financings and a loss on foreign currency transactions of approximately $11,000.

Income tax benefit for the three months ended June 30, 2013 was $1,000 as compared to income tax expense of $9,000 for the three months ended June 30, 2012. The income tax benefit is primarily related to adjustments to estimated federal alternative minimum taxes offset by minimum state taxes. Income tax expense for the three months ended June 30, 2012 includes $10,000 related to estimated federal alternative minimum taxes and a $6,000 provision for uncertain tax positions relative to foreign taxes, offset by $7,000 in estimated state tax adjustments. At June 30, 2013, the Company had U.S. federal tax loss carryforwards of approximately $7.1 million which expire at various dates through and until 2031 as well as significant state and foreign net operating loss carryforwards.

Net loss for the three months ended June 30, 2013 was $666,000 as compared to net income of $548,000 for the three months ended June 30, 2012.

Nine months Ended June 30, 2013 Compared to

Nine months Ended June 30, 2012

Total Revenues

The following table presents total revenue, revenue increase (decrease) and percentage change in revenue for the nine months ended June 30, 2013 and 2012:

	Nine Months Ended
	June 30,				Increase			Percentage
	2013		2012		(Decrease)			Change
				(In thousands)
Software licenses	$	13,634	$	13,182	$	452			3	%
Maintenance		7,042		5,683		1,359			24	%
Professional Services		803		1,126		(323	)		-29	%
Total revenue	$	21,479	$	19,991	$	1,488			7	%

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Software license revenue for the nine months ended June 30, 2013 was $13,634,000 or approximately 63% of total revenue, as compared to $13,182,000, or approximately 66% of total revenue for the nine months ended June 30, 2012. The increase in software license revenue of $452,000 for the nine months ended June 30, 2013 consists of a $585,000 increase in Information Optimization Solutions offset by a $133,000 decrease in Business Service Management Solutions. Included in software license revenue for the nine months ended June 30, 2013 was $600,000 related to a royalty payment from one customer.

Maintenance revenue for the nine months ended June 30, 2013 was $7,042,000 or approximately 33% of total revenue, as compared to $5,683,000, or approximately 28% of total revenue for the nine months ended June 30, 2012. The increase in maintenance revenue of $1,359,000 consists of a $1,469,000 increase in Information Optimization Solutions offset by a $110,000 decrease in Business Service Management Solutions. The increase in maintenance revenue is due to higher overall sales and increased renewal rates of Monarch Professional.

Professional services revenue for the nine months ended June 30, 2013 was $803,000 or approximately 4% of total revenue, as compared to $1,126,000, or approximately 6% of total revenue for the nine months ended June 30, 2012. The decrease in professional services revenue of $323,000 consists of a $249,000 decrease in Information Optimization Solutions and a $74,000 decrease in Business Service Management Solutions. This decrease is due to lower consulting services primarily related to the Company’s Report Manager on Demand and Visual QSM product offerings.

Costs and Operating Expenses

The following table presents costs of sales and operating expenses, increase (decrease) in costs of sales and operating expenses and percentage changes in costs of sales and operating expenses for the nine months ended June 30, 2013 and 2012:

	Nine Months Ended
	June 30,				Increase			Percentage
	2013		2012		(Decrease)			Change
	(In thousands)
Cost of software licenses	$	1,602	$	1,743	$	(141	)		-8	%
Cost of maintenance and services		1,697		2,019		(322	)		-16	%
Sales and marketing		12,391		9,041		3,350			37	%
Engineering and product development		2,361		2,048		313			15	%
General and administrative		4,475		3,469		1,006			29	%
Total costs and operating expenses	$	22,526	$	18,320	$	4,206			23	%

The decrease in cost of software licenses of $141,000, or approximately 8%, is primarily due to a decrease in royalty expense attributable to the acquisition of intellectual property underlying the Company’s Monarch Professional and Datawatch Data Pump products on March 30, 2012 which was partially offset by higher software amortization costs. As a result of this acquisition, the Company is no longer incurring royalty expense related to these products to cost of software licenses but is amortizing the purchase price of the intellectual property to cost of software licenses.

The decrease in cost of maintenance and services of $322,000, or approximately 16%, is primarily due to lower commissions resulting from decreased consulting sales and lower travel expenses and other employee-related costs.

The increase in sales and marketing expenses of $3,350,000, or approximately 37%, is attributable to higher wages and employee-related costs, including share-based compensation, due to increased headcount, higher travel expenses and increased consulting, promotional and lead generation costs as compared to the same period last

23

year. These increases reflect the Company’s significant investment in a new sales and marketing team during the last several quarters to accelerate revenue generation. The Company does not expect increases of this magnitude to continue beyond fiscal year 2013.

The increase in engineering and product development expenses of $313,000, or approximately 15%, is primarily due to higher wages and other employee-related costs offset by lower consulting costs as compared to the same period last year.

The increase in general and administrative expenses of $1,006,000, or approximately 29%, is primarily attributable to acquisition costs incurred during the three months ended June 30, 2013 in connection with the Company’s planned acquisition of a privately-held software company as well as higher external consulting costs and higher share-based compensation costs as compared to the same period last year. In June 2013, the Company announced the signing of a definitive agreement under which it has agreed to acquire Panopticon Software AB (“Panopticon”), a privately-held Swedish company specializing in the delivery of real-time data visualization solutions. Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of this transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter of 2013. Total acquisition-related costs in the nine months ended June 30, 2013 were approximately $563,000.

Interest expense and other income (expense), net for the nine months ended June 30, 2013 was $465,000 which includes $474,000 of interest expense related to both the Company’s $4.0 million subordinated note with a private investment company and borrowings under a $2.0 million revolving credit facility with a bank; offset by a gain on foreign currency transactions of $9,000. Both of these debt financings were issued in connection the Company’s acquisition of the intellectual property underlying its Monarch Professional and Datawatch Data Pump product offerings. Interest expense and other income (expense), net for the nine months ended June 30, 2012 was $285,000 which included $167,000 of interest expense related to the Company’s debt financings and a loss on foreign currency transactions of approximately $118,000. The foreign currency loss for the nine months ended June 30, 2012 was attributable to the settlement of intercompany account balances due to the dissolution of one of the Company’s foreign subsidiaries and the repatriation of international funds to the US required by the Company’s line of credit facility which was entered into on March 30, 2012. Additionally, the foreign currency loss for the nine months ended June 30, 2012 was partially due to the repayment of intercompany loans between the Australian and UK subsidiaries.

Income tax expense for the nine months ended June 30, 2013 was $2,000 as compared to $75,000 for the nine months ended June 30, 2012. Income tax expense for the nine months ended June 30, 2013 includes a $13,000 provision related to uncertain tax positions relative to foreign taxes offset by adjustments to estimated federal alternative minimum taxes and estimated state taxes totaling $11,000. Income tax expense for the nine months ended June 30, 2012 includes $30,000 related to estimated federal alternative minimum taxes, $26,000 related to estimated state taxes and $19,000 related to uncertain tax positions relative to foreign taxes.

Net loss for the nine months ended June 30, 2013 was $1,514,000 as compared to net income of $1,311,000 for the nine months ended June 30, 2012.

OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

The Company leases various facilities and equipment in the U.S. and overseas under non-cancelable operating leases that expire through 2016. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was approximately $128,000 and $105,000 for the three months ended June 30, 2013 and 2012, respectively, and $397,000 and $327,000 for the nine months ended June 30, 2013 and 2012, respectively.

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As of June 30, 2013, the Company’s contractual obligations include minimum rental commitments under non-cancelable operating leases, long-term debt obligations and other liabilities related to uncertain tax positions as follows (in thousands):

			Less than 1						More than
Contractual Obligations:	Total		Year		1-3 Years		3-5 Years		5 Years
Operating Lease Obligations	$	701	$	339	$	362	$	-	$	-
Long-term Debt Obligations	$	4,000	$	267	$	1,600	$	1,600	$	533
Other Liabilities	$	213	$	-	$	-	$	-	$	213

Prior to the acquisition of intellectual property on March 30, 2012, as disclosed in Note 1 to the condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Additionally, the Company pays royalties under arrangements with vendors related to sales of its Datawatch Report Manager on Demand and Datawatch Dashboards products. Royalty expense included in cost of software licenses was approximately $35,000 and $21,000 for the three months ended June 30, 2013 and 2012, respectively, and $102,000 and $1,116,000 for the nine months ended June 30, 2013 and 2012, respectively. The Company is not obligated to pay any minimum amounts for royalties. As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Professional and Datawatch Data Pump products.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. If necessary, the Company would provide for the estimated cost of warranties based on specific warranty claims and claim history. However, the Company has never incurred significant expense under its product or service warranties. As a result, the Company believes its exposure related to these warranty agreements is minimal. Accordingly, there are no liabilities recorded for warranty claims as of June 30, 2013.

The Company enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company generally agrees to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.

Certain of the Company’s agreements also provide for the performance of services at customer sites. These agreements may contain indemnification clauses, whereby the Company will indemnify the customer from any and all damages, losses, judgments, costs and expenses for acts of its employees or subcontractors resulting in bodily injury or property damage. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that would enable it to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes its exposure related to these agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.

As permitted under Delaware law, the Company has agreements with its directors and certain officers whereby the Company will indemnify them for certain events or occurrences while the director or officer is, or was, serving at the Company’s request in such capacity. The term of the director indemnification period is for the later of ten years after the date that the director ceases to serve in such capacity or the final termination of proceedings against the director as outlined in the indemnification agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited;

25

however, the Company’s director and officer insurance policy would enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes its exposure related to these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these potential obligations as of June 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Management believes that its current cash balances and cash generated from operations will be sufficient to meet theCompany’s cash needs for working capital and anticipated capital expenditures for at least the next twelve months. At June 30, 2013, the Company had $10,424,000 of cash and equivalents, an increase of $1,702,000 from September 30, 2012.

At June 30, 2013, the Company had working capital of approximately $5,627,000 as compared to $4,041,000 at September 30, 2012. The Company expects cash flows from operations to remain positive as it anticipates profitability in the future. However, if the Company’s cash flow from operations were to decline significantly, it may need to consider reductions to its operating expenses. The Company does not anticipate additional cash requirements to fund growth or the acquisition of additional complementary technology or businesses. However, if in the future, such expenditures are anticipated or required, the Company may seek additional financing by issuing equity or obtaining credit facilities to fund such requirements. There can be no assurance that the Company will be able to issue additional equity or obtain a new or expanded credit facility at attractive prices or rates, or at all.

The Company had a net loss of approximately $1,514,000 for the nine months ended June 30, 2013 as compared to net income of approximately $1,311,000 for the nine months ended June 30, 2012. During the nine months ended June 30, 2013 and 2012, approximately $2,053,000 and $2,492,000, respectively, of cash was provided by the Company’s operations. During the nine months ended June 30, 2013, the main source of cash from operations was net loss adjusted for share-based compensation expense and depreciation and amortization expense.

Net cash used in investing activities for the nine months ended June 30, 2013 of $392,000 is primarily related to capitalized software development costs and the purchase of property and equipment.

Net cash provided by financing activities for the nine months ended June 30, 2013 of $142,000 is related to proceeds from the exercise of stock options.

On March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with a private investment company. The terms of the Note and Warrant Purchase Agreement include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. Additionally, beginning on March 31, 2014 and on the last day of each month thereafter until the maturity date, the Company will make principal payments totaling $66,667. The Company is required under this agreement to maintain certain interest coverage and leverage ratios.  As of June 30, 2013, the Company was in compliance with the covenants under the Note and Warrant Purchase Agreement.

On March 30, 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with a bank which established a $2.0 million revolving line of credit facility and borrowed $1.5 million under the Loan Agreement on that date. The Company repaid $600,000 under the line of credit in September 2012. The Loan Agreement terminates on March 29, 2014. On that date, the principal amount of all advances under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor of 3.25%. The Company can borrow under the revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the Loan Agreement requires that the Company maintain certain net asset and net income ratios. The Company’s obligations under the line of credit facility are secured by substantially all of the Company’s assets other than intellectual property.  As of June 30, 2013, the Company was in compliance with the covenants under the Loan Agreement.

26

Management believes that the Company’s current operations have not been materially impacted by the effects of inflation.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

At June 30, 2013, the Company did not participate in or hold any derivative financial instruments or commodity instruments. The Company holds no investment securities that possess significant market risk.

Primary Market Risk Exposures

The Company’s primary market risk exposure is foreign currency exchange rate risk. The Company’s exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its international subsidiaries are almost exclusively conducted in their respective local currencies, and dollar advances to the Company’s international subsidiaries, if any, are usually considered to be of a long-term investment nature. Accordingly, the majority of currency movements are reflected in the Company’s other comprehensive income (loss). There are, however, certain situations where the Company will invoice customers in currencies other than its own. Such gains or losses from operating activity, whether realized or unrealized, are reflected in interest expense and other income (expense), net in the condensed consolidated statements of operations. Currently, the Company does not engage in foreign currency hedging activities.

Item 4.  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

The principal executive officer and principal financial officer, with the participation of the Company’s management, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a−15(e) and 15d−15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period.

 (b) Changes in Internal Controls.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is occasionally involved in legal proceedings and other claims arising out of its operations in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, Item 1A under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, which could materially affect its business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. 

Item 6.  Exhibits
2.1	Stock Purchase Agreement by and among Datawatch Corporation, the shareholders of Panopticon Software AB, certain optionholders of Panopticon Software AB, Panopticon Software AB and Willem De Geer, dated June 14, 2013 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K previously filed on June 20, 2013 with the Commission (File No. 000-19960) and incorporated herein by reference).
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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 on August 14, 2013.

DATAWATCH CORPORATION

/s/ Michael A. Morrison

Michael A. Morrison

President, Chief Executive Officer, and

Director (Principal Executive Officer)

/s/ James L. Eliason

James L. Eliason

Chief Financial Officer

(Principal Financial Officer)

29

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Michael A. Morrison, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2013
	/s/ Michael A. Morrison
	Michael A. Morrison
	President, Chief Executive Officer
	and Director

30

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James L. Eliason, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2013
	/s/ James L. Eliason
	James L. Eliason
	Chief Financial Officer

31

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Morrison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael A. Morrison

Michael A. Morrison

Chief Executive Officer

August 14, 2013

32

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datawatch Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Eliason, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James L. Eliason

James L. Eliason

Chief Financial Officer

August 14, 2013

33

XML

Summary of Significant Accounting Policies (Tables)

9 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Schedule of concentration of risk and revenue by major customers

	Percentage of total						Percentage of total
	revenue for the three						revenue for the nine						Percentage of total
	months ended						months ended						accounts receivable at
	June 30,						June 30,						June 30,			September 30,
	2013			2012			2013			2012			2013			2012
Lifeboat Distribution		24	%		22	%		22	%		13	%		30	%		19	%
ASG		10	%			*			*			*		12	%			*
Unisys Belgium			*			*			*			*			*		24	%

* - Amounts represent less than 10% for indicated periods.

Schedule of estimated future amortization expense related to the intellectual property

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	431
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	6,453

Schedule of assets and liabilities measured at fair value on a recurring basis

	June 30, 2013										September 30, 2012
								Estimated										Estimated
	Fair Value Measurement							Fair			Fair Value Measurement							Fair
	Using Input Types							Value			Using Input Types							Value
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets:
Money market funds	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Total assets at fair value	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Liablities:
Line of credit	$	900	$	-		$	-	$	900		$	900	$	-		$	-	$	900
Note payable		4,000		-			-		4,000			4,000		-			-		4,000
Debt discount		-		(899	)		-		(899	)		-		(1,017	)		-		(1,017	)
Total liabilities at fair value	$	4,900	$	(899	)	$	-	$	4,001		$	4,900	$	(1,017	)	$	-	$	3,883

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
REVENUE:
Software licenses	$ 5,007	$ 4,699	$ 13,634	$ 13,182
Maintenance	2,409	2,106	7,042	5,683
Professional services	411	368	803	1,126
Total revenue	7,827	7,173	21,479	19,991
COSTS AND EXPENSES:
Cost of software licenses	549	509	1,602	1,743
Cost of maintenance and services	602	668	1,697	2,019
Sales and marketing	4,398	3,244	12,391	9,041
Engineering and product development	759	730	2,361	2,048
General and administrative	2,038	1,289	4,475	3,469
Total costs and expenses	8,346	6,440	22,526	18,320
INCOME (LOSS) FROM OPERATIONS	(519)	733	(1,047)	1,671
Interest expense and other income (expense), net	(148)	(176)	(465)	(285)
INCOME (LOSS) BEFORE INCOME TAXES	(667)	557	(1,512)	1,386
Provision (benefit) for income taxes	(1)	9	2	75
NET INCOME (LOSS)	$ (666)	$ 548	$ (1,514)	$ 1,311
Net income per share - basic (in dollars per share)	$ (0.10)	$ 0.09	$ (0.24)	$ 0.21
Net income per share - diluted (in dollars per share)	$ (0.10)	$ 0.08	$ (0.24)	$ 0.20
Weighted-Average Shares Outstanding - Basic (in shares)	6,495	6,288	6,434	6,224
Weighted-Average Shares Outstanding - Diluted (in shares)	6,495	6,775	6,434	6,653

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Financing Arrangements

9 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Financing Arrangements

Note 4 – Financing Arrangements

Revolving Line of Credit

In connection with the acquisition of intellectual property disclosed in Note 1 to the Company’s condensed consolidated financial statements, on March 30, 2012, the Company entered into a $2.0 million revolving credit facility with Silicon Valley Bank (“SVB”), pursuant to a Loan and Security Agreement with SVB. On March 30, 2012, the Company borrowed $1.5 million under this revolving credit facility. The Company repaid $600,000 under the line of credit in September 2012. The revolving line of credit under the SVB facility terminates on March 29, 2014. On that date, the principal amount of all advances then outstanding under the revolving line and all unpaid interest thereon will become due and payable. The principal amount outstanding under the revolving line accrues interest at a floating rate per annum equal to 1.5% above the prime rate, with the prime rate having a floor under the SVB agreement of 3.25%. The Company can borrow under the SVB revolving line of credit based on a formula percentage of its accounts receivable balance. Additionally, the SVB facility requires that the Company maintain certain net asset and net income ratios. The Company was in compliance with the covenants under its Loan and Security Agreement at June 30, 2013. The Company’s obligations under the SVB facility are secured by substantially all of the Company’s assets other than intellectual property. The principal amount outstanding under the revolving line of credit at June 30, 2013 was $900,000.

Note Payable

Also in connection with the intellectual property acquisition, on March 30, 2012, the Company entered into a Note and Warrant Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), the terms of which include a $4.0 million subordinated note and warrants for 185,000 shares of the Company’s common stock. The subordinated note issued to MCRC has a maturity date of February 28, 2019, with interest due monthly on the unpaid principal amount of the note at the rate of 10% per annum in arrears. The subordinated note also contains interest rate premiums on any optional redemption of principal payments during the first three years of the note agreement. The Company is also required under the MCRC agreement to maintain certain interest coverage and leverage ratios. The Company was in compliance with the covenants under its Note and Warrant Purchase Agreement at June 30, 2013.

Future principal payments related to the subordinated note are as follows (in thousands): 

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	-
2014		467
2015		800
2016		800
2017		800
2018		800
Thereafter		333
Total future principal payments	$	4,000

The warrants issued to MCRC are exercisable at any time prior to the later of the repayment in full of the MCRC note or February 28, 2019 at a purchase price per share of $11.54, which is equal to the average closing price of the Company’s common stock for the 45 trading days prior to the issuance of the warrants on March 30, 2012. The number of shares issuable upon exercise of the warrants is subject to adjustment in connection with stock splits and other events impacting the Company’s common stock generally, however, the warrants do not provide the holder with any anti-dilution protection.

The Company accounted for the borrowing under the Note and Warrant Purchase Agreement in accordance with the guidance prescribed in the FASB Accounting Standard Codification Topic 470-20, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“ASC 470-20”). In accordance with ASC 470-20, the value of the stock purchase warrants is considered an Original Issue Discount (“OID”) which is required to be amortized over the life of the note as interest expense with a corresponding credit to note payable.  The fair value of the warrants on March 30, 2012, as determined under the Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) was approximately $1.1 million which is included in Additional Paid-in Capital in the Company’s condensed consolidated balance sheets at June 30, 2013. The Company used the Black-Scholes pricing model to calculate the fair value of the warrants which included the following key assumptions: the contractual life of the warrants (7 years), stock price volatility (68.18%), risk-free interest rate (1.61%) and dividend yield (0%).

The unamortized debt discount at June 30, 2013 was $899,000 which will be amortized to interest expense over the life of the subordinated note which is seven years. Interest expense related to the warrants during the three and nine months ended June 30, 2013 was $39,000 and $117,000, respectively. Interest expense related to the warrants during the three and nine months ended June 30, 2012 was approximately $39,000 and $40,000, respectively.

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Summary Of Significant Accounting Policies (Concentration of Credit Risks and Major Customers) (Details)	3 Months Ended		9 Months Ended			12 Months Ended	3 Months Ended			9 Months Ended					12 Months Ended		3 Months Ended				9 Months Ended						12 Months Ended
	Jun. 30, 2013 Life Boat Distribution Revenue	Jun. 30, 2012 Life Boat Distribution Revenue	Jun. 30, 2013 Life Boat Distribution Revenue	Jun. 30, 2012 Life Boat Distribution Revenue	Jun. 30, 2013 Life Boat Distribution Accounts Receivable	Sep. 30, 2012 Life Boat Distribution Accounts Receivable	Jun. 30, 2013 ASG Revenue	Jun. 30, 2012 ASG Revenue		Jun. 30, 2013 ASG Revenue		Jun. 30, 2012 ASG Revenue		Jun. 30, 2013 ASG Accounts Receivable	Sep. 30, 2012 ASG Accounts Receivable		Jun. 30, 2013 Unisys Belgium Revenue		Jun. 30, 2012 Unisys Belgium Revenue		Jun. 30, 2013 Unisys Belgium Revenue		Jun. 30, 2012 Unisys Belgium Revenue		Jun. 30, 2013 Unisys Belgium Accounts Receivable		Sep. 30, 2012 Unisys Belgium Accounts Receivable
Revenue, Major Customer [Line Items]
Concentration risk, percentage	24.00%	22.00%	22.00%	13.00%	30.00%	19.00%	10.00%		[1]		[1]		[1]	12.00%		[1]		[1]		[1]		[1]		[1]		[1]	24.00%

[1] Amounts represent less than 10% for indicated periods.

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Other Intangible Assets, Net (Tables)

9 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of other intangible assets by major class

	Weighted		June 30, 2013						September 30, 2012
	Average		Gross						Gross
Identified Intangible	Useful Life		Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
Asset	in Years		Amount		Amortization		Amount		Amount		Amortization		Amount
							(in thousands)
Capitalized software		1	$	1,468	$	1,224	$	244	$	1,190	$	1,160	$	30
Patents		20		160		71		89		160		65		95
Customer lists		10		1,790		1,320		470		1,790		1,195		595
Loan acquisition costs		4		88		39		49		88		16		72
Total			$	3,506	$	2,654	$	852	$	3,228	$	2,436	$	792

Schedule of future intangible assets

Fiscal Years Ending September 30,
Remainder of fiscal 2013	$	107
2014		380
2015		179
2016		110
2017		13
2018		13
Thereafter		50
Total estimated future amortization expense	$	852

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Shareholders' Equity (Market prices per share on a national securities exchange as vesting condition) (Details) (USD $)	9 Months Ended
	Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	660,630
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	660,630
Third Anniversary | Seventeen Dollars And Fifty Cents Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	166,500
Weighted average fair value per share restricted stock	$ 17.50
Fourth Anniversary | Ten Dollar Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	189,273
Weighted average fair value per share restricted stock	$ 10
Fourth Anniversary | Seventeen Dollars And Fifty Cents Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	112,171
Weighted average fair value per share restricted stock	$ 17.50
Fourth Anniversary | Twenty Dollar Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	8,500
Weighted average fair value per share restricted stock	$ 20
Fourth Anniversary | Twenty Two Dollars And Fifty Cents Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	19,000
Weighted average fair value per share restricted stock	$ 22.50
Fifth Anniversary | Ten Dollar Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	103,513
Weighted average fair value per share restricted stock	$ 10
Fifth Anniversary | Seventeen Dollars And Fifty Cents Per Share Market Price
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	30,000
Weighted average fair value per share restricted stock	$ 17.50
No Vesting | Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted stock units subject to vesting conditions	31,673

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Other Intangible Assets, Net (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Goodwill and Intangible Assets Disclosure [Abstract]
Amortization expense related to intangible assets	$ 87	$ 52	$ 218	$ 167

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Summary Of Significant Accounting Policies (Schedule Of Assets And Liabilities Measured At Fair Value) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Sep. 30, 2012
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash equivalents	$ 2,234	$ 2,234
Line of credit	900	900
Note payable	4,000	4,000
Debt discount	(899)	(1,017)
Total liabilities at fair value	4,001	3,883
Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash equivalents	2,234	2,234
Line of credit	900	900
Note payable	4,000	4,000
Total liabilities at fair value	4,900	4,900
Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt discount	(899)	(1,017)
Total liabilities at fair value	(899)	(1,017)
Money Market Funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash equivalents	2,234	2,234
Money Market Funds | Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash equivalents	$ 2,234	$ 2,234

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Shareholders' Equity (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 760	$ 227	$ 1,922	$ 560
Option vesting period, years			3 years
Period from grant date in which options start to vest			3 months
Weighted-average fair value of options granted (in dollars per share)	$ 7.61		$ 7.61
Total intrinsic value of options	51	61	612	670
Proceeds from exercise of stock options	9		142	235
Unrecognized compensation costs related to non-vested stock option arrangements	648		648
Weighted-average period for RSUs expense			2 years 7 months 17 days
Annualized estimated forfeiture rate (in percent)			10.00%
Total number of unvested RSUs (in shares)			660,630
RSU vesting rate (in percent)	33.33%		33.33%
Number of restricted stock units subject to vesting condition, shares			660,630
Fair value of RSUs			4,619,795	1,198
Weighted-average fair value per share RSUs			$ 14.77	$ 6.77
Restricted stock compensation expense	683	185	1,765	431
Total unrecognized compensation cost	$ 7,000		$ 7,000
Weighted-average period for RSUs expense			2 years 3 months 27 days
Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period from grant date			7 years
Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period from grant date			10 years
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total number of unvested RSUs (in shares)			660,630
Number of restricted stock units subject to vesting condition, shares			660,630

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Basic and Diluted Net Income (Loss) Per Share (Narrative) (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Earnings Per Share [Abstract]
Potentially dilutive shares
Potentially dilutive restricted stock units	228,336	25,599	225,743	9,560
Potentially dilutive warrants				62,792

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Financing Arrangements (Schedule Of Future Principal Payments On Subordinated Note) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Debt Disclosure [Abstract]
Remainder of fiscal 2013
2014	467
2015	800
2016	800
2017	800
2018	800
Thereafter	333
Total future principal payments	$ 4,000

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Segment Information (Schedule Of Information By Geographic Location) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Sep. 30, 2012
Segment Reporting Information [Line Items]
Total revenue	$ 7,827	$ 7,173	$ 21,479	$ 19,991
Total Operating Income (Loss)	(519)	733	(1,047)	1,671
Non-current Assets	7,819		7,819		9,101
Domestic
Segment Reporting Information [Line Items]
Total revenue	7,054	6,491	19,130	17,728
Total Operating Income (Loss)	2	1,030	377	2,231
Non-current Assets	7,747		7,747		9,018
International
Segment Reporting Information [Line Items]
Total revenue	984	869	2,996	2,881
Total Operating Income (Loss)	(521)	(297)	(1,424)	(560)
Non-current Assets	72		72		83
Intercompany Eliminations
Segment Reporting Information [Line Items]
Total revenue	(211)	(187)	(647)	(618)
Total Operating Income (Loss)
Non-current Assets

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Summary Of Significant Accounting Policies (Schedule Of Estimated Future Amortization Expense) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012
Accounting Policies [Abstract]
Remainder of fiscal 2013	$ 431
2014	1,723
2015	1,723
2016	1,723
2017	853
Total estimated future amortization expense	$ 6,453

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (1,514)	$ 1,311
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	1,590	698
Provision for (recovery of) doubtful accounts and sales returns	(99)	26
Loss on disposition of fixed assets	2	1
Share-based compensation	1,922	560
Non-cash interest expense on warrants	117	40
Amortization of debt issuance cost	24
Changes in operating assets and liabilities:
Accounts receivable	(632)	(1,995)
Inventories	4	(2)
Prepaid expenses and other assets	(221)	(185)
Accounts payable, accrued expenses and other liabilities	868	333
Deferred revenue	(8)	1,705
Cash provided by operating activities	2,053	2,492
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and fixtures	(114)	(117)
Proceeds from sale of equipment		1
Purchase of intellectual property		(8,616)
Capitalized software development costs	(278)	(54)
Increase in other assets		(4)
Cash used in investing activities	(392)	(8,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	142	235
Advances on line of credit		1,500
Proceeds from issuance of long-term debt		4,000
Debt issuance costs		(80)
Cash provided by financing activities	142	5,655
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS	(101)	95
INCREASE (DECREASE) IN CASH AND EQUIVALENTS	1,702	(548)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD	8,722	8,384
CASH AND EQUIVALENTS, END OF PERIOD	10,424	7,836
SUPPLEMENTAL INFORMATION:
Income taxes paid	9	51
Interest paid	$ 334	$ 120

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Acquisition

9 Months Ended

Jun. 30, 2013

Business Combinations [Abstract]

Acquisition

Note 2 – Acquisition

On June 14, 2013, the Company entered into a Stock Purchase Agreement under which it has agreed to acquire Panopticon Software AB, a privately-held Swedish company specializing in the delivery of real-time data visualization solutions (“Panopticon”). Pursuant to this agreement, the Company plans to acquire all outstanding shares of Panopticon in an all-stock transaction. Completion of the transaction is subject to the approval of the Company’s shareholders, which is expected to occur during its fourth fiscal quarter ending September 30, 2013. 

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Income Taxes

9 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Taxes

Note 5 – Income Taxes

During the three months ended June 30, 2013, the Company recorded a tax benefit of $1,000 primarily related to adjustments to estimated federal alternative minimum taxes and estimated state taxes. During the nine months ended June 30, 2013, the Company recorded $2,000 in tax expense related to uncertain tax positions relative to foreign taxes net of these adjustments. During the three and nine months ended June 30, 2012, the Company recorded $9,000 and $75,000, respectively, related to estimated federal alternative minimum taxes, estimated state taxes and uncertain tax positions relative to foreign taxes.

Deferred Tax Assets

The Company’s deferred tax assets include net operating loss carry forwards and tax credits that expire at different times through and until 2031. Significant judgment is required in determining the Company’s provision for income taxes, the carrying value of deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Factors such as future reversals of deferred tax assets and liabilities, projected future taxable income, changes in enacted tax rates and the period over which the Company’s deferred tax assets will be recoverable are considered in making these determinations. Management does not believe the deferred tax assets are more likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets at June 30, 2013 and September 30, 2012. 

Provision for Uncertain Tax Positions

At September 30, 2012, the Company had a cumulative tax liability of $200,000 related to foreign tax exposure that could result in cash payments, of which approximately $6,000 and $19,000, respectively, were recorded during the three and nine months ended June 30, 2012. The Company increased its tax liability by $6,000 during each of the three month periods ended December 31, 2012 and March 31, 2013. During the nine months ended June 30, 2013, the Company released a portion of its reserve for uncertain tax positions and recorded a benefit of $4,000. The Company does not expect its tax liability to change significantly during the next twelve months. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense in its consolidated statements of operations. To date, the Company has not accrued any amounts for interest and penalties associated with this liability as such amounts have been de minimis.

The Company’s unrecognized tax benefits (before consideration of any valuation allowance) represent differences between tax positions taken by the Company in its various consolidated and separate worldwide tax returns and the benefits recognized and measured for uncertain tax positions. This amount also represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The change in the unrecognized tax benefits during the nine months ended June 30, 2013 was as follows (in thousands): 

Balance at October 1, 2012	$	866
Additions for prior year tax positions	8
Balance at June 30, 2013	$	874

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such jurisdictions as the United Kingdom, Germany, Singapore, Australia and the United States, and as a result, files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The fiscal years ended September 30, 2010 through September 30, 2012 are generally still open to examination in the jurisdictions listed above.

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Other Intangible Assets, Net

9 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Other Intangible Assets, Net

Note 3 – Other Intangible Assets, Net

Other intangible assets, net, were comprised of the following as of June 30, 2013 and September 30, 2012:

	Weighted		June 30, 2013						September 30, 2012
	Average		Gross						Gross
Identified Intangible	Useful Life		Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
Asset	in Years		Amount		Amortization		Amount		Amount		Amortization		Amount
							(in thousands)
Capitalized software		1	$	1,468	$	1,224	$	244	$	1,190	$	1,160	$	30
Patents		20		160		71		89		160		65		95
Customer lists		10		1,790		1,320		470		1,790		1,195		595
Loan acquisition costs		4		88		39		49		88		16		72
Total			$	3,506	$	2,654	$	852	$	3,228	$	2,436	$	792

For the three months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $87,000 and $52,000, respectively. For the nine months ended June 30, 2013 and 2012, amortization expense related to intangible assets was $218,000 and $167,000, respectively.

The estimated future amortization expense related to amortizing intangible assets as of June 30, 2013 is as follows (in thousands): 

Fiscal Years Ending September 30,
Remainder of fiscal 2013	$	107
2014		380
2015		179
2016		110
2017		13
2018		13
Thereafter		50
Total estimated future amortization expense	$	852

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Commitments And Contingencies (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Royalty Expense	$ 35	$ 584	$ 102	$ 1,116
Maximum
Royalties as percentage of revenue	50.00%
Minimum
Royalties as percentage of revenue	7.00%

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Other Intangible Assets, Net (Schedule Of Other Intangible Assets By Major Class) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2013	Sep. 30, 2012
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 3,506	$ 3,228
Accumulated Amortization	2,654	2,436
Net Carrying Amount	852	792
Capitalized software
Finite-Lived Intangible Assets [Line Items]
Weighted Average Useful Life in Years	1 year
Gross Carrying Amount	1,468	1,190
Accumulated Amortization	1,224	1,160
Net Carrying Amount	244	30
Patents
Finite-Lived Intangible Assets [Line Items]
Weighted Average Useful Life in Years	20 years
Gross Carrying Amount	160	160
Accumulated Amortization	71	65
Net Carrying Amount	89	95
Customer lists
Finite-Lived Intangible Assets [Line Items]
Weighted Average Useful Life in Years	10 years
Gross Carrying Amount	1,790	1,790
Accumulated Amortization	1,320	1,195
Net Carrying Amount	470	595
Loan acquisition costs
Finite-Lived Intangible Assets [Line Items]
Weighted Average Useful Life in Years	4 years
Gross Carrying Amount	88	88
Accumulated Amortization	39	16
Net Carrying Amount	$ 49	$ 72

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Income Taxes (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Sep. 30, 2012
Income Tax Disclosure [Abstract]
Provision for income taxes	$ (1)			$ 9	$ 2	$ 75
Potential cash payments related to cash exposures							200
Tax liability for uncertain tax postions	(1)	6	6	6		19
Benefit for uncertain tax position					$ 4

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Shareholders' Equity (Summary Of The Company's Stock Option Plans) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Jun. 30, 2013
Equity [Abstract]
Weighted Average Exercise Price, beginning balance	$ 3.71
Number of Options Outstanding, Options Granted	75,000
Weighted-Average Exercise Price, Options Granted	$ 12.92
Number of Options Outstanding, Options Canceled
Weighted-Average Exercise Price, Options Canceled
Number of Options Outstanding, Options Exercised	(49,000)
Weighted -Average Exercise Price, Options Exercised	$ 2.87
Weighted Average Exercise Price, ending balance	$ 5.63
Weighted-Average Remaining Contractual Term, ending balance	4 years 4 months 28 days
Aggregate Intrinsic Value, ending balance	$ 4,732
Number of Options Outstanding, Vested or expected to vest	(136,287)
Weighted-Average Exercise Price, Vested or expected to vest	$ 5.51
Weighted-Average Remaining Contractual Term, Vested or expected to vest	3 years 3 months 29 days
Aggregate Intrinsic Value, Vested or expected to vest	4,611
Number of Options Outstanding, Exercisable	246,975
Weighted-Average Exercise Price, Exercisable	$ 3.8
Weighted-Average Remaining Contractual Term, Exercisable	3 years 6 months 25 days
Aggregate Intrinsic Value, Exercisable	$ 3,516

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Sep. 30, 2012
Statement of Financial Position [Abstract]
Accounts receivable, allowance for doubtful accounts and sales returns (in dollars)	$ 112	$ 212
Unamortized debt discount (in dollars)	$ 899	$ 1,017
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	6,543,918	6,372,465
Common stock, shares outstanding	6,529,672	6,358,219
Treasury stock, shares	14,246	14,246

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Commitments and Contingencies

9 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments And Contingencies

Note 8 - Commitments and Contingencies

Prior to the acquisition of intellectual property on March 30, 2012, as disclosed in Note 1 to these condensed consolidated financial statements, the Company was obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Additionally, the Company pays royalties under arrangements with vendors related to sales of its Datawatch Report Manager on Demand and Datawatch Dashboards products. Royalty expense included in cost of software licenses was approximately $35,000 and $21,000, respectively, for the three months ended June 30, 2013 and 2012 and $102,000 and $1,116,000, respectively, for the nine months ended June 30, 2013 and 2012. The Company is not obligated to pay any minimum amounts for royalties. As a result of the acquisition of the intellectual property, the Company is no longer required to pay royalties related to its Monarch Professional and Datawatch Data Pump products.

From time to time, the Company is subject to claims and may be party to actions that arise in the normal course of business. The Company is not party to any litigation that management believes will have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Condensed Consolidated Statements Of Comprehensive Income Loss
Net Income (Loss)	$ (666)	$ 548	$ (1,514)	$ 1,311
Other Comprehensive Income (Loss):
Foreign currency translation adjustments	(29)	18	(47)	108
Comprehensive income (Loss)	$ (695)	$ 566	$ (1,561)	$ 1,419

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Sep. 30, 2012
CURRENT ASSETS:
Cash and equivalents	$ 10,424	$ 8,722
Accounts receivable, less allowances for doubtful accounts and sales returns of $112 and $212, respectively	5,085	4,391
Inventories	55	59
Prepaid expenses	803	532
Total current assets	16,367	13,704
Property and equipment, net	286	281
Acquired intellectual property, net	6,453	7,745
Other intangible assets, net	852	792
Other long-term assets	228	283
Total assets	24,186	22,805
CURRENT LIABILITIES:
Revolving line of credit	900	900
Current portion of note payable	267
Accounts payable	1,183	676
Accrued expenses	2,107	1,792
Deferred revenue	6,283	6,295
Total current liabilities	10,740	9,663
LONG-TERM LIABILITIES:
Note payable, net of unamortized debt discount of $899 and $1,017, respectively	2,834	2,983
Deferred revenue	203	265
Other liabilities	213	200
Total long-term liabilities	3,250	3,448
SHAREHOLDERS' EQUITY:
Common stock, par value $.01; 20,000,000 shares authorized; issued, 6,543,918 shares and 6,372,465 shares, respectively; outstanding, 6,529,672 shares and 6,358,219 shares, respectively	65	64
Additional paid-in capital	28,772	26,710
Accumulated deficit	(17,338)	(15,824)
Accumulated other comprehensive loss	(1,163)	(1,116)
Stockholders' equity before treasury stock	10,336	9,834
Less treasury stock, at cost, 14,246 shares	(140)	(140)
Total shareholders' equity	10,196	9,694
Total liabilities and shareholders' equity	$ 24,186	$ 22,805

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Other Intangible Assets, Net (Schedule Of Future Intangible Assets) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Sep. 30, 2012
Goodwill and Intangible Assets Disclosure [Abstract]
Remainder of fiscal 2013	$ 107
2014	380
2015	179
2016	110
2017	13
2018	13
Thereafter	50
Total estimated future amortization expense	$ 852	$ 792

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Summary Of Significant Accounting Policies (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	0 Months Ended	3 Months Ended		9 Months Ended
	Mar. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 Customer	Jun. 30, 2012	Sep. 30, 2012
License Sales To Distributors And Resellers As Percentage Of Total Revenue		37.00%	34.00%	32.00%	31.00%
Deferred revenue recognition period				1 year
Initial service period				90 days
Regular invoicing period				90 days
Subscription cancellation notice period				90 days
Product warranty period				30 days
Money back guarantee period				30 days
Number of Major Customers				3
Capitalized software development costs		$ 244		$ 244		$ 30
Capitalized software development costs related to new products				278	54
Purchase price of intellectual property	8,541
Capitalized closing costs and adjustments	75
Amortization expense on intellectual property		$ 431	$ 431	$ 1,292	$ 440
Software and Software Development Costs | Maximum
Finite-Lived Intangible Asset, Useful Life				24 months
Software and Software Development Costs | Minimum
Finite-Lived Intangible Asset, Useful Life				12 months

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Stockholders' Equity (Schedule Of Restricted Stock Unit Information) (Details)	9 Months Ended
	Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options Outstanding, Options Granted	75,000
Number of Options Outstanding, Options Canceled
Number of Options Outstanding, Options Vested	(136,287)
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options Outstanding, beginning balance	464,584
Number of Options Outstanding, Options Granted	339,000
Number of Options Outstanding, Options Canceled	(6,667)
Number of Options Outstanding, Options Vested	(136,287)
Number of Options Outstanding, ending balance	660,630

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Shareholder's Equity (Schedule Of Share-Based Compensation Expense Categories) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 760	$ 227	$ 1,922	$ 560
Sales and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	523	118	1,451	317
Engineering and product development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	21	20	64	29
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 216	$ 89	$ 407	$ 214

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Shareholder's Equity (Schedule Of Share-Based Compensation key assumptions) (Details)	9 Months Ended
	Jun. 30, 2013
Equity [Abstract]
Expected life	5 years
Expected volatility	72.95%
Weighted-average volatility	72.95%
Risk-free interest rate	0.71%
Dividend yield	0.00%

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Basic and Diluted Net Income (Loss) Per Share

9 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Basic and Diluted Net Income (Loss) Per Share

Note 7 - Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of stock options and the vesting of restricted stock units using the treasury stock method. Diluted net loss per share for the nine months ended June 30, 2013 is the same as basic net loss per share as the potentially dilutive securities are all anti-dilutive.

There were no potentially dilutive common stock options for either the three or nine months ended June 30, 2013 or the three or nine months ended June 30, 2012. Potentially dilutive restricted stock units aggregating 228,336 shares and 225,743 shares for the three and nine months ended June 30, 2013, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. Potentially dilutive restricted stock units aggregating 25,599 shares and 9,560 shares for the three and nine months ended June 30, 2012, respectively, have been excluded from the computation of diluted net income (loss) per share because their inclusion would be anti-dilutive. There were no potentially dilutive warrants for the three or nine months ended June 30, 2013. There were no potentially dilutive warrants for the three months ended June 30, 2012. Potentially dilutive warrants aggregating 62,792 shares for the nine months ended June 30, 2012 have been excluded from the computation of diluted net income per share because their inclusion would be anti-dilutive.

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Financing Arrangements (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	1 Months Ended	6 Months Ended	9 Months Ended	12 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Mar. 30, 2012	Jun. 30, 2013	Sep. 30, 2012	Jun. 30, 2013 Note Warrant	Jun. 30, 2012 Note Warrant	Jun. 30, 2013 Note Warrant	Jun. 30, 2012 Note Warrant
Subsidiary, Sale of Stock [Line Items]
Line of credit facility, maximum borrowing capacity		$ 2,000
Line of credit facility, amount outstanding		1,500	900
Amount repaid	600
Floating interest rate on outstanding revolving line of credit				1.50%
Interest rate floor on the SVB system				3.25%
Debt instrument amount		4,000
Warrant for stock options		185
Subordinated note maturity date			Feb. 28, 2019
Rate of subordinated note			10.00%
Period of interest rate premium on prinicpal payments			3 years
Share Price			$ 11.54
Trading period prior to the issuance of the warrants		45 days
Fair value of warrants							1,100
Expected life			5 years				7 years
Expected volatility			72.95%				68.18%
Risk free interest rate			0.71%				1.61%
Dividend yield			0.00%				0.00%
Unamortized debt discount	1,017		899	1,017
Life of subordinated note			7 years
Interest Expense					$ 39	$ 39	$ 117	$ 40

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Segment Information (Schedule Of Revenues By Product Line Percentages) (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 Segment	Jun. 30, 2012
Segment Reporting Information [Line Items]
Number of reportable business segments			1
Total percent of product line	100.00%	100.00%	100.00%	100.00%
Information Optimization Solutions
Segment Reporting Information [Line Items]
Percent of revenue by product line	97.00%	96.00%	97.00%	95.00%
Business Service Management Solutions
Segment Reporting Information [Line Items]
Percent of revenue by product line	3.00%	4.00%	3.00%	5.00%

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Presentation and Principles of Consolidation

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2012, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts and disclosures reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 37% and 34%, respectively, of total sales for the three months ended June 30, 2013 and 2012, and 32% and 31%, respectively, of total sales for the nine months ended June 30, 2013 and 2012. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. All of the Company’s software product offerings are considered to be “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and generally do not involve modification or customization of the software or any unusual acceptance clauses or terms. The Company has established VSOE of fair value for the majority of its professional services using the bell-shaped curve method. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets. The Company has established VSOE of fair value for the majority of its post-contract customer support based on stated renewal rates only if the rate is determined to be substantive and falls within the Company’s customary pricing practices. VSOE of fair value for post-contract customer support through the Company’s distribution channel was established using the bell-shaped curve method. VSOE calculations are updated and reviewed quarterly.

The Company also licenses its enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription, the customer is invoiced for an initial 90 day service period and an account receivable and deferred revenue are recorded. Beginning on the date the software is installed at the customer site and available for use by the customer, and provided that all other criteria for revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The customer is then invoiced every 90 days and revenue is recognized ratably over the period of the subscription. The subscription arrangement includes software, maintenance and unspecified future upgrades on a when and if available basis including major version upgrades. The subscription renewal rate is the same as the initial subscription rate. Subscriptions can be cancelled by the customer at any time by providing 90 days prior written notice following the first year of the subscription term.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration Of Credit Risks And Major Customers

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Three customers, Lifeboat Distribution, ASG and Unysis Belgium, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

	Percentage of total						Percentage of total
	revenue for the three						revenue for the nine						Percentage of total
	months ended						months ended						accounts receivable at
	June 30,						June 30,						June 30,			September 30,
	2013			2012			2013			2012			2013			2012
Lifeboat Distribution		24	%		22	%		22	%		13	%		30	%		19	%
ASG		10	%			*			*			*		12	%			*
Unisys Belgium			*			*			*			*			*		24	%

* - Amounts represent less than 10% for indicated periods.

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory and historical trends.

Capitalized Software Development Costs

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 12 to 24 months. The net amount of capitalized software development costs was approximately $244,000 and $30,000 at June 30, 2013 and September 30, 2012, respectively. The Company capitalized approximately $278,000 and $54,000 of software development costs related to new products in development during the nine months ended June 30, 2013 and June 30, 2012, respectively.

Intangible Asset - Intellectual Property

Intangible Asset – Intellectual Property

On March 30, 2012, the Company acquired intellectual property which consisted primarily of the source code underlying its Monarch Professional and Datawatch Data Pump products for a purchase price of $8,541,000. Additionally, the Company capitalized approximately $75,000 in closing costs and adjustments related to the acquisition. The intellectual property assets are being amortized to cost of software licenses using the straight-line method over the estimated life of the asset, which is five years. Amortization expense related to the intellectual property assets was $431,000 and $1,292,000, respectively, for the three and nine months ended June 30, 2013. Amortization expense related to the intellectual property assets was $431,000 and $440,000, respectively, for the three and nine months ended June 30, 2012. The estimated future amortization expense related to the intellectual property is as follows (in thousands): 

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	431
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	6,453

Other Intangible Assets, Net

Other Intangible Assets, Net

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. The values allocated to loan acquisition costs are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in interest expense and other income (expense), net. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized. 

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash And Equivalents

Cash and Equivalents 

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less.

Fair Value Measurements

Fair Value Measurements

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy. 

· Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities; 

· Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and 

● Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and September 30, 2012 (in thousands): 

	June 30, 2013										September 30, 2012
								Estimated										Estimated
	Fair Value Measurement							Fair			Fair Value Measurement							Fair
	Using Input Types							Value			Using Input Types							Value
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets:
Money market funds	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Total assets at fair value	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Liablities:
Line of credit	$	900	$	-		$	-	$	900		$	900	$	-		$	-	$	900
Note payable		4,000		-			-		4,000			4,000		-			-		4,000
Debt discount		-		(899	)		-		(899	)		-		(1,017	)		-		(1,017	)
Total liabilities at fair value	$	4,900	$	(899	)	$	-	$	4,001		$	4,900	$	(1,017	)	$	-	$	3,883

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this standard in its fiscal quarter ended December 31, 2012 by including a new separate consolidated statement of comprehensive income (loss).

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in its fiscal quarter ended December 31, 2012.

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Shareholders' Equity

9 Months Ended

Jun. 30, 2013

Equity [Abstract]

Shareholders' Equity

Note 6 – Shareholders’ Equity

Share-based compensation expense for the three months ended June 30, 2013 and 2012 was $760,000 and $227,000, respectively, and $1,922,000 and $560,000 for the nine months ended June 30, 2013 and 2012, respectively, as included in the following expense categories:

	Three months Ended				Nine months Ended
	June 30,				June 30,
	2013		2012		2013		2012
	(In thousands)
Sales and marketing	$	523	$	118	$	1,451	$	317
Engineering and product development		21		20		64		29
General and administrative		216		89		407		214
	$	760	$	227	$	1,922	$	560

The Company’s stock compensation plans provide for the granting of restricted stock units and either incentive or non-qualified stock options to employees and non-employee directors. Options and restricted stock units are subject to terms and conditions determined by the Compensation and Stock Committee of the Board of Directors. Options generally vest over a three year period beginning three months from the date of grant and expire either seven or ten years from the date of grant. Restricted stock units vest annually over a three year period.

Stock Options

The Company uses the Black-Scholes option-pricing model to calculate the fair value of options on the date of grant. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate and dividend yield. The weighted-average fair value of options granted under the stock option plans for the three and nine months ended June 30, 2013 was $7.61 per share. No options were granted under the stock option plans for the three or nine months ended June 30, 2012. The total intrinsic value of options exercised during the three months ended June 30, 2013 and 2012 was approximately $51,000 and $61,000, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2013 and 2012 was approximately $612,000 and $670,000, respectively. Total cash received from option exercises during the three and nine months ended June 30, 2013 was $9,000 and $142,000, respectively. As of June 30, 2013, there was $648,000 of total unrecognized compensation cost related to non-vested stock option arrangements, which is expected to be recognized over a weighted-average period of 2.63 years.

Many of the assumptions used in the determination of share-based compensation expense are judgmental and highly volatile. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended June 30, 2013: 

	2013
Expected life	5 Years
Expected volatility		72.95	%
Weighted-average volatility		72.95	%
Risk-free interest rate		0.71	%
Dividend yield		0.0	%

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which are obtained from public data sources. The risk-free interest rate is equal to the historical U.S. Treasury zero-coupon bond rate with a remaining term equal to the expected life of the option. The Company uses a dividend yield of zero which is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.

The following table summarizes information about the Company’s stock option plans for the nine months ended June 30, 2013.

						Weighted -
				Weighted-		Average
	Number of			Average		Remaining		Aggregate
	Options			Exercise		Contractual		Intrinsic
	Outstanding			Price		Term		Value $(000)
Outstanding, October 1, 2012		355,334		$	3.71
Granted		75,000			12.92
Canceled		-			-
Exercised		(49,000	)		2.87
Outstanding, June 30, 2013		381,334		$	5.63		4.41	$	4,732
Vested or expected to vest, June 30, 2013		367,898		$	5.51		4.33	$	4,611
Exercisable, June 30, 2013		246,975		$	3.80		3.57	$	3,516

Restricted Stock Units

The Company periodically grants awards of restricted stock units (“RSU”) to each of its non-employee directors and some of its management team and employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at June 30, 2013 was 660,630. Each RSU vests at the rate of 33.33% on each of the first through third anniversaries of the grant date with final vesting of the most recent grants scheduled to occur in May 2016. Included in the total number of RSUs unvested at June 30, 2013 are certain RSUs that are subject to a further vesting condition that the Company’s common stock must trade at a price greater than the following market prices per share on a national securities exchange for a period of twenty consecutive days on or prior to certain anniversaries of the grant date as follows: 

		Number of
		Unvested RSUs
$10.00 per share prior to the fifth anniversary of the grant date	*		103,513
$10.00 per share prior to the fourth anniversary of the grant date	*		189,273
$17.50 per share prior to the fifth anniversary of the grant date			30,000
$17.50 per share prior to the fourth anniversary of the grant date	*		112,171
$17.50 per share prior to the third anniversary of the grant date			166,500
$20.00 per share prior to the fourth anniversary of the grant date			8,500
$22.50 per share prior to the fourth anniversary of the grant date			19,000
No vesting condition			31,673
Unvested RSUs, June 30, 2013			660,630

The Company’s common stock has satisfied both the $10 per share market price vesting condition and the $17.50 per share market price vesting condition for the grants denoted with an asterisk above totaling 404,957 RSUs. For all of the RSUs containing a market price vesting condition, the Company performed fair value analysis using the Monte Carlo option-pricing model. The fair value related to the RSUs was calculated based primarily on the average stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development and general and administrative expense. The fair values of the RSUs granted in the nine months ended June 30, 2013 and 2012, respectively, were approximately $4,619,795 (or $14.77 weighted-average fair value per share) and $1,198,000 (or $6.77 weighted-average fair value per share). The Company recorded compensation expense related to RSUs of approximately $683,000 and $185,000 for the three months ended June 30, 2013 and 2012, respectively, and $1,765,000 and $431,000 for the nine months ended June 30, 2013 and 2012, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of June 30, 2013, there was approximately $7.0 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 2.31 years.

The following table presents RSU information for the nine months ended June 30, 2013: 

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2012		464,584
Granted		339,000
Canceled		(6,667	)
Vested		(136,287	)
Outstanding, June 30, 2013		660,630

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Summary of Significant Accounting Policies

9 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch Corporation (the “Company”) and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2012, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments, which are evaluated on an on-going basis, that affect the amounts and disclosures reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, acquired intellectual property, other intangible assets and share-based awards.

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence (“VSOE”) of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company licenses its software products directly to end-users, through value added resellers and through distributors. Sales to distributors and resellers accounted for approximately 37% and 34%, respectively, of total sales for the three months ended June 30, 2013 and 2012, and 32% and 31%, respectively, of total sales for the nine months ended June 30, 2013 and 2012. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. All of the Company’s software product offerings are considered to be “off-the-shelf” as such term is customarily defined. The Company’s software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and the license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations by the Company.

Datawatch software products are generally sold in multiple element arrangements which may include software licenses, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and generally do not involve modification or customization of the software or any unusual acceptance clauses or terms. The Company has established VSOE of fair value for the majority of its professional services using the bell-shaped curve method. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company’s condensed consolidated balance sheets. The Company has established VSOE of fair value for the majority of its post-contract customer support based on stated renewal rates only if the rate is determined to be substantive and falls within the Company’s customary pricing practices. VSOE of fair value for post-contract customer support through the Company’s distribution channel was established using the bell-shaped curve method. VSOE calculations are updated and reviewed quarterly.

The Company also licenses its enterprise software using a subscription model. At the time a customer enters into a binding agreement to purchase a subscription, the customer is invoiced for an initial 90 day service period and an account receivable and deferred revenue are recorded. Beginning on the date the software is installed at the customer site and available for use by the customer, and provided that all other criteria for revenue recognition are met, the deferred revenue amount is recognized ratably over the period the service is provided. The customer is then invoiced every 90 days and revenue is recognized ratably over the period of the subscription. The subscription arrangement includes software, maintenance and unspecified future upgrades on a when and if available basis including major version upgrades. The subscription renewal rate is the same as the initial subscription rate. Subscriptions can be cancelled by the customer at any time by providing 90 days prior written notice following the first year of the subscription term.

The Company’s software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. The Company also offers a 30 day money-back guarantee on its Monarch product sold directly to end-users. Additionally, the Company provides its distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company’s experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

All share-based awards, including grants of employee stock options and restricted stock units, are recognized in the financial statements based on their fair value at date of grant.

The Company recognizes the fair value of share-based awards over the requisite service period of the individual awards, which generally equals the vesting period. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 6 to the Company’s condensed consolidated financial statements.

Concentration of Credit Risks and Major Customers

The Company licenses its products and services to U.S. and non-U.S. distributors and other software resellers, as well as to end users, under customary credit terms. Three customers, Lifeboat Distribution, ASG and Unysis Belgium, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

	Percentage of total						Percentage of total
	revenue for the three						revenue for the nine						Percentage of total
	months ended						months ended						accounts receivable at
	June 30,						June 30,						June 30,			September 30,
	2013			2012			2013			2012			2013			2012
Lifeboat Distribution		24	%		22	%		22	%		13	%		30	%		19	%
ASG		10	%			*			*			*		12	%			*
Unisys Belgium			*			*			*			*			*		24	%

* - Amounts represent less than 10% for indicated periods.

The Company licenses to Lifeboat Distribution under a distribution agreement which automatically renews for successive one-year terms unless terminated. Other than these customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable for the periods presented. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns based on management’s review of receivables, inventory and historical trends.

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to engineering and product development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life of the product (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 12 to 24 months. The net amount of capitalized software development costs was approximately $244,000 and $30,000 at June 30, 2013 and September 30, 2012, respectively. The Company capitalized approximately $278,000 and $54,000 of software development costs related to new products in development during the nine months ended June 30, 2013 and June 30, 2012, respectively.

Intangible Asset – Intellectual Property

On March 30, 2012, the Company acquired intellectual property which consisted primarily of the source code underlying its Monarch Professional and Datawatch Data Pump products for a purchase price of $8,541,000. Additionally, the Company capitalized approximately $75,000 in closing costs and adjustments related to the acquisition. The intellectual property assets are being amortized to cost of software licenses using the straight-line method over the estimated life of the asset, which is five years. Amortization expense related to the intellectual

property assets was $431,000 and $1,292,000, respectively, for the three and nine months ended June 30, 2013. Amortization expense related to the intellectual property assets was $431,000 and $440,000, respectively, for the three and nine months ended June 30, 2012. The estimated future amortization expense related to the intellectual property is as follows (in thousands): 

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	431
2014		1,723
2015		1,723
2016		1,723
2017		853
Total estimated future amortization expense	$	6,453

Other Intangible Assets, Net

Other intangible assets consist of internally developed software, patents and customer lists acquired through business combinations. The values allocated to the majority of these intangible assets are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. The values allocated to loan acquisition costs are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in interest expense and other income (expense), net. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

The Company follows the accounting guidance for uncertain tax positions. This guidance clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting of money market investments with original maturities of 90 days or less.

Fair Value Measurements

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy. 

● Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities; 

● Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and 

● Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and September 30, 2012 (in thousands): 

	June 30, 2013										September 30, 2012
								Estimated										Estimated
	Fair Value Measurement							Fair			Fair Value Measurement							Fair
	Using Input Types							Value			Using Input Types							Value
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets:
Money market funds	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Total assets at fair value	$	2,234	$	-		$	-	$	2,234		$	2,234	$	-		$	-	$	2,234
Liablities:
Line of credit	$	900	$	-		$	-	$	900		$	900	$	-		$	-	$	900
Note payable		4,000		-			-		4,000			4,000		-			-		4,000
Debt discount		-		(899	)		-		(899	)		-		(1,017	)		-		(1,017	)
Total liabilities at fair value	$	4,900	$	(899	)	$	-	$	4,001		$	4,900	$	(1,017	)	$	-	$	3,883

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under this standard, an entity can elect to present items of net income and other comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this standard in its fiscal quarter ended December 31, 2012 by including a new separate consolidated statement of comprehensive income (loss).

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 supersedes certain paragraphs in ASU 2011-05 which pertain to how, when and where reclassification adjustments out of accumulated other comprehensive income are presented. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in its fiscal quarter ended December 31, 2012.

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Income Taxes (Schedule Of Unrecognized Tax Benefits) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2013
Reconciliation of Unrecognized Tax Benefits, Excluding Amounts Pertaining to Examined Tax Returns [Roll Forward]
Beginning Balance	$ 866
Additions for prior year tax positions	8
Ending Balance	$ 874

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Financing Arrangements (Tables)

9 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Schedule of future principal payments on subordinated note

Fiscal Years Ended September 30,
Remainder of fiscal 2013	$	-
2014		467
2015		800
2016		800
2017		800
2018		800
Thereafter		333
Total future principal payments	$	4,000

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Segment Information

9 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Segment Information

Note 9 - Segment Information

The Company has determined that it has only one reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company’s consolidated operations and operating results.

The following table presents information about the Company’s revenue by product lines:

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server - Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards and iMergence)		97	%		96	%		97	%		95	%
Business Service Management Solutions (including Visual QSM and Visual HD)		3	%		4	%		3	%		5	%
Total		100	%		100	%		100	%		100	%

The Company conducts operations in the U.S. and internationally. The following table presents information about the Company’s geographic operations:

						Intercompany
	Domestic		International			Eliminations			Total
	(In thousands)
Total Revenue
Three months ended June 30, 2013	$	7,054	$	984		$	(211	)	$	7,827
Three months ended June 30, 2012	$	6,491	$	869		$	(187	)	$	7,173
Nine months ended June 30, 2013	$	19,130	$	2,996		$	(647	)	$	21,479
Nine months ended June 30, 2012	$	17,728	$	2,881		$	(618	)	$	19,991
Total Operating Income (Loss)
Three months ended June 30, 2013	$	2	$	(521	)	$	-		$	(519	)
Three months ended June 30, 2012	$	1,030	$	(297	)	$	-		$	733
Nine months ended June 30, 2013	$	377	$	(1,424	)	$	-		$	(1,047	)
Nine months ended June 30, 2012	$	2,231	$	(560	)	$	-		$	1,671
Non-current Assets
At June 30, 2013	$	7,747	$	72		$	-		$	7,819
At September 30, 2012	$	9,018	$	83		$	-		$	9,101

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Segment Information (Tables)

9 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Schedule of revenues by product line percentages

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Information Optimization Solutions (including Monarch Professional, Datawatch Data Pump, Datawatch Enterprise Server, Datawatch Enterprise Server - Cloud, Datawatch RMS, Datawatch Report Manager on Demand, Datawatch Dashboards and iMergence)		97	%		96	%		97	%		95	%
Business Service Management Solutions (including Visual QSM and Visual HD)		3	%		4	%		3	%		5	%
Total		100	%		100	%		100	%		100	%

Schedule of information by geographic location

						Intercompany
	Domestic		International			Eliminations			Total
	(In thousands)
Total Revenue
Three months ended June 30, 2013	$	7,054	$	984		$	(211	)	$	7,827
Three months ended June 30, 2012	$	6,491	$	869		$	(187	)	$	7,173
Nine months ended June 30, 2013	$	19,130	$	2,996		$	(647	)	$	21,479
Nine months ended June 30, 2012	$	17,728	$	2,881		$	(618	)	$	19,991
Total Operating Income (Loss)
Three months ended June 30, 2013	$	2	$	(521	)	$	-		$	(519	)
Three months ended June 30, 2012	$	1,030	$	(297	)	$	-		$	733
Nine months ended June 30, 2013	$	377	$	(1,424	)	$	-		$	(1,047	)
Nine months ended June 30, 2012	$	2,231	$	(560	)	$	-		$	1,671
Non-current Assets
At June 30, 2013	$	7,747	$	72		$	-		$	7,819
At September 30, 2012	$	9,018	$	83		$	-		$	9,101

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Income Taxes (Tables)

9 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of unrecognized tax benefits

Balance at October 1, 2012	$	866
Additions for prior year tax positions	8
Balance at June 30, 2013	$	874

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Document and Entity Information	9 Months Ended
	Jun. 30, 2013	Aug. 08, 2013
Document And Entity Information
Entity Registrant Name	DATAWATCH CORP
Entity Central Index Key	0000792130
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Entity a Well-known Seasoned Issuer	No
Entity a Voluntary Filer	No
Entity's Reporting Status Current	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,551,503
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Shareholders' Equity (Tables)

9 Months Ended

Jun. 30, 2013

Equity [Abstract]

Schedule of share-based compensation expense categories

	Three months Ended				Nine months Ended
	June 30,				June 30,
	2013		2012		2013		2012
	(In thousands)
Sales and marketing	$	523	$	118	$	1,451	$	317
Engineering and product development		21		20		64		29
General and administrative		216		89		407		214
	$	760	$	227	$	1,922	$	560

Schedule of assumptions used in the option valuation calculations

	2013
Expected life	5 Years
Expected volatility		72.95	%
Weighted-average volatility		72.95	%
Risk-free interest rate		0.71	%
Dividend yield		0.0	%

Schedule of company's stock option plans

						Weighted -
				Weighted-		Average
	Number of			Average		Remaining		Aggregate
	Options			Exercise		Contractual		Intrinsic
	Outstanding			Price		Term		Value $(000)
Outstanding, October 1, 2012		355,334		$	3.71
Granted		75,000			12.92
Canceled		-			-
Exercised		(49,000	)		2.87
Outstanding, June 30, 2013		381,334		$	5.63		4.41	$	4,732
Vested or expected to vest, June 30, 2013		367,898		$	5.51		4.33	$	4,611
Exercisable, June 30, 2013		246,975		$	3.80		3.57	$	3,516

Schedule of market prices per share on a national securities exchange

		Number of
		Unvested RSUs
$10.00 per share prior to the fifth anniversary of the grant date	*		103,513
$10.00 per share prior to the fourth anniversary of the grant date	*		189,273
$17.50 per share prior to the fifth anniversary of the grant date			30,000
$17.50 per share prior to the fourth anniversary of the grant date	*		112,171
$17.50 per share prior to the third anniversary of the grant date			166,500
$20.00 per share prior to the fourth anniversary of the grant date			8,500
$22.50 per share prior to the fourth anniversary of the grant date			19,000
No vesting condition			31,673
Unvested RSUs, June 30, 2013			660,630

Schedule of restricted stock unit information

	Number of
	RSUs
	Outstanding
Outstanding, October 1, 2012		464,584
Granted		339,000
Canceled		(6,667	)
Vested		(136,287	)
Outstanding, June 30, 2013		660,630