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Note 11. Shareholder's Equity
 12 Months Ended
Sep. 30, 2012
Stockholders' Equity Note Disclosure [Text Block]
11.   Shareholder’s Equity

On May 31, 2012, the Company sold 2,173,913 shares of common stock at $1.15 per share for gross proceeds of $2.5 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.3 million. In addition, the Company issued the placement agent and its affiliates five year warrants to purchase an aggregate of 217,913 shares of Bridgeline’s common stock at a price equal to $1.40 per share.  There are no plans to register the common stock issued in this offering, however in the event the Company does register other Common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

In connection with the acquisition of Marketnet on May 31, 2012, contingent consideration of 204,331 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of Marketnet. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets.  In addition, Marketnet is also eligible to earn additional equity consideration of 200,000 shares of Bridgeline Digital common stock if a certain annual revenue threshold is met in any fiscal year during the next three years.

In connection with the acquisition of Magnetic Corporation on October 3, 2011, contingent consideration of 166,666 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of Magnetic. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets.  For the nine months ended June 30, 2012, the sole stockholder of Magnetic earned 41,666 shares of common stock.

In order to increase employee retention and morale, in October 2011, the Company offered its employees the opportunity to have certain outstanding options modified by (i) reducing the grant exercise price to $0.67, the fair market value of the common stock as of the modification date and (ii) starting a new three year vesting schedule. The aggregate fair value of the modified options of approximately $90 thousand was calculated using the difference in value between the original terms and the new terms as of the modification date. The incremental cost of the modified option over the original option will be recognized as additional compensation expense over the new three year vesting period beginning on the date of modification. This opportunity was generally limited to options issued subsequent to the October 2008 repricing described in Note 11 to the Company’s Annual Report on Form 10-K for fiscal 2011. Options to purchase a total of 697,667 shares of common stock were exchanged for new grants in the October 28, 2011 repricing.

On October 29, 2010, the Company sold 1,000,000 shares of common stock at $1.00 per share for gross proceeds of $1,000,000 in a private placement. Net proceeds to the Company after offering expenses were approximately $857,000.  The placement agents also received a four year warrant exercisable for 64,000 shares of the Company’s common stock at a price equal to $1.45 per share.  In return for such warrants, the placement agents agreed to cancel certain outstanding warrants to purchase shares of the Company’s common stock previously issued to such placement agents to purchase 71,231 shares of the Company’s common stock at a price of $5.00 per share and 57,000 shares of the Company’s common stock at a price of $7.50 per share.

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. At September 30, 2012, the Company maintained one stock option plan and one employee stock purchase plan.

Amended and Restated Stock Incentive Plan

Effective March 2011, the Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provides for the issuance of up 3.3 million shares of common stock. The Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company.   Options granted under the Plan may be granted with contractual lives of up to ten years. There were 2,989,620 options outstanding reserved under the Plan as of September 30, 2012 and 310,380 shares available for future issuance.

2001 Lead Dog Stock Option Plan

In connection with the Company’s merger with Lead Dog in February 2002, the Company assumed Lead Dog’s 2001 Stock Option Plan (the “Lead Dog Plan”). Options under the Lead Dog Plan may be granted for periods of up to ten years and at prices no less than the fair market value of the shares on the date of grant. There were 7,419 options reserved for issuance under the Lead Dog Plan as of February 2012.  The Lead Dog Plan expired in February 2012.  

Employee Stock Purchase Plan

On April 12, 2012, the Company’s stockholders approved and adopted the Bridgeline Digital, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”).  Under the terms of the ESPP, the Company will grant eligible employees the right to purchase shares of Bridgeline common stock through payroll deductions at a price equal to 85% of the fair market value of Bridgeline common stock on the purchase termination date of defined offering or purchase periods. Each offering period is six months in duration. The ESPP permits the Company to offer up to 300,000 shares of common stock. The maximum number of shares of common stock that may be purchased by all participants in any purchase period may not exceed 150,000 shares.  The first purchase period is June 2012 through November 2012.

Common Stock Warrants

In July 2007, the Company issued 150,000 warrants to the underwriter’s of the Company’s initial public offering (the “IPO Warrants”) with an original exercise price of $7.50 per share.  In October 2010, 57,000 IPO warrants were cancelled (see below). After adjustments for anti-dilution provisions, the IPO Warrants are exercisable to purchase shares of the Company’s common stock at an exercise price of $7.39.  The IPO Warrants expired in July 2012.  

On October 21, 2010, the Company issued 50,000 common stock warrants to purchase shares of the Company’s common stock to a non-employee consultant as compensation for services rendered. The warrants vested over a one year period and expire on October 15, 2015.  Of the warrants issued, 25,000 are exercisable at an exercise price of $1.00 per share and 25,000 are exercisable at an exercise price of $2.00 per share.  

On October 29, 2010, the Company issued four year warrants to the placement agent in the Company’s private placement.  The warrants are exercisable to purchase 64,000 shares of the Company’s common stock at a price equal to $1.45 per share.   In return for such warrants, the placement agent agreed to cancel 71,231 warrants issued to the placement agent in April 2006 and 57,000 IPO Warrants.

On May 31, 2012, the Company issued five year warrants to the placement agent in the Company’s private placement.  The warrants are exercisable to purchase 217,931 shares of the Company’s common stock at a price equal to $1.40 per share.  

As of September 30, 2012: (i) placement agent warrants to purchase 64,000 shares and 217,931 at an exercise price of $1.45 and $1.40 respectively are outstanding; and (ii) warrants issued to a non-employee consultant to purchase 25,000 shares at an exercise price of $1.00 and 25,000 shares at an exercise price of $2.00 are outstanding.

Effective October 1, 2009, the Company changed its method of accounting for its common stock warrants to comply with the guidance in ASC 815-40-15 “Derivatives and Hedging” (formerly Emerging Issues Task force EITF 07-05).  ASC 815-40-15  requires many common stock awards that were previously treated as equity to be accounted for as liabilities due to certain features with downside ratchet provisions that are not considered indexed to a company’s stock.  The Company evaluated its common stock warrants to determine whether they should be classified as an equity instrument or a liability and made the determination that its common stock warrants should be classified as liabilities; however, the fair value of the related liability was immaterial. Accordingly, no adjustment was needed.

Subsequent to the adoption of AC 815-40-15, the common stock warrants are carried at fair value at each reporting date, with changes in their fair value recorded in other income (expense) in the consolidated statements of operation. The Company estimates the fair value of common stock warrants issued to non-employees using a binomial options pricing model. As of September 30, 2012, the change in fair value of the common stock warrants was immaterial for all interim periods since the date of adoption and no adjustment to income(loss) was recorded in the consolidated statements of operations for the year ended September 30, 2012.

Stock Option and Warrant Activity and Outstanding Shares

A summary of combined option and warrant activity follows:

   
Stock Options
   
Stock Warrants
 
   
Options
   
Weighted
Average
Exercise
Price
   
Warrants
   
Weighted
Average
Exercise
Price
 
                         
Outstanding, September 30, 2010
    2,345,705     $ 1.01       302,000     $ 5.58  
Granted
    692,000     $ 1.20       114,000     $ 1.47  
Exercised
    (117,999 )   $ 1.03       —       —  
Forfeited or expired
    (639,502 )   $ 1.24       (209,000 )   $ 4.71  
Outstanding, September 30, 2011
    2,280,204     $ 1.00       207,000     $ 4.13  
Granted
    2,094,667     $ 0.80       217,931     $ 1.40  
Exercised
    (157,921 )   $ 0.84       —       —  
Forfeited or expired
    (1,227,330 )   $ 1.00       (93,000 )   $ 7.39  
Outstanding, September 30, 2012
    2,989,620     $ 0.86       331,931     $ 1.42  

There were 157,921 options exercised during the year ended September 30, 2012, with an intrinsic value of $42 thousand. There were 117,999 options exercised during the year ended September 30, 2011, with an intrinsic value of $33 thousand.   There were 1,028,293 options vested and exercisable as of September 30, 2012 with an intrinsic value of $290 thousand. The intrinsic value was calculated based on the gross difference between the Company’s closing stock price on the last day of trading of fiscal 2012 and the exercise prices for all in-the money options vested and exercisable, excluding tax effects.

A summary of the status of nonvested shares is as follows:

   
Shares
   
Weighted
Average
Grant-Date
Fair Value
 
Nonvested at September 30, 2011
    1,229,261     $ 1.05  
Granted
    2,094,667       0.80  
Vested
    (419,264 )     0.94  
Forfeited
    (943,607 )     0.99  
Nonvested at September 30, 2012
    1,961,057     $ 0.83  

Price ranges of outstanding and exercisable options as of September 30, 2012 are summarized below:

Outstanding Options
   
Exercisable Options
 
Exercise
Price
 
Number
of
Options
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Weighted
Average
Exercise
Price
   
Number
of
Options
Exercisable
   
Weighted
Average
Exercise
Price
 
$0.01
to $0.75     1,359,667       9.04     $ 0.65       44,000     $ 0.68  
$0.76
to $1.00     1,053,703       6.67       0.89       853,703       0.90  
$1.01
to $1.10     79,000       7.80       1.08       47,004       1.07  
$1.11
to $3.00     497,250       9.00       1.35       83,856       1.20  
          2,989,620       8.17     $ 0.86       1,028,563     $ 0.92  

Compensation Expense


The Company estimates the fair value of stock options using the Black-Scholes-Merton option valuation model (the “Model”). The assumptions used to calculate compensation expense is as follows:

   
Year Ended September 30,
 
   
2012
   
2011
 
Expected option life in years
      6.0           6.5    
Expected volatility
      65.00%           56.00%    
Expected dividend rate
      0.00%           0.00%    
Risk free interest rate
      1.13           1.86    
Option exercise prices
    $0.59 to $1.48       $1.00 to $1.58  
Weighted average fair value of options granted during the year
      $0.51           $0.67    

Compensation expense is generally recognized on a graded straight-line basis over the vesting period of grants. During the years ended September 30, 2012 and 2011, the Company recognized $386 thousand and $356 thousand, respectively, as compensation expense related to share based payments.  As of September 30, 2012, the Company had approximately $392 thousand of unrecognized compensation costs related to unvested options which the Company expects to recognize through fiscal 2015.