EQUITY


(a)	General

At the annual meeting of stockholders on June 10, 2010, the Company’s stockholders approved an amendment to its Certificate of Incorporation to increase the number of authorized shares of capital stock from 20,000,000 shares to 30,000,000 shares, all of which shall be Common Stock. The increase in authorized shares was done pursuant to a Certificate of Amendment to the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on, and effective as of, June 15, 2010.

At December 31, 2013 the Company had issued and outstanding 22,155,939 shares of its common stock, par value $0.01 per share. Holders of outstanding common stock are entitled to receive dividends when, as and if declared by the Board and to share ratably in the assets of the Company legally available for distribution in the event of a liquidation, dissolution or winding up of the Company. Holders of common stock do not have subscription, redemption, conversion or other preemptive rights. Holders of the common stock are entitled to elect all of the Directors on the Company’s Board. Holders of the common stock do not have cumulative voting rights, meaning that the holders of more than 50% of the common stock can elect all of the Company’s Directors. Except as otherwise required by Delaware General Corporation Law, all stockholder action is taken by vote of a majority of shares of common stock present at a meeting of stockholders at which a quorum (a majority of the issued and outstanding shares of common stock) is present in person or by proxy or by written consent pursuant to Delaware law (other than the election of Directors, who are elected by a plurality vote).

The Company is not authorized to issue preferred stock. Accordingly, no preferred stock is issued or outstanding.


(b)	Dividend Reinvestment Plan

On August 15, 2012, the Company announced that it was offering its stockholders an opportunity to participate in a Dividend Reinvestment Plan ("DRIP "). The Company offered up to 600,000 shares of its common stock for purchase under the DRIP. The DRIP provided participants the ability to invest all or a portion of cash dividends on their Acorn shares in additional shares of the Company's common stock. The Company issued the shares under the DRIP directly at a 5% discount from the market price. The DRIP was administered by the Company's stock transfer agent. During the period from August 2012 (when the Company adopted the DRIP )through December 31, 2012, the Company issued 22,734 shares of common stock under the DRIP. During the period from January 2013 through March 2013 (when the Company suspended dividend payments), it issued an additional 18,976 shares of common stock under the DRIP (see Note 17(c)). The DRIP is no longer in effect.


(c)	Dividends

In October 2011, the Board of Directors of the Company approved the payment of a quarterly dividend of $0.035 per share and a 2011 year-end special dividend of $0.05 per share which was paid in January 2012. The Company suspended this policy after its March 2013 dividend payment and does not presently intend to pay dividends to stockholders in the foreseeable future. Dividends paid since the approval of the quarterly dividend are as follows:



Period	Regular dividend per share		Special dividend per share		Total dividend paid per share		Dividend paid in cash		Value of dividend paid in shares under the DRIP		Total dividend paid		Value of share discount under the DRIP		Number of shares granted under the DRIP
Fourth quarter 2011	$	0.035	$	—	$	0.035	$	613	$	—	$	613	$	—	—
Year ended December 31, 2011	$	0.035	$	—	$	0.035	$	613	$	—	$	613	$	—	—

First quarter 2012	$	0.035	$	0.05	$	0.085	$	1,496	$	—	$	1,496	$	—	—
Second quarter 2012	$	0.035	$	—	$	0.035	$	627	$	—	$	627	$	—	—
Third quarter 2012	$	0.035	$	—	$	0.035	$	559	$	69	$	628	$	4	8,429
Fourth quarter 2012	$	0.035	$	—	$	0.035	$	526	$	106	$	632	$	6	14,305
Year ended December 31, 2012	$	0.14	$	0.05	$	0.19	$	3,208	$	175	$	3,383	$	10	22,734

First quarter 2013	$	0.035	$	—	$	0.035	$	517	$	117	$	634	$	6	18,976
Year ended December 31, 2013	$	0.035	$	—	$	0.035	$	517	$	117	$	634	$	6	18,976


(d)	Capital Raise

On October, 17, 2013, the Company closed on a public offering of 3,508,771 shares of its common stock at $2.85 per share for gross proceeds to the Company of $10,000. The Company received net proceeds of $9,134 after deducting discounts and commissions to the underwriters and offering expenses. In connection with the Underwriting Agreement, the Company also issued a warrant to the underwriters to acquire 228,070 shares of common stock at $3.14 per share which shall be exercisable for five years (see Note 17(k)).

On October, 23, 2013, the Company closed on a sale of 526,316 shares of its common stock following the full exercise of the over-allotment option granted to the underwriters at $2.85 per share for gross proceeds to the Company of $1,500. The Company received net proceeds of $1,370 after deducting discounts and commissions to the underwriters and offering expenses. In connection with the over-allotment closing, the Company also issued a warrant to the underwriters to acquire 34,211 shares of common stock at $3.14 per share which shall be exercisable for five years (see Note 17(k)). In addition to the abovementioned commissions to underwriters and offering expenses, the Company incurred an additional $129 of other expenses in connection with the two closings.


(e)	Summary Employee Option Information

The Company’s stock option plans provide for the grant to officers, directors and other key employees of options to purchase shares of common stock. The purchase price may be paid in cash or at the end of the option term, if the option is "in-the-money", it is automatically exercised "net" . In a net exercise of an option, the Company does not require a payment of the exercise price of the option from the optionee, but reduces the number of shares of common stock issued upon the exercise of the option by the smallest number of whole shares that has an aggregate fair market value equal to or in excess of the aggregate exercise price for the option shares covered by the option exercised. Each option is exercisable to one share of the Company’s common stock. Most options expire within five to ten years from the date of the grant, and generally vest over three year period from the date of the grant. At the annual meeting of stockholders on September 11, 2012, the Company’s stockholders approved an Amendment to the Company’s 2006 Stock Incentive Plan to increase the number of available shares by 1,000,000 and an Amendment to the Company’s 2006 Stock Incentive Plan for Non-Employee Directors to increase the number of available shares by 200,000. At December 31, 2013, 1,490,253 options were available for grant under the 2006 Amended and Restated Stock Incentive Plan and 111,667 options were available for grant under the 2006 Director Plan. In 2011 and 2012, all options granted to non-employees were from the 2006 Amended and Restated Stock Incentive Plan which permits grants to non-employees.

In connection with the stock option exercises during the years ended December 31, 2011 , 2012 and 2013, the Company received proceeds of $211, $305 and $0, respectively. The intrinsic value of options exercised in 2011 , 2012 and 2013 were $707, $1,932 and $144, respectively. The intrinsic value of options outstanding and options exercisable at December 31, 2013 was $314 and $290, respectively.

Option grants to directors and officers for the years ended December 31, 2011, 2012 and 2013 can be found below:



	2011			2012			2013
	Number of shares	Weighted average exercise price		Number of shares	Weighted average exercise price		Number of shares		Weighted average exercise price
Options granted to - directors and officers (included above) during the year	141,666	$	4.51	211,898	$	8.02	201,095	*	$	5.98
Exercised by directors and officers during the year	159,779	$	2.64	199,697	$	3.12	30,316		$	3.30
Forfeited by directors and officers during the year	351,221	$	3.00	127,803	$	5.75	125,518		$	4.11
Number of options held by directors and officers at year end	1,199,999	$	4.13	1,134,397	$	4.95	1,179,658		$	5.30

* Includes 25,000 options granted to a director of USSI.

The Company utilized the Black-Scholes option-pricing model to estimate fair value, utilizing the following assumptions for the respective years (all in weighted averages):



	2011			2012			2013
Risk-free interest rate	1.8		%	1.8		%	1.8		%
Expected term of options, in years	5.5			7.0			6.7
Expected annual volatility	62		%	58		%	59		%
Expected dividend yield	1.8		%	1.3		%	0.2		%
Determined weighted average grant date fair value per option	$	2.17		$	3.72		$	3.36

The expected term of the options is the length of time until the expected date of exercising the options. With respect to determining expected exercise behavior, the Company has grouped its option grants into certain groups in order to track exercise behavior and establish historical rates. The Company estimated volatility by considering historical stock volatility over the expected term of the option. The risk-free interest rates are based on the U.S. Treasury yields for a period consistent with the expected term. Up to October 17, 2011, the Company expected no dividends to be paid. On October 17, 2011, the Company approved the payment of a quarterly dividend of $0.035 per share and a 2011 year-end declaration of a special dividend of $0.050 per share (see Note 17(c)). The expected dividend yield for 2011, 2012 and the first quarter of 2013 takes into account the quarterly dividend per share on options grants from October 17, 2011. The dividend policy was terminated in March 2013. All options granted subsequent to the termination of the dividend used the assumption that no dividends would be paid. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in determining the estimated fair value of the Company’s stock options granted in the years ended December 31, 2011 , 2012 and 2013. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.


(f)	Non-Employee Options

On February 26, 2013, the Company granted an outside consultant an option for the purchase of 25,000 shares of the Company’s common stock. The options vest over one year, have an exercise price of $6.84 and expire after seven years. The Company used the Black-Scholes valuation method to estimate the fair value of the options granted to the consultant. The Company used a risk free interest rate of 1.3%, an expected life of seven years, an annual volatility of 57% and an annual dividend rate of 2.1% to determine the value the options granted. The Company estimated the fair value of each option granted to be $3.17. The Company recorded $41 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2013.

In addition, on August 20, 2013, the Company granted an outside consultant an option for the purchase of 20,000 shares of the Company’s common stock. The options vest 5,000 each quarter, have an exercise price of $5.91 and expire after seven years. The Company used the Black-Scholes valuation method to estimate the fair value of the options granted to the consultant. The Company used a risk free interest rate of 2.2%, an expected life of seven years, an annual volatility of 57% and no dividends to determine the value the options granted. The Company estimated the fair value of each option granted to be $3.44. The Company recorded $24 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2013.

On January 16, 2012, the Company granted an outside consultant an option for the purchase of 25,000 shares of the Company’s common stock. The options vest over one year, have an exercise price of $6.68 and expire after seven years. The Company used the Black-Scholes valuation method to estimate the fair value of the options granted to the consultant. The Company used a risk free interest rate of 1.4%, an expected life of seven years, an annual volatility of 60% and an annual dividend rate of 2.1% to determine the value the options granted. The Company estimated the fair value of each option granted to be $3.23. The Company recorded $115 and ($23) to selling, general and administrative expense with respect to the option granted to the consultant in the years ended December 31, 2012 and 2013, respectively.

In addition, on December 12, 2012, the Company granted an outside consultant an option for the purchase of 5,000 shares of the Company’s common stock. The options vested immediately, have an exercise price of $7.57 and expire after seven years. The Company used the Black-Scholes valuation method to estimate the fair value of the options granted to the consultant. The Company used a risk free interest rate of 1.1%, an expected life of seven years, an annual volatility of 57% and an annual dividend rate of 1.8% to determine the value the options granted. The Company estimated the fair value of each option granted to be $3.53. The Company recorded $18 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2012.

On October 4, 2011, the Company granted an outside consultant an option for the purchase of 25,000 shares of the Company’s common stock. The options vested over 90 days, have an exercise price of $5.30 and expire after seven years. The Company used the Black-Scholes valuation method to estimate the fair value of the options granted to the consultant. The Company used a risk free interest rate of 1.3%, an expected life of seven years, an annual volatility of 62% and no expected dividends to determine the value the options granted. The Company estimated the fair value of each option granted to be $3.23. The Company recorded $79 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2011.

In the years ended December 31, 2011 , 2012 and 2013, the Company included $87, $133 and $42 respectively, of stock-based compensation expense in selling, general and administrative expense in its Consolidated Statements of Operations with respect to options granted to non-employees.


(g)	Summary Employee and Non-Employee Option Information

A summary of the Company’s option plans as of December 31, 2011, 2012 and 2013, as well as changes during each of the years then ended, is presented below:



	2011				2012				2013
	Number of Options (in shares)		Weighted Average Exercise Price		Number of Options (in shares)		Weighted Average Exercise Price		Number of Options (in shares)		Weighted Average Exercise Price
Outstanding at beginning of year	1,817,665		$	3.69	1,388,333		$	4.17	1,311,397		$	5.20
Granted at market price	166,666		4.63		348,898		7.85		246,095		6.06
Exercised *	(231,831	)	2.62		(252,453	)	3.24		(30,316	)	3.30
Forfeited or expired	(364,167	)	3.00		(173,381	)	5.10		(125,518	)	4.11
Outstanding at end of year	1,388,333		4.17		1,311,397		5.20		1,401,658		5.49
Exercisable at end of year	1,267,915		$	4.08	954,432		$	4.26	1,029,507		$	5.06

* All shares issued in connection with option exercises were newly issued shares.

The breakdown of option exercises between cashless net exercises and cash exercises is as follows the years ended December 31, 2011 , 2012 and 2013:



	Shares granted in net exercise of options	Options forfeited in net exercise of options	Total net exercise options	Weighted average exercise price for net exercise options	Options exercised for cash	Weighted average exercise price for options exercised for cash
Year ended December 31, 2011	148,165	304,167	452,332	$2.69	83,666	$2.51
Year ended December 31, 2012	101,619	148,381	250,000	$5.06	150,834	$2.02
Year ended December 31, 2013	30,316	102,184	132,500	$3.30	—	—

Summary information regarding the options outstanding and exercisable at December 31, 2013 is as follows:



	Outstanding			Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
	(in shares)	(in years)		(in shares)
$2.24 – $2.56	157,500	0.68	$2.44	157,500	$2.44
$3.51 – $3.90	150,276	3.58	$3.68	103,818	$3.74
$4.09 – $5.00	238,333	2.71	$4.59	229,999	$4.57
$5.05 – $5.91	332,500	4.30	$5.22	317,500	$5.19
$6.31 - $7.57	359,690	6.16	$6.92	115,664	$7.13
$7.60 - $11.42	163,359	5.83	$8.82	105,026	$8.63
	1,401,658			1,029,507

Stock-based compensation expense included in the Company’s Statements of Operations was:



	Year ended December 31,
	2011		2012		2013
Cost of sales	$	—	$	—	$	44
Research and development expense	—		81		41
Selling, general and administrative expense*	458		774		1,134
Total stock compensation expense	$	458	$	855	$	1,219

* Stock compensation expense in 2011 includes $51 with respect to stock granted to consultants.

In addition to the above amounts, the Company recorded stock compensation expense of $176 with respect to CoaLogix operations in the period ended August 31, 2011, which is included in the Loss from discontinued operations, net of income taxes.

As at December 31, 2013, the total compensation cost related to non-vested awards not yet recognized was approximately $705 which the Company expects to recognize over a weighted-average period of approximately 1.4 years.


(h)	DSIT Stock Option Plan

In November 2006, the Company adopted a Key Employee Stock Option Plan (the “DSIT Plan”) for its DSIT subsidiary to be administrated by a committee of board members of DSIT, currently comprised of the entire board of directors of DSIT. The purpose of the DSIT Plan and associated grants is to provide incentives to key employees of DSIT to further the growth, development and financial success of DSIT.

A summary status of the DSIT Plan as of December 31, 2011, 2012 and 2013, as well as changes during the years then ended, is presented below:



	2011				2012				2013
	Number of Options (in shares)		Weighted Average Exercise Price		Number of Options (in shares)		Weighted Average Exercise Price		Number of Options (in shares)		Weighted Average Exercise Price
Outstanding at beginning of year	152,400		$	1.18	240,824		$	1.67	238,764		$	1.69
Granted at fair value	93,054	*	$	2.45	—		$	—	6,700	*	$	2.70
Exercised	—		$	—	—		$	—	—		$	—
Forfeited	(4,630)		$	1.09	(2,060)	*	$	2.51	(1,540)	*	$	2.70
Outstanding at end of year	240,824		$	1.67	238,764		$	1.69	243,924		$	1.78
Exercisable at end of year	—		$	—	—		$	—	101,904		$	1.51

* The weighted average exercise price of these grants and forfeitures are NIS 9.38 translated to US dollars using the year end exchange rates (NIS 3.83, NIS 3.73 and NIS 3.47 for the years ended December 31, 2011, 2012 and 2013, respectively)

In 2011, DSIT granted options to purchase 93,054 of its ordinary shares to senior management and employees of DSIT at an exercise price of NIS 9.38 per share and exercisable for a period of seven years. These options originally vested and became exercisable only upon the occurrence of an initial public offering of DSIT or a merger, acquisition, reorganization, consolidation or similar transaction involving DSIT (see below). In addition, DSIT also extended the expiration date of 147,770 previously granted options from December 31, 2013 to August 10, 2018. No other option terms were modified. In 2013, DSIT granted options to purchase 6,700 of its ordinary shares to an employee of DSIT at an exercise price of NIS 9.38 per share and exercisable for a period of approximately 5.1 years.

On July 1, 2013, DSIT modified the vesting terms of all options granted such that options would vest either upon the occurrence of an initial public offering of DSIT or a merger, acquisition, reorganization, consolidation or similar transaction involving DSIT or upon the grantee achieving 25 years of service with DSIT. As a result of the modified vesting terms, DSIT recorded stock-based compensation expense of $160 ($44 in Cost of sales and $116 is Selling, general and administrative expense) during the year ended December 31, 2013.

Summary information regarding the options under the Plan outstanding and exercisable at December 31, 2013 is as follows:



	Outstanding				Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
	(in shares)	(in years)			(in shares)
$1.05 – $1.26	147,770	4.6	$	1.18	81,068	$	1.20
$2.70	96,154	4.6	$	2.70	20,836	$	2.70
	243,924		$	1.78	101,904	$	1.51

If all the options in the DSIT Plan are exercised, the Company’s holdings in DSIT will be diluted from 88.3% to approximately 77.4% on an as converted basis (see Note 3(d)).


(i)	DSIT Warrants

In August 2012, the warrant to purchase 10.0% of DSIT issued in August 2005 to the purchaser of the Company's former dsIT Technologies, Ltd. subsidiary expired.


(j)	USSI Stock Option Plan

In connection with the USSI Purchase Agreement, the Company established a 2012 Stock Plan (the “USSI 2012 Stock Option Plan” or the "Plan") under which key employees, directors and consultants of USSI may receive options to purchase up to an aggregate of 1,180,000 shares of USSI Common Stock on such terms as the Plan provides and as determined by USSI's board of directors or by such committee designated by USSI's board to administer the Plan, if any. USSI granted options to purchase 637,375 and 50,000 of its common shares in 2012 and 2013, respectively, to senior management, employees, outside directors and a consultant of USSI under the Plan. The options were granted with an exercise price of $1.72 per share based on a valuation performed by an independent third party and are exercisable for a period of seven years. The options vest over a three to four year period based on date of hire or other benchmark specified in the option agreement. Upon exercise of all the options in the Plan, the Company’s holdings in USSI will be diluted from 95.7% (on an as converted basis) to approximately 88.4% (see Note 3(b)). During the years ended December 31, 2012 and 2013, $323 and $133, respectively, was recorded as stock compensation expense with respect to the abovementioned options ($80 and $41 in Research and development expenses, net of credits and $243 and $92 in Selling, general and administrative expenses in 2012 and 2013, respectively). The purposes of the Plan for our USSI subsidiary are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to service providers and to promote the success of the business of USSI.

A summary status of the USSI 2012 Stock Option Plan as of December 31, 2012 and 2013, as well as changes during the years then ended, is presented below :



	2012					2013
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
	(in shares)				(in years)	(in shares)				(in years)
Outstanding at beginning of year	—		$	—		632,375		$	1.72
Granted at fair value	637,375		1.72			50,000		1.72
Exercised	—		—			—		—
Forfeited	(5,000	)	1.72			(46,000	)	1.72
Outstanding at end of year	632,375		1.72		6.7	636,375		1.72		5.7
Exercisable at end of year	322,337		$	1.72	6.7	460,619		$	1.72	5.7


(k)	Warrants

The Company has issued warrants at exercise prices equal to or greater than market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows:



	2011			2012				2013
	Number of shares underlying warrants	Weighted Average Exercise Price		Number of shares underlying warrants		Weighted Average Exercise Price		Number of shares underlying warrants		Weighted Average Exercise Price
Outstanding at beginning of year	313,806	$	4.29	313,806		$	4.29	28,750		$	3.68
Granted	—	—		—		—		262,281		3.14
Exercised	—	—		(269,808	)	4.35		(5,750	)	3.68
Forfeited or expired	—	—		(15,248	)	3.68		—		—
Outstanding and exercisable at end of year	313,806	$	4.29	28,750		$	3.68	285,281		$	3.18

The warrants outstanding at December 31, 2013 have a weighted average remaining contractual life of 4.6 years .

The 262,281 warrants that were granted in connection with the October 2013 Capital Raises (see Note 17(d)) are exercisable for shares of the Company’s Common Stock for five years at an exercise price of $3.14 per share. The Company allocated $482 to the value of the warrants based on a Black Scholes calculation using a five year expected life, an annual volatility of 62%, a discount rate of 1.4% and no dividends. The value allocated to the warrants was offset against additional paid-in-capital.

During the years ended December 31, 2012 and 2013, the Company received proceeds of $1,050 and $0 from the exercise of warrants. No warrants were exercised in 2011. During the year ended December 31, 2012, 36,502 warrants were exercised and 15,248 warrants were forfeited in connection with the cashless net exercise of 51,750 warrants at a weighted average exercise price of $3.68 per share. During the year ended December 31, 2013, 2,954 warrants were exercised and 2,796 warrants were forfeited in connection with the cashless net exercise of 5,750 warrants at a weighted average exercise price of $3.68 per share.