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, 2012 the Company had issued and outstanding 18,068,606 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 is offering its stockholders an opportunity to participate in a Dividend Reinvestment Plan ("DRIP "). The Company is offering up to 600,000 shares of its common stock for purchase under the DRIP. The DRIP provides 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. Initially, the Company will issue the shares under the DRIP directly at a 5% discount from the market price. The DRIP is administered by the Company's stock transfer agent.

(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. 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	$	0.050	$	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

See Note 24 - Subsequent Events with respect to the declaration of the first quarter 2013 dividend.


(d)	Capital Raise

(i) March 2010 Capital Raise

On March 8, 2010, the Company completed a registered direct offering through a placement agent of 2,231,818 shares of its common stock pursuant to separate subscription agreements between the Company and each of the investors at $5.50 per share to certain accredited investors for gross proceeds of approximately $12,275. The aggregate net proceeds from the offering, after deducting the placement agent’s fee and the offering expenses payable by the Company in connection with the offering, was $11,467.

(ii) December 2010 Capital Raise

On December 17, 2010, the Company entered into a Placement Agent Agreement (the “Placement Agent Agreement”) related to a registered direct offering of up to 1,150,000 shares of its common stock. Under the terms of the transaction and pursuant to separate subscription agreements between the Company and each of the investors, the Company sold the common stock at $3.50 per share for gross proceeds of $4,027. The Placement Agent Agreement provided for the payment of a placement agent fee equal to 7% ($282) of the gross proceeds of the offering, plus a warrant exercisable for an additional 80,500 shares (see Note 16(k)). The aggregate net proceeds from the offering, after deducting the placement agent’s fee and expenses in connection with the offering, was $3,709.


(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, 2012, 1,623,014 options were available for grant under the 2006 Amended and Restated Stock Incentive Plan and 201,667 options were available for grant under the 2006 Director Plan. In 2010 , 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, 2010 , 2011 and 2012, the Company received proceeds of $159, $211 and $305, respectively. The intrinsic value of options exercised in 2010 , 2011 and 2012 were $247, $707 and $1,932, respectively. The intrinsic value of options outstanding and options exercisable at December 31, 2012 was $3,585 and $3,384, respectively.

Option grants to directors and officers for the years ended December 31, 2010 , 2011 and 2012 can be found below:



	2010			2011			2012
	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	95,000	$	4.82	141,666	$	4.51	211,898	$	8.02
Exercised by directors and officers during the year	67,500	$	2.36	159,779	$	2.64	199,697	$	3.12
Forfeited by directors and officers during the year	120,000	$	6.13	351,221	$	3.00	127,803	$	5.75
Number of options held by directors and officers at year end	1,574,665	$	3.69	1,199,999	$	4.13	1,134,397	$	4.95

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):



	2010			2011			2012
Risk-free interest rate	2.8		%	1.8		%	1.8		%
Expected term of options, in years	6.3			5.5			7
Expected annual volatility	68		%	62		%	58		%
Expected dividend yield	—		%	1.8		%	1.3		%
Determined weighted average grant date fair value per option	$	3.47		$	2.17		$	3.72

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 16(c)). The expected dividend yield for 2011 and 2012 takes into account the quarterly dividend per share on options grants from October 17, 2011. 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, 2010 , 2011 and 2012. 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 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 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2012.

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 vest 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 January 2010, the Company granted an outside consultant an option for the purchase of 25,000 shares of the Company’s common stock. The options vested after one year, have an exercise price of $7.38 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 3.4%, an expected life of seven years, an annual volatility of 69% and no expected dividends to determine the value the options granted. The Company estimated the fair value of each option granted to be $5.01. The Company recorded $124 and $1 to selling, general and administrative expense with respect to the option granted to the consultant in the year ended December 31, 2010 and 2011, respectively.

In the years ended December 31, 2010 , 2011 and 2012, the Company included $139, $87 and $133 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, 2010, 2011 and 2012, as well as changes during each of the years then ended, is presented below:



	2010				2011				2012
	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	1,745,165		$	3.52	1,817,665		$	3.69	1,388,333		$	4.17
Granted at market price	260,000		$	5.58	166,666		$	4.63	348,898		$	7.85
Exercised *	(67,500	)	$	2.36	(231,831	)	$	2.62	(252,453	)	$	3.24
Forfeited or expired	(120,000	)	$	6.13	(364,167	)	$	3.00	(173,381	)	$	5.10
Outstanding at end of year	1,817,665		$	3.69	1,388,333		$	4.17	1,311,397		$	5.20
Exercisable at end of year	1,572,455		$	3.62	1,267,915		$	4.08	954,432		$	4.26

* 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, 2010 , 2011 and 2012:



	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, 2010	—	—	—	$—	—	$—
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

Summary information regarding the options outstanding and exercisable at December 31, 2012 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	1.68	$2.44	156,875	$2.44
$3.28 – $3.90	229,166	1.65	$3.51	229,166	$3.51
$4.09 – $4.96	188,333	3.52	$4.48	171,666	$4.43
$5.05 – $5.50	362,500	5.05	$5.15	362,500	$5.15
$6.49 - $7.57	257,000	6.94	$7.19	30,000	$7.41
$7.38 - $11.42	116,898	6.66	$9.21	4,225	$7.60
	1,311,397			954,432

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



	Year ended December 31,
	2010		2011		2012
Research and development expense	$	—	$	—	$	81
Selling, general and administrative expense*	690		458		774
Total stock compensation expense	$	690	$	458	$	855

* 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 $339 which is included in Loss from discontinued operations, net of income taxes with respect to Coreworx with respect to the period ended December 17, 2010, respectively. The Company also recorded stock compensation expense of $440 and $176 with respect to CoaLogix operations in the year ended December 31, 2010, and the period ended August 31, 2011, respectively which are also included in the Loss from discontinued operations, net of income taxes.

As at December 31, 2012, the total compensation cost related to non-vested awards not yet recognized was approximately $937 which the Company expects to recognize over a weighted-average period of approximately 1.8 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, 2010, 2011 and 2012, as well as changes during the years then ended, is presented below:



	2010			2011				2012
	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	152,400		$	1.18	240,824		$	1.67
Granted at fair value	—	—		93,054		2.45		—		$	—
Exercised	—	—		—		—		—		—
Forfeited	—	—		(4,630	)	1.09		(2,060	)	$	2.51
Outstanding at end of year	152,400	$	1.18	240,824		$	1.67	238,764		1.69
Exercisable at end of year*	—	—		—		—		—		—

* Options vest only upon an exit event for the Company.

On August 10, 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 vest and become exercisable only upon the occurrence of an initial public offering of DSIT or a merger, acquisition, reorganization, consolidation or similar transaction involving DSIT. 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.

Summary information regarding the options under the Plan outstanding and exercisable at December 31, 2012 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	6.6	$	1.18	—	—
$2.51	90,994	6.6	$	2.51	—	—
	238,764		$	1.69	—	—

If all the options in the DSIT Plan are exercised, the Company’s holdings in DSIT will be diluted from 84% to approximately 71.4% (see Note 24 - Subsequent Events).


(i)	DSIT Warrants

In August 2012, the warrant to purchase 10% 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 new 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. In September 2012, USSI granted options to purchase 637,375 of its common shares, 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 94.4% to approximately 85.1% (see Note 3(c)). During the year ended December 31, 2012, $323 was recorded as stock compensation expense with respect to the abovementioned options ($80 in Research and development expenses, net of credits and $243 in Selling, general and administrative expenses). 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, as well as changes during the year then ended, is presented below :



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


(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:



	2010				2011			2012
	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	246,904		$	4.50	313,806	$	4.29	313,806		$	4.29
Granted	80,500		3.68		—	$	—	—		—
Exercised	(13,598	)	$	4.50	—	$	—	(269,808	)	4.35
Forfeited or expired	—		—		—	—		(15,248	)	3.68
Outstanding and exercisable at end of year	313,806		$	4.29	313,806	$	4.29	28,750		$	3.68

The warrants outstanding at December 31, 2012 expire on December 17, 2015.

The 80,500 warrants that were granted in connection with the December 2010 Capital Raise (see Note 16(d)(ii)) are exercisable for shares of the Company’s Common Stock for five years at an exercise price of $3.68 per share. The Company allocated $153 to the value of the warrants based on a Black Scholes calculation using a five year expected life, an annual volatility of 59%, a discount rate of 2.0% and no dividends. The value allocated to the warrants was offset against additional paid-in-capital.

During the year ended December 31, 2010 and 2012, the Company received proceeds of $61 and $1,050, respectively, 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.


(l)	Treasury shares

The Company used 473,161 of its treasury shares to acquire shares of USSI (see Note 3(c)). The treasury shares had a basis of $1,791 and a value of $2,229 on the date of the transfer. In accordance with generally accepted accounting principles, the Company recorded an adjustment of $438 to additional paid-in-capital as a result of the transfer of the treasury shares. As at December 31, 2011 and 2012, the Company owned a total of 801,920 of its own shares.