UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended March 31, 2010





Commission
file number:  0-19771





ACORN
ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              
              22-2786081(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)4
      West Rockland Road
                Montchanin,
      Delaware
              
              19710(Address
      of principal executive offices)
              
              (Zip
      Code)





(302)
656-1708


(Registrant’s
telephone number, including area code)





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
      x 
         No   ̈





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
      o 
       No  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 the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
(Check one):





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer  ̈
            Smaller
      reporting company x





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


Yes
       ̈ 
      No  x





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
                  
                  Outstanding at May 10, 2010Common
      Stock, $0.01 par value per share
                  
                  15,269,148
      shares








ACORN
ENERGY, INC.


Quarterly
Report on Form 10-Q


for
the Quarterly Period Ended March 31, 2010





TABLE
OF CONTENTS





PART
      I.  Financial InformationItem
      1.
                Financial
      StatementsUnaudited
      Consolidated Financial Statements:Consolidated
      Balance Sheets as of December 31, 2009 and March 31, 2010
                1Consolidated
      Statements of Operations for the three month periods ended March 31, 2009
      and 2010
                2Consolidated
      Statement of Changes in Equity for the three month period ended March 31,
      2010
                3Consolidated
      Statements of Cash Flows for the three month periods ended March 31, 2009
      and 2010
                4Notes
      to Consolidated Financial Statements
                6Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                17Item
      4.
                Controls
      and Procedures
                27PART
      II. Other InformationItem
      1.
                Legal
      Proceedings
                28Item
      6.
                Exhibits
                30Signatures
                31




Certain
statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as “we
expect”, “we anticipate”, “we believe”, “we estimate” and other phrases of
similar meaning. Whether such statements ultimately prove to be accurate depends
upon a variety of factors that may affect our business and operations. Many of
these factors are described in our most recent Annual Report on Form 10-K as
filed with Securities and Exchange Commission.





ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)




As of
                      December 31,
                      2009
                    
                    
                    As of
                      March 31,
                      2010(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    11,208
                    
                    
                    $
                    18,554Restricted
      deposits
                    
                    
                    1,627
                    
                    
                    
                    876Accounts
      receivable, net
                    
                    
                    3,541
                    
                    
                    
                    5,165Unbilled
      revenue and work-in-process
                    
                    
                    4,113
                    
                    
                    
                    3,720Inventory
                    
                    
                    1,848
                    
                    
                    
                    2,439Other
      current assets
                    
                    
                    2,317
                    
                    
                    
                    2,269Total
      current assets
                    
                    
                    24,654
                    
                    
                    
                    33,023Property
      and equipment, net
                    
                    
                    3,357
                    
                    
                    
                    5,212Other
      investments and loans to equity investees
                    
                    
                    2,796
                    
                    
                    
                    2,808Funds
      in respect of employee termination benefits
                    
                    
                    2,074
                    
                    
                    
                    2,175Restricted
      deposits
                    
                    
                    611
                    
                    
                    
                    1,185Intangible
      assets, net
                    
                    
                    8,194
                    
                    
                    
                    10,647Goodwill
                    
                    
                    6,679
                    
                    
                    
                    8,174Deferred
      taxes
                    
                    
                    227
                    
                    
                    
                    238Other
      assets
                    
                    
                    143
                    
                    
                    
                    139Total
      assets
                    
                    $
                    48,735
                    
                    
                    $
                    63,601LIABILITIES
      AND EQUITYCurrent
      liabilities:Short-term
      bank credit and current maturities of long-term bank debt
                    
                    $
                    430
                    
                    
                    $
                    463Accounts
      payable
                    
                    
                    1,607
                    
                    
                    
                    2,068Accrued
      payroll, payroll taxes and social benefits
                    
                    
                    1,409
                    
                    
                    
                    1,340Advances
      from customers
                    
                    
                    1,924
                    
                    
                    
                    1,386Other
      current liabilities
                    
                    
                    3,064
                    
                    
                    
                    4,721Total
      current liabilities
                    
                    
                    8,434
                    
                    
                    
                    9,978Long-term
      liabilities:Liability
      for employee termination benefits
                    
                    
                    3,129
                    
                    
                    
                    3,312Long-term
      debt
                    
                    
                    405
                    
                    
                    
                    379Other
      long-term liabilities
                    
                    
                    669
                    
                    
                    
                    534Total
      long-term liabilities
                    
                    
                    4,203
                    
                    
                    
                    4,225Equity:Acorn
      Energy, Inc. shareholdersCommon
      stock - $0.01 par value per share:Authorized
      – 20,000,000 shares; Issued –13,248,813 and 15,494,229 shares at December
      31, 2009 and March 31, 2010, respectively
                    
                    
                    132
                    
                    
                    
                    154Additional
      paid-in capital
                    
                    
                    58,373
                    
                    
                    
                    70,217Warrants
                    
                    
                    290
                    
                    
                    
                    274Accumulated
      deficit
                    
                    
                    (23,343
                    )
                    
                    
                    (26,466
                    )Treasury
      stock, at cost –1,275,081 shares at December 31, 2009 and March 31, 2010,
      respectively
                    
                    
                    (4,827
                    )
                    
                    
                    (4,827
                    )Accumulated
      other comprehensive income
                    
                    
                    152
                    
                    
                    
                    277Total
      Acorn Energy, Inc. shareholders’ equity
                    
                    
                    30,777
                    
                    
                    
                    39,629Non-controlling
      interests
                    
                    
                    5,321
                    
                    
                    
                    9,769Total
      equity
                    
                    
                    36,098
                    
                    
                    
                    49,398Total
      liabilities and equity
                    
                    $
                    48,735
                    
                    
                    $
                    63,601




The
accompanying notes are an integral part of these consolidated financial
statements.


1


ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)


(IN
THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)




Three months ended
                  March 31,2009
                
                
                2010Revenues:SCR
      services
                
                $
                5,390
                
                
                $
                4,478Projects
                
                
                1,966
                
                
                
                2,507Software
      license and services
                
                
                1,027
                
                
                
                770Other
                
                
                95
                
                
                
                99Total
      revenues
                
                
                8,478
                
                
                
                7,854Cost
      of sales:SCR
      services
                
                
                3,535
                
                
                
                2,546Projects
                
                
                1,219
                
                
                
                1,342Software
      license and services
                
                
                271
                
                
                
                176Other
                
                
                74
                
                
                
                82Total
      cost of sales
                
                
                5,099
                
                
                
                4,146Gross
      profit
                
                
                3,379
                
                
                
                3,708Operating
      expenses:Research
      and development expenses
                
                
                276
                
                
                
                670Selling,
      general and administrative expenses
                
                
                4,108
                
                
                
                6,321Dividends
      received from EnerTech
                
                
                —
                
                
                
                (135
                )Impairments
                
                
                70
                
                
                
                —Total
      operating expenses
                
                
                4,454
                
                
                
                6,856Operating
      loss
                
                
                (1,075
                )
                
                
                (3,148
                )Finance
      income (expense), net
                
                
                (169
                )
                
                
                50Gain
      on sale of shares in Comverge
                
                
                417
                
                
                
                —Loss
      before taxes on income
                
                
                (827
                )
                
                
                (3,098
                )Income
      tax benefit (expense)
                
                
                —
                
                
                
                (75
                )Loss
      from operations of the Company and its consolidated
      subsidiaries
                
                
                (827
                )
                
                
                (3,173
                )Share
      in losses of GridSense
                
                
                (129
                )
                
                
                —Net
      loss
                
                
                (956
                )
                
                
                (3,173
                )Net
      loss (income) attributable to non-controlling interests
                
                
                (107
                )
                
                
                50Net
      loss attributable to Acorn Energy, Inc. shareholders.
                
                $
                (1,063
                )
                
                $
                (3,123
                )Basic
      and diluted net loss per share attributable to Acorn Energy, Inc.
      shareholders
                
                $
                (0.09
                )
                
                $
                (0.25
                )Weighted
      average number of shares outstanding attributable to Acorn Energy, Inc.
      shareholders – basic and diluted
                
                
                11,535
                
                
                
                12,498


The
accompanying notes are an integral part of these consolidated financial
statements.




2





ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGESIN EQUITY (UNAUDITED)


(IN
THOUSANDS)




Acorn Energy, Inc. ShareholdersNumber
                        of Shares
                    
                    
                    Common
                        Stock
                    
                    
                    Additional
                        Paid-In
                        Capital
                    
                    
                    Warrants
                    
                    
                    Accumulated
                        Deficit
                    
                    
                    Treasury
                        Stock
                    
                    
                    Accumulated
                        Other
                        Comprehensive
                        Income
                    
                    
                    Total Acorn
                        Energy, Inc.
                        Shareholders
                        Equity
                    
                    
                    Non-controlling
                        interests
                    
                    
                    Total
                        EquityBalances
      as of December 31, 2009
                    
                    
                    13,249
                    
                    
                    $
                    132
                    
                    
                    $
                    58,373
                    
                    
                    $
                    290
                    
                    
                    $
                    (23,343
                    )
                    
                    $
                    (4,827
                    )
                    
                    $
                    152
                    
                    
                    $
                    30,777
                    
                    
                    $
                    5,321
                    
                    
                    $
                    36,098Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3,123
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3,123
                    )
                    
                    
                    (50
                    )
                    
                    
                    (3,173
                    )Differences
      from translation of subsidiaries’ financial statements and equity
      investees
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    125
                    
                    
                    
                    125
                    
                    
                    
                    18
                    
                    
                    
                    143Comprehensive
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,998
                    )
                    
                    
                    (32
                    )
                    
                    
                    (3,030
                    )Issuance
      by CoaLogix of CoaLogix shares to non-controlling
interests
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    177
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    177
                    
                    
                    
                    667
                    
                    
                    
                    844Shares
      issued in capital raise, net of transaction costs
                    
                    
                    2,232
                    
                    
                    
                    22
                    
                    
                    
                    11,445
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    11,467
                    
                    
                    
                    —
                    
                    
                    
                    11,467Non-controlling
      interests created in USSI consolidation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,600
                    
                    
                    
                    3,600Other
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2
                    
                    
                    
                    2Stock
      option compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    145
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    145
                    
                    
                    
                    —
                    
                    
                    
                    145Stock
      option compensation of subsidiaries
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    211
                    
                    
                    
                    211Exercise
      of options and warrants
                    
                    
                    13
                    
                    
                    
                    —
                    
                    
                    
                    77
                    
                    
                    
                    (16
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    61
                    
                    
                    
                    —
                    
                    
                    
                    61Balances
      as of March 31, 2010
                    
                    
                    15,494
                    
                    
                    $
                    154
                    
                    
                    $
                    70,217
                    
                    
                    $
                    274
                    
                    
                    $
                    (26,466
                    )
                    
                    $
                    (4,827
                    )
                    
                    $
                    277
                    
                    
                    $
                    39,629
                    
                    
                    $
                    9,769
                    
                    
                    $
                    49,398




The
accompanying notes are an integral part of these consolidated financial
statements.


3


ACORN
ENERGY, INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows(unaudited)


(dollars
in thousands)





Three months ended
                          March 31,2009
                        
                        
                        2010Cash
      flows provided by (used in) operating activities:Net
      loss
                        
                        $
                        (956
                        )
                        
                        $
                        (3,173
                        )Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        436
                        
                        
                        
                        449Share
      in losses of GridSense
                        
                        
                        129
                        
                        
                        
                        —Exchange
      rate adjustment on restricted deposits
                        
                        
                        253
                        
                        
                        
                        —Exchange
      rate adjustment on amounts funded for employee termination benefits net of
      exchange adjustment on liability for employee termination
      benefits
                        
                        
                        (82
                        )
                        
                        
                        (18
                        )Increase
      in liability for employee termination benefits
                        
                        
                        58
                        
                        
                        
                        135Amortization
      of stock-based deferred compensation
                        
                        
                        409
                        
                        
                        
                        356Deferred
      taxes
                        
                        
                        —
                        
                        
                        
                        11Impairments
                        
                        
                        70
                        
                        
                        
                        —Gain
      on sale of Comverge shares
                        
                        
                        (417
                        )
                        
                        
                        —Other
                        
                        
                        —
                        
                        
                        
                        (2
                        )Change
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable, unbilled work-in process, other current
      and other assets
                        
                        
                        298
                        
                        
                        
                        (1,130
                        )Increase
      in inventory
                        
                        
                        (77
                        )
                        
                        
                        (581
                        )Increase
      (decrease) in accounts payable, accrued payroll, payroll taxes and social
      benefits, advances from  customers, other current liabilities and
      other liabilities
                        
                        
                        (1,387
                        )
                        
                        
                        1,051Net
      cash used in operating activities
                        
                        
                        (1,266
                        )
                        
                        
                        (2,902
                        )Cash
      flows provided by (used in) investing activities:Proceeds
      from sale of Comverge shares
                        
                        
                        1,397
                        
                        
                        
                        —Deposits
      in restricted deposits
                        
                        
                        —
                        
                        
                        
                        (495
                        )Release
      of restricted deposits
                        
                        
                        —
                        
                        
                        
                        672Loan
      to GridSense
                        
                        
                        —
                        
                        
                        
                        (200
                        )Amounts
      funded for employee termination benefits
                        
                        
                        (57
                        )
                        
                        
                        (35
                        )Acquisitions
      of property and equipment
                        
                        
                        (120
                        )
                        
                        
                        (2,004
                        )Acquisition
      of USSI, net of cash acquired (See Schedule A)
                        
                        
                        —
                        
                        
                        
                        7Net
      cash provided by (used in) investing activities
                        
                        
                        1,220
                        
                        
                        
                        (2,055
                        )Cash
      flows provided by (used in) financing activities:Proceeds
      from capital raise, net of transaction costs
                        
                        
                        —
                        
                        
                        
                        11,467Issuance
      of shares to non-controlling interests in consolidated
      subsidiary
                        
                        
                        —
                        
                        
                        
                        844Exercise
      of options and warrants
                        
                        
                        —
                        
                        
                        
                        61Short-term
      debt borrowings, net
                        
                        
                        259
                        
                        
                        
                        29Repayments
      of long-term debt
                        
                        
                        (4
                        )
                        
                        
                        (31
                        )Other
                        
                        
                        —
                        
                        
                        
                        2Purchase
      of additional shares of DSIT
                        
                        
                        (294
                        )
                        
                        
                        —Purchase
      of treasury shares
                        
                        
                        (328
                        )
                        
                        
                        —Net
      cash provided by (used in) financing activities
                        
                        
                        (367
                        )
                        
                        
                        12,372Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        (31
                        )
                        
                        
                        (69
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        (444
                        )
                        
                        
                        7,346Cash
      and cash equivalents at beginning of period
                        
                        
                        15,142
                        
                        
                        
                        11,208Cash
      and cash equivalents at end of period
                        
                        
                        14,698
                        
                        
                        $
                        18,554




The
accompanying notes are an integral part of these consolidated financial
statements.


4


ACORN
ENERGY, INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows(unaudited)


(dollars
in thousands)





Non-cash
      items:Unrealized
      gain (loss) from Comverge shares
                    
                    $
                    625Due
      from broker from sale of Comverge shares
                    
                    $
                    178Schedule
      A:Assets/liabilities
      acquired in the acquisition of USSI:Other
      current assets
                    
                    
                    
                    
                    
                    $
                    (55
                    )Property
      and equipment
                    
                    
                    
                    
                    
                    
                    (56
                    )Intangibles
                    
                    
                    
                    
                    
                    
                    (2,565
                    )Goodwill
                    
                    
                    
                    
                    
                    
                    (1,402
                    )Current
      liabilities
                    
                    
                    
                    
                    
                    
                    285Prior
      year investment in USSI
                    
                    
                    
                    
                    
                    
                    200Non-controlling
      interests
                    
                    
                    
                    
                    
                    
                    3,600$
                    7


5


ACORN
ENERGY, INC. AND SUBSIDIARIES


Notes to Consolidated Financial
Statements(unaudited)


(dollars
in thousands)




Note
1: Basis of Presentation




The
accompanying unaudited consolidated financial statements of Acorn Energy, Inc.
and its subsidiaries (the “Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included.  Operating results for the three-month period ended March
31, 2010 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2010. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009.




Note
2: Recent Authoritative Guidance




In
March 2010, the Financial Accounting Standard Board (“FASB”) ratified a
consensus of the Emerging Issues Task Force related to the milestone method of
revenue recognition. The consensus will codify a method of revenue recognition
that has been common practice. Under this method, contingent consideration from
research and development activities that is earned upon the achievement of a
substantive milestone is recognized in its entirety in the period in which the
milestone is achieved. This guidance is effective for annual periods beginning
on or after June 15, 2010 but may be early adopted as of the beginning of
an annual period. The Company is currently evaluating the effect that this
guidance will have on its consolidated financial position, results of operations
and cash flows.




In
September 2009, the FASB issued authoritative guidance regarding
multiple-deliverable revenue arrangements. This guidance addresses how to
measure and allocate consideration to one or more units of accounting.
Specifically, the guidance requires that consideration be allocated among
multiple deliverables based on relative selling prices. The guidance establishes
a selling price hierarchy of (1) vendor-specific objective evidence,
(2) third-party evidence and (3) estimated selling price. This
guidance is effective for annual periods beginning on or after June 15,
2010 but may be early adopted as of the beginning of an annual period. The
Company is currently evaluating the effect that this guidance will have on its
consolidated financial position, results of operations and cash
flows.




Note
3: Inventory





As of
                    December 31,
                    2009
                  
                  
                  As of
                    March 31,
                    2010Raw
      materials
                  
                  $
                  550
                  
                  
                  $
                  674Work-in-process
                  
                  
                  1,298
                  
                  
                  
                  1,765$
                  1,848
                  
                  
                  $
                  2,439


6




Note
4: US Sensor Systems Inc. (USSI)





(a) Acorn
investment and option agreements




On
February 23, 2010, following its $200 investment in November 2009, the Company
entered into an option agreement with USSI and a related option agreement with
certain stockholders of USSI (the “Option Agreements”).




Under the
terms of the Option Agreements, the Company has the right to acquire up to an
additional 254,854 shares of USSI’s common stock for a purchase price of $800 as
follows:




·
            The
      Company had the right to acquire 95,469 of these shares under the option
      in consideration for payment of $300 on or before March 31, 2010. (This
      option was exercised immediately following the signing of the Option
      Agreements – see below).




·
            The
      Company has the right to acquire 63,646 of these shares in consideration
      for payment of $200 on or before May 31, 2010.




·
            If
      the Company exercises this installment, it has the right to acquire an
      additional 95,469 shares on or before August 27, 2010 in consideration for
      payment of $300.




In
addition, the Company has the right to acquire 516,378 shares of USSI
common stock held by stockholders in consideration for payment to them of
$2,112 on or before August 27, 2010.  The purchase price is payable in
the Company’s common stock which shall be priced on the basis of the volume
weighted average of the Company’s common stock on the 20 trading days ending on
the day that is five days preceding the date that the Company exercises its
option to acquire the shares of the USSI stockholders.  The shares of the
Company’s common stock that are issued to the USSI stockholders in consideration
for their shares would be restricted securities under Securities Act of 1933 and
would be subject to a lock-up by certificate legend.  The shares would be
released from the lock-up over a one year period, with 25% being released each
three months. If the Company exercises the options described in this and in the
preceding paragraph, the Company would own common stock of USSI representing
approximately 51% of USSI’s fully diluted capitalization.




Under the
Option Agreements, if the Company exercises all of the previously mentioned
options, the Company would have the right to acquire 1,693,391 additional shares
of USSI’s common stock from USSI on or before November 30, 2010 in consideration
for payment of $1,500.  If the Company exercises this option, it would have
the right to acquire 1,693,391 additional shares of common stock from USSI on or
before May 30, 2011 in consideration for payment of $1,500.




If the
Company purchases all of the USSI common stock it is entitled to purchase under
the Option Agreements, the Company would hold USSI shares representing
approximately 84% of USSI’s fully diluted capitalization.




Immediately
following the signing of the Option Agreements, the Company exercised an option
and purchased an additional 95,469 shares of USSI on February 23, 2010 for $300
and currently owns 146,386 shares of USSI’s common stock which represents
approximately 10.0% of USSI’s fully diluted capitalization. Of the $500 the
Company has paid to USSI with respect to the acquisition of shares and options,
the Company has allocated $100 of the purchase price to the value of the options
received with the remaining $400 being allocated to the 10% investment in USSI
imputing a fair value of USSI of $4,100.


7


(b) USSI
as a Consolidated Variable Interest Entity




As a
result of the abovementioned investments and option agreements, USSI is a
variable interest entity by virtue of the Company's $500 investment and the call
options that can give the Company control of USSI within a short period of time
and that may be considered "in-the-money".  USSI is dependent upon the
Company exercising its options under the Option Agreements for it cash
requirements.  The Company considered several factors to determine whether
it or another shareholder is the primary beneficiary of the activities of USSI,
including the existence of the Company's options in USSI and the likelihood of
the Company's exercising those options as well as the level of control and
influence the Company has in USSI and USSI's dependence on the Company's
exercising its options in order to finance its operations.  Based on those
factors, the Company determined that it is most closely associated with USSI and
is therefore the primary beneficiary.  Accordingly, the financial results
of USSI are included in the Company’s consolidated financial statements
effective February 23, 2010 and all amounts pertaining to other shareholders’
interests in USSI are reported as noncontrolling interests in subsidiaries. USSI
is presented as the Company’s new Energy and Security Sensor System
segment.




The
transaction is accounted for as a purchase business combination. USSI’s results
from operations for the period from acquisition (February 23, 2010) to March 31,
2010 have been included in the Company’s consolidated statement of
operations.




In
accordance with generally accepted accounting principles, the $4,100 of fair
value of USSI is allocated to USSI’s identifiable tangible and intangible assets
and liabilities assumed based on their fair values as of the date of the
completion of the transaction. The Company is in the process of obtaining
third-party valuation of intangible assets as of that date, for the purposes of
allocating the purchase price to assets and liabilities and has preliminarily
allocated the purchase price as follows:





Cash
                  
                  $
                  307Other
      current assets
                  
                  
                  37Property
      and equipment
                  
                  
                  56Other
      assets
                  
                  
                  18Intangible
      assets
                  
                  
                  2,565Goodwill
                  
                  
                  1,402Total
      assets acquired
                  
                  
                  4,385Current
      liabilities
                  
                  
                  (285
                  )Fair
      value acquired
                  
                  $
                  4,100




The
third-party valuation of intangible assets with estimable useful lives are
amortized over that period. The acquired intangible assets with estimable useful
lives is comprised of approximately $2,565 for the estimated fair market value
of USSI's sensor technologies (estimated useful life of 20 years). Both the
goodwill and the intangibles resulting from the acquisition are not deductible
for income tax purposes. The goodwill will not be amortized for financial
statement purposes in accordance with applicable accounting principles. The
intangible assets and the goodwill acquired were assigned to the Company’s new
Energy and Security Sensor System segment.


8


Note
5:  CoaLogix





On April 8, 2009, the Company entered
into a Common Stock Purchase Agreement (the “Purchase Agreement”) with the
Company’s CoaLogix Inc. subsidiary, EnerTech Capital Partners III L.P.
(“EnerTech”) and certain members of CoaLogix’s senior management pursuant to
which each of the Company and EnerTech agreed to purchase from CoaLogix 781,111
shares of common stock for a purchase price of $5,624, and certain members of
CoaLogix’s senior management agreed to purchase 36,111 shares of common stock of
CoaLogix for an aggregate purchase price of $260 for a total of $11,508. 
The Purchase Agreement provides that the Company, EnerTech and senior management
will purchase such shares of common stock in stages as funding is needed by
CoaLogix for plant expansion, technology development, legal expenses and
computer software.  Following completion of all the stages of the stock
purchase under the Purchase Agreement, the Company would own approximately 72.3%
of CoaLogix.





Through December 31, 2009, the
Company’s funded $2,747 of its $5,624 commitment under the Purchase Agreement
and its interest in CoaLogix was diluted to approximately 77.4%. In March 2010,
CoaLogix issued a capital call of $1,650 of which the Company's share was $806,
which capital call was funded by the Company, Enertech and CoaLogix’s senior
management. At March 31, 2010, the Company’s interest in CoaLogix was diluted to
approximately 75.8%.





In accordance with applicable
accounting principles, the Company recorded an increase of $177 in additional
paid-in-capital as a result of the $844 investment by non-controlling interests
in March 2010.




Note
6: Non-Controlling Interests




The
composition of the net income (loss) attributable to non-controlling interests
(“NCI”) is as follows:




Three months ended
                    March 31,2009
                  
                  
                  2010Net
      income attributable to NCI in CoaLogix
                  
                  $
                  87
                  
                  
                  $
                  5Net
      income attributable to NCI in DSIT
                  
                  
                  20
                  
                  
                  
                  60Net
      loss attributable to NCI in USSI
                  
                  
                  —
                  
                  
                  
                  (115
                  )Net
      income (loss) attributable to NCI
                  
                  $
                  107
                  
                  
                  $
                  (50
                  )


9




Note
7:  Goodwill and Other Intangible Assets




The
changes in the carrying amounts of goodwill from December 31, 2009 to March
31, 2010 were as follows:





CoaLogix
                      segment
                    
                    
                    Naval &
                      RT
                      Solutions
                      segment
                    
                    
                    EIS
                      segment
                    
                    
                    Energy and
                      Security
                      Sensor
                      System
                      segment
                    
                    
                    TotalBalance
      as of December 31, 2009
                    
                    
                    3,714
                    
                    
                    $
                    534
                    
                    
                    $
                    2,431
                    
                    
                    $
                    —
                    
                    
                    $
                    6,679Goodwill
      recorded in the acquisition of USSI (see Note 4)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,402
                    
                    
                    
                    1,402Translation
      adjustment
                    
                    
                    —
                    
                    
                    
                    9
                    
                    
                    
                    84
                    
                    
                    
                    
                    
                    
                    
                    93Balance
      as of March 31, 2010
                    
                    $
                    3,714
                    
                    
                    $
                    543
                    
                    
                    $
                    2,515
                    
                    
                    $
                    1,402
                    
                    
                    $
                    8,174




The
changes in the carrying amounts and accumulated amortization of intangible
assets from December 31, 2009 to March 31, 2010 were as
follows:




CoaLogix segment
                  
                  
                  Naval & RT
                      Solutions
                      segment
                  
                  
                  EIS Segment
                  
                  
                  Energy and
                      Security Sensor
                      System segmentSCR
                      Technologies**
                  
                  
                  Naval
                      Technologies
                  
                  
                  Software
                  
                  
                  Customer
                      Relationships
                  
                  
                  Sensor
                      Technologies
                  
                  
                  TotalCost
                  
                  
                  A.A.*
                  
                  
                  Cost
                  
                  
                  A.A.*
                  
                  
                  Cost
                  
                  
                  A.A.*
                  
                  
                  Cost
                  
                  
                  A.A.*
                  
                  
                  Cost
                  
                  
                  A.A.*Balance
      as of December 31, 2009
                  
                  $
                  5,511
                  
                  
                  $
                  (1,184
                  )
                  
                  $
                  527
                  
                  
                  $
                  (128
                  )
                  
                  $
                  3,436
                  
                  
                  $
                  (317
                  )
                  
                  $
                  405
                  
                  
                  $
                  (56
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  8,194Intangibles
      recorded in the acquisition of USSI (see Note 4)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,565
                  
                  
                  
                  —
                  
                  
                  
                  2,565Amortization
                  
                  
                  —
                  
                  
                  
                  (136
                  )
                  
                  
                  —
                  
                  
                  
                  (16
                  )
                  
                  
                  —
                  
                  
                  
                  (64
                  )
                  
                  
                  —
                  
                  
                  
                  (10
                  )
                  
                  
                  —
                  
                  
                  
                  (11
                  )
                  
                  
                  (237
                  )Cumulative
      translation adjustment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8
                  
                  
                  
                  (3
                  )
                  
                  
                  119
                  
                  
                  
                  (12
                  )
                  
                  
                  15
                  
                  
                  
                  (2
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  125Balance
      as of March 31, 2010
                  
                  $
                  5,511
                  
                  
                  $
                  (1,320
                  )
                  
                  $
                  535
                  
                  
                  $
                  (147
                  )
                  
                  $
                  3,555
                  
                  
                  $
                  (393
                  )
                  
                  $
                  420
                  
                  
                  $
                  (68
                  )
                  
                  $
                  2,565
                  
                  
                  $
                  (11
                  )
                  
                  $
                  10,647




* 
  Accumulated amortization




** 
 SCR Technologies includes regeneration, rejuvenation and on-site cleaning
technologies.




All
intangible assets are being amortized over their estimated useful lives, which
were estimated to be ten years for SCR Technologies and the Solucorp license,
seven years for Naval Technologies, sixteen years for Software, ten years for
customer relationships and twenty years for sensor technologies. Amortization
expense for each of the three months ended March 31, 2009 and 2010 amounted to
$258 and $237, respectively.  Amortization expense with respect to
intangible assets is estimated to be $1,062, $1,042, $1,014, $1,014 and $995 for
each of the years ending March 31, 2011 through 2015.


10




Note
8: Agreement to Acquire Decision Dynamics




On March
2, 2010, the Company entered into a definitive agreement pursuant to which its
wholly-owned Coreworx subsidiary acquired all of the issued and outstanding
common stock of Decision Dynamics Technology Ltd., a Canadian corporation
(“Decision Dynamics”).  Decision Dynamics, a TSX Venture Exchange-traded
company, is a leading provider of capital project controls and cost management
software for normal operations and capital projects in the energy
industry.




As
contemplated by the definitive agreement, effective April 30, 2010 Coreworx
acquired all of the issued and outstanding securities of Decision Dynamics in
consideration for issuance of 1,000,000 shares of the Company’s common stock to
the Decision Dynamics shareholders.  The acquisition was structured as a
plan of arrangement under the Canada Business Corporations Act and was approved
by the holders of at least two-thirds of the outstanding common shares and
options of Decision Dynamics at a special meeting held on April 27, 2010, each
voting as a separate class, and also approved by the Court of Queen's Bench of
Alberta on April 29, 2010.  See Note 15 – Subsequent Events.




Note
9:  Capital Raise




On March
8, 2010, the Company completed a registered direct offering through a placement
agent of 2,231,818 shares of our 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.




Note
10:  Stock Options and Warrants




(a)
Acorn Stock Options





A summary
of stock option activity for the three months ended March 31, 2010 is as
follows:





Number of
                        Options
                        (in shares)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding
      at December 31, 2009
                      
                      
                      1,745,165
                      
                      
                      $
                      3.52Granted
                      
                      
                      145,000
                      
                      
                      $
                      6.35Exercised
                      
                      
                      —Forfeited
      or expired
                      
                      
                      —Outstanding
      at March 31, 2010
                      
                      
                      1,890,165
                      
                      
                      $
                      3.74
                      
                      
                      3.8 years
                      
                      
                      $
                      4,194Exercisable
      at  March 31, 2010
                      
                      
                      1,464,331
                      
                      
                      $
                      3.50
                      
                      
                      3.5 years
                      
                      
                      $
                      3,559





The
weighted average grant date fair value of the 145,000 stock options granted
during the first three months of 2010 was $4.14 per share. The fair value of the
options granted was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted average
assumptions:





Volatility
                  
                  
                  68
                  %Expected
      term (years)
                  
                  
                  6.4Risk
      free interest rate
                  
                  
                  3.3
                  %Expected
      dividend yield
                  
                  None


11





(b)
Stock-based compensation expense




Total
stock-based compensation expense included in the Company’s statements of
operations for the three months ended March 31, 2009 and 2010, respectively,
was:





Three months ended March 31,2009
                  
                  
                  2010Cost
      of sales
                  
                  $
                  49
                  
                  
                  $
                  5Research
      and development expense
                  
                  
                  19
                  
                  
                  
                  32Selling,
      general and administrative expenses
                  
                  
                  341
                  
                  
                  
                  319Total
      stock based compensation expense
                  
                  $
                  409
                  
                  
                  $
                  356





(c)
Warrants





A summary
of stock warrants activity for the three months ended March 31, 2009 is as
follows:





Number of
                        Warrants
                        (in shares)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        LifeOutstanding
      at December 31, 2009
                      
                      
                      246,904
                      
                      
                      $
                      4.50
                      
                      
                      2.3
      yearsGranted
                      
                      
                      —Exercised
                      
                      
                      13,598Forfeited
      or expired
                      
                      
                      —Outstanding
      and exercisable at March 31, 2010
                      
                      
                      233,306
                      
                      
                      $
                      4.50
                      
                      
                      2.0 years




Note
11: Warranty Provision





The
following table summarizes the changes in accrued warranty liability from the
period from December 31, 2009 to March 31, 2010:





Gross Carrying
                    AmountBalance
      at December 31, 2009
                  
                  $
                  284Warranties
      issued
                  
                  
                  5Adjustment
      of provision
                  
                  
                  (8
                  )Warranty
      claims
                  
                  
                  —Balance
      at  March 31, 2010*
                  
                  $
                  281




* $157 of
the warranty provision is included in Other Current Liabilities and $124 in
Other Liabilities at March 31, 2010.





The
Company’s warranty provision is based upon the Company’s estimate of costs to be
incurred during the warranty period.


12





Note
12: Fair Value Measurement





Financial
items measured at fair value are classified in the table below in accordance
with the hierarchy established in applicable accounting principles.





As at March 31, 2010Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalCash
      and cash equivalents
                  
                  $
                  18,554
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  18,554Restricted
      deposits – current and non-current
                  
                  
                  2,061
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,061Derivative
      assets
                  
                  
                  22
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  22Total
                  
                  $
                  20,637
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  20,637





As at December 31, 2009Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  TotalCash
      and cash equivalents
                  
                  $
                  11,208
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  11,208Restricted
      deposits – current and non-current
                  
                  
                  2,238
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,238Derivative
      liabilities
                  
                  
                  (5
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )Total
                  
                  $
                  13,441
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  13,441





Derivative
assets and liabilities that are classified in Level 1 consist of forward
contracts for the purchase of NIS for which market prices are readily available.
Unrealized gains or losses from forward contracts are recorded in Finance
expense, net.




Note
13:  EnerTech Distribution





In March
2010, the Company received a distribution of $135 from EnerTech relating to the
Company’s investment in EnerTech. The distribution is recorded as dividends
received from EnerTech in the Company's Consolidated Statement of
Operations.


13




Note
14: Segment Information




The Company’s currently operates in
four operating segments:




·
            CoaLogix
      - SCR (Selective Catalytic Reduction) Catalyst and Management services
      conducted through the Company’s CoaLogix subsidiary which provides through
      its SCR-Tech, LLC subsidiary catalyst regeneration technologies and
      management services for selective catalytic reduction (SCR) systems used
      by coal-fired power plants to reduce nitrogen oxides (NOx)
      emissions.




·
            Naval
      and RT Solutions whose activities are focused on the following areas –
      sonar and acoustic related solutions for energy, defense and commercial
      markets and other real-time and embedded hardware & software
      development and production. Naval and RT Solutions activities are provided
      through the Company’s DSIT Solutions Ltd.
  subsidiary.




·
            Energy
      Infrastructure Software (EIS) services are provided through the Company’s
      Coreworx subsidiary. Coreworx provides integrated project collaboration
      and advanced document management solutions for the architecture,
      engineering and construction markets, particularly for large capital
      projects.




·
            Energy
      and Security Sensor Systems (ESSS) services are provided through USSI
      which was effectively acquired in February 2010 (see Note 4). USSI's
      primary focus is to develop and produce fiber optic sensing systems for
      the energy and security markets.   As these activities were
      effectively acquired in February 2010, there are no comparative results
      reported for these activities for the three month period ended March 31,
      2009.




Other operations include various
operations in Israel that do not meet the quantitative thresholds under
applicable accounting principles.





CoaLogix
                  
                  
                  Naval and RT
                    Solutions
                  
                  
                  EIS
                  
                  
                  ESSS
                  
                  
                  Other
                  
                  
                  TotalThree
      months ended March 31, 2010:Revenues
      from external customers
                  
                  $
                  4,478
                  
                  
                  $
                  2,281
                  
                  
                  $
                  770
                  
                  
                  $
                  —
                  
                  
                  $
                  325
                  
                  
                  $
                  7,854Intersegment
      revenues
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Segment
      gross profit
                  
                  
                  1,932
                  
                  
                  
                  1,048
                  
                  
                  
                  594
                  
                  
                  
                  —
                  
                  
                  
                  134
                  
                  
                  
                  3,708Stock
      compensation expense
                  
                  
                  121
                  
                  
                  
                  —
                  
                  
                  
                  90
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  211Depreciation
      and amortization expense
                  
                  
                  284
                  
                  
                  
                  44
                  
                  
                  
                  100
                  
                  
                  
                  13
                  
                  
                  
                  6
                  
                  
                  
                  447Segment
      income (loss) before income taxes
                  
                  
                  20
                  
                  
                  
                  461
                  
                  
                  
                  (2,182
                  )
                  
                  
                  (127
                  )
                  
                  
                  7
                  
                  
                  
                  (1,821
                  )Three
      months ended March 31, 2009:Revenues
      from external customers
                  
                  $
                  5,390
                  
                  
                  $
                  1,796
                  
                  
                  $
                  1,027
                  
                  
                  $
                  —
                  
                  
                  $
                  265
                  
                  
                  $
                  8,478Intersegment
      revenues
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5Segment
      gross profit
                  
                  
                  1,855
                  
                  
                  
                  719
                  
                  
                  
                  755
                  
                  
                  
                  —
                  
                  
                  
                  50
                  
                  
                  
                  3,379Stock
      compensation expense
                  
                  
                  101
                  
                  
                  
                  2
                  
                  
                  
                  54
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  157Depreciation
      and amortization expense
                  
                  
                  305
                  
                  
                  
                  44
                  
                  
                  
                  81
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  436Segment
      income (loss) before income taxes
                  
                  
                  576
                  
                  
                  
                  198
                  
                  
                  
                  (827
                  )
                  
                  
                  —
                  
                  
                  
                  (42
                  )
                  
                  
                  (95
                  )


14


Reconciliation
of Segment Income (Loss) to Consolidated Net Income





Three months ended
                    March 31,2009
                  
                  
                  2010Total
      loss for reportable segments
                  
                  $
                  (53
                  )
                  
                  $
                  (1,828
                  )Other
      operational segment income (loss)
                  
                  
                  (42
                  )
                  
                  
                  7Total
      operating loss
                  
                  
                  (95
                  )
                  
                  
                  (1,821
                  )Share
      of losses in GridSense
                  
                  
                  (129
                  )
                  
                  
                  —Impairments
                  
                  
                  (70
                  )
                  
                  
                  —Non-controlling
      interests
                  
                  
                  (107
                  )
                  
                  
                  50Gain
      on sale of Comverge shares
                  
                  
                  417
                  
                  
                  
                  —Dividends
      received
                  
                  
                  —
                  
                  
                  
                  135Income
      tax expense*
                  
                  
                  —
                  
                  
                  
                  (75
                  )Net
      loss of corporate headquarters and other unallocated
    costs**
                  
                  
                  (1,079
                  )
                  
                  
                  (1,412
                  )Net
      loss attributable to Acorn Energy Inc.
                  
                  $
                  (1,063
                  )
                  
                  $
                  (3,123
                  )





* 
  Tax expense relates to DSIT's consolidated net income.





**
Includes stock compensation expense of $252 and $145 for the three month periods
ending March 31, 2009 and 2010, respectively.




Note
15: Subsequent Events





DDY
Acquisition





On April
30, 2010, the Company's Coreworx subsidiary completed the acquisition of all of
the issued and outstanding common shares of Decision Dynamics Technology Ltd.,
a Canadian corporation (“Decision Dynamics”), in consideration for issuance
of 1,000,000 shares of the Company's common stock to the shareholders of
Decision Dynamics in accordance with terms of a previously announced agreement
that we entered into on March 2, 2010 with Coreworx and Decision Dynamics. 
Decision Dynamics is a leading provider of capital project controls and cost
management software for normal operations and capital projects in the energy
industry and, until completion of the acquisition by Coreworx, had been a TSX
Venture Exchange-traded company.





The
acquisition was structured as a plan of arrangement under the Canada Business
Corporations Act and was subject to approval by the holders of at least
two-thirds of the outstanding common shares and options of Decision Dynamics,
each voting as a separate class, which was obtained at a meeting held on April
27, 2010.  The acquisition was also approved on April 29, 2010 by the Court
of Queen's Bench of Alberta, which conducted a hearing upon the fairness of the
terms of the transaction.





Of the
Company's shares issued in connection with completion of the acquisition,
approximately 340,000 were escrowed at closing, with one-half to be released 90
days after the date of closing and the balance to be released 180 days after the
date of closing.  Subject to such escrow, the shares issued to the Decision
Dynamics shareholders are freely tradable under US federal securities
laws.  The issuance of the Company’s common stock to the Decision Dynamics
shareholders was made without registration under the Securities Act of 1933, as
amended, in reliance upon Section 3(a)(10) thereof.


15


GridSense
Acquisition





Under the
terms of a Share Sale Agreement entered into by and among the Company,
GridSense, the GridSense shareholders and certain note holders of GridSense
dated April 28, 2010, on May 12, 2010, we acquired the outstanding GridSense
shares that were not owned by us (approximately 70%) in consideration for 
206,995 shares of the Company’s common stock. Under the Share Sale Agreement
these shares were valued at $5.91 per share which was the volume weighted
average of our common stock for the 20 trading days preceding October 16,
2009.  In addition, we acquired $1,128 principal amount of promissory notes
of GridSense at a price equal to the principal amount plus accrued interest
($1,764 total principal and interest).  Under the Share Sale Agreement, 50%
of the purchase price of the notes was paid in cash ($882) and 50% was paid
in shares of our common stock, valued at $5.91 per share,
which resulted in the issuance of 149,201 shares of our common stock. In
addition, we provided to GridSense at closing with approximately $594 to be used
to pay a shareholder loan.





Under the
Share Sale Agreement, we have also agreed to pay an earn-out to the shareholders
of GridSense as part of the consideration for their shares.  To the extent
that GridSense’s sales for the period April 1, 2010 through March 31, 2011
exceed $4,384, we would pay the GridSense shareholders an amount equal to 50% of
that excess, up to $2,435, multiplied by 69.86% (representing their ownership
interest in GridSense) for a maximum earn-out of $1,701.  We have the
option of paying any earn-out in cash and/or shares of our common stock. 
If we use shares as all or part of the payment, each share would be valued as
the volume weighted average price of our common stock on the 20 trading days
preceding the date of the issuance of the auditor’s report relating to the
Company’s 2010 financial statements.





Lawsuit
by Environmental Energy Services, Inc.





In
connection with the lawsuit brought by Environmental Energy Services, Inc.
(“EES”) against CoaLogix Inc. and CoaLogix’ CEO William McMahon, on May 11,
2010, CoaLogix, Mr. McMahon and EES entered into a Settlement and Release
Agreement (the “Settlement Agreement”) providing for EES’ agreement to dismiss
its suit against CoaLogix and Mr. McMahon with prejudice within three business
days following the payment by CoaLogix to EES of an undisclosed sum. Under the
terms of the Settlement Agreement the amount paid to EES by CoaLogix is to
remain confidential.  CoaLogix paid such sum of money to EES on May 11,
2010, and EES has agreed to dismiss its suit with prejudice no later than May
14, 2010.  EES and CoaLogix together with Mr. McMahon agreed to mutually
release one another from claims related to the EES suit.





EnerTech
Capital Call





In March
2010, the Company received a capital call of $500 from EnerTech relating to the
Company’s investment in EnerTech. The Company funded the capital call in April
2009. The Company’s has currently funded $2,650 of its $5,000 investment
commitment in EnerTech.


16


ACORN
ENERGY, INC.


Management’s
Discussion and Analysis of


Financial
Condition and Results of Operations





Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations




The
following discussion includes statements that are forward-looking in nature.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect our business and operations.  Certain of these
factors are discussed in this report and in our Annual Report on Form 10-K for
the year ended December 31, 2009.





REVENUES
BY COMPANY




The
following table shows, for the periods indicated, the dollar amount (in
thousands) of the consolidated revenues attributable to each of our consolidated
companies. The financial results of USSI are included in our consolidated
financial statements effective February 23, 2010 (see Recent Developments).
Accordingly, there are no comparative results reported for these activities for
the three month period ended March 31, 2009.





Three months ended
                    March 31,2009
                  
                  
                  2010CoaLogix
                  
                  $
                  5,390
                  
                  
                  $
                  4,478DSIT
      Solutions
                  
                  
                  2,061
                  
                  
                  
                  2,606Coreworx
                  
                  
                  1,027
                  
                  
                  
                  770USSI
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  8,478
                  
                  
                  $
                  7,854





BACKLOG




As of
March 31, 2010, our backlog of work to be completed was as follows (amounts in
millions of U.S. dollars):




Backlog at
                    March 31,
                    2010CoaLogix
                  
                  $
                  7.1DSIT
      Solutions
                  
                  
                  7.6Coreworx
                  
                  
                  1.1USSI
                  
                  
                  0.1Total
                  
                  $
                  15.9





RECENT
DEVELOPMENTS




Acquisition
of Decision Dynamics




On April
30, 2010, our Coreworx subsidiary completed the acquisition of all of the issued
and outstanding common shares of Decision Dynamics Technology Ltd.,
a Canadian corporation (“Decision Dynamics”), in consideration for issuance
of 1,000,000 shares of our common stock to the shareholders of Decision Dynamics
in accordance with terms of a previously announced agreement that we entered
into on March 2, 2010 with Coreworx and Decision Dynamics.  Decision
Dynamics is a leading provider of capital project controls and cost management
software for normal operations and capital projects in the energy industry and,
until completion of the acquisition by Coreworx, had been a TSX Venture
Exchange-traded company.


17




The
acquisition was structured as a plan of arrangement under the Canada Business
Corporations Act and was subject to approval by the holders of at least
two-thirds of the outstanding common shares and options of Decision Dynamics,
each voting as a separate class, which was obtained at a meeting held on April
27, 2010.  The acquisition was also approved on April 29, 2010 by the Court
of Queen's Bench of Alberta, which conducted a hearing upon the fairness of the
terms of the transaction.




Of the
Company's shares issued in connection with completion of the acquisition,
approximately 340,000 were escrowed at closing, with one-half to be released 90
days after the date of closing and the balance to be released 180 days after the
date of closing.  Subject to such escrow, the shares issued to the Decision
Dynamics shareholders are freely tradable under US federal securities
laws.  The issuance of the Company’s common stock to the Decision Dynamics
shareholders was made without registration under the Securities Act of 1933, as
amended, in reliance upon Section 3(a)(10) thereof.





Completion
of Acquisition of GridSense





On
November 4, 2009 we entered into a binding letter of intent with GridSense Pty
Ltd (“GridSense”) and the principal stockholders of GridSense to acquire all of
the outstanding shares of GridSense that the Company did not already own. 
This letter of intent had expired but served as the basis for the parties to
negotiate the Share Sale Agreement which the parties executed as of April 28,
2010. The acquisition covered by the Share Sale Agreement closed effective May
12, 2010.  Prior to the acquisition, we owned shares of GridSense
representing approximately 30% of GridSense’s outstanding shares.





Under the
terms of the Share Sale Agreement, we acquired the outstanding GridSense shares
that were not owned by us (approximately 70%) in consideration for 206,995
shares of the Company’s common stock. Under the Share Sale Agreement these
shares were valued at $5.91 per share which was the volume weighted average
price of our common stock for the 20 trading days preceding October 16,
2009.  In addition, we acquired $1,128,339 principal amount of promissory
notes of GridSense at a price equal to the principal amount plus accrued
interest ($1,763,555).  Under the Share Sale Agreement, 50% of the purchase
price of the notes was paid in cash ($881,778) and 50% was paid in shares
of our common stock, valued at $5.91 per share, which resulted in the
issuance of 149,201 shares of our common stock. In addition, we provided to
GridSense at closing with approximately $594,000 to be used to pay a shareholder
loan.





Under the
Share Sale Agreement, we have also agreed to pay an earn-out to the shareholders
of GridSense as part of the consideration for their shares.  To the extent
that GridSense’s sales for the period April 1, 2010 through March 31, 2011
exceed $4,383,720, we would pay the GridSense shareholders an amount equal to
50% of that excess, up to $2,435,400, multiplied by 69.86% (representing their
ownership interest in GridSense) for a maximum earn-out of $1,701,370.  We
have the option of paying any earn-out in cash and/or shares of our common
stock.  If we use shares as all or part of the payment, each share would be
valued as the volume weighted average price of our common stock on the 20
trading days preceding the date of the issuance of the auditor’s report relating
to the Company’s 2010 financial statements.





The
shares of common stock which were issued in consideration for acquiring the
debt, including any shares issued in payment of the earn-out, are subject
to an escrow for possible indemnity claims and restrictive legend, with 50% of
the shares released after six months and the balance one year after
issuance.  The shares of common stock which were issued in consideration
for acquiring Gridsense’s shares are subject to restrictive legends. The
escrow arrangement and the restrictive legends provide that 50% of the shares
will be available for trading after six months and the balance available for
trading one year after issuance.


18





When we
signed the letter of intent, we loaned GridSense $550,000 which accrues interest
at 8% per annum and is due in October 2011.  On March 4, 2010 we loaned
GridSense an additional $200,000 at 8% interest per annum that is due in March,
2012.





Pursuant
to the terms of the Share Sale Agreement, the Company has agreed to provide
GridSense with up to an additional $1.8 million in working capital which may be
in the form of debt or equity.





Investment
in USSI




On
February 23, 2010, following our $0.2 million investment in November 2009, we
entered into an option agreement with USSI and a related option agreement with
certain stockholders of USSI (the “Option Agreements”).  Under the terms of
the Option Agreements, we have the right to increase our holdings to up to 84%
of USSI's fully diluted capital in sequential stages through May 30, 2011 for
cash ($3.8 million) and Acorn stock (approximately $2.1 million). Immediately
following the signing of the Option Agreements, we exercised an option and made
an additional investment of $0.3 million and increased our holdings in USSI to
10% of its fully diluted capital.  Of the $0.5 million we paid to USSI with
respect to the acquisition of shares and options, we have allocated $0.1 million
of the value of the options received with the remaining $0.4 million being
allocated to the investment in USSI.




As a
result of our investment and Option Agreements, USSI is considered a variable
interest entity under applicable accounting principles.  We considered
several factors to determine whether we or another shareholder is the primary
beneficiary of the activities of USSI, such as existence of our options in USSI
and the likelihood of us exercising those options as well as the level of
control and influence we have in USSI and USSI's dependence our exercising the
options in order for it to finance its operations.  Based on those factors,
we determined that we are most closely associated with USSI and therefore the
primary beneficiary.  Accordingly, the financial results of USSI are
included in our consolidated financial statements effective February 23, 2010
and all amounts pertaining to other shareholders’ interests in USSI are reported
as non-controlling interests in subsidiaries. USSI is presented as our new
Energy and Security Sensor System segment.





Capital
Raise




On March
11, 2010, we completed a registered direct offering through a placement agent of
2,231,818 shares of our common stock pursuant to separate subscription
agreements between us 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 us in connection with the offering, was
$11,467.





CoaLogix
and FLSmidth Alliance




In
February 2010, CoaLogix's subsidiary (CoaLogix Tech LLC) signed an agreement
with FLSmidth to provide SO3 and mercury remediation technologies to the coal
fired power generation market. With this agreement, CoaLogix Tech becomes the
exclusive partner for selling and executing FLSmidth’s leading SO3 reduction
technology into the power generation market. In addition to marketing existing
lines, CoaLogix Tech and FLSmidth will jointly design standardized products,
which will be marketed to energy producers by the CoaLogix Tech sales force. The
agreement also brings FLSmidth’s existing technology for mercury remediation to
CoaLogix Tech.  FLSmidth is a global company employing more than 10,500
people world-wide and is the leading supplier of equipment and services to the
cement and minerals industries.


19





OVERVIEW
AND TREND INFORMATION




During
the 2010 period included in this report, we had operations in four reportable
segments: providing catalyst regeneration technologies and management services
for SCR systems provided through our CoaLogix subsidiary. Naval and RT Solutions
is conducted through our DSIT subsidiary. Energy Infrastructure Software (“EIS”)
services provided through our Coreworx subsidiary; and Energy and Security
Sensor Systems ("ESSS") services which is provided by USSI which was effectively
acquired in February 2010 (See "Recent Developments").  Accordingly, our
results for the three month period ending March 31, 2010 do not include
comparative information for the three month period ending March 31, 2009 with
respect to USSI’s results.




The
following analysis should be read together with the segment information provided
in Note 14 to the interim unaudited consolidated financial statements included
in this quarterly report.





CoaLogix




Our CoaLogix segment reported decreased
revenues in the first quarter of 2010 as compared to the first quarter of 2009,
however, despite decreased revenues, CoaLogix still reported increased gross
profit and gross margin.





Revenues of $4.5 million represent a
decrease of approximately $0.9 million or 17% in the first quarter of 2010 as
compared to the first quarter of 2009. First quarter 2010 revenues also
reflected a similar decrease of $0.9 million or 16% compared to fourth quarter
2009 revenues of $5.3 million. The decrease in revenues from the first quarter
of 2009 and from the fourth quarter of 2009 was primarily due to delayed revenue
recognition timing on completed modules awaiting third party test results. 
In addition, some of CoaLogix's processing resources were directed to processing
its inventory of modules which increased by $0.5 million in the first quarter of
2010.





Despite the decreased revenues, gross
profit in the first quarter of 2010 increased by approximately $0.1 million, or
4%, over first quarter 2009 gross profit. The increase in gross profit was due
to the significantly increased gross margin which increased from 34% for the
2009 period to 43% in the 2010 period. The increased gross margin is primarily
due to higher regeneration margins resulting from improved processing
efficiencies and the processing of some mechanical cleaning jobs that typically
have higher margins.





During the quarter, CoaLogix received
new orders totaling $3.7 million and at the end of March 2010 had a firm backlog
of $7.1 million. We expect revenues in the second half of 2010 to accelerate as
we expect the new Steele Creek plant to become operational in the third
quarter.





In April
2009, we entered into an agreement with CoaLogix, EnerTech and certain members
of CoaLogix’s senior management pursuant to which Acorn and EnerTech each agreed
to invest $5.6 million, and certain members of CoaLogix’s senior management
agreed to invest an aggregate of approximately $260,000, in CoaLogix. 
Through March 31, 2010, CoaLogix received $7.3 million (including $3.6 million
from Acorn) out of the $11.5 million investment commitment from Acorn, EnerTech
and CoaLogix's senior management, including $1.65 million invested ($0.8 million
by Acorn) in March 2010.  Proceeds of the investment have been or will be
used by CoaLogix primarily for plant expansion, technology development, legal
expenses and computer software. The remaining committed funds are expected to be
used for development of CoaLogix's new Steele Creek facility. 
 CoaLogix currently believes that it will need to expend additional funds
beyond the amounts to be received under the Purchase Agreement to make the
Steele Creek facility operational by the third quarter of 2010. We believe that
these funds will be generated from cash flows from operations and existing
credit lines.


20


DSIT
Solutions




DSIT
reported increased revenues in the first quarter of 2010 as compared to the
first quarter of 2009 as well as increased gross profit, gross margin and net
income. DSIT's revenues of $2.6 million for the quarter represents an increase
of approximately $0.5 million or 26% as compared to the first quarter of 2009.
First quarter 2010 revenues also reflected a slight decrease ($0.1 million or
5%) compared to fourth quarter 2009 revenues of $2.7 million. The increase in
revenues from the first quarter of 2009 was primarily due to increased revenues
in our Naval and RT Solutions segment which reported first quarter 2010 revenues
of $2.3 million compared to $1.8 million in the first quarter of 2009. The
increase in revenues was due to the revenues recorded from the $4.4 million
AquaShield DDS order received at the end of 2009.





DSIT's gross profit in the first
quarter of 2010 increased by approximately $0.4 million or 54% over first
quarter 2009 gross profit. Gross margins also increased in the first quarter of
2010 to 45% as compared to 37% in the first quarter of 2009. The increase in
gross profit was attributable to the increased margins on projects as the
current mix of projects has higher margins than those in 2009, particularly the
Naval and RT Solutions' AquaShield DDS projects.





At December 31, 2009, DSIT had a
backlog of approximately $7.6 million. During the quarter, we received new
orders totaling approximately $2.1 million and at the end of March 2010 had
a backlog of approximately $7.6 million. Based on our backlog, and
pending orders, we expect that DSIT's revenues for the remainder of 2010 will
continue to be at least at first quarter 2010 levels.





Coreworx




Coreworx’s
revenues of $0.8 million in the first quarter of 2010 represents a decrease of
$0.3 million or 25% from Coreworx’s first quarter 2009 revenues of $1.0 million.
The decrease in revenues is due to a reduction in license sales revenues which
generally constitutes a large portion of Coreworx's revenue base.





Coreworx’s
gross profit in the first quarter of 2010 was $0.6 million compared to 2009
first quarter gross profit of $0.8 million – a decrease of 21%.  The
decrease in Coreworx’s gross profit in 2010 was attributable to the decrease in
revenues as their gross margin increased slightly from 74% in the first quarter
of 2009 to 77% in the first quarter of 2010. The first quarter 2010 gross profit
and margin was negatively impacted by a one time charge to expense in the first
quarter of 2010.





Coreworx's
net loss of $2.2 million in the first quarter of 2010 was $1.4 million greater
than its first quarter 2009 net loss primarily due to increased development
costs ($0.4 million) related to additional developer and architect personnel in
the development of its new products as well as increased selling and marketing
costs ($0.3 million) as it expanded its sales force to penetrate new markets
combined with the costs related to the acquisition of Decision Dynamics (see
"Recent Developments").





During
the first quarter of 2010, Acorn lent Coreworx $2.2 million and an additional
$0.8 million in April 2010 to finance its working capital needs. Following the
recent acquisition of Decision Dynamics, Coreworx's financing requirements are
expected to lessen in part as a result of the $1.0  million of cash
acquired in the transaction and in part as a result of the expected increase in
revenues in Coreworx as it introduces its new suite of products (Interface
Management, Project Controls and Contract Management) in the second and third
quarters of 2010. We have no assurance that Coreworx will not need additional
financing from time-to-time to finance its working capital needs in 2010 and
beyond. This support may be in the form of a bank line, new investment by
others, additional investment by Acorn, or a combination of the above. There is
no assurance that such support will be available from such sources in sufficient
amounts, in a timely manner and on acceptable terms.  The availability and
amount of any additional investment from us in Coreworx may be limited by the
working capital needs of our corporate activities and other operating
companies.


21





GridSense





Through
May 12, 2010 (the date we completed our acquisition of GridSense – see "Recent
Developments"), we accounted for our GridSense investment using the equity
method. As our investment in GridSense was previously reduced to zero, we
stopped recording equity income or loss in GridSense. Following the acquisition
of GridSense, the financial results of GridSense will be included in our
consolidated financial statements effective May 12, 2010.





USSI





In
accordance with applicable accounting standards, we began consolidating the
results of USSI beginning February 23, 2010, the date we entered into the Option
Agreements with USSI and certain stockholders of USSI (see "Recent
Developments").  We recorded no revenues during this period and a net loss
of $127,000 (prior to adjusting for attribution to non-controlling interests)
with respect to USSI results. USSI continues to submit proposals and await
responses for numerous projects related to its fiber-optic sensor systems for
the energy market (4D Seismic products) and the security markets. Since February
23, 2010, USSI has received approximately $0.4 million in new orders including a
$0.3 million order from Penn State Electro-Optics Center for Phase II of the
Harbor Sentinel project, which calls for the development and testing of a
prototype harbor security system being designed to protect 360 U.S. ports and
harbors.





Corporate





In March
2010, we received a capital call of $500,000 from EnerTech in connection with
our investment in EnerTech.  We funded the capital call in April 2010.
Following this capital call, we will have funded approximately $2.7 million of
our $5.0 million commitment to EnerTech.





In
addition, as noted above in "Recent Developments", in March 2010, we raised
approximately $11.5 million (after transaction costs) in a registered direct
offering. At the end of April 2010, we had approximately $14.2 million in
unrestricted cash and restricted cash of $0.3 million which we expect to be
released in the third quarter of 2010. We continue to have significant corporate
cash expenses and expect to continue to finance the working capital requirements
of our current portfolio of companies as required. In addition, we expect to
continue to expend in the future, significant amounts of funds on professional
fees and other costs in connection with our strategy to seek out and invest in
companies that fit our target business model.





Corporate
general and administrative expense in the first quarter of 2010 reflected a $0.4
million increase to $1.4 million as compared to $1.0 million of expense in the
first quarter of 2009. The increase is due primarily to bonuses recorded in the
first quarter of 2010 combined with increased professional fees associated with
the SEC inquiry and our GridSense acquisition (see "Recent Developments"). In
coming quarters, we expect our corporate general and administrative costs to be
lower than first quarter 2010 costs.


22


Results
of Operations




The
following table sets forth certain information with respect to the consolidated
results of operations of the Company for the three months ended March 31, 2009
and 2010, including the percentage of total revenues during each period
attributable to selected components of the operations statement data and for the
period to period percentage changes in such components.  For segment data
see Note 14 to the Unaudited Consolidated Financial Statements included in this
quarterly report.




Three months ended March 31,2009
                        
                        
                        2010
                        
                        
                        Change($,000)
                        
                        
                        % of
                          revenues
                        
                        
                        ($,000)
                        
                        
                        % of
                          revenues
                        
                        
                        From
                          2009 to
                          2010Revenues
                        
                        $
                        8,478
                        
                        
                        
                        100
                        %
                        
                        $
                        7,854
                        
                        
                        
                        100
                        %
                        
                        
                        (7
                        )Cost
      of sales
                        
                        
                        5,099
                        
                        
                        
                        60
                        
                        
                        
                        4,146
                        
                        
                        
                        53
                        
                        
                        
                        (19
                        )Gross
      profit
                        
                        
                        3,379
                        
                        
                        
                        40
                        
                        
                        
                        3,708
                        
                        
                        
                        47
                        
                        
                        
                        10R&D
      expenses
                        
                        
                        276
                        
                        
                        
                        3
                        
                        
                        
                        670
                        
                        
                        
                        9
                        
                        
                        
                        143Impairments
                        
                        
                        70
                        
                        
                        
                        1
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (100
                        )Dividends
      received from EnerTech
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (135
                        )
                        
                        
                        (2
                        )SG&A
      expenses
                        
                        
                        4,108
                        
                        
                        
                        48
                        
                        
                        
                        6,321
                        
                        
                        
                        80
                        
                        
                        
                        54Operating
      loss
                        
                        
                        (1,075
                        )
                        
                        
                        (13
                        )
                        
                        
                        (3,148
                        )
                        
                        
                        (40
                        )
                        
                        
                        193Finance
      income (expense), net
                        
                        
                        (169
                        )
                        
                        
                        (2
                        )
                        
                        
                        50
                        
                        
                        
                        1
                        
                        
                        
                        (130
                        )Gain
      on sale of Comverge shares
                        
                        
                        417
                        
                        
                        
                        5
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (100
                        )Loss
      before taxes on income
                        
                        
                        (827
                        )
                        
                        
                        (10
                        )
                        
                        
                        (3,098
                        )
                        
                        
                        (39
                        )
                        
                        
                        275Taxes
      on income
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        (75
                        )
                        
                        
                        (1
                        )Loss
      from operations of the  Company and its consolidated
      subsidiaries
                        
                        
                        (827
                        )
                        
                        
                        (10
                        )
                        
                        
                        (3,173
                        )
                        
                        
                        (40
                        )
                        
                        
                        284Share
      of losses in GridSense
                        
                        
                        (129
                        )
                        
                        
                        (2
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (100
                        )Net
      loss
                        
                        
                        (956
                        )
                        
                        
                        (11
                        )
                        
                        
                        (3,173
                        )
                        
                        
                        (40
                        )
                        
                        
                        232Net
      income (loss) attributable to  non-controlling
    interests
                        
                        
                        (107
                        )
                        
                        
                        (1
                        )
                        
                        
                        50
                        
                        
                        
                        1
                        
                        
                        
                        (147
                        )Net
      loss attributable to Acorn Energy Inc.
                        
                        $
                        (1,063
                        )
                        
                        
                        (13
                        )
                        
                        $
                        (3,123
                        )
                        
                        
                        (40
                        )
                        
                        
                        194




Revenues.  Revenues in
the first quarter of 2010 decreased by $0.6 million or 7% from $8.5 million in
the first quarter of 2009 to $7.9 million in the first quarter of 2010. The
decrease in revenues is due to a decrease in revenues for both CoaLogix and
Coreworx which was partially offset by an increase in DSIT revenues. CoaLogix
revenues decreased by $0.9 million (17%) to $4.5 million compared to first
quarter 2009 sales of $5.4 million. Coreworx revenues decreased by $0.3 million
(25%) to $0.8 million while DSIT revenues increased $0.5 million (26%) to $2.6
million. The decrease in CoaLogix revenues was due to delayed revenue
recognition timing on completed customer modules awaiting third party test
results.  In addition, some of CoaLogix's processing resources were
directed to processing its inventory of modules which increased by $0.5 million
in the first quarter of 2010. The decrease in Coreworx revenues was due a
reduction in license sales revenues. DSIT's increased revenues was primarily due
to revenues recorded from the $4.4 million AquaShield DDS order received at the
end of 2009.


23




Gross profit.Gross profit in
the first quarter of 2010 increased by $0.3 million (10%) as compared to the
first quarter of 2009 despite the decrease in revenues. Gross profit at CoaLogix
increased by $0.1 million (4%) in the first quarter of 2010 compared to the
first quarter of 2009. The increase in CoaLogix gross profit is attributable to
an increase in CoaLogix's gross margin from 34% to 43% is primarily due to
higher regeneration margins from improved processing efficiencies and the
processing of some mechanical cleaning jobs that typically have higher margins.
Coreworx gross profit decreased $0.2 million (21%) as compared to the same
period in 2009. Coreworx gross margin increased slightly from 74% to 77% over
the periods. DSIT's first quarter 2010 gross profit increased by $0.4 million
(54%) over first quarter 2009 gross profit. The increase in DSIT's gross profit
was attributable to the reported increased revenues as well as increased margins
which improved from 37% in 2009 to 45% in 2010. DSIT's increased gross margins
in 2010 was due to greater revenues reported on higher margin projects such as
its AquaShield DDS worked on in 2010.




Research and development (“R&D”)
expenses. R& D expenses increased from $0.3 million in the first
quarter of 2009 to $0.7 million in the first quarter of 2010 primarily due to
increased development costs at Coreworx related to additional developer and
architect personnel in the development of its new products.




Selling, general and administrative
expenses(“SG&A”).SG&A costs in the first quarter of 2010 increased
by $2.2 million as compared to the first quarter of 2009. CoaLogix’s SG&A
costs in the first quarter of 2010 increased by $0.6 million as compared to the
first quarter of 2009 reflecting increased overhead costs resulting from the
company’s growth and a provision recorded for the settlement of the suit with
EES (see "Recent Developments"). Coreworx SG&A costs increased $0.9 million
in the first quarter of 2010 due primarily to increased selling and marketing
costs as the company has expanded its sales force to penetrate new markets as
well as for costs related to the acquisition of Decision Dynamics. DSIT’s
SG&A increased $0.2 million primarily as a result of increased salary costs
and non-recurring provisions recorded associated with salary adjustments.
Corporate general and administrative costs increased by $0.5 million due to $0.3
million of bonuses recorded in the quarter and increased administrative and
salary costs.




Net loss.We had a net
loss of $3.1 million in the first quarter of 2010 compared with net loss of $1.1
million in the first quarter of 2009. Our loss in 2010 was primarily due to
Coreworx losses of $2.2 million and corporate expenses of $1.2 million (net of
the dividend received from EnerTech), partially offset by net income from our
DSIT subsidiary of $0.4 million.




Liquidity
and Capital Resources




As of
March 31, 2010, we had working capital of $23.1 million, including $18.6 million
of non-restricted cash and cash equivalents. Our working capital includes
restricted deposits of approximately $0.9 million which we expect to be released
by the end of 2010.  Net cash increased during the three months ended March
31, 2010 by $7.3 million, of which approximately $2.9 million was used in
operating activities. The primary use of cash in operating activities during the
first three months of 2010 was the $2.3 million used by Coreworx in their
operations combined with the $0.9 million of cash used in our corporate
operating activities. This was partially offset by the $0.3 and $0.1 million of
cash provided by operating activities from our DSIT and CoaLogix
subsidiaries.




Cash used
in investment activities of $2.1 million was primarily due to the $2.0 million
used for the acquisition of property and equipment (primarily at CoaLogix for
its new Steele Creek facility) and a loan of $0.2 million to GridSense. Those
uses of cash were partially offset by the $0.2 million of restricted deposits,
net, released during the period.




Net cash
of $12.4 million was provided by financing activities, primarily from our recent
sale of shares ($11.5 million net of transaction costs) and the $0.8 million of
proceeds from the issuance of shares to non-controlling interests in
CoaLogix.


24




At March
31, 2010, DSIT had NIS 2.0 million ($539,000) of Israeli credit lines available
to it by an Israeli bank of which $134,000 was then being used. The
line-of-credit is subject to certain financial covenants. DSIT was in compliance
with its financial covenants at March 31, 2010. In addition, DSIT also has a
term loan of approximately NIS 1.9 million ($508,000) which is payable over the
four year period ending December 31, 2013.  DSIT has recently received a
proposal from another Israeli bank for additional credit lines. DSIT is
currently awaiting formal approval by its primary lender of the secondary bank.
We believe that DSIT will have sufficient liquidity to finance its activities
from cash flow from its own operations over the next 12 months.  This is
based on continued utilization of its lines of credit and expected continued
improvement of operating results stemming from anticipated growth in
sales.




On March
31, 2010, CoaLogix had a $2 million formula based line-of-credit available to it
for utilization from a bank.  At March 31, 2010, CoaLogix was utilizing
$200,000 of the formula based line-of-credit.  The line-of-credit expires
on June 1, 2010 and CoaLogix is negotiating more favorable terms and expects to
renew the line-of-credit before the extension period expires. The line-of-credit
is used to finance CoaLogix’s working capital and to finance its growth and is
subject to certain financial covenants. CoaLogix was in compliance with its
financial covenants at March 31, 2010. We believe that CoaLogix will have
sufficient liquidity to finance its operating activities and plant expansion
from cash flows from its own operations, cash received from Acorn, EnerTech and
certain members of CoaLogix senior management (see below) and bank financing
over the next 12 months.




In April
2009, Acorn, EnerTech and certain members of CoaLogix senior management agreed
to invest approximately $11.5 million in CoaLogix.  Through April 30, 2010,
approximately $7.3 million of the $11.5 million had been invested including $3.6
million from Acorn. CoaLogix expects to call and receive the remaining $4.2
million, of which $2.1 million will be invested by Acorn, by the fourth quarter
of 2010.




During
the first three months of 2010, we lent Coreworx $2.2 million and an additional
$0.8 million in April 2010 to finance Coreworx's working capital needs.
Following the recent acquisition Decision Dynamics, (see "Recent Developments"),
Coreworx's financing requirements are expected to lessen in part as a result of
the $1.0 million of cash acquired in the transactions and in part as a result of
the expected increase in revenues in Coreworx as it introduces its new suite of
products (Interface Management, Project Controls and Contract Management) in the
second and third quarters of 2010. We have no assurance that Coreworx will not
need additional financing from time-to-time to finance its working capital needs
in 2010 and beyond. This support may be in the form of a bank line, new
investment by others, additional investment by Acorn, or a combination of the
above. There is no assurance that such support will be available from such
sources in sufficient amounts, in a timely manner and on acceptable terms. 
The availability and amount of any additional investment from us in Coreworx may
be limited by the working capital needs of our corporate activities and other
operating companies.




On
February 23, 2010, we exercised our first option under the Option Agreements
with respect to USSI and invested $300,000 in USSI. USSI currently has no other
sources of financing other than its internally generated sales and the funds
from the exercise of our options. Our next option (exercise price of $200,000)
expires on May 31, 2010. If we do not exercise the option, we have no assurance
that USSI will not need additional financing from time-to-time to finance its
working capital needs. This support may be in the form of a bank line or new
investment by others, or a combination of the above. There is no assurance that
such support will be available from such sources in sufficient amounts, in a
timely manner and on acceptable terms.  The amount of any additional
investment from us in USSI may be limited by the working capital needs of our
corporate activities and other operating companies.




As of May
1, 2010, the Company’s corporate operations had a total of approximately $14.4
million in cash and cash equivalents (including the $0.3 million deposited in an
account as a security for a guarantee for DSIT), reflecting a $1.5 million
decrease from the balance as of March 31, 2010. The decrease from March 31, 2010
includes $0.8 million that was lent to our Coreworx subsidiary and $0.5 million
that was transferred to EnerTech as a result of a recent capital
call.




We
believe that the cash on hand plus the expected release of restricted deposits
as well as cash from our subsidiaries operating activities will provide more
than sufficient liquidity to finance Acorn and its subsidiaries activities for
the foreseeable future and for the next 12 months in
particular.


25





Contractual
Obligations and Commitments




Our
contractual obligations and commitments at March 31, 2010 principally include
obligations associated with our outstanding indebtedness, future minimum
operating lease obligations and potential severance obligations, investment and
purchase commitments and are set forth in the table below.




Cash Payments Due During Year Ending March 31,(amounts in thousands)Contractual Obligations
                    
                    Total
                    
                    
                    2011
                    
                    
                    
                    2012-2013
                    
                    
                    
                    2014-2015
                    
                    
                    2016 and
                      thereafterLong-term
      bank debt and utilized lines-of-credit
                    
                    $
                    842
                    
                    
                    $
                    463
                    
                    
                    $
                    272
                    
                    
                    $
                    107
                    
                    
                    $
                    —Operating
      leases
                    
                    
                    6,395
                    
                    
                    
                    1,964
                    
                    
                    
                    2,529
                    
                    
                    
                    895
                    
                    
                    
                    1,007Potential
      severance obligations
                    
                    
                    3,326
                    
                    
                    
                    14
                    
                    
                    
                    —
                    
                    
                    
                    1,026
                    (1)
                    
                    
                    2,286
                    (1)Investment
      in EnerTech(2)
                    
                    
                    2,850
                    
                    
                    
                    2,850
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Investment
      in CoaLogix (3)
                    
                    
                    2,071
                    
                    
                    
                    2,071
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Purchase
      commitments
                    
                    
                    4,706
                    
                    
                    
                    4,706
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      contractual cash obligations
                    
                    $
                    20,190
                    
                    
                    $
                    12,068
                    
                    
                    $
                    2,801
                    
                    
                    $
                    2,028
                    
                    
                    $
                    3,293




We expect
to finance these contractual commitments from cash on hand and cash generated
from operations.




(1) Under
Israeli law and labor agreements, DSIT is required to make severance payments to
dismissed employees and to employees leaving employment under certain other
circumstances. The obligation for severance pay benefits, as determined by the
Israeli Severance Pay Law, is based upon length of service and ending salary.
These obligations are substantially covered by regular deposits with recognized
severance pay and pension funds and by the purchase of insurance policies. 
As of March 31, 2010, we accrued a total of $3.3 million for potential severance
obligations of which approximately $2.2 million was funded with cash to
insurance companies.




(2) In
August 2007, we committed to invest up to $5 million over a ten-year period in
EnerTech, a proposed $250 million venture capital fund targeting early and
expansion stage energy and clean energy technology companies that can enhance
the profits of the producers and consumers of energy.




Our
obligation under this commitment is presented as an obligation due in the next
12 months, though it is uncertain as to when actual payments may be made.
Through March 31, 2010, we have received and funded capital calls of $2,150,000
to EnerTech. In March 2010, we received a capital call of $500,000. We funded
the capital call in April 2009. The Company’s has currently funded $2,650,000 of
its $5.0 million investment commitment in EnerTech.




(3) In
April 2009, we entered into an agreement with CoaLogix, EnerTech and certain
members of CoaLogix’s senior management to invest up to $5,624,000 in CoaLogix.
Through March 31, 2010, we invested $3,553,000 of our $5,624,000 commitment. Our
remaining obligation under this commitment of $2,071,000 is presented as due in
the next 12 months, though it is uncertain as to when actual payments may be
made.


26




Item
4.  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this Report, we carried out an evaluation, under
the supervision and with the participation of our management, including the
Chief Executive Officer and the Chief Financial Officer, of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act’)). Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level at end of the period covered by
this report to ensure that the information required to be disclosed by us in the
reports we file or submit under the Exchange Act is (i) accumulated and
communicated to our management (including our Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.




Changes
in Internal Coltrol Over Financial Reporting




There was
no change in our internal control over financial reporting (as such term is
defined in Rule 13a-15(f) under the Exchange Act) during the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


27




PART
II – OTHER INFORMATION




Item
1.  Legal Proceedings


Environmental
Energy Services, Inc. v. CoaLogix, Inc.


District
of Connecticut, Case No. 3:08 CV 1237 (RNC)





On August
13, 2008, Environmental Energy Services (“EES”) filed suit against CoaLogix and
William McMahon, the president and chief executive officer of CoaLogix, in the
United States District Court for the District of Connecticut alleging claims for
tortious interference with contract, fraudulent misrepresentation, conversion,
unfair trade practices and unjust enrichment. EES’ claims arise largely out of a
series of business relationships that existed between EES, CoaLogix and Solucorp
Industries, Ltd. On May 11, 2010, CoaLogix, William McMahon and EES entered into
a Settlement and Release Agreement (the “Settlement Agreement”) providing for
EES’ agreement to dismiss its suit against CoaLogix and Mr. McMahon with
prejudice within three business days following the payment by CoaLogix to EES of
an undisclosed sum of money.  Under the terms of the Settlement Agreement
the amount of money paid to EES by CoaLogix shall remain confidential. 
CoaLogix paid such sum of money to EES on May 11, 2010, and EES has agreed to
dismiss its suit with prejudice no later than May 14, 2010.  EES and
CoaLogix together with Mr. McMahon agreed to mutually release one another from
claims related to the  EES suit.





SCR-Tech
LLC v Evonik Energy Services LLC et al.


District
of Connecticut, Case No. 3:08 CV 1237 (RNC)





On July
30, 2008, SCR-Tech LLC (“SCR-Tech”), a subsidiary of CoaLogix, filed suit in
Mecklenburg County, North Carolina, Superior Court against Evonik Energy
Services LLC (“Evonik LLC”), Hans-Ulrich Hartenstein and Brigitte Hartenstein
(the “Hartensteins”), and three of Evonik LLC’s German parent companies: Evonik
Energy Services GmbH, Evonik Steag GmbH and Evonik Industries AG (the “German
Defendants”).  Subsequent to the initial filing, the case was designated as
a complex business matter and transferred to the North Carolina Business
Court.  The Hartensteins, Evonik LLC and the German Defendants are
collectively referred to as the “Evonik Defendants.”





SCR-Tech’s
claims arise largely from the Hartensteins’ previous employment as officers of
SCR-Tech and the Confidentiality and Invention Assignment Agreement signed by
the Hartensteins upon termination of their employment with SCR-Tech. 
Shortly after leaving SCR-Tech in late 2005, the Hartensteins accepted positions
as officers of Evonik LLC f/k/a Steag LLC.  Evonik LLC then announced that
it would be opening a catalyst regeneration facility in Kings Mountain, North
Carolina.  SCR-Tech subsequently became concerned that the Hartensteins
were acting in contravention of their confidentiality agreement.  After
Evonik LLC refused to engage in meaningful discussions regarding SCR-Tech’s
concerns, SCR-Tech filed suit alleging claims for breach of contract, tortious
interference with contract, misappropriation of trade secrets, breach of
fiduciary duty and usurpation of corporate opportunity.  SCR-Tech’s claims
against the German Defendants stem from Evonik LLC’s admission that its parent
entities knew of the Hartensteins’ contractual obligations to SCR-Tech and,
nevertheless, directed the actions which have been in contravention of those
obligations.





Subsequent
to the filing of this lawsuit, the Hartensteins filed a motion to dismiss
SCR-Tech’s claims related to breach of fiduciary duty and usurpation of
corporate opportunity, and the court dismissed these two claims effective May 6,
2009.  The other claims stated against the Hartensteins in the complaint
are not affected by this ruling.  Also subsequent to the filing of this
lawsuit, the German Defendants filed motions to have the German Defendants
dismissed on the basis of lack of jurisdiction and failure to state a claim upon
which relief can be granted, and on May 6, 2009 the court granted the motion to
dismiss with respect to Evonik Industries AG and denied the motion to dismiss
with respect to failure to state a claim upon which relief can be granted. 
Consequently, Evonik Industries AG has been dismissed as a defendant, and Evonik
Energy Services GmbH and Evonik Steag GmbH remain defendants in the
lawsuit.


28





Additionally,
Evonik LLC has filed a counterclaim against SCR-Tech, for unspecified damages,
alleging trade libel, abuse of process and unfair and deceptive trade
practices.  SCR-Tech vehemently denies the allegations of Evonik LLC’s
counterclaim and will vigorously defend against them.





On
February 25, 2010, the Evonik Defendants filed a motion for summary judgment on
the non-existence of SCR-Tech’s trade secrets or confidential information and a
motion requesting that the court stay discovery.  SCR-Tech has filed
responses to these motions.  These motions will be considered and decided
by the North Carolina Business Court.


29




Item
6.  Exhibits.




1.1
              
              Placement
      Agency Agreement between the Registrant and Merriman Curhan Ford & Co.
      dated as of March 8, 2010 (incorporated herein by reference to Exhibit 1.1
      to the Registrant’s Current Report on Form 8-K dated March 8,
      2010).1.2
              
              Form
      of Investor Purchase Agreement (incorporated herein by reference to
      Exhibit 1.2 to the Registrant’s Current  Report on Form 8-K dated
      March 8, 2010).2.1
              
              Arrangement
      Agreement among Acorn Energy, Inc., Coreworx, Inc. and Decision Dynamics
      Technology Ltd. dated March 2, 2010 (incorporated herein by reference to
      Registrant’s Current Report on Form 8-K filed May 4,
  2010).10.1
              
              Common
      Stock Option Purchase Agreement between the Registrant and US Sensor
      Systems Inc. dated as of February 23, 2010.  #10.2
              
              Capital
      Stock Option Purchase Agreement by and among the Registrant, US Sensor
      Systems Inc. and other parties named therein dated as of February 23,
      2010.  #10.3
              
              Stockholders
      Agreement by and among the Registrant, US Sensor Systems Inc. and other
      parties named therein dated as of February 23,
      2010.  #10.4
              
              Amended
      and Restated Investors Rights Agreement by and among the Registrant, US
      Sensor Systems Inc. and other parties named therein dated as of February
      23, 2010.  #31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. #31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. #32.1
              
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002. #32.2
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002. #





#  This
exhibit is filed herewith.


30


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 its principal financial
officer thereunto duly authorized.





ACORN
      ENERGY, INC.Dated:  May
      13, 2010By:
                  /s/Michael
      BarthMichael
      BarthChief
      Financial
Officer


31