UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September 30,
2009
 
 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 November 6, 2009Common
      Stock, $0.01 par value per share
                          
                          11,646,788
      shares
  
  ACORN
ENERGY, INC.
 Quarterly
Report on Form 10-Q
 for
the Quarterly Period Ended September 30, 2009
 
 TABLE
OF CONTENTS
 
 PART
      I.  Financial InformationItem
      1.
                                        Financial
      StatementsUnaudited
      Consolidated Financial Statements:Consolidated
      Balance Sheetsas
      of December 31, 2008 and September 30, 2009
                                        1Consolidated
      Statements of Operationsfor
      the nine and three month periods ended September 30, 2008 and
      2009
                                        2Consolidated
      Statement of Changes in Equityfor
      the nine month period ended September 30, 2009
                                        3Consolidated
      Statements of Cash Flowsfor
      the nine month periods ended September 30, 2008 and 2009
                                        4Notes
      to Consolidated Financial Statements
                                        7Item
      2.
                                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                        21Item
      3.
                                        Quantitative
      and Qualitative Disclosures about Market Risk
                                        30Item
      4.
                                        Controls
      and Procedures
                                        31PART
      II. Other InformationItem
      1.
                                        Legal
      Proceedings
                                        32Item
      2 .
                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                        34Item
      4 .
                                        Submission
      of Matters to a Vote of Security Holders
                                        35Item
      6.
                                        Exhibits
                                        36Signatures
                                        
                                        37
  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, 2008
                            
                            
                            As of
                              September
                              30, 2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            15,142
                            
                            
                            $
                            12,018Restricted
      deposit
                            
                            
                            2,157
                            
                            
                            
                            970Accounts
      receivable, net
                            
                            
                            4,524
                            
                            
                            
                            4,606Unbilled
      work-in-process
                            
                            
                            581
                            
                            
                            
                            1,728Inventory
                            
                            
                            1,148
                            
                            
                            
                            2,493Other
      current assets
                            
                            
                            2,080
                            
                            
                            
                            2,071Total
      current assets
                            
                            
                            25,632
                            
                            
                            
                            23,886Property
      and equipment, net
                            
                            
                            2,447
                            
                            
                            
                            2,901Available
      for sale - Investment in Comverge
                            
                            
                            2,462
                            
                            
                            
                            —Investment
      in GridSense
                            
                            
                            129
                            
                            
                            
                            —Investment
      in EnerTech
                            
                            
                            1,117
                            
                            
                            
                            2,037Funds
      in respect of employee termination benefits
                            
                            
                            1,677
                            
                            
                            
                            1,863Restricted
      deposit
                            
                            
                            579
                            
                            
                            
                            —Other
      intangible assets, net
                            
                            
                            10,357
                            
                            
                            
                            10,085Goodwill
                            
                            
                            6,342
                            
                            
                            
                            6,637Other
      assets
                            
                            
                            313
                            
                            
                            
                            355Total
      assets
                            
                            $
                            51,055
                            
                            
                            $
                            47,764LIABILITIES
      AND EQUITYCurrent
      liabilities:Short-term
      bank credit and current maturities of long-term debt
                            
                            $
                            445
                            
                            
                            $
                            820Notes
      payable
                            
                            
                            3,400
                            
                            
                            
                            —Trade
      accounts payable
                            
                            
                            2,285
                            
                            
                            
                            2,391Accrued
      payroll, payroll taxes and social benefits
                            
                            
                            1,314
                            
                            
                            
                            1,319Other
      current liabilities
                            
                            
                            4,350
                            
                            
                            
                            3,196Total
      current liabilities
                            
                            
                            11,794
                            
                            
                            
                            7,726Long-term
      liabilities:Liability
      for employee termination benefits
                            
                            
                            2,651
                            
                            
                            
                            2,892Other
      liabilities
                            
                            
                            487
                            
                            
                            
                            581Total
      long-term liabilities
                            
                            
                            3,138
                            
                            
                            
                            3,473Equity:Acorn
      Energy Inc. Common stock - $0.01 par value per share:Authorized
      – 20,000,000 shares; Issued –12,454,528 at December 31, 2008 and
      12,485,086 at  September 30, 2009
                            
                            
                            124
                            
                            
                            
                            124Additional
      paid-in capital
                            
                            
                            54,735
                            
                            
                            
                            56,460Warrants
                            
                            
                            1,020
                            
                            
                            
                            978Accumulated
      deficit
                            
                            
                            (17,587
                            )
                            
                            
                            (19,531
                            )Treasury
      stock, at cost – 841,286 and 1,275,081 shares for December 31, 2008 and
      September 30, 2009, respectively
                            
                            
                            (3,719
                            )
                            
                            
                            (4,827
                            )Accumulated
      other comprehensive loss
                            
                            
                            (425
                            )
                            
                            
                            (208
                            )Total
      Acorn Energy Inc. shareholders’ equity
                            
                            
                            34,148
                            
                            
                            
                            32,996Non-controlling
      interests
                            
                            
                            1,975
                            
                            
                            
                            3,569Total
      equity
                            
                            
                            36,123
                            
                            
                            
                            36,565Total
      liabilities and equity
                            
                            $
                            51,055
                            
                            
                            $
                            47,764
  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 per share data)
 
 Nine months ended
                              September 30,
                            
                            
                            Three months ended
                              September 30,2008
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009SalesCatalytic
      regeneration services
                            
                            $
                            5,441
                            
                            
                            $
                            12,761
                            
                            
                            $
                            1,840
                            
                            
                            $
                            2,824Projects
                            
                            
                            5,959
                            
                            
                            
                            6,156
                            
                            
                            
                            1,918
                            
                            
                            
                            2,154Software
      license and services
                            
                            
                            767
                            
                            
                            
                            3,487
                            
                            
                            
                            767
                            
                            
                            
                            1,385Other
                            
                            
                            363
                            
                            
                            
                            317
                            
                            
                            
                            103
                            
                            
                            
                            10012,530
                            
                            
                            
                            22,721
                            
                            
                            
                            4,628
                            
                            
                            
                            6,463Cost
      of salesCatalytic
      regeneration services
                            
                            
                            4,573
                            
                            
                            
                            8,592
                            
                            
                            
                            2,075
                            
                            
                            
                            2,126Projects
                            
                            
                            4,091
                            
                            
                            
                            3,566
                            
                            
                            
                            1,314
                            
                            
                            
                            1,215Software
      license and services
                            
                            
                            257
                            
                            
                            
                            599
                            
                            
                            
                            257
                            
                            
                            
                            183Other
                            
                            
                            282
                            
                            
                            
                            234
                            
                            
                            
                            85
                            
                            
                            
                            789,203
                            
                            
                            
                            12,991
                            
                            
                            
                            3,731
                            
                            
                            
                            3,602Gross
      profit
                            
                            
                            3,327
                            
                            
                            
                            9,730
                            
                            
                            
                            897
                            
                            
                            
                            2,861Operating
      expenses:Research
      and development expenses, net of SRED credits of $1,016 in the nine months
      ended September 30, 2009
                            
                            
                            510
                            
                            
                            
                            76
                            
                            
                            
                            402
                            
                            
                            
                            424Acquired
      in-process research and development
                            
                            
                            551
                            
                            
                            
                            —
                            
                            
                            
                            551
                            
                            
                            
                            —Impairments
                            
                            
                            3,000
                            
                            
                            
                            80
                            
                            
                            
                            2,454
                            
                            
                            
                            —Selling,
      general and administrative expenses
                            
                            
                            8,094
                            
                            
                            
                            13,292
                            
                            
                            
                            3,401
                            
                            
                            
                            4,565Total
      operating expenses
                            
                            
                            12,155
                            
                            
                            
                            13,448
                            
                            
                            
                            6,808
                            
                            
                            
                            4,989Operating
      loss
                            
                            
                            (8,828
                            )
                            
                            
                            (3,718
                            )
                            
                            
                            (5,911
                            )
                            
                            
                            (2,128
                            )Gain
      on early redemption of convertible debentures
                            
                            
                            1,259
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Finance
      income (expense), net
                            
                            
                            (2,950
                            )
                            
                            
                            213
                            
                            
                            
                            (50
                            )
                            
                            
                            297Gain
      on sale of Comverge shares
                            
                            
                            8,861
                            
                            
                            
                            1,403
                            
                            
                            
                            3,079
                            
                            
                            
                            176Gain
      on outside investment in Company’s equity investments, net
                            
                            
                            7
                            
                            
                            
                            —
                            
                            
                            
                            7
                            
                            
                            
                            —Loss
      before taxes on income
                            
                            
                            (1,651
                            )
                            
                            
                            (2,102
                            )
                            
                            
                            (2,875
                            )
                            
                            
                            (1,655
                            )Tax
      benefit (expense) on income
                            
                            
                            (689
                            )
                            
                            
                            72
                            
                            
                            
                            (691
                            )
                            
                            
                            72Loss
      from operations of the Company and its consolidated
      subsidiaries
                            
                            
                            (2,340
                            )
                            
                            
                            (2,030
                            )
                            
                            
                            (3,566
                            )
                            
                            
                            (1,583
                            )Share
      in losses of GridSense
                            
                            
                            (194
                            )
                            
                            
                            (129
                            )
                            
                            
                            (60
                            )
                            
                            
                            —Share
      in income (losses) of Paketeria
                            
                            
                            (1,560
                            )
                            
                            
                            263
                            
                            
                            
                            (899
                            )
                            
                            
                            263Net
      loss
                            
                            
                            (4,094
                            )
                            
                            
                            (1,896
                            )
                            
                            
                            (4,525
                            )
                            
                            
                            (1,320
                            )Net
      (income) loss attributable to non-controlling interests
                            
                            
                            284
                            
                            
                            
                            (48
                            )
                            
                            
                            204
                            
                            
                            
                            96Net
      loss attributable to Acorn Energy Inc.
                            
                            $
                            (3,810
                            )
                            
                            $
                            (1,944
                            )
                            
                            $
                            (4,321
                            )
                            
                            $
                            (1,224
                            )Basic
      and diluted earnings per share attributable to Acorn
      Energy  Inc.:Net
      loss per share attributable to Acorn Energy Inc.   – basic
      and diluted
                            
                            $
                            (0.34
                            )
                            
                            $
                            (0.17
                            )
                            
                            $
                            (0.37
                            )
                            
                            $
                            (0.11
                            )Weighted
      average number of shares outstanding attributable to Acorn Energy
      Inc.  – basic and diluted
                            
                            
                            11,285
                            
                            
                            
                            11,365
                            
                            
                            
                            11,538
                            
                            
                            
                            11,186
  The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  ACORN
ENERGY, INC. AND SUBSIDIARIES
 Consolidated Statement of Changes in
Equity(unaudited)
 (in
thousands)
 
 Number
      of
                                Shares
                            
                            
                            Common
                                Stock
                            
                            
                            Additional
                                Paid-In
                                Capital
                            
                            
                            Warrants
                            
                            
                            Accumulated
                                Deficit
                            
                            
                            Treasury
                                Stock
                            
                            
                            Accumulated
                                Other
                                Comprehensive
                                Income
      (Loss)
                            
                            
                            Non-
                                controlling
                                interests
                            
                            
                            TotalBalances
      as of December 31, 2008
                            
                            
                            12,455
                            
                            
                            $
                            124
                            
                            
                            $
                            54,735
                            
                            
                            $
                            1,020
                            
                            
                            $
                            (17,587
                            )
                            
                            $
                            (3,719
                            )
                            
                            $
                            (425
                            )
                            
                            $
                            1,975
                            
                            
                            $
                            36,123Net
      income (loss)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (1,944
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            48
                            
                            
                            
                            (1,896
                            )Adjustment
      to fair market value on Comverge shares
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            125
                            
                            
                            
                            —
                            
                            
                            
                            125Differences
      from translation of financial statements of subsidiaries
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            92
                            
                            
                            
                            —
                            
                            
                            
                            92Comprehensive
      income
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            (1,679
                            )Purchase
      of treasury shares
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (1,108
                            )
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            (1,108
                            )Exercise
      of options and warrants
                            
                            
                            30
                            
                            
                            
                            —
                            
                            
                            
                            139
                            
                            
                            
                            (42
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            97Sale
      by CoaLogix  of CoaLogix shares to Acorn and non-controlling
      interests
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            445
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,546
                            
                            
                            
                            1,991Stock
      option compensation
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            593
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            593Stock
      option compensation of subsidiaries
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            548
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            548Balances
      as of September 30, 2009
                            
                            
                            12,485
                            
                            
                            $
                            124
                            
                            
                            $
                            56,460
                            
                            
                            $
                            978
                            
                            
                            $
                            (19,531
                            )
                            
                            $
                            (4,827
                            )
                            
                            $
                            (208
                            )
                            
                            $
                            3,569
                            
                            
                            $
                            36,565
  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)
 
 Nine months ended
                              September 30,2008
                            
                            
                            2009Cash
      flows used in operating activities:Net
      loss
                            
                            $
                            (4,094
                            )
                            
                            $
                            (1,896
                            )Adjustments
      to reconcile net loss to net cash used in operating activities (see
      Schedule A):
                            
                            
                            (222
                            )
                            
                            
                            (2,245
                            )Net
      cash used in operating activities
                            
                            
                            (4,316
                            )
                            
                            
                            (4,141
                            )Cash
      flows provided by (used in) investing activities:Proceeds
      from sale of Comverge shares and covered calls
                            
                            
                            15,355
                            
                            
                            
                            3,990Investment
      in EnerTech
                            
                            
                            (750
                            )
                            
                            
                            (1,000
                            )Payment
      for DSIT shares from exercise of put option
                            
                            
                            —
                            
                            
                            
                            (294
                            )Investment
      in GridSense
                            
                            
                            (1,153
                            )
                            
                            
                            —Restricted
      deposits
                            
                            
                            (1,437
                            )
                            
                            
                            (670
                            )Release
      of restricted deposits
                            
                            
                            —
                            
                            
                            
                            2,468Loans
      provided to Paketeria
                            
                            
                            (2,551
                            )
                            
                            
                            —Loans
      provided to GridSense
                            
                            
                            (736
                            )
                            
                            
                            —Loans
      provided to EES
                            
                            
                            (200
                            )
                            
                            
                            —Loans
      provided to Local Power
                            
                            
                            (250
                            )
                            
                            
                            —Loan
      and accrued interest to Coreworx in contemplation of
      acquisition
                            
                            
                            (1,563
                            )
                            
                            
                            —Transaction
      costs in 2007 acquisition of SCR Tech
                            
                            
                            (956
                            )
                            
                            
                            —Amounts
      funded for employee termination benefits
                            
                            
                            (178
                            )
                            
                            
                            (180
                            )Utilization
      of employee termination benefits
                            
                            
                            28
                            
                            
                            
                            21Acquisition
      of license
                            
                            
                            (2,000
                            )
                            
                            
                            —Acquisitions
      of property and equipment
                            
                            
                            (1,327
                            )
                            
                            
                            (983
                            )Acquisition
      of Coreworx net of cash acquired (see Schedule B)
                            
                            
                            (2,466
                            )
                            
                            
                            —Net
      cash provided by (used in) investing activities
                            
                            
                            (184
                            )
                            
                            
                            3,352Cash
      flows provided by (used in) financing activities:Short-term
      debt borrowings, net
                            
                            
                            (67
                            )
                            
                            
                            379Repayments
      of long-term debt
                            
                            
                            (189
                            )
                            
                            
                            (4
                            )Repayments
      of notes payable due to former shareholders of Coreworx
                            
                            
                            —
                            
                            
                            
                            (3,400
                            )Purchase
      of treasury shares
                            
                            
                            —
                            
                            
                            
                            (1,108
                            )Redemption
      of Convertible Debentures
                            
                            
                            (3,443
                            )
                            
                            
                            —Issuance
      of shares to non-controlling interest in consolidated
      subsidiary
                            
                            
                            2,226
                            
                            
                            
                            1,991Proceeds
      from employee stock option and warrant exercises
                            
                            
                            764
                            
                            
                            
                            97Net
      cash used in financing activities
                            
                            
                            (709
                            )
                            
                            
                            (2,045
                            )Effect
      of exchange rate changes on cash and cash equivalents
                            
                            
                            —
                            
                            
                            
                            (290
                            )Net
      decrease in cash and cash equivalents
                            
                            
                            (5,209
                            )
                            
                            
                            (3,124
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            19,644
                            
                            
                            
                            15,142Cash
      and cash equivalents at end of period
                            
                            $
                            14,435
                            
                            
                            $
                            12,018
  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)
 
 Nine months ended
                              September 30,2008
                            
                            
                            2009Schedule
      A:Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                            
                            
                            888
                            
                            
                            
                            1,359Acquired
      in-process research and development
                            
                            
                            551
                            
                            
                            
                            —Share
      in losses of Paketeria
                            
                            
                            1,535
                            
                            
                            
                            (263
                            )Share
      in losses of GridSense
                            
                            
                            194
                            
                            
                            
                            129Exchange
      rate adjustment on restricted deposits
                            
                            
                            —
                            
                            
                            
                            (32
                            )Exchange
      rate adjustment on amounts funded for employee termination benefits net of
      exchange adjustment on liability for employee termination
      benefits
                            
                            
                            234
                            
                            
                            
                            11Exchange
      loss on loans to Paketeria and GridSense
                            
                            
                            129
                            
                            
                            
                            —Increase
      in liability for employee termination benefits
                            
                            
                            184
                            
                            
                            
                            203Deferred
      income taxes
                            
                            
                            893
                            
                            
                            
                            —Amortization
      of stock-based deferred compensation
                            
                            
                            1,014
                            
                            
                            
                            1,141Amortization
      of beneficial conversion feature, debt origination costs and value of
      warrants in private placement of Debentures
                            
                            
                            3,064
                            
                            
                            
                            —Gain
      on early redemption of Debentures
                            
                            
                            (1,259
                            )
                            
                            
                            —Impairments
                            
                            
                            3,000
                            
                            
                            
                            80Gain
      on outside investment in Company’s equity investments, net
                            
                            
                            (7
                            )
                            
                            
                            —Gain
      on sale of Comverge shares
                            
                            
                            (8,861
                            )
                            
                            
                            (1,403
                            )Other
                            
                            
                            2
                            
                            
                            
                            —Change
      in operating assets and liabilities:Increase
      in accounts receivable, unbilled work-in process and other current and
      other assets
                            
                            
                            (2,240
                            )
                            
                            
                            (1,148
                            )Increase
      in inventory
                            
                            
                            (683
                            )
                            
                            
                            (1,345
                            )Increase
      (decrease) in accounts payable, accrued payroll, payroll taxes and social
      benefits, other current liabilities and other liabilities
                            
                            
                            1,140
                            
                            
                            
                            (977
                            )Net
      cash used in operating activities
                            
                            $
                            (222
                            )
                            
                            $
                            (2,245
                            )Schedule
      B:Assets/liabilities
      acquired in the acquisition of Coreworx:Other
      current assets
                            
                            $
                            (605
                            )Property
      and equipment
                            
                            
                            (183
                            )Intangibles
                            
                            
                            (3,509
                            )Goodwill
                            
                            
                            (4,478
                            )Current
      liabilities
                            
                            
                            668Due
      to Acorn
                            
                            
                            1,559Value
      of Acorn stock issued in acquisition
                            
                            
                            1,233Notes
      issued to former debenture holders of Coreworx
                            
                            
                            3,400In-process
      research and development
                            
                            
                            (551
                            )$
                            (2,466
                            )
  The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  ACORN
ENERGY, INC. AND SUBSIDIARIES
 Consolidated Statements of Cash Flows(unaudited)
 (dollars
in thousands)
 
 Nine months ended
                                          September 30,2008
                                        
                                        
                                        2009Non-cash
      items:Unrealized
      loss from Comverge shares
                                        
                                        $
                                        (46,733
                                        )Reduction
      of deferred tax liability with respect to unrealized loss from
      Comverge  shares
                                        
                                        $
                                        (16,902
                                        )Increase
      in goodwill with respect to finalizing purchase price
      allocation
                                        
                                        $
                                        209Reduction
      in intangibles acquired with respect to finalizing purchase price
      allocation
                                        
                                        $
                                        250Reduction
      in value of put option with respect to finalizing purchase price
      allocation
                                        
                                        $
                                        41Conversion
      of Debentures to common stock and additional
    paid-in-capital
                                        
                                        $
                                        2,963Intangibles
      acquired by Coreworx in consideration for future royalties
                                        
                                        
                                        
                                        
                                        
                                        $
                                        99Adjustment
      of additional paid-in-capital and non-controlling interests from
      investment in CoaLogix by non-controlling interests
                                        
                                        
                                        
                                        
                                        
                                        $
                                        445
  The
accompanying notes are an integral part of these consolidated financial
statements.
  6
  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 nine and three-month periods
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2009. 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, 2008.
  Effective
January 1, 2009, the Company implemented the principles of Accounting
Standards Codification (“ASC”) ASC Subtopic 810-10-65 (originally issued as
Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”). These principles changed the
accounting for and reporting of minority interests (now called noncontrolling
interests) in the Company’s consolidated financial statements. Upon adoption,
certain prior period amounts have been reclassified to conform to the current
period financial statement presentation. These reclassifications have no effect
on the Company’s previously reported financial position or results of operations
(See Note 2).
  Note
2: New Accounting Pronouncements
  With the
exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the nine months
ended September 30, 2009, as compared to the recent accounting
pronouncements described in the Annual Report that are of material significance,
or have potential material significance, to the Company.
  In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standard Codification (“ASC”) No. 105, Generally Accepted Accounting Principles
(“GAAP”) (“ASC 105” or “FASB Codification”), previously referred to
as  SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No 162 (“SFAS 168”). The effective date for
use of the FASB Codification is for interim and annual periods ending after
September 15, 2009. Companies should account for the adoption of the
guidance on a prospective basis. Effective July 1, 2009, the Company adopted the
FASB Codification and its adoption did not have a material impact on its
consolidated financial statements. The Company has appropriately updated its
disclosures with the appropriate FASB Codification references during the
three months ended September 30, 2009.  As such, all the notes to the
condensed consolidated financial statements below have been updated with the
appropriate FASB Codification references.
  In
December 2007, the FASB issued ASC No. 805, Business Combinations (“ASC 805”),
previously referred to as  SFAS 141 (revised 2007), Business
Combinations.  ASC 805 will significantly change current practices
regarding business combinations. Among the more significant changes, ASC 805
expands the definition of a business and a business combination; requires the
acquirer to recognize the assets acquired, liabilities assumed and
noncontrolling interests (including goodwill), measured at fair value at the
acquisition date; requires acquisition-related expenses and restructuring costs
to be recognized separately from the business combination; and requires
in-process research and development to be capitalized at fair value as an
indefinite-lived intangible asset. ASC 805 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company adopted
the provisions of ASC 805 on January 1, 2009 and the adoption did not have
a significant impact on the Company’s consolidated financial statements.
However, if the Company enters into material business combinations in the
future, a transaction may significantly impact the Company’s consolidated
financial statements as compared to the Company’s previous acquisitions
accounted for under prior GAAP requirements, due to the changes described
above.
  7
  In December 2007, the FASB issued ASC
No. 810-10-65, Transition Related to Noncontrolling Interests in Consolidated
Financial Statement (“ASC 810-10-65”), previously referred to as SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements — an
amendment of Accounting Research Bulletin (“ARB”) No. 51. ASC 810-10-65 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. ASC 810-10-65 establishes accounting and reporting standards
that require noncontrolling interests (previously referred to as minority
interest) to be reported as a component of equity, changes in a parent’s
ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, and upon a loss of control, retained
ownership interest will be remeasured at fair value, with any gain or loss
recognized in earnings. Prior to adoption of SFAS 160 on January 1, 2009, the
Company had stopped attributing losses to its DSIT subsidiary because the losses
exceeded the carrying amount of the noncontrolling interest. Upon adoption of
SFAS 160, the Company prospectively attributes income and losses to the
noncontrolling interests associated with DSIT. The presentation and disclosure
requirements of SFAS 160 were applied retrospectively. Other than the change in
presentation of noncontrolling interests and the treatment of noncontrolling
interests associated with DSIT and CoaLogix, the adoption of SFAS 160 had no
impact on the Company’s financial statements.
 
 In March
2008, the FASB issued ASC No. 815-10-65, Transition Related to Disclosures about
Derivative Instruments and Hedging Activities (“ASC 815-10-65”), previously
referred to as SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, which requires
additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are
accounted for under ASC No. 815, Derivatives and Hedging (“ASC 815”), previously
referred to as FASB Statement No.133 and its related interpretations, and the
effect of derivative instruments and related hedged items on financial position,
financial performance, and cash flows. ASC 815 also requires disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. Per ASC 815-10-65, the additional disclosures about derivatives and
hedging activities mentioned above are required for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged.  The Company adopted the
provisions mentioned above effective January 1, 2009 and other than the required
disclosures (see Note 16), its adoption did not have a material impact on
its consolidated financial statements.
  In April
2009, the FASB issued ASC No. 805-10-35, Business Combinations Subsequent
Measurement (“ASC 805-10-35”), which discusses the accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies, which was previously discussed in FSP FAS 141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies. ASC 805-10-35 addresses application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The provisions under ASC 805-10-35 relating to assets acquired and
liabilities assumed in a business combination that arise from contingencies are
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The Company adopted the provisions of ASC 805 on
January 1, 2009 and the adoption did not have a significant impact on the
Company’s consolidated financial statements. However, if the Company enters into
material business combinations in the future, a transaction may significantly
impact the Company’s consolidated financial statements as compared to the
Company’s previous acquisitions, accounted for under prior GAAP requirements,
due to the changes described above.
  8
  In
May 2009, the FASB issued ASC No. 855, Subsequent Events (“ASC 855”), previously
referred to as SFAS No. 165, Subsequent Events. ASC 855 should be
applied to the accounting for and disclosure of subsequent events. This
Statement does not apply to subsequent events or transactions that are within
the scope of other applicable GAAP that provide different guidance on the
accounting treatment for subsequent events or transactions.  ASC 855
would apply to both interim financial statements and annual financial
statements. The objective of ASC 855 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In
particular, this Statement sets forth: 1) The period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; 2) The circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and, 3) The disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. ASC 855 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this standard effective April 1, 2009 and the Company’s
adoption did not have a material impact on its consolidated financial
statements.
  On January 1, 2009, the Company
adopted FSP No. FAS 142-3, Determination of the Useful Life of Intangible
Assets, (“FSP No. FAS 142-3”), which is codified primarily in ASC Subtopic
350-30, General Intangibles Other than Goodwill. This pronouncement
prospectively amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under ASC Topic 350, Intangibles – Goodwill and Other. Adoption
of FSP No. FAS 142-3 did not have a material effect on the Company’s
consolidated financial statements.
  In June 2009, the FASB issued SFAS
166, “Accounting for Transfers of Financial Assets” and SFAS 167, “Amendments to
FASB Interpretation No. 46(R)”, which update accounting for securitizations
and special-purpose entities.  SFAS 166 is a revision to FASB ASC 860,
“Transfers and Servicing” (previously referred to as SFAS 140) and will require
additional information regarding financial asset transfers, including
securitization transactions, and the presence of continuing exposure around the
risks related to transferred financial assets. It removes the concept of a
qualifying special-purpose entity from FASB ASC 810, “Consolidation” (previously
referred to as SFAS 140) and removes the exception from applying FASB
Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, to
variable interest entities that are qualifying special-purpose entities. 
SFAS 167 is a revision to FASB Interpretation No. 46(R) and modifies a
company’s determination of consolidating an entity that is insufficiently
capitalized or is not controlled through voting or similar ownership
rights.  SFAS 166 and 167 will be effective January 1, 2010, and are
effective for interim periods within the first annual reporting period. Earlier
application is prohibited.  The Company is currently evaluating the
possible impact from the implementation of SFAS 166 or 167 on its financial
statements.
  9
  In October 2009, the FASB issued
Accounting Standard Update No. 2009-13 on Topic 605, Revenue Recognition–
Multiple Deliverable Revenue Arrangements – a consensus of the FASB Emerging
Issues Task Force. The objective of this Update is to address the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Vendors often
provide multiple products or services to their customers. Those deliverables
often are provided at different points in time or over different time periods.
This Update provides amendments to the criteria in Subtopic 605-25 for
separating consideration in multiple-deliverable arrangements. The amendments in
this Update establish a selling price hierarchy for determining the selling
price of a deliverable. The selling price used for each deliverable will be
based on vendor specific objective evidence if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor specific objective evidence nor third-party evidence is
available. The amendments in this Update also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. This update is effective for fiscal
years beginning on or after June 15, 2010.  The Company is currently
evaluating the impact, if any, of this new accounting update on its
consolidated financial statements.
  Note
3: Inventory
 
 As of
                              December
                              31, 2008
                            
                            
                            As of
                              September
                              30, 2009Raw
      materials
                            
                            $
                            720
                            
                            
                            $
                            712Finished
      goods
                            
                            
                            428
                            
                            
                            
                            1,781$
                            1,148
                            
                            
                            $
                            2,493
  Note
4: Investment in Comverge Inc. (Comverge)
  During
the nine months ended September 30, 2009, the Company sold all of the 502,500
Comverge shares held at the beginning of 2009.  The Company received
proceeds of $3,990 (including $112 received from covered-call options) and
recorded a pre-tax gain of $1,403 on the sale of these shares.
  Note
5:  CoaLogix
 
 On April 8, 2009, the Company entered
into a Common Stock Purchase Agreement (the “Purchase Agreement”) with the
Company’s 85% owned 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.
 
 The Company’s share of the first two
stages of the stock purchase under the Purchase Agreement was $1,904. The
Company transferred this amount to CoaLogix and was issued 264,375 shares of
CoaLogix common stock. Concurrently, EnerTech and CoaLogix’s senior management’s
share of the first two stages of the stock purchase under the Purchase Agreement
was $1,991. CoaLogix received these amounts from EnerTech and CoaLogix senior
management issued 264,375 and 12,223 shares of CoaLogix common stock,
respectively. As a result of these issuances of shares, the Company’s holdings
in CoaLogix were diluted to approximately 79.4%. In accordance with ASC Subtopic
810-10-65, the Company recorded an increase of $445 in Additional
Paid-in-Capital as a result of the $1,991 investment by non-controlling
interests.
 
 As part of the Purchase Agreement,
CoaLogix granted additional options to purchase shares of common stock to its
senior management (see Note 12(b)).
  10
  Note
6:  Investment in EnerTech
  In April
2009, 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.  In September 2009, the Company received another
capital call of $500 from EnerTech. This capital call was funded in September
2009. To date, the Company has funded $2,150 of its $5,000 investment commitment
in EnerTech.
  Note
7:  Privatization of GridSense
  On June
15, 2009, GridSense Systems Inc. (“GSI”) effectively completed a plan which was
approved by a majority of GSI shareholders in February 2009, whereby GSI
transferred its grid monitoring business to a newly formed private Australian
corporation known as Gridsense Pty Ltd. (“GPL”). Concurrently, certain GSI
shareholders (including Acorn) transferred their shares to a third party and
received shares in GPL. Under the plan, GPL assumed all the debt of GSI
including its debt to Acorn (CDN$750 ($701)) which was previously fully written
down by Acorn as an impairment). As a result, the Company’s percentage ownership
in the grid monitoring business increased from approximately 23% (in GSI) to
approximately 31% of the newly formed Australian corporation (GPL).  The
Company recorded no gain or loss on the privatization transaction. The carrying
value of the Company’s investment in GPL is zero as was the carrying value of
the Company’s investment in GSI prior to the going private
transaction.
  Note
8: Acquisition of ProExecute Licensed Technology
 
 On April 23, 2009, the Company’s
Coreworx subsidiary signed an agreement with ProExecute LLC for the rights to
its Contract Management Solution technology (“ProExecute”). With the acquisition
of ProExecute, Coreworx will now be extending its Project Information Control
software platform, which is used for managing complex engineering documentation
and information exchange among design professionals, external engineering firms
and contractors, to include an integrated contract and document management
solution designed to address the complete construction contract life
cycle.
 
 Upon analysis, the Company has
determined that the acquisition of ProExecute should be recorded as a business
acquisition under the principles of ASC Subtopic 805-10-55 (originally issued as
SFAS No. 141(R), “Business Combinations”), as Coreworx acquired substantially
all of the net assets of the ProExecute business including its core intellectual
property, full use of ProExecute’s physical assets, as well as the access to all
intellectual knowledge.
 
 In accordance with ASC Subtopic
805-20-30 (originally issued as SFAS No. 141(R), “Business Combinations”), the
Company recorded the assets acquired and the liabilities assumed (including any
contractual contingencies) measured at their fair values as of the date of
acquisition. The Company determined that fair value of the acquired assets on
the date of acquisition was $99 all of which was allocated to license technology
– an amortizable intangible asset. This asset is being amortized over a 30-month
period and is included in the Company’s EIS segment (see Note 11). Additionally,
the Company recorded as a liability the fair value of expected future royalty
fees payable ($81 included in other current liabilities and $18 in other
liabilities) with respect to the acquisition of ProExecute.
  11
  Note
9: Paketeria
  In the
third quarter of 2009, liquidation proceedings began with respect to Paketeria
AG (“Paketeria”). The Company’s net investment in Paketeria had previously been
written down to zero. As a result of the liquidation proceedings, the Company
eliminated the previously recorded cumulative translation adjustment of $263
associated with the investment in Paketeria and recognized that amount as Share
of Income in Paketeria.
 
 Note
10:  Non-Controlling Interests
 
 The following schedule presents the
effects of changes in the Company’s ownership interests in its subsidiaries on
the Company’s equity.
 
 Net
      Income Attributable to Acorn Energy Inc.
                                and
      Transfers to (from) the Noncontrolling InterestNine months ended
                                September 30,2008
                              
                              
                              2009Net
      loss attributable to Acorn Energy, Inc.
                              
                              $
                              (3,810
                              )
                              
                              $
                              (1,944
                              )Transfers
      to (from) the non-controlling interests:Increase
      in Acorn Energy Inc.’s Additional Paid-in-Capital from sale by CoaLogix of
      its shares to non-controlling interests
                              
                              
                              —
                              
                              
                              
                              445Net
      transfers to non-controlling interest
                              
                              
                              —
                              
                              
                              
                              445Changes
      from net income attributable to Acorn Energy, Inc. and transfers to (from)
      non-controlling interests
                              
                              $
                              (3,810
                              )
                              
                              $
                              (1,499
                              )
  Note
11:  Goodwill and Other Intangible Assets
 
 The
changes in the carrying amounts of goodwill from December 31, 2008 to
September 30, 2009 were as follows:
  CoaLogix
                            
                            
                            Naval &
                              RT
                              Solutions
                            
                            
                            EIS
                            
                            
                            TotalBalance
      as of December 31, 2008
                            
                            
                            3,714
                            
                            
                            $
                            530
                            
                            
                            $
                            2,098
                            
                            
                            $
                            6,342Translation
      adjustment
                            
                            
                            —
                            
                            
                            
                            6
                            
                            
                            
                            289
                            
                            
                            
                            295Balance
      as of September 30, 2009
                            
                            $
                            3,714
                            
                            
                            $
                            536
                            
                            
                            $
                            2,387
                            
                            
                            $
                            6,637
  12
  The
changes in the carrying amounts and accumulated amortization of intangible
assets from December 31, 2008 to September 30, 2009 were as
follows:
  CoaLogix*
                              
                              
                              Naval
      Technologies
                              
                              
                              EIS**
                              
                              
                              TotalCost
                              
                              
                              AccumulatedAmortization
                              
                              
                              Cost
                              
                              
                              AccumulatedAmortization
                              
                              
                              Cost
                              
                              
                              AccumulatedAmortization
                              
                              
                              NetBalance
      as of December 31, 2008
                              
                              $
                              7,511
                              
                              
                              $
                              (761
                              )
                              
                              $
                              523
                              
                              
                              $
                              (48
                              )
                              
                              $
                              3,214
                              
                              
                              $
                              (82
                              )
                              
                              $
                              10,357Acquisition
      (see Note 8)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              99
                              
                              
                              
                              —
                              
                              
                              
                              99Amortization
                              
                              
                              —
                              
                              
                              
                              (562
                              )
                              
                              
                              —
                              
                              
                              
                              (59
                              )
                              
                              
                              —
                              
                              
                              
                              (184
                              )
                              
                              
                              (805
                              )Cumulative
      translation adjustment
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              6
                              
                              
                              
                              (2
                              )
                              
                              
                              457
                              
                              
                              
                              (27
                              )
                              
                              
                              434Balance
      as of September 30, 2009
                              
                              $
                              7,511
                              
                              
                              $
                              (1,323
                              )
                              
                              $
                              529
                              
                              
                              $
                              (109
                              )
                              
                              $
                              3,770
                              
                              
                              $
                              (293
                              )
                              
                              $
                              10,085
  *   CoaLogix
includes regeneration, rejuvenation and on-site cleaning technologies as well as
the Solucorp license.
  ** EIS
includes software and customer relationships.
  All
intangible assets are being amortized over their estimated useful lives, whose
weighted average lives were estimated to be ten years for CoaLogix, seven years
for Naval Technologies and eighteen years for EIS. Amortization expense for each
of the nine months ended September 30, 2008 and 2009 amounted to $560 and $805,
respectively.  Amortization expense with respect to intangible assets
is estimated to be $1,161, $1,161, $1,113, $1,108 and $1,108 per year for each
of the years ending September 30, 2010 through 2014.
  Note
12:  Stock Options and Warrants
  (a)
Acorn Stock Options
 
 A summary
of stock option activity for the nine months ended September 30, 2009 is as
follows:
 
 Number of
                                  Options (in
                                  shares)
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price
                                
                                Weighted
                                  Average
                                  Remaining
                                  Contractual
                                  Life
                                
                                Aggregate
                                  Intrinsic
                                  ValueOutstanding
      at December 31, 2008
                                
                                
                                1,876,500
                                
                                
                                $
                                3.27Granted
                                
                                
                                379,500
                                
                                
                                $
                                2.19Exercised
                                
                                
                                (2,500
                                )
                                
                                $
                                0.91Forfeited
      or expired
                                
                                
                                (253,667
                                )
                                
                                $
                                2.65Outstanding
      at September 30, 2009
                                
                                
                                1,999,833
                                
                                
                                $
                                3.21
                                
                                3.4 years
                                
                                $
                                4,581Exercisable
      at  September 30, 2009
                                
                                
                                1,553,164
                                
                                
                                $
                                3.16
                                
                                2.5 years
                                
                                $
                                3,646
  13
  The
weighted average grant date fair value of the 379,500 stock options granted
during the first nine months of 2009 was $1.74 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
                              
                              
                              70
                              %Expected
      term (years)
                              
                              5.8
      yearsRisk
      free interest rate
                              
                              
                              2.14
                              %Expected
      dividend yield
                              
                              None
  (b)
CoaLogix Stock Options
 
 In April
2009, CoaLogix granted options (the “April 2009 Options”) to purchase 81,445 of
its common stock to senior management of CoaLogix under the CoaLogix Inc. 2008
Stock Option Plan (the “CoaLogix Plan”). The options were granted with an
exercise price of $7.20 per share and are exercisable for a period of ten years.
The options are subject to a double trigger vesting schedule. The April 2009
Options will vest over a four-year term with 25% vesting after one year and the
balance vesting quarterly over the following three years. In addition, the
maximum cumulative number of April 2009 Options that may vest at any applicable
vesting date is limited based on the amount invested by the purchasers under the
Purchase Agreement described in Note 5.
 
 If and
when all of the options in the CoaLogix Plan are exercised, the Company’s
holdings in CoaLogix would be diluted from 79.4% to approximately
68.9%.
  CoaLogix
valued the options using a Black Scholes model using the following
variables:
  Stock
      price*
                              
                              $
                              7.20Exercise
      price
                              
                              $
                              7.20Expected
      term of option in years
                              
                              6.1
      yearsVolatility**
                              
                              
                              65
                              %Risk-free
      interest rate
                              
                              
                              1.8
                              %Expected
      dividend yield
                              
                              None
  *The stock price was determined
based upon the valuation used in the Company’s recent investment in CoaLogix
(see Note 5).
  **The
calculated volatility for comparable companies for the expected term was
used.
  Based
upon the above, it was determined that the options granted had a value of $4.33
per option.
  14
  A summary
status of the CoaLogix Plan as of September 30, 2009, as well as changes during
the nine months then ended, is presented below:
 
 2009Number
      of
                                Options
      (in
                                shares)
                              
                              
                              Weighted
                                Average
                                Exercise
                                PriceOutstanding
      at January 1, 2009
                              
                              
                              376,475
                              
                              
                              $
                              5.05Granted
      at fair value
                              
                              
                              81,445
                              
                              
                              
                              7.20Exercised
                              
                              
                              —
                              
                              
                              
                              —Forfeited
                              
                              
                              —
                              
                              
                              
                              —Outstanding
      at September 30, 2009
                              
                              
                              457,920
                              
                              
                              $
                              5.43Exercisable
      at September 30, 2009
                              
                              
                              128,678
                              
                              
                              $
                              5.05
  (c)
Stock-based compensation expense
  Total
stock-based compensation expense included in the Company’s statements of
operations for the nine and three months ended September 30, 2008 and 2009,
respectively, was:
  Nine months ended
                              September 30,
                            
                            
                            Three months ended
                              September 30,2008
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009Cost
      of sales
                            
                            $
                            122
                            
                            
                            $
                            101
                            
                            
                            $
                            65
                            
                            
                            $
                            3Research
      and development expense
                            
                            
                            —
                            
                            
                            
                            76
                            
                            
                            
                            —
                            
                            
                            
                            36Selling,
      general and   administrative expenses
                            
                            
                            867
                            
                            
                            
                            964
                            
                            
                            
                            326
                            
                            
                            
                            336Share
      of losses in Paketeria
                            
                            
                            25
                            
                            
                            
                            —
                            
                            
                            
                            13
                            
                            
                            
                            —Total
      stock based compensation expense
                            
                            $
                            1,014
                            
                            
                            $
                            1,141
                            
                            
                            $
                            404
                            
                            
                            $
                            375
 
 (d)
Warrants
 
 A summary
of stock warrants activity for the nine months ended September 30, 2009 is as
follows:
 
 Number of
                                      Warrants (in
                                      shares)
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise
                                      Price
                                    
                                    Weighted
                                      Average
                                      Remaining
                                      Contractual
                                      LifeOutstanding
      at December 31, 2008
                                    
                                    
                                    784,023
                                    
                                    
                                    $
                                    4.06
                                    
                                    3.1
      yearsGranted
                                    
                                    
                                    —Exercised
                                    
                                    
                                    (28,062
                                    )
                                    
                                    $
                                    3.38Forfeited
      or expired
                                    
                                    
                                    —Outstanding
      and exercisable at  September 30, 2009
                                    
                                    
                                    755,961
                                    
                                    
                                    $
                                    4.08
                                    
                                    2.3
years
  15
  Note
13: Share Repurchase Program
 
 On
October 6, 2008, the Board of Directors of the Company authorized a share
repurchase program of up to 1,000,000 shares of its common stock. The share
repurchase program is being implemented at management’s discretion from time to
time. During the period from January 1, 2009 to September 30, 2009, the Company
repurchased 433,795 shares of its common stock at an average price of $2.55 per
share. As at September 30, 2009, the Company repurchased a total of 497,710
shares of its common stock under the program.
 
 Note
14: Research and Development Expenses, Net
 
 In April 2009, following a technical
audit, the Company’s Coreworx subsidiary’s claims for scientific and
experimental development tax credits and Ontario innovation tax credits
pertaining to its 2007 tax year totaling approximately CDN$826 ($710) net of
contingency fees and interest (collectively “SR&ED Claims”) were accepted by
the Canada Revenue Agency and the Ontario Ministry of Revenue, respectively.
 During the second quarter of 2009, Coreworx received CDN$627 ($539) of the
2007 SRED Claim with the remaining CDN$199 ($186) expected to be received in the
fourth quarter of 2009. Additionally, as a result of it passing the technical
audit, Coreworx has also accrued CDN$400 ($373) with respect to similar SRED
Claims pertaining to its 2008 tax year only to the extent that it is entitled to
apply for refundable credits on qualifying expenditures up to August 13, 2008
(the date it was acquired by the Company). Tax credits resulting from qualifying
expenditures after August 13, 2008 are applicable against income taxes otherwise
payable by Coreworx.
  It is the
Company’s policy that credits arising from qualifying scientific research and
experimental development expenditures are netted against research and
development expenses. Accordingly, all the credits ($1,016) were netted against
research and development expenses in the second quarter of 2009.
 
 Note
15: Warranty Provision
 
 The
following table summarizes the changes in accrued warranty liability from the
period from December 31, 2008 to September 30, 2009:
 
 Gross Carrying
                                AmountBalance
      at December 31, 2008
                              
                              $
                              256Warranties
      issued and adjustment of provision
                              
                              
                              16Warranty
      claims
                              
                              
                              —Balance
      at  September 30, 2009*
                              
                              $
                              272
  * $24 of
the warranty provision is included in Other Current Liabilities and $248 in
Other Liabilities at September 30, 2009.
 
 The
Company’s warranty provision is based upon the Company’s estimate of costs to be
incurred during the warranty period.
 
 Note
16: Fair Value Measurement
 
 In
February 2008, the FASB delayed the effective date of ASC Subtopic 820-10
(originally issued as SFAS No. 157, “Fair Value Measurements”) for non-financial
assets and non-financial liabilities to fiscal years beginning after November
15, 2008, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. This provision was effective for the
Company beginning on January 1, 2009. The adoption of this guidance did not have
a material impact on the Company’s condensed consolidated financial statements,
because the Company did not have any non-financial assets or non-financial
liabilities recognized or disclosed at fair value at the adoption
date.
  16
  ASC
Subtopic 820-10 defines fair value for financial reporting as the price that
would be received upon the sale of an asset or paid upon the transfer of a
liability in an orderly transaction between market participants at the
measurement date. The fair value measurement of our financial assets utilized
assumptions categorized as observable inputs under ASC Subtopic 820-10.
Observable inputs are assumptions based on independent market data
sources.
  The
following table sets forth information regarding the fair value measurement of
our financial assets as of September 30, 2009:
 
 Level 1
                              
                              
                              Level 2
                              
                              
                              TotalDerivative
      assets
                              
                              $
                              22
                              
                              
                              $
                              —
                              
                              
                              $
                              22Total
                              
                              $
                              22
                              
                              
                              $
                              —
                              
                              
                              $
                              22
 
 Derivative
assets 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 income (expense),
net.
  Note
17: Segment Information
  The Company’s current operations are
based upon three 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 Inc. subsidiary which was acquired in August 2008. Coreworx
      provides integrated project collaboration and advanced document management
      solutions for the architecture, engineering and construction markets,
      particularly for large capital projects. As these activities were acquired
      in August 2008, there are no comparative results reported for these
      activities for the three or nine month periods ended September 30,
      2008.
  Other
operations include various operations that do not meet the quantitative
thresholds of ASC 280-10 (previously referred to as SFAS No.
131.)
  17
  CoaLogix
                                  
                                  
                                  Naval and RTSolutions
                                  
                                  
                                  EIS
                                  
                                  
                                  Other
                                  
                                  
                                  TotalNine
      months ended September 30, 2009:Revenues
      from external customers
                                  
                                  $
                                  12,761
                                  
                                  
                                  $
                                  5,541
                                  
                                  
                                  $
                                  3,487
                                  
                                  
                                  $
                                  932
                                  
                                  
                                  $
                                  22,721Intersegment
      revenues
                                  
                                  
                                  —
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  5Segment
      gross profit
                                  
                                  
                                  4,169
                                  
                                  
                                  
                                  2,368
                                  
                                  
                                  
                                  2,888
                                  
                                  
                                  
                                  305
                                  
                                  
                                  
                                  9,730Segment
      income (loss)
                                  
                                  
                                  (295
                                  )
                                  
                                  
                                  605
                                  
                                  
                                  
                                  (1,115
                                  )
                                  
                                  
                                  22
                                  
                                  
                                  
                                  (783
                                  )Depreciation
      and amortization expense
                                  
                                  
                                  922
                                  
                                  
                                  
                                  140
                                  
                                  
                                  
                                  275
                                  
                                  
                                  
                                  20
                                  
                                  
                                  
                                  1,357Stock
      compensation expense
                                  
                                  
                                  378
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  171
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  551Nine
      months ended September 30, 2008:Revenues
      from external customers
                                  
                                  
                                  5,441
                                  
                                  
                                  
                                  5,340
                                  
                                  
                                  
                                  767
                                  
                                  
                                  
                                  982
                                  
                                  
                                  
                                  12,530Intersegment
      revenues
                                  
                                  
                                  —
                                  
                                  
                                  
                                  70
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  70Segment
      gross profit
                                  
                                  
                                  868
                                  
                                  
                                  
                                  1,749
                                  
                                  
                                  
                                  510
                                  
                                  
                                  
                                  200
                                  
                                  
                                  
                                  3,327Segment
      income (loss)
                                  
                                  
                                  (1,772
                                  )
                                  
                                  
                                  165
                                  
                                  
                                  
                                  (310
                                  )
                                  
                                  
                                  (106
                                  )
                                  
                                  
                                  (2,023
                                  )Depreciation
      and amortization expense
                                  
                                  
                                  661
                                  
                                  
                                  
                                  139
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  37
                                  
                                  
                                  
                                  886Stock
      compensation expense
                                  
                                  
                                  122
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  122Three
      months ended September 30, 2009:Revenues
      from external customers
                                  
                                  
                                  2,824
                                  
                                  
                                  
                                  1,905
                                  
                                  
                                  
                                  1,385
                                  
                                  
                                  
                                  349
                                  
                                  
                                  
                                  6,463Intersegment
      revenues
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Segment
      gross profit
                                  
                                  
                                  698
                                  
                                  
                                  
                                  819
                                  
                                  
                                  
                                  1,202
                                  
                                  
                                  
                                  142
                                  
                                  
                                  
                                  2,861Segment
      income (loss)
                                  
                                  
                                  (828
                                  )
                                  
                                  
                                  192
                                  
                                  
                                  
                                  (512
                                  )
                                  
                                  
                                  43
                                  
                                  
                                  
                                  (1,105
                                  )Depreciation
      and amortization expense
                                  
                                  
                                  309
                                  
                                  
                                  
                                  47
                                  
                                  
                                  
                                  102
                                  
                                  
                                  
                                  6
                                  
                                  
                                  
                                  464Stock
      compensation expense
                                  
                                  
                                  148
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  60
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  208Three
      months ended September 30, 2008:Revenues
      from external customers
                                  
                                  
                                  1,840
                                  
                                  
                                  
                                  1,745
                                  
                                  
                                  
                                  767
                                  
                                  
                                  
                                  276
                                  
                                  
                                  
                                  4,628Intersegment
      revenues
                                  
                                  
                                  —
                                  
                                  
                                  
                                  54
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  54Segment
      gross profit
                                  
                                  
                                  (234
                                  )
                                  
                                  
                                  568
                                  
                                  
                                  
                                  510
                                  
                                  
                                  
                                  53
                                  
                                  
                                  
                                  897Segment
      income (loss)
                                  
                                  
                                  (1,361
                                  )
                                  
                                  
                                  (24
                                  )
                                  
                                  
                                  (310
                                  )
                                  
                                  
                                  (64
                                  )
                                  
                                  
                                  (1,759
                                  )Depreciation
      and amortization expense
                                  
                                  
                                  229
                                  
                                  
                                  
                                  40
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  17
                                  
                                  
                                  
                                  335Stock
      compensation expense
                                  
                                  
                                  65
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  65
  18





Reconciliation
of Segment Income (Loss) to Consolidated Net Loss





Nine months ended
                      September 30,
                    
                    
                    Three months ended
                      September 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Total
      loss for reportable segments
                    
                    $
                    (1,917
                    )
                    
                    $
                    (805
                    )
                    
                    $
                    (1,695
                    )
                    
                    $
                    (1,148
                    )Other
      operational segment income (loss)
                    
                    
                    (106
                    )
                    
                    
                    22
                    
                    
                    
                    (64
                    )
                    
                    
                    43Total
      operating income (loss)
                    
                    
                    (2,023
                    )
                    
                    
                    (783
                    )
                    
                    
                    (1,759
                    )
                    
                    
                    (1,105
                    )Share
      of income (losses) in Paketeria
                    
                    
                    (1,560
                    )
                    
                    
                    263
                    
                    
                    
                    (899
                    )
                    
                    
                    263Share
      of losses in GridSense
                    
                    
                    (194
                    )
                    
                    
                    (129
                    )
                    
                    
                    (60
                    )
                    
                    
                    —Non-controlling
      interest
                    
                    
                    284
                    
                    
                    
                    (48
                    )
                    
                    
                    204
                    
                    
                    
                    96Impairments
                    
                    
                    (3,000
                    )
                    
                    
                    (80
                    )
                    
                    
                    (2,454
                    )
                    
                    
                    —Gain
      on sale of Comverge shares
                    
                    
                    8,861
                    
                    
                    
                    1,403
                    
                    
                    
                    3,079
                    
                    
                    
                    176Gain
      on early redemption of Debentures
                    
                    
                    1,259
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Acquired
      in-process research and development
                    
                    
                    (551
                    )
                    
                    
                    —
                    
                    
                    
                    (551
                    )
                    
                    
                    —Gain
      on outside investment in Company’s equity investments, net
                    
                    
                    7
                    
                    
                    
                    —
                    
                    
                    
                    7
                    
                    
                    
                    —Interest
      expense recorded with respect to the private placement of
      Debentures
                    
                    
                    (3,064
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Income
      tax benefit (expense)
                    
                    
                    (689
                    )
                    
                    
                    72
                    
                    
                    
                    (691
                    )
                    
                    
                    72Net
      loss of corporate headquarters and other unallocated
costs*
                    
                    
                    (3,140
                    )
                    
                    
                    (2,642
                    )
                    
                    
                    (1,197
                    )
                    
                    
                    (726
                    )Net
      loss attributable to Acorn Energy Inc
                    
                    $
                    (3,810
                    )
                    
                    $
                    (1,944
                    )
                    
                    $
                    (4,321
                    )
                    
                    $
                    (1,224
                    )





*
Includes stock compensation expense of $867 and $591 for the nine month periods
ending September 30, 2008 and 2009, respectively.  Includes stock
compensation expense of $326 and $168 for the three month periods ending
September 30, 2008 and 2009, respectively.




Note
18: Subsequent Events





Subsequent events have been evaluated
through November 12, 2009, the filing date of this Quarterly Report on Form 10Q,
for disclosure and recognition.





(a)
GridSense





On
November 4, 2009, the Company entered into a binding letter of intent with
Gridsense Pty. Ltd. (“GPL”), a company registered in Australia of which the
Company owns approximately 31% of the outstanding shares, and the principal
shareholders of GPL. According to the terms of the letter of intent the Company
will acquire all of the shares of GPL not currently owned by the Company as well
as the debt owed by GPL to certain of its shareholders (the “GPL debt”).
Consideration for the acquisition of the GPL shares and the GPL debt is $4,384
multiplied by the percentage of the GPL shares not owned by the Company at
closing, plus an earn-out to be determined based on the gross sales of GPL for
2010. The earn-out is capped at $2,435 multiplied by the percentage of the GPL
shares not owned by the Company at closing. In connection with the Letter of
Intent, the Company has made a bridge loan of $550 to GPL with an annual
interest rate of 8% per annum and a term of 24 months. The bridge loan will be
used by GPL for working capital and debt reduction purposes. The Company is in
the process of conducting due diligence regarding this transaction and preparing
the definitive purchase agreement. Closing is expected to occur in the first
quarter of 2010.


19


(b)
Exercise of options and warrants





During
the period from October 1, 2009 to October 31, 2009, the Company issued 199,668
common shares as a result of option holders exercising options at an average
exercise price of $1.10. As a result of the options exercised during that
period, the Company received proceeds of $220.





During
the period from October 1, 2009 to October 31, 2009, the Company issued 202,979
common shares as a result of warrant holders exercising warrants at an average
exercise price of $4.39. As a result of the warrants exercised during that
period, the Company received proceeds of $891.





(c) Call
of warrants





On
October 26, 2009, the Company exercised its right to call all outstanding and
unexercised warrants to purchase its common stock that were issued to investors
in a private placement of shares and warrants in 2006. Under the terms of the
warrants, any warrants that remain outstanding and unexercised after the call
date of November 24, 2009 shall be automatically cancelled and no longer
exercisable.





The
amount of the cash proceeds that the Company will receive will depend upon the
number of warrants exercised.  If all of the 184,262 presently
outstanding called warrants are exercised, the Company will receive proceeds of
approximately $512.


20


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, 2008.





Recent
Developments





CoaLogix
Additional Facility in North Carolina




On
September 4, 2009, CoaLogix’s SCR-Tech subsidiary entered into a lease agreement
to lease approximately 7.3 acres of land in Charlotte, North Carolina together
with a building containing approximately 143,500 square feet of office and
warehouse space. SCR-Tech entered into the lease in order to begin operating a
second manufacturing, warehousing and research and development facility. The
initial term of the lease is for seven years, and SCR-Tech may extend the lease
for up to two extension terms of five years each. SCR-Tech is initially leasing
98,460 square feet through August 31, 2010, and will lease the balance of the
45,040 square feet on September 1, 2010. SCR-Tech has the right to elect to
lease the balance of such square feet prior to September 1, 2010.




Under the
terms of the lease, SCR-Tech will have free rent for the first nine months of
lease of the 98,460 square feet of space, and will have free rent for the first
six months of the lease of the 45,040 square feet of space. Once the rent-free
periods have passed, SCR-Tech will begin making monthly payments of rent on the
basis of $2.70 per square foot with the rental rate increasing at 3% per year.
The rental rate for the extension terms shall be the prevailing base rental rate
per square foot of rentable area available in the Charlotte, North Carolina
market for comparable properties with a cap of 110% of the rental rate at the
expiration of the preceding expiring term.





GridSense





On
November 4, 2009, we entered into a binding letter of intent with Gridsense Pty.
Ltd. (“GPL”), a company registered in Australia of which we own approximately
31% of the outstanding shares, and the principal shareholders of GPL. According
to the terms of the letter of intent, we will acquire all of the shares of GPL
not currently owned by us as well as the debt owed by GPL to certain of its
shareholders (the “GPL debt”). Consideration for the acquisition of the GPL
shares and the GPL debt is $4,384,000 multiplied by the percentage of the GPL
shares not owned by the Company at closing, plus an earn-out to be determined
based on the gross sales of GPL for 2010. The earn-out is capped at $2,435,000
multiplied by the percentage of the GPL shares not owned by us at closing. In
connection with the letter of intent, we made a bridge loan of $550,000 to GPL
with an annual interest rate of 8% per annum and a term of 24 months. The bridge
loan will be used by GPL for working capital and debt reduction purposes. We are
in the process of conducting due diligence regarding this transaction and
preparing the definitive purchase agreement. Closing is expected to occur in the
first quarter of 2010.


21





Call
of Warrants





On
October 26, 2009, we exercised our right to call all outstanding and unexercised
warrants to purchase our common stock that were issued to investors in a private
placement of shares and warrants in 2006. Under the terms of the warrants, any
warrants that remain outstanding and unexercised after the call date of November
24, 2009 will be automatically cancelled and no longer exercisable. The amount
of the cash proceeds that the Company will receive will depend upon the number
of warrants exercised.  If all of the 184,262 presently outstanding
called warrants are exercised, we will receive proceeds of approximately $0.5
million.





Registration
Statement





On
September 16, 2009, The Securities and Exchange Commission declared effective a
previously filed a registration statement on Form S-3 which registers the shelf
for offer and sale from time to time the securities referenced in the
registration statement in one or more offerings with an aggregate offering price
of up to $12 million.




Overview
and Trend Information




During
the 2009 period included in this report, we had operations in three reportable
segments: providing catalyst regeneration technologies and management services
for SCR systems through our CoaLogix subsidiary; Naval and RT Solutions which is
conducted through our DSIT subsidiary and Energy Infrastructure Software (“EIS”)
services provided through our Coreworx subsidiary which was acquired in August
2008.  Accordingly, our results presented in this report do not
include meaningful comparative information for the three and nine month periods
ending September 30, 2008 with respect to Coreworx’s results.




The
following analysis should be read together with the segment information provided
in Note 17 to the interim unaudited consolidated financial statements included
in this quarterly report.





CoaLogix




Our CoaLogix segment reported
significantly increased revenues, gross profit, gross margin and net income in
2009 as compared to 2008 (for both the three and nine months ended September
30).





Revenues of $12.8 million represent an
increase of approximately $7.3 million or 135% in the first nine months of 2009
as compared to the first nine months of 2008. Third quarter 2009 revenues of
$2.8 million also reflected an increase of approximately $1.0 million or 53%
over second quarter 2008 revenues of $1.8 million. The increase in revenues was
due to continuing penetration in the regeneration market combined with the
ability to process more SCR modules facilitated by the completion of a plant
expansion in the fourth quarter 2008. Third quarter 2009 revenues of $2.8
million decreased from second quarter 2009 revenues of $4.5 million primarily
due to the re-scheduling of jobs that will be processed in the fourth quarter
rather than the third quarter.  CoaLogix was still able to manage its plant
capacity by beginning to process items for its own inventory.





Gross profit in the first nine months
of 2009 increased by approximately $3.3 million or 380% over first nine months
of 2008 gross profit. In the third quarter of 2009, gross profit of $0.7 million
represents an increase of $0.9 million over third quarter 2008 gross profit. The
increase in gross profit was due to increased revenues noted above and increased
gross margins.





CoaLogix’s gross margins increased to
33% in the first nine months of 2009 compared to 16% in the first nine months of
2008.  Gross margins increased during the period due to increased
efficiencies and additional throughput from the plant expansion in the fourth
quarter of 2008.


22





At the end of the third quarter,
SCR-Tech had a backlog of approximately $9.8 million which CoaLogix expects to
realize over the next 2 years.




In April
2009, we entered into the Purchase Agreement with CoaLogix, EnerTech and certain
members of CoaLogix’s senior management pursuant to which Acorn and EnerTech
each agreed to purchase from CoaLogix 781,111 shares of common stock for a
purchase price of $5.6 million, 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 approximately $260,000.  Proceeds of the
sale of the common stock will be used by CoaLogix for plant expansion,
technology development, legal expenses and computer
software.  Including the $1.8 million received by CoaLogix in
September 2009, CoaLogix has received approximately $3.9 million of the total
$11.5 million commitment by Acorn, EnerTech and management. A majority of the
$2.2 million of expenditures to date has been for technology development and
legal costs associated with pending legal actions to which CoaLogix is a party
(see Part II – Other Information, Item 1. Legal Proceedings).





CoaLogix
is currently engaged in reevaluating and testing the economic viability of its
MetalliFix technology which is used for the removal of heavy metals, such as
mercury and selenium, from coal-fired power plants. If, as a result of the
testing, the MetalliFix technology is found not to be economically viable,
CoaLogix may record an impairment of all or a portion of its MetalliFix related
assets. Such impairment, if recorded, could have a material adverse effect on
our results of operations and financial condition. Such assets include the
license for the technology as well as chemical inventories and certain prepaid
assets. The current book value of those assets is approximately $2.4 million.
Under the license agreement for the acquisition of the technology from Solucorp
Industries Ltd. (Solucorp), CoaLogix has the right to terminate the license
agreement in the event Solucorp cannot deliver to CoaLogix the MetalliFix
product for the prices set forth in the license agreement, and upon such
termination Solucorp would be obligated to refund to CoaLogix a pro rata portion
of the $2.0 million license fee it paid Solucorp.  Solucorp has agreed that
in the event CoaLogix so terminates the license agreement the amount of the
license fee to be refunded to CoaLogix would be $1.8 million.  In the event
of such termination of the license agreement, CoaLogix would seek to return to
Solucorp the chemicals purchased from Solucorp and obtain a refund for the
amounts paid. CoaLogix is uncertain as to whether Solucorp would be able to
satisfy these refund obligations.





As noted in Recent Developments, in
September 2009, CoaLogix’s SCR-Tech subsidiary entered a lease agreement to
lease approximately 7.3 acres of land in Charlotte, North Carolina together with
a building containing approximately 143,500 square feet in order to begin
operating a second manufacturing, warehousing and research and development
facility. CoaLogix expects the new facility to begin operations during the first
half of next year and will be able to service its continued growth while
providing additional capacity for new and existing customers. CoaLogix will make
a significant capital investment in the expansion from funds received under the
Purchase Agreement. In addition, SCR-Tech will receive both state and local
government incentives. CoaLogix’s decision for SCR-Tech to lease additional
space is in response to the increased demand for its services and
products.


23


Naval
& RT Solutions




Our Naval
& RT Solutions segment in DSIT reported slightly increased revenues but
significantly increased gross profit, gross margin and net income in the first
nine months of 2009 as compared to the first nine months of 2008.





First nine months 2009 revenues of $5.5
million were slightly higher ($0.2 million) as compared to the first nine months
of 2008 revenues of $5.3 million. Third quarter 2009 revenues of $1.9 million
reflected a slight increase of $0.2 million or 9% compared to third quarter 2008
segment revenues of $1.7 million. Within the segment, sales from our Naval
Solutions (which include AquaShieldTM sales) increased in the first nine
months of 2009 by approximately $1.2 million as compared to the first nine
months of 2008. This increase was almost entirely offset by a decrease of
approximately $1.0 million in our other RT Solutions projects. DSIT expects this
trend to continue as it increasingly focuses on growing the Naval Solutions
portion of this segment.





Gross profit in the first nine months
of 2009 increased by approximately $0.6 million or 35% over first nine months of
2008 gross profit. Gross margins increased in the first nine months of 2009 to
43% as compared to 33% in the first nine months of 2008. The increase in gross
profit was due to increased margins on projects as the current mix of projects
(with increased Naval Solutions sales) has higher margins than the mix of
projects in 2008.





At September 30, 2009, our Naval and RT
Solutions segment had a backlog of approximately $5.0 million. In addition, in
July 2009, DSIT signed an agreement with a leading Homeland Security integrator
securing future orders for its underwater site security systems. Under the
agreement the integrator committed to providing DSIT, by the end of the first
quarter of 2010, with orders for the AquaShieldTM Diver Detection Sonar (DDS)
system totaling close to $5 million. The agreement also includes an option for
ordering of additional AquaShieldTM systems valued at approximately an additional
$5 million by the end of 2011. Our current backlog does not reflect any of these
orders. Based on our backlog, we expect that revenues in the coming quarters
will continue to be at approximately at the level of sales in the third quarter
of 2009.




Coreworx




During the third quarter of 2009,
Coreworx continued its increased focus on providing its software solutions to
the nuclear power industry by more than doubling its second quarter expenditures
on its development of solutions to the nuclear power industry.  Coreworx is
planning to deliver a nuclear industry solution that addresses project execution
and information control requirements for major refurbishment, modifications to
the original plant design to increase the maximum capacity output at which the
plant can operate and new build projects.  The nuclear industry solution
will address regulatory compliance, document traceability, and work processes
that utilize best practices in managing major capital projects.  Market
conditions that Coreworx believes will drive nuclear solutions as a growing
source of revenue include: an increasing world-wide energy demand, an aging
North American nuclear infrastructure, and public pressure to provide clean-air
electricity sources that reduce dependency on overseas supplies of fossil fuel.
Coreworx anticipates receiving its first order for its nuclear industry solution
in either the fourth quarter of 2009 or the first quarter of 2010.




As we acquired Coreworx in August 2008,
we have only included its results from August 2008 in our 2008 results. However,
Coreworx’s revenues of CDN$4.1 million in the first nine months of 2009
represents an increase of CDN$1.8 million over Coreworx’s first nine months 2008
revenues of CDN$2.3 million. The increase in revenues is principally due to
increases in software licenses sold and increases in ongoing maintenance
fees.


24





Coreworx’s
gross profit in the first nine months of 2009 was CDN$3.4 million compared to
2008 first nine months gross profit of CDN$2.0 million.  The increase
in Coreworx’s gross profit in 2009 was attributable to the increase in
sales.





As of the
end of the third quarter of 2009, Coreworx had deferred revenue of approximately
CDN$1.2 million resulting from receipts of recurring maintenance and support
billings from its customers. Coreworx expects to recognize those revenues in the
fourth quarter of 2009 and into 2010.




In
addition to the $1.0 loan million made by Acorn to Coreworx in June 2009 for
development of the new project information software for the nuclear power plant
industry, Coreworx will require additional working capital support to accelerate
its nuclear and contract management product offerings in order to achieve market
readiness in early 2010. 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.




GridSense





In June
2009, GridSense completed a going private transaction. As a result of this
transaction, our holdings in the entity which will continue to carry on
GridSense’s grid monitoring business increased to approximately 31%. We account
for our GridSense investment using the equity method; however, as our investment
in GridSense has been reduced to zero, we no longer record equity income or loss
in GridSense. In the future, should our investment carrying value become
positive, we will record approximately 31% of GridSense’s income or loss as our
share of their income or loss.  See Recent Developments for disclosure
regarding the binding letter of intent which we entered into on November 4, 2009
for the acquisition of the shares of Gridsense which we do not currently
own.




Corporate





In October, 2008, our Board of
Directors authorized a share repurchase program of up to 1,000,000 shares of our
common stock. The share repurchase program is being implemented at management’s
discretion from time to time. In the period from January 1, 2009 to September
30, 2009, we purchased 433,795 shares at an average price of $2.55 per share
under our Stock Repurchase Program (see Item 2(c) – Issuer Purchases of Equity
Securities).





During
the third quarter of 2009, we repaid our corporate debt of $3.4 million related
to our acquisition of Coreworx. In addition, we also invested approximately $1.4
million in CoaLogix and Enertech following capital calls from those companies.
Offsetting these expenditures and our normal corporate operating costs was the
release of approximately $2.5 million of cash that had been restricted for the
benefit of a guarantee for a project for DSIT was released. Following the
aforementioned activity, we had approximately $8.4 million in unrestricted
corporate cash at September 30, 2009.  We continue to have significant
corporate cash expenses and will 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.
Following the end of the third quarter, we received approximately $1.0 million
from the proceeds from exercises of options and warrants, received a tax refund
of approximately $0.2 million and lent Gridsense $550,000. At the end of October
2009, our unrestricted cash balance stood at approximately $9.1
million.


25


Results
of Operations




The
following table sets forth certain information with respect to the consolidated
results of operations of the Company for the three and nine months ended
September 30, 2008 and 2009, 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.  Our results for the three and nine months ended September
30, 2009 include the results of our newly acquired Coreworx subsidiary. As such,
results for the three months ended September 30, 2009 may not be meaningfully
comparable to the results for the three and nine months ended September 30, 2008
without negating the effect of Coreworx’s results for 2008. For segment data see
Note 17 to the Unaudited Consolidated Financial Statements included in this
quarterly report.




Nine months ended September 30,
                  
                  
                  Three months ended September 30,2008
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  Change($,000)
                  
                  
                  %
      of
                    sales
                  
                  
                  ($,000)
                  
                  
                  %
      of
                    sales
                  
                  
                  From
                    2008
      to
                    2009
                  
                  
                  ($,000)
                  
                  
                  %
      of
                    sales
                  
                  
                  ($,000)
                  
                  
                  %
      of
                    sales
                  
                  
                  From
                    2008
      to
                    2009Sales
                  
                  $
                  12,530
                  
                  
                  
                  100
                  %
                  
                  $
                  22,721
                  
                  
                  
                  100
                  %
                  
                  
                  81
                  %
                  
                  $
                  4,628
                  
                  
                  
                  100
                  %
                  
                  $
                  6,463
                  
                  
                  
                  100
                  %
                  
                  
                  40
                  %Cost
      of sales
                  
                  
                  9,203
                  
                  
                  
                  73
                  
                  
                  
                  12,991
                  
                  
                  
                  57
                  
                  
                  
                  41
                  
                  
                  
                  3,731
                  
                  
                  
                  81
                  
                  
                  
                  3,602
                  
                  
                  
                  56
                  
                  
                  
                  (3
                  )Gross
      profit
                  
                  
                  3,327
                  
                  
                  
                  27
                  
                  
                  
                  9,730
                  
                  
                  
                  43
                  
                  
                  
                  192
                  
                  
                  
                  897
                  
                  
                  
                  19
                  
                  
                  
                  2,861
                  
                  
                  
                  44
                  
                  
                  
                  219R&D
      expenses, net
                  
                  
                  510
                  
                  
                  
                  4
                  
                  
                  
                  76
                  
                  
                  
                  0
                  
                  
                  
                  (85
                  )
                  
                  
                  402
                  
                  
                  
                  9
                  
                  
                  
                  424
                  
                  
                  
                  7
                  
                  
                  
                  5Acquired
      in-process research and development
                  
                  
                  551
                  
                  
                  
                  4
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )
                  
                  
                  551
                  
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )Impairments
                  
                  
                  3,000
                  
                  
                  
                  24
                  
                  
                  
                  80
                  
                  
                  
                  0
                  
                  
                  
                  (97
                  )
                  
                  
                  2,454
                  
                  
                  
                  53
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )SG&A
      expenses
                  
                  
                  8,094
                  
                  
                  
                  65
                  
                  
                  
                  13,292
                  
                  
                  
                  59
                  
                  
                  
                  64
                  
                  
                  
                  3,401
                  
                  
                  
                  73
                  
                  
                  
                  4,565
                  
                  
                  
                  71
                  
                  
                  
                  34Operating
      loss
                  
                  
                  (8,828
                  )
                  
                  
                  (70
                  )
                  
                  
                  (3,718
                  )
                  
                  
                  (16
                  )
                  
                  
                  (58
                  )
                  
                  
                  (5,911
                  )
                  
                  
                  (128
                  )
                  
                  
                  (2,128
                  )
                  
                  
                  (33
                  )
                  
                  
                  (64
                  )Gain
      on early redemption of Debentures
                  
                  
                  1,259
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Finance
      income (expense), net
                  
                  
                  (2,950
                  )
                  
                  
                  (24
                  )
                  
                  
                  213
                  
                  
                  
                  1
                  
                  
                  
                  (107
                  )
                  
                  
                  (50
                  )
                  
                  
                  (1
                  )
                  
                  
                  297
                  
                  
                  
                  5
                  
                  
                  
                  (694
                  )Gain
      on sale of Comverge shares
                  
                  
                  8,861
                  
                  
                  
                  71
                  
                  
                  
                  1,403
                  
                  
                  
                  6
                  
                  
                  
                  (84
                  )
                  
                  
                  3,079
                  
                  
                  
                  67
                  
                  
                  
                  176
                  
                  
                  
                  3
                  
                  
                  
                  (94
                  )Gain
      on outside investment in Company’s equity investments
                  
                  
                  7
                  
                  
                  
                  0
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )
                  
                  
                  7
                  
                  
                  
                  0
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )Loss
      before taxes on income
                  
                  
                  (1,651
                  )
                  
                  
                  (13
                  )
                  
                  
                  (2,102
                  )
                  
                  
                  (9
                  )
                  
                  
                  27
                  
                  
                  
                  (2,875
                  )
                  
                  
                  (62
                  )
                  
                  
                  (1,655
                  )
                  
                  
                  (26
                  )
                  
                  
                  (42
                  )Taxes
      on income
                  
                  
                  (689
                  )
                  
                  
                  (5
                  )
                  
                  
                  72
                  
                  
                  
                  0
                  
                  
                  
                  (110
                  )
                  
                  
                  (691
                  )
                  
                  
                  (15
                  )
                  
                  
                  72
                  
                  
                  
                  1
                  
                  
                  
                  (110
                  )Loss
      from operations of the Company and its consolidated
      subsidiaries
                  
                  
                  (2,340
                  )
                  
                  
                  (19
                  )
                  
                  
                  (2,030
                  )
                  
                  
                  (9
                  )
                  
                  
                  (13
                  )
                  
                  
                  (3,566
                  )
                  
                  
                  (77
                  )
                  
                  
                  (1,583
                  )
                  
                  
                  (24
                  )
                  
                  
                  (56
                  )Share
      of losses in GridSense
                  
                  
                  (194
                  )
                  
                  
                  (2
                  )
                  
                  
                  (129
                  )
                  
                  
                  (1
                  )
                  
                  
                  (34
                  )
                  
                  
                  (60
                  )
                  
                  
                  (1
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (100
                  )Share
      in income (losses) in Paketeria
                  
                  
                  (1,560
                  )
                  
                  
                  (12
                  )
                  
                  
                  263
                  
                  
                  
                  1
                  
                  
                  
                  (117
                  )
                  
                  
                  (899
                  )
                  
                  
                  (19
                  )
                  
                  
                  263
                  
                  
                  
                  4
                  
                  
                  
                  (129
                  )Net
      loss
                  
                  
                  (4,094
                  )
                  
                  
                  (33
                  )
                  
                  
                  (1,896
                  )
                  
                  
                  (8
                  )
                  
                  
                  (54
                  )
                  
                  
                  (4,525
                  )
                  
                  
                  (98
                  )
                  
                  
                  (1,320
                  )
                  
                  
                  (20
                  )
                  
                  
                  (71
                  )Net
      (income) loss attributable to  non-controlling
      interests
                  
                  
                  284
                  
                  
                  
                  2
                  
                  
                  
                  (48
                  )
                  
                  
                  0
                  
                  
                  
                  (117
                  )
                  
                  
                  204
                  
                  
                  
                  4
                  
                  
                  
                  96
                  
                  
                  
                  1
                  
                  
                  
                  (53
                  )Net
      loss attributable to Acorn Energy Inc.
                  
                  $
                  (3,810
                  )
                  
                  
                  (30
                  )
                  
                  $
                  (1,944
                  )
                  
                  
                  (9
                  )
                  
                  
                  (49
                  )
                  
                  $
                  (4,321
                  )
                  
                  
                  (93
                  )
                  
                  $
                  (1,224
                  )
                  
                  
                  (19
                  )
                  
                  
                  (72
                  )




Sales.  Sales in
the first nine months of 2009 increased by $10.2 million or 81% from $12.5
million in the first nine months of 2008 to $22.7 million in the first nine
months of 2009. The increase in sales is partially attributable to the inclusion
of Coreworx sales of $3.5 million in the first nine months of 2009 compared to
the $0.8 million of Coreworx sales from the date of our acquisition on August
13, 2008 through September 30, 2008 included in our 2008 results. The balance of
the increase in sales is due to the increase in CoaLogix sales which increased
by $7.3 million (135%) to $12.8 million compared to first nine months 2008 sales
of $5.4 million. DSIT’s Naval & RT Solutions segment sales increased
slightly from $5.3 million to $5.5 million. The increase in CoaLogix sales was
due to continued penetration in the regeneration market combined with the
ability to process more SCR modules facilitated by the completion of a plant
expansion in the fourth quarter 2008.


26





Sales in the third quarter of 2009 also
reflected an increase of $1.8 million over the third quarter of 2008. The
increase in sales was attributable primarily to CoaLogix’s increase in sales of
$1.0 million from $1.8 million in 2008 to $2.8 million in 2009 combined with the
increase in Coreworx’s third quarter  sales of $0.6 million as well as
a $0.2 million increase in DSIT sales.




Gross profit.Gross profit in
the first nine months of 2009 increased by $6.4 million or 192% as compared to
the first nine months of 2008. The increase in gross profit is attributable to
the inclusion of Coreworx gross profit in the first nine months of 2009 of $2.9
million compared to the gross profit of $0.5 million recorded for Coreworx
following our acquisition in August 2008. In addition, both CoaLogix and DSIT
recorded increased gross profits of $3.3 million (an increase of 380%) and $0.7
million (an increase of 37%), respectively. The increase in CoaLogix gross
profit was attributable to both the increase in CoaLogix sales as well as
increased margins. Gross margins for CoaLogix increased from 16% in the first
nine months of 2008 to 33% in the first nine months of 2009
reflecting  greater operational efficiency since the plant expansion
at the end of 2008. Gross margin in DSIT’s Naval and RT Solutions segment
increased from 33% in the first nine months of 2008 to 43% in the first nine
months of 2009 due to an increase in the higher margin AquaShieldTM
projects worked on in 2009.




Research and development, net
(“R&D”). We recorded net  R&D expenses of $76,000 in
the first nine months of 2009 as compared to an expense of $510,000 in the first
nine months of 2008. The expense recorded for the first nine months of 2009 is
net of a benefit of approximately $1.0 million  following the approval
of a claim by our Coreworx subsidiary for scientific research and experimental
development tax credit refunds from the Canada Revenue Agency of the Ontario
Ministry of Revenue in the second quarter of 2009.




Impairments.In 2008, we
recorded impairments and provisions of $3.0 million with respect to loans made
to and investments in affiliated companies. In 2009, we recorded an impairment
of $80,000 with respect to our investment in EnerTech.




Selling, general and administrative
expenses (“SG&A”).SG&A in the first nine months of
2009 increased by $5.2 million as compared to the first nine months of 2008. A
portion of the increase is attributable to the Coreworx’s SG&A costs of $4.6
million in 2009 compared to the $0.4 million recorded in 2008 with respect to
the period following our acquisition in August 2008. CoaLogix’s SG&A costs
in the first nine months of 2009 increased by $1.8 million as compared to the
first nine months of 2008 reflecting increased overhead costs resulting from the
company’s growth and legal expenses associated with the EES and Evonik lawsuits
discussed in Part II, Item 1, Legal Proceedings. DSIT’s SG&A costs were
relatively unchanged. Corporate general and administrative costs decreased by
$0.8 million reflecting the continuing effects of our efforts to reduce
corporate costs.




Gain on early redemption of
Debentures. In accordance with applicable accounting standards, we
recorded a non-cash gain of approximately $1.3 million in connection with the
January 2008 redemption of our convertible debentures.




Finance income (expense), net.The decrease in finance expense in the first nine months of 2009 compared
with the first nine months of 2008 is primarily due to the interest expense of
$3.1 million recorded with respect to the write-off of the remaining balances of
debt origination costs, warrants value and beneficial conversion features in the
early redemption of our convertible
debentures.




Gain on sale of Comverge
shares.  In the first nine months of 2009, we sold all of the
502,500 shares of Comverge shares that we held at the beginning of 2009 and
recorded a gain of $1.4 million on proceeds of $4.0 million. In the first nine
months of 2008, we sold 1,261,165 of our Comverge shares of and recorded a gain
of $8.9 million on proceeds of $15.4 million.


27




Liquidity
and Capital Resources




As of
September 30, 2009, we had working capital of $16.2 million, including $12.0
million of non-restricted cash and cash equivalents. During the nine months
ended September 30, 2009, approximately $4.1 million was used in operating
activities. The primary use of cash in operating activities during the first
nine months of 2009 was the $2.1 million and the $1.8 million used respectively
by CoaLogix and our corporate operations. Both Coreworx and DSIT each used
approximately $0.1 million in their operating activities during the first nine
months of 2009.




Cash
provided by investing activities of $3.4 million was primarily due to the $4.0
million of proceeds from the sale of our Comverge shares and covered-calls
during the period and $2.5 million from the release of restricted deposits
associated with on of DSIT’s projects. Those proceeds amounts were partially
offset by new restricted deposits of approximately $0.7 million as security for
new DSIT’s projects, $1.0 million for investment in EnerTech arising from
capital calls, $1.0 million for the acquisition of property and equipment and
the payment of $0.3 million for DSIT shares as a result of the exercise of a put
option at the end of 2008.




Net cash
of $2.0 million was used in financing activities, primarily from repayment of
notes due to former shareholders of Coreworx ($3.4 million) and the purchase of
treasury shares ($1.1 million). These uses of cash were partially offset by the
proceeds from the issuance of shares to non-controlling interests in CoaLogix
($2.0 million) and the proceeds from new short-term borrowings by our operating
subsidiaries ($0.4 million).




At
September 30, 2009, DSIT had approximately $530,000 in Israeli credit lines
available to it by an Israeli bank. DSIT’s bank temporarily increased DSIT’s
credit line to approximately $800 (until October 1, 2009). At September 30,
2009, DSIT was utilizing $620 of the temporarily increased line-of-credit. On
October 1, 2009, DSIT reduced its utilization of the line of credit following
the receipt of cash from certain customers.




The
line-of-credit is subject to certain financial covenants. DSIT was in compliance
with its financial covenants at September 30, 2009. 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. DSIT is continuing
to search for additional sources of financing to support its
growth.




At
September 30, 2009, CoaLogix had a $500,000 term loan and a $2 million formula
based line-of-credit available to it for utilization from a bank.  At
September 30, 2009, CoaLogix was utilizing $200,000 of the formula based line of
credit. Both the term loan and the line-of-credit are to finance CoaLogix’s
working capital and to finance its growth and are subject to certain financial
covenants. CoaLogix was in compliance with its financial covenants at September
30, 2009. We believe that CoaLogix will have sufficient liquidity to finance its
operating activities from cash flow from its own operations and its bank
financing over the next 12 months.




In
anticipation of CoaLogix’s need to increase production capacity in order to
satisfy expected increased orders from customers, in April 2009, we entered into
the Purchase Agreement (see “Recent Developments”) with CoaLogix and other
parties and each party agreed to purchase shares of common stock from CoaLogix
for an aggregate  purchase price of approximately $11.5
million.  The Purchase Agreement provides that Acorn and others will
purchase such shares of common stock in installments as funding is needed by
CoaLogix for plant expansion, technology development, legal expenses and
computer software.  The first stage of funding under the Purchase
Agreement was $2.1 million which was received by CoaLogix in April 2009. The
second stage of funding under the Purchase Agreement
was $1.8 million which was received by CoaLogix in September
2009.


28




CoaLogix’
subsidiary, SCR-Tech, entered into a five-year regeneration agreement with a
major customer during the fourth quarter requiring it to issue a performance
bond with a surety company in the amount of 100% of the price of each purchase
order.  The surety company requires an irrevocable letter of credit issued
by one of its approved financial institutions supported by 50% collateral of the
performance bond.   In addition, Acorn Energy, CoaLogix and SCR-Tech
have agreed to indemnify the surety company for any potential claims, losses,
costs, and damages incurred should the bond need to be executed by the surety
company.  SCR-Tech expects to record $531,000 of operating cash to
restricted cash during the fourth quarter to meet the letter of credit
collateral requirement.




In
addition to the loan of $1.0 million by us to Coreworx for development of a new
project information software product for the nuclear power plant industry which
we made in June 2009, we continue to expect that Coreworx will require
additional working capital support in order to finance its working capital needs
in 2009 and into 2010. This support may be in the form of a bank line, new
investment by others, additional investment or loan 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.




As of
October 31, 2009, the Company’s corporate operations had a total of
approximately $9.1 million in cash and cash equivalents, reflecting a $0.7
million increase from the $8.4 million balance as of September 30, 2009. The
increase from September 30, 2009 is primarily due to cash of $1.1 million
received from the exercise of warrants and options and a tax refund of
approximately $0.2 million which was partially offset by our $550,000 loan to
Gridsense.





On
October 26, 2009, we exercised our right to call all outstanding and unexercised
warrants to purchase its common stock that were issued to investors in a private
placement of shares and warrants in 2006. Under the terms of the warrants, any
warrants that remain outstanding and unexercised after the call date of November
24, 2009 will be automatically cancelled and no longer exercisable. The amount
of the cash proceeds that the Company will receive will depend upon the number
of warrants exercised.  If all of the 184,262 presently outstanding
called warrants are exercised, we will receive proceeds of approximately $0.5
million.





Furthermore,
in the offering for our 2007 Private Placement of Convertible Redeemable
Subordinated Debentures, we issued 634,258 of warrants that had an exercise
price of $4.50. As of October 31, 2009, 217,369 of these warrants were still
outstanding. Under the terms of the offering, the warrants are currently
callable by us at any time on 20 business days notice as our Common Stock has
achieved a volume weighted average price of $6.00 for more than 20 consecutive
trading days. If we called these options and all of the 217,369 warrants
outstanding at October 31 are exercised, we will receive proceeds of
approximately $1.0 million.




We
believe that the cash on hand, plus the cash potentially available from
exercises of warrants, 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.





Contractual
Obligations and Commitments




Our
contractual obligations and commitments at September 30, 2009 principally
include obligations associated with our outstanding indebtedness, future minimum
operating lease obligations and potential severance obligations to Israeli
employees and are set forth in the table below.


29




Cash Payments Due During Year Ending
                      September 30,(amounts in thousands)Contractual Obligations
                    
                    Total
                    
                    
                    2010
                    
                    
                    
                    2011-
                      2012
                    
                    
                    
                    2013-
                      2014
                    
                    
                    2015 and
                      thereafterOperating
      leases
                    
                    $
                    5,931
                    
                    
                    $
                    1,415
                    
                    
                    $
                    2,388
                    
                    
                    $
                    896
                    
                    
                    $
                    1,232Potential
      severance obligations (1)
                    
                    
                    3,009
                    
                    
                    
                    117
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,892Investment
      in EnerTech Capital Partners III L.P. (2)
                    
                    
                    2,850
                    
                    
                    
                    2,850
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Investment
      in CoaLogix (3)
                    
                    
                    3,720
                    
                    
                    
                    3,720
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      contractual cash obligations
                    
                    $
                    15,510
                    
                    
                    $
                    8,102
                    
                    
                    $
                    2,388
                    
                    
                    $
                    896
                    
                    
                    $
                    4,124




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 September 30, 2009, we accrued a total of $2.9
million for potential severance obligations of which approximately $1.9 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 Capital Partners III L.P. (“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 September 30, 2009, we have received and funded capital calls of
$2,150,000 to EnerTech III.




(3) In
April 2009, we entered into the Purchase Agreement with CoaLogix, EnerTech and
certain members of CoaLogix’s senior management pursuant to which each of Acorn
and EnerTech agreed to purchase from CoaLogix 781,111 shares of common stock for
a purchase price of $5,624,000 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 $260,000.  The Purchase Agreement provides
that Acorn, EnerTech and senior management will purchase such shares of common
stock in installments as funding is needed by CoaLogix for plant expansion,
technology development, legal expenses and computer software. Through September
30, 2009, we have invested $1,904,000 of our $5,624,000 commitment. Our
remaining obligation under this commitment of $3,720,000 is presented as due in
the next 12 months, though it is uncertain as to when actual payments may be
made.




Item
3.   Quantitative and Qualitative Disclosures About Market
Risk




In the
normal course of business, we are exposed to fluctuations in interest rates on
lines-of-credit incurred to finance our operations in Israel, whose net
utilization at September 30, 2009 stood at $0.6 million. Our non-US dollar
monetary assets and liabilities (net assets of approximately $0.3 million) in
Israel are exposed to fluctuations in exchange rates. In addition, our non-US
dollar monetary assets and liabilities (net assets of approximately $0.3 million
as at September 30, 2009) in Canada at our Coreworx subsidiary are also exposed
to fluctuations in exchange rates.




Furthermore,
$0.8 million and $1.0 million of our backlog of projects are contracts and
orders that are denominated in NIS and linked to an Israeli Ministry of Defense
Index, and denominated in NIS, respectively.


30




In 2009,
our DSIT subsidiary began to enter into forward contracts which did not qualify
as hedging instruments under accounting principles to try to mitigate its
foreign currency exposure risks. At September 30, 2009, DSIT had committed to
selling NIS 1.1 million each in October and November 2009 at an exchange rate of
3.847 and NIS 0.8 million in December 2009 at an exchange rate of 3.913. At
September 30, 2009, the exchange rate of the NIS was 3.758.




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 Control 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.


31




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. (“Solucorp”).  Beginning in
2005, EES acquired a license to distribute certain Solucorp technology related
to the reduction of mercury emissions.  Subsequently, in the fall of
2007, CoaLogix entered into separate and independent business relationships with
both Solucorp and EES.  While CoaLogix’s relationship with Solucorp
matured into a licensing arrangement, a business relationship with EES, after
further investigation and due diligence, was ultimately deemed
inadvisable.  EES initially alleged that CoaLogix and its CEO utilized
confidential information obtained during negotiations with EES in order to
improperly seek out and broker a deal with Solucorp in violation of EES’
contractual rights.  On October 10, 2008, CoaLogix and its CEO filed a
motion to have the case transferred to the Western District of North
Carolina.  Simultaneously, CoaLogix and its CEO filed motions to
extend all deadlines in the case until such time as the court had ruled on the
motion to transfer venue.  Thereafter, on October 22, 2008, EES filed
an Amended Complaint dropping CoaLogix’s CEO as a defendant and removing its
claim for fraudulent misrepresentation.  The Amended Complaint seeks
unspecified damages in addition to disgorgement of all revenues CoaLogix has
earned from its dealings with Solucorp.





On June
24, 2009, EES filed a further Amended Complaint to add CoaLogix’ CEO and
EnerTech as parties to the suit and to add further claims of theft of
opportunity and civil conspiracy.  EES has subsequently indicated that
it will drop EnerTech as a defendant to the suit.  The court recently
allowed CoaLogix’ CEO to be added as a party to the suit and also allowed the
claims of theft of opportunity and civil conspiracy to be added.





CoaLogix
denies any liability and is vigorously defending this lawsuit in the event that
a favorable settlement is not reached.  Further, CoaLogix contends
that its cost of defense, together with any ultimate judgment, is the
responsibility of Solucorp due to an indemnification agreement between the
companies.  Solucorp has agreed to assume the cost of defense, but has
not made a commitment regarding any ultimate judgment nor a commitment as to
when it will make payment as to CoaLogix’ legal costs. The discovery phase of
the case has closed, and mediation is scheduled for December 15,
2009.  In the event a favorable settlement is not reached in
mediation, CoaLogix intends to file a motion with the court for dismissal of the
lawsuit in summary judgment.





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.


32





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.





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.  The case is in
the initial phase of discovery with interrogatory requests having been exchanged
by some of the parties.


33


Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





(c)
Issuer Purchases of Equity Securities





The Company purchased, pursuant to its
share repurchase program, shares of the Company’s common stock as follows for
the months of January through September 2009:





Period
              
              Total Number of
                  Shares Purchased
              
              
              Average Price
                  Paid Per Share
              
              
              Total Number of
                  Shares Purchased
                  as Part of
                  Publicly
                  Announced Plan
              
              
              Maximum
                  Number of
                  Shares That May
                  Yet be Purchased
                  Under the Plan1January
      1, 2009 – January 31, 2009
              
              
              59,640
              
              
              $
              2.15
              
              
              
              123,555
              
              
              
              876,445February
      1, 2009 – February 28, 2009
              
              
              45,907
              
              
              $
              2.42
              
              
              
              169,462
              
              
              
              830,538March
      1, 2009 –March 31, 2009
              
              
              40,106
              
              
              $
              2.21
              
              
              
              209,568
              
              
              
              790,432April
      1, 2009 –April 30, 2009
              
              
              37,701
              
              
              $
              2.46
              
              
              
              247,269
              
              
              
              752,731May
      1, 2009 –May 31, 2009
              
              
              68,701
              
              
              $
              2.74
              
              
              
              315,970
              
              
              
              684,030June
      1, 2009 – June 30, 2009
              
              
              165,340
              
              
              $
              2.74
              
              
              
              481,310
              
              
              
              518,690July
      1, 2009 –July 31, 2009
              
              
              16,400
              
              
              $
              2.81
              
              
              
              497,710
              
              
              
              502,290August
      1, 2009 –August 31, 2009
              
              
              —
              
              
              
              —
              
              
              
              497,710
              
              
              
              502,290September
      1, 2009 – September 30, 2009
              
              
              —
              
              
              
              —
              
              
              
              497,710
              
              
              
              502,290Total
              
              
              433,795
              
              
              $
              2.55





1 The
maximum number of shares that may be purchased under the share repurchase plan
is 1,000,000 shares. To date, an aggregate of 497,710 shares have been
purchased.


34


Item
4.  Submission of Matters to a Vote of Security Holders





At our
Annual Meeting of Stockholders on August 4, 2009, John A. Moore, George
Morgenstern, Richard J. Giacco, Joseph Musanti, Richard S. Rimer and Samuel M.
Zentman were elected as directors, each for a term of one year to serve until
the next annual meeting of stockholders and until their successors have been
elected and qualified. The results of the voting were as
follows:





Nominee
                  
                  For
                  
                  
                  WithheldJohn
      A. Moore
                  
                  
                  8,233,416
                  
                  
                  
                  705,483George
      Morgenstern
                  
                  
                  8,166,464
                  
                  
                  
                  772,435Richard
      J. Giacco
                  
                  
                  8,876,529
                  
                  
                  
                  62,370Joseph
      Musanti
                  
                  
                  8,876,529
                  
                  
                  
                  62,370Richard
      S. Rimer
                  
                  
                  8,879,029
                  
                  
                  
                  59,870Samuel
      M. Zentman
                  
                  
                  8,876,529
                  
                  
                  
                  62,370


35




Item
6.   Exhibits.




10.1
                    
                    Lease
      Agreement dated September 4, 2009 by and between SCR-Tech, LLC and Fat Boy
      Trading Company31.1
                    
                    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.


36


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:  November
      12, 2009By:/s/Michael
      BarthMichael
      BarthChief
      Financial Officer


37