—INCOME TAXES


(a)	Composition of loss from continuing operations before income taxes is as follows:



	Year ended December 31,
	2011			2012			2013
Domestic	$	(7,053	)	$	(20,167	)	$	(29,357	)
Foreign	(515		)	(524		)	(1,476		)
	$	(7,568	)	$	(20,691	)	$	(30,833	)

Income tax expense (benefit) consists of the following:



	Year ended December 31,
	2011			2012			2013
Current:
Federal	$	1,800		$	(1,802	)	$	—
State and local	2			2			2
Foreign	88			676			—
	1,890			(1,124		)	2
Deferred:
Federal	(14,571		)	(1,434		)	—
State and local	—			—			—
Foreign	(86		)	(398		)	154
	(14,657		)	(1,832		)	154
Total income tax expense (benefit)	$	(12,767	)	$	(2,956	)	$	156


(b)	Effective Income Tax Rates

Set forth below is reconciliation between the federal tax rate and the Company’s effective income tax rates with respect to continuing operations:



	Year ended December 31,
	2011		2012		2013
Statutory Federal rates	34	%	34	%	34	%
Increase (decrease) in income tax rate resulting from:
Tax on foreign activities	2		2		2
Other, net (primarily permanent differences)	(2	)	(1	)	(2	)
Valuation allowance	135		(21	)	(35	)
Effective income tax rates	169	%	14	%	(1	)%


(c)	Analysis of Deferred Tax Assets and (Liabilities)



	As of December 31,
	2012			2013
Deferred tax assets consist of the following:
Employee benefits and deferred compensation	$	1,386		$	1,981
Asset impairments	—			2,693
Other temporary differences	750			1,301
Net operating loss carryforwards	6,972			13,746
	9,108			19,721
Valuation allowance	(8,413		)	(19,132		)
Net deferred tax assets	695			589

Valuation allowances relate principally net operating loss carryforwards related to the Company's consolidated tax losses as well as state tax losses related the Company's USSI, GridSense and OmniMetrix subsidiaries and book-tax differences related asset impairments and stock compensation expense of the Company. During the year ended December 31, 2012, the valuation allowance increased by $4,570. During the year ended December 31, 2013, the valuation allowance increased by $10,719. The increase in the valuation allowance in both 2012 and 2013 was primarily attributable to the net losses recorded in the Company's U.S. operations.

Deferred tax assets relate to primarily to employee benefits and other temporary differences at the Company's DSIT subsidiary.


(d)	Summary of Tax Loss Carryforwards

As of December 31, 2013, the Company had various net operating loss carryforwards expiring as follows:



Expiration	Federal*		State		Foreign
2021-2033	$	31,667	$	35,239
Unlimited	—		—		3,000
Total	$	31,667	$	35,239	$	3,000

* The utilization of a portion of these net operating loss carryforwards is limited to a total of approximately $259 per year due to limits on utilizing the acquired net operating loss carryforwards under Internal Revenue Service regulations following a change in control.


(e)	Taxation in the United States

On October 22, 2004, The American Jobs Creation Act (the “Act”) was signed into law. The Act includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act. The Company’s foreign earnings are derived from the Company’s Israeli and Australian subsidiaries. Due to Israeli tax and company law constraints and DSIT’s own cash and finance needs as well as GridSense’s cash needs, the Company does not expect any foreign earnings to be repatriated to the United States in the near future.

As a holding company without other business activity in Delaware, the Company is exempt from Delaware state income tax. Thus, the Company’s statutory income tax rate on domestic earnings is the federal rate of 34%.

Following the acquisition of OmniMetrix in February 2012 (see Note 3(a), the Company began consolidating their results for tax purposes. As a result of the increased holdings in USSI during 2011 (see Note 3(b)), the Company began consolidating the results of USSI for tax purposes beginning in February 2011.


(f)	Taxation in Israel

The income of the Company’s Israeli subsidiaries are taxed at regular rates. Tax rates relevant to the Company's Israeli subsidiaries in the years 2011 - 2013 are as follows:

•2011 - 24%

•2012 - 25%

•2013 - 25%

On August 5, 2013, the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) - 2013 was published in the Official Gazette, by which, the corporate tax rate would be raised by 1.5% to a rate of 26.5% as from 2014.

Taxation in Australia

The income of the Company’s GridSense subsidiaries is taxed on their worldwide taxable income at the general corporate tax rate which currently stands at 30%.


(h)	Uncertain Tax Positions (UTP)

As of December 31, 2012 and 2013, $0 interest or penalties were accrued on the balance sheet related to UTP.

Following is a reconciliation of the total amounts of the Company’s unrecognized tax benefits for the period from January 1, 2012 to December 31, 2013:



	2012			2013
Balance at January 1	$	73		$	—
Increases (decreases) in unrecognized tax benefits and associated interest and penalties as a result of tax positions made during the prior period	—			—
Decreases in unrecognized tax benefits and associated interest and penalties as a result of tax positions taken during the current period	(73		)	—
Balance at December 31	$	—		$	—

The Company is subject to U.S. Federal and state income tax, Australian income tax and Israeli income tax. As of January 1, 2014, the Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2010, for years before 2009 for state income taxes, before 2009 for Israeli income taxes and before 2010 for Australian taxes.