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| <NonNumbericText> <div> <p style="margin:0pt; page-break-after:avoid"><font style="font-family:'Times New Roman'; font-size:10pt; font-weight:bold">NOTE 12—INCOME TAXES </font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be </font><font style="font-family:'Times New Roman'; font-size:10pt">recovered,</font><font style="font-family:'Times New Roman'; font-size:10pt"> and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate. </font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">As of June 30, 2013, the Company had net operating loss (“NOL”) </font><font style="font-family:'Times New Roman'; font-size:10pt">carryforwards</font><font style="font-family:'Times New Roman'; font-size:10pt"> for federal and state purposes of approximately $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">81.1</font><font style="font-family:'Times New Roman'; font-size:10pt"> million and $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">56.9</font><font style="font-family:'Times New Roman'; font-size:10pt"> million, respectively, which begin to expire in </font><font style="font-family:'Times New Roman'; font-size:10pt; ">2013</font><font style="font-family:'Times New Roman'; font-size:10pt">. The utilization of NOL and credit </font><font style="font-family:'Times New Roman'; font-size:10pt">carryforwards</font><font style="font-family:'Times New Roman'; font-size:10pt"> may be limited under the provisions of the Internal Revenue Code (“IRC”) Section</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">382 and similar state provisions. IRC Section</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">382 generally imposes an annual limitation on the amount of NOL </font><font style="font-family:'Times New Roman'; font-size:10pt">carryforwards</font><font style="font-family:'Times New Roman'; font-size:10pt"> that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. During the year ended December</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">31, 2006, the Company completed an analysis to determine the potential applicability of any annual limitations imposed by IRC Section</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">382. Based on the analysis, management determined that there was no significant IRC Section</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">382 limitation. As of June 30, 2013, the Company had research and development tax credit </font><font style="font-family:'Times New Roman'; font-size:10pt">carryforwards</font><font style="font-family:'Times New Roman'; font-size:10pt"> for federal and state purposes of approximately $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">1.3</font><font style="font-family:'Times New Roman'; font-size:10pt; "> million</font><font style="font-family:'Times New Roman'; font-size:10pt"> and $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">815,000</font><font style="font-family:'Times New Roman'; font-size:10pt">, respectively, which will begin to expire in </font><font style="font-family:'Times New Roman'; font-size:10pt; ">2018</font><font style="font-family:'Times New Roman'; font-size:10pt"> for federal purposes and will </font><font style="font-family:'Times New Roman'; font-size:10pt">carryforward</font><font style="font-family:'Times New Roman'; font-size:10pt"> indefinitely for state purposes. An updated analysis may be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">382 limitation. </font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on </font><font style="font-family:'Times New Roman'; font-size:10pt">derecognition</font><font style="font-family:'Times New Roman'; font-size:10pt">, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has elected to classify interest and penalties as a component of its income tax provision. </font><font style="font-family:'Times New Roman'; font-size:10pt">With respect to the liability for unrecognized tax benefits, including related estimates of penalties and interest, the Company recorded increases of $0 and $1,000 for the three and six months ended June 30, 2013, respectively, and $1,000 and $2,000 for the three and six months ended June 30, 2012, respectively.</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt"> </font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">For the three and six months ended June 30, 2013, the Company recorded an income tax provision of $168,000 and benefit of $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">204,000</font><font style="font-family:'Times New Roman'; font-size:10pt">, respectively. For the three and six months ended June 30, 2012, the Company recorded an income tax provision of $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">34,000</font><font style="font-family:'Times New Roman'; font-size:10pt"> and $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">63,000</font><font style="font-family:'Times New Roman'; font-size:10pt">, respectively.</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">During the six months ended June</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">30, 2013, the Company reversed certain deferred tax liabilities associated with </font><font style="font-family:'Times New Roman'; font-size:10pt">unrecognized tax benefits related to international operations due to expiring statutes and recognized tax benefits of $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">107,000</font><font style="font-family:'Times New Roman'; font-size:10pt"> and recognized deferred tax assets related to certain indefinite lived assets (federal alternative minimum tax credits and California R&D credits) that were used to offset deferred tax liabilities related to indefinite-lived intangible assets of $107,000 </font><font style="font-family:'Times New Roman'; font-size:10pt">resulting in a</font><font style="font-family:'Times New Roman'; font-size:10pt">n overall</font><font style="font-family:'Times New Roman'; font-size:10pt"> tax benefit of $</font><font style="font-family:'Times New Roman'; font-size:10pt; ">214,000</font><font style="font-family:'Times New Roman'; font-size:10pt">. </font><font style="font-family:'Times New Roman'; font-size:10pt">Management does not expect to record additional significant tax benefits in the foreseeable future.</font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">During the three and six months ended June</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">30, 2013, the Company recorded an income tax </font><font style="font-family:'Times New Roman'; font-size:10pt">expense</font><font style="font-family:'Times New Roman'; font-size:10pt"> of $</font><font style="font-family:'Times New Roman'; font-size:10pt">16</font><font style="font-family:'Times New Roman'; font-size:10pt">8</font><font style="font-family:'Times New Roman'; font-size:10pt">,000</font><font style="font-family:'Times New Roman'; font-size:10pt"> and $</font><font style="font-family:'Times New Roman'; font-size:10pt">10</font><font style="font-family:'Times New Roman'; font-size:10pt">,000</font><font style="font-family:'Times New Roman'; font-size:10pt">, respectively</font><font style="font-family:'Times New Roman'; font-size:10pt">, related to the current year tax provision</font><font style="font-family:'Times New Roman'; font-size:10pt">.</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">The tax expense differs from expense derived from statutory rate of</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt; ">34%</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and federal alternative minimum tax liability</font><font style="font-family:'Times New Roman'; font-size:10pt">. The income tax provision for the three and six months ended June 30, 2013 was calculated using the discrete year-to-date method, which </font><font style="font-family:'Times New Roman'; font-size:10pt">m</font><font style="font-family:'Times New Roman'; font-size:10pt">anagement determined to be more appropriate than the annual effective rate method which was used to calculate the income tax provision for the quarter ended March 31, 2013</font><font style="font-family:'Times New Roman'; font-size:10pt">. </font></p> <p style="margin:6pt 0pt 0pt; text-indent:24.5pt"><font style="font-family:'Times New Roman'; font-size:10pt">Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. The state of California requires the use of a single sales factor apportionment formula for tax years beginning on or after January</font><font style="font-family:'Times New Roman'; font-size:10pt"> </font><font style="font-family:'Times New Roman'; font-size:10pt">1, 2013. </font><font style="font-family:'Times New Roman'; font-size:10pt">During the three months ended June 30, 2013, t</font><font style="font-family:'Times New Roman'; font-size:10pt">he Company’s state deferred tax assets </font><font style="font-family:'Times New Roman'; font-size:10pt">were</font><font style="font-family:'Times New Roman'; font-size:10pt"> revalued to account for the change in the tax law</font><font style="font-family:'Times New Roman'; font-size:10pt">; however, t</font><font style="font-family:'Times New Roman'; font-size:10pt">he Company records a full valuation allowance against the state deferred tax assets therefore the California apportionment mandate </font><font style="font-family:'Times New Roman'; font-size:10pt">did</font><font style="font-family:'Times New Roman'; font-size:10pt"> not have a material impact on the Company’s consolidated financial statements. </font></p> </div> </NonNumbericText> |
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