7.	Income Taxes

For the three months ended June 30, 2013, we did not record a tax benefit for the losses incurred during the second quarter ended June 30, 2013. For the six months ended June 30, 2013, we recorded an income tax benefit of $1.9 million. That effective tax rate differed from our statutory federal rate of 34% as a result of state income taxes (net of federal benefit), less a permanent tax difference associated with an addition to our deferred tax valuation allowance of approximately $633,000.

We record as a deferred tax asset on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (“tax benefits”) that we believe will be available to us to offset or reduce the amounts of our income taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then, we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount which we believe we are more likely than not to be able to utilize. Such a reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our statements of operations. The determination of whether and the extent to which we will be able to utilize our deferred tax asset involves significant management judgments and assumptions that are subject to period to period changes as a result of changes in tax laws, changes in market or economic conditions that could affect our operating results or variances between our actual operating results and our projected operating results, as wells as other factors.

At June 30, 2013, we have a net deferred tax asset of $13.7 million, as compared with $11.7 million at December 31, 2012. The increase in our deferred tax asset was directly attributable to the losses we incurred during the six months ended June 30, 2013. Adjustments to our deferred tax valuation allowance could be required in the future if we were to conclude, on the basis of our assessment of the realizability of the deferred tax asset, that the amount of that asset which is more likely, than not, to be available to offset or reduce future taxes has decreased. Any such decrease could result in an increase in our provision for income taxes or reductions to our income tax benefits.

We file income tax returns with the U.S. federal government and the state of California. As of June 30, 2013, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal income tax return for the 2008 to 2012 tax year and Franchise Tax Board for California state income tax returns for the 2008 to 2012 tax years. We do not believe there will be any material adverse changes in our unrecognized tax benefits over the next 12 months. Net operating losses (“NOLs”) on our U.S. federal and California state income tax returns may be carried forward 20 years. Beginning in 2012, California taxpayers may carryback losses for two years and carryforward for 20 years, which conforms to the U.S. tax laws. We expect (although no assurance can be given) that we will generate taxable income in future years sufficient to enable us to use the California NOL generated in prior years.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was recognized during the quarters ended June 30, 2013 and 2012.