NOTE

—INCOME TAXES

The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign jurisdictions. The Company’s income (loss) before provision for income taxes consisted of the following (in thousands):

	Year Ended December 31,
	201 8			201 7		201 6
U.S.	$	(14,177	)	$	11,203	$	2,207
Foreign		662			757		513
Income (loss) before income taxes	$	(13,515	)	$	11,960	$	2,720

The components of the provision (benefit) for income taxes are as follows (in thousands):

	Year Ended December 31,
	201 8		201 7		201 6
Current:
Federal	$	(15)	$	148	$	—
State		123		71		16
Foreign		303		511		131
Total Current		411		730		147
Deferred:
Federal		15,674		(17,393)		(24)
State		1,230		(1,348)		(2)
Foreign		(60)		(22)		22
Total Deferred		16,844		(18,763)		(4)
Tax provision	$	17,255	$	(18,033)	$	143

The Company’s deferred tax asset consists of the following (in thousands):

	December 31,
	201 8		201 7
Net operating loss carryforwards	$	11,227	$	8,604
Stock-based compensation		1,040		1,179
Other accruals and reserves		1,924		1,663
Credits		10,857		11,781
Foreign		457		399
Accrued warranty		1,863		847
Depreciation and amortization		2,024		1,592
Other		282		303
Deferred tax asset before valuation allowance		29,674		26,368
Valuation allowance		(27,865)		(7,242)
Deferred tax asset after valuation allowance		1,809		19,126
Deferred tax liability		(1,269)		—
Deferred tax liability on goodwill		(83)		(71)
Net deferred tax asset	$	457	$	19,055

The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate are as follows:

	Year Ended December 31,
	201 8			2017*		2016*
U.S. federal statutory income tax rate		21.00	%	34.00	%	34.00	%
State tax rate		(4.95)		(5.59)		(14.56)
Meals and entertainment		(2.66)		2.15		7.56
Stock-based compensation		13.66		(21.55)		14.36
SAB 118 Change in Estimate		(2.43)		—
Foreign rate differential		0.11		(0.50)		(0.16)
Other		(1.21)		0.65		(2.15)
General business credit		4.31		(2.72)		(9.25)
Change in Federal Tax Rate		—		60.98		—
Valuation allowance		(155.49)		(218.17)		(24.57)
Effective tax rate		(127.66)	%	(150.75)	%	5.23	%

Other balance in

2017

and

2016

was reclassified for consistency with current year.

The Company assesses the ability to realize its net deferred tax assets by evaluating all available evidence, both positive and negative, including (

) cumulative results of operations in recent years, (

) sources of recent income (loss), (

) estimates of future taxable income and (

) the length of net operating loss and tax credit carryforward periods. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified.

The Company’s deferred tax assets are primarily comprised of U.S. Net Operating Loss (“NOL”), tax credit and other deferred tax assets relating to book-to-tax temporary differences. The Company had recorded and maintained a full valuation allowance against those net deferred tax assets to reduce them to their estimated net realizable value through

September 30, 2017.

As of

December 31, 2017,

the Company determined that it is more likely than

not

that a portion of the net deferred tax assets would be realized for federal and U.S. states, except California, and therefore recorded a net valuation allowance release of

$26.3

million.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of

December 31, 2018,

in part because in the current year, the Company achieved

three

years of cumulative pre-tax losses in the U.S. federal tax jurisdiction, management determined that sufficient negative evidence exists as of

December 31, 2018,

to conclude that it is more likely than

not

that certain of its net deferred taxes would

not

be realizable, and therefore, recorded a valuation allowance in the amount of

$16.9

million accordingly.

December 31, 2018,

the Company had approximately

$45.7

million and

$20.5

million of federal and state net operating loss carryforwards, respectively, available to offset future taxable income. The federal and state net operating loss carryforwards, if

not

utilized will generally begin to expire in

2029

through

2038.

$11.8

million of total federal net operating loss carryforwards were generated post

December 31, 2017

and have

expiration. At

December 31, 2018,

the Company had research and development tax credits available to offset federal, California and Massachusetts tax liabilities in the amount of

$6.7

million,

$7.4

million and

$0.3

million, respectively. Federal credits will begin to expire in

2024,

California state tax credits have

expiration, and Massachusetts tax credits begin to expire in

2021.

The utilization of NOL carryforwards and tax credits

may

be subject to a substantial annual limitation due to the ownership change limitations provided by Section

382

of the U.S. Internal Revenue Code (“IRC”), and similar state provisions. The annual limitation

may

result in the expiration of NOL carryforwards and tax credits before utilization. The Company completed an IRC Section

382

analysis through

December 31, 2018

and determined that there were

significant limitations to the utilization of NOL or tax credit carryforwards. As such, the NOL and tax credit carryforwards presented are

not

expected to expire unutilized, unless there is a future ownership change as determined by Section

382

of the IRC.

Undistributed earnings of the Company’s foreign subsidiaries at

December 31, 2018

are considered to be indefinitely reinvested and, accordingly,

provision for federal and state income taxes has been provided thereon. Due to the Transition Tax and GILTI regimes as enacted by the

2017

Tax Act, those foreign earnings will

not

be subject to federal income taxes when actually distributed in the form of a dividend or otherwise. The Company, however, could still be subject to state income taxes and withholding taxes payable to various foreign countries. The amounts of taxes which the Company could be subject to are

not

material to the accompanying financial statements.

December

2017,

the SEC staff issued Staff Accounting Bulletin

No.

118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB

118”

), which allows companies to record provisional amounts during a measurement period

not

to extend beyond

one

year of the enactment date. Since the

2017

Tax Act was passed late in the

fourth

quarter of

2017,

and ongoing guidance and accounting interpretation was yet to be issued, the Company’s accounting of the transition tax and deferred tax re-measurements was incomplete as of

December

31,

2017.

The Company filed its

2017

Federal corporate income tax return in the

fourth

quarter of

2018.

The Company’s final analysis and impact of the

2017

Tax Act is reflected in the tax provision and related tax disclosures for the year ended

December

31,

2018.

There was a net increase of approximately

$0.3

million to the originally estimated

$7.3

million remeasurement of deferred tax assets. The Company considers the

$0.3

million true-up to be an immaterial change in estimate which has been reflected within the measurement period in accordance with SAB

118.

January

2018,

the FASB released guidance on the accounting for tax on the GILTI provisions of the

2017

Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat any taxes on GILTI inclusions as a period cost.

Uncertain Tax Positions

The Company establishes reserves for uncertain tax positions based on the largest amount that is more-likely-than-

not

to be sustained. An uncertain income tax position will

not

be recognized if it has less than a

50%

likelihood of being sustained. The Company performs a

two

-step approach to recognizing and measuring uncertain tax positions. The

first

step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than

not

that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The

second

step is to measure the tax benefit as the largest amount that is more than

50%

likely of being realized upon settlement.

Although the Company believes it has adequately reserved for its uncertain tax positions,

assurance can be given that the final tax outcome of these matters will

not

be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.

The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The

2005

through

2018

tax years generally remain subject to examination by U.S. federal and California state tax authorities due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the

2011

through

2017

tax years generally remain subject to examination by their respective tax authorities.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in

December

31,

2016

December 31, 2018 (

in thousands):

	Year Ended December 31,
	201 8		201 7		201 6
Balance at beginning of year	$	1,519	$	707	$	651
Decreases related to prior year tax positions		(70)		643		—
Increases related to current year tax positions		114		169		56
Balance at end of year	$	1,563	$	1,519	$	707

It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. As of

December 31, 2018,

the Company had accrued interest and penalties of

$107,000

related to uncertain tax positions.