NOTE

7—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 9			201 8			201 7
U.S.	$	(13,037)		$	(14,177)		$	11,203
Foreign		774			662			757
Income (loss) before income taxes	$	(12,263	)	$	(13,515	)	$	11,960

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

	Year Ended December 31,
	201 9		201 8		201 7
Current:
Federal	$	-	$	(15)	$	148
State		101		123		71
Foreign		(76)		303		511
Total Current		25		411		730
Deferred:
Federal		2		15,674		(17,393)
State		1		1,230		(1,348)
Foreign		57		(60)		(22)
Total Deferred		60		16,844		(18,763)
Tax provision	$	85	$	17,255	$	(18,033)

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

	December 31,
	2019		2018
Net operating loss carryforwards	$	14,507	$	11,227
Stock-based compensation		1,111		1,040
Other accruals and reserves		2,202		1,924
Credits		11,888		10,857
Foreign		-		457
Accrued warranty		924		1,863
Depreciation and amortization		2,354		2,024
Other		897		282
Operating Lease Asset		3,949		-
Deferred tax asset before valuation allowance		37,831		29,674
Valuation allowance		(32,350)		(27,865)
Deferred tax asset after valuation allowance		5,482		1,809
Deferred tax liability on Accrued commissions 606 cost		(1,076)		(1,269)
Deferred tax liability on goodwill		(97)		(83)
Operating Lease Liability		(3,885)		-
Net deferred tax asset	$	424	$	457

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,
	2019		2018		2017*
U.S. federal statutory income tax rate		21.00%		21.00%		34.00%
State tax rate		2.82		(4.95)		(5.59)
Meals and entertainment		(2.83)		(2.66)		2.15
Permanent differences		(2.58)		-		-
Stock-based compensation		3.78		13.66		(21.55)
SAB 118 Change in Estimate		-		(2.43)		-
Foreign rate differential		(0.34)		0.11		(0.50)
Other		(0.33)		(1.21)		0.65
General business credit		8.14		4.31		(2.72)
Change in Federal Tax Rate		-		-		60.98
Valuation allowance		(38.60)		(155.49)		(218.17)
Change in prior year reserves		2.53		-		-
Deferred true-up		5.71		-		-
Effective tax rate		(0.70)%		(127.66)%		(150.75)%

*	Other balance in 2017 was reclassified for consistency with 2018 and 2019 .

As of

December 31, 2019,

we recorded a valuation allowance of

$32.4

million for the portion of the deferred tax asset that we do

not

expect to be realized. The valuation allowance on the Company’s net deferred taxes increased by

$4.5

million and

$20.6

million during the years ended

December 31, 2019,

and

2018,

respectively. The changes in valuation allowance are primarily due to additional U.S. deferred tax assets and liabilities incurred in the respective year. The Company has

$0.4

million of net deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-

not

to be fully realized given the expectation of future earnings in these jurisdictions. We continue to monitor the realizability of the U.S. deferred tax assets taking into account multiple factors, including the results of operations and magnitude of excess tax deductions for stock-based compensation. We intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of all, or a portion, of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.

December 31, 2019,

the Company had approximately

$60.1

million and

$31.3

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.

$18.4

million of total federal net operating loss carryforwards were generated post

December 31, 2017

and have

expiration. At

December 31, 2019,

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

$6.6

million,

$8.1

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.

Federal and state laws can impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section

382

of the Internal Revenue Code. We have determined that

significant limitation would be placed on the utilization of our net operating loss and tax credit carry-forwards due to prior ownership changes.

deferred tax liabilities for foreign withholding taxes have been recorded relating to the earnings of our foreign subsidiaries since all such earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability associated with these earnings is immaterial.

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

2019

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

2018

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, 2017

December 31, 2019 (

in thousands):

	Year Ended December 31,
	201 9		201 8			201 7
Balance at beginning of year	$	1,563	$	1,519		$	707
Decreases related to prior year tax positions		(291)		(70	)		643
Increases related to prior year tax positions		25		-			-
Increases related to current year tax positions		129		114			169
Balance at end of year	$	1,426	$	1,563		$	1,519

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

December 31, 2019,

the Company had accrued interest and penalties of

$58,000

related to uncertain tax positions.