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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes 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,
202120202019
U.S.$(356)$(25,793)$(13,037)
Foreign3,741 2,386 774 
Income (loss) before income taxes$3,385 $(23,407)$(12,263)
The components of the provision for income taxes are as follows (in thousands):
Year Ended December 31,
202120202019
Current:
Federal$— $— $— 
State(87)(53)101 
Foreign1,512 747 (76)
Total Current1,425 694 25 
Deferred:
Federal2 2 2 
State1 1 1 
Foreign(105)(227)57 
Total Deferred(102)(224)60 
Tax provision$1,323 $470 $85 
The Company’s net deferred tax assets consist of the following (in thousands):
December 31,
20212020
Net operating loss carryforwards$18,274 $18,270 
Stock-based compensation3,160 869 
Other accruals and reserves2,863 3,670 
Credits13,634 12,653 
Accrued warranty939 976 
Depreciation and amortization2,226 2,191 
Other977 979 
Operating lease liability3,784 4,311 
Deferred tax asset before valuation allowance45,857 43,919 
Valuation allowance(40,485)(38,321)
Deferred tax asset after valuation allowance5,372 5,598 
Deferred contract acquisition costs(990)(803)
Goodwill(124)(110)
Right of use asset(3,480)(4,042)
Net deferred tax asset (liability)$778 $643 
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,
202120202019
U.S. federal statutory income tax rate21.00 %21.00 %21.00 %
State tax rate(2.55)2.77 2.82 
Meals and entertainment9.28 (0.65)(2.83)
Permanent differences1.11 (2.87)(2.58)
Stock-based compensation(13.08)(1.07)3.78 
Extinguishment of PPP loan(44.59)— — 
Excess compensation7.88 — — 
Foreign rate differential17.03 (1.05)(0.34)
Other(0.08)0.15 (0.33)
General business credit(17.95)2.74 8.14 
Valuation allowance72.82 (25.51)(38.60)
Change in prior year reserves— 0.40 2.53 
Deferred true-up(11.76)2.08 5.71 
Effective tax rate39.11 %(2.01)%(0.70)%
As of December 31, 2021, the Company recorded a valuation allowance of $40.5 million for the portion of the deferred tax asset that it does not expect to be realized. The valuation allowance on the Company’s net deferred taxes increased by $2.2 million and $6.0 million during the years ended December 31, 2021 and 2020, 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 $0.8 million of net deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-not to be realized given the expectation of future earnings in these jurisdictions. The Company continues 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. The Company intends to continue maintaining a full valuation allowance on its 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.
At December 31, 2021, the Company had approximately $75.9 million and $39.3 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 2039. Approximately $35.4 million of total federal net operating loss carryforwards were generated post December 31, 2017 and have no expiration. At December 31, 2021, the Company had research and development tax credits available to offset federal and California tax liabilities in the amount of $6.9 million and $8.5 million, respectively. Federal credits will begin to expire in 2024 and California state tax credits have no expiration.
Federal and state laws can impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code. The Company has determined that no significant limitation would be placed on the utilization of the Company’s net operating loss and tax credit carryforwards due to prior ownership changes.
No deferred tax liabilities have been recorded relating to the earnings of the Company’s 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, no 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. Tax years after 2006 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, tax years after 2016 remain subject to examination by their respective tax authorities.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits, excluding related interest and penalties, in December 31, 2019 to December 31, 2021 (in thousands):
Year Ended December 31,
202120202019
Balance at beginning of year$1,864 $1,426 $1,563 
Decreases related to prior year tax positions(37)(32)(291)
Increases related to prior year tax positions— — 25 
Increases related to current year tax positions919 470 129 
Balance at end of year$2,746 $1,864 $1,426