NOTE 9 —Income Taxes

The following table presents the income (loss) before income taxes for domestic and foreign operations for the years ended December 31:

The Company’s effective tax rate differs from the federal statutory rate due to the following for the years ended December 31:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities at December 31:

A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain.  The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets.  Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income, and the accumulated deficit, the Company provided a full valuation allowance against the U.S. deferred tax assets resulting from the accruals and reserves along with the net operating loss and credits carried forward.   The valuation allowance was $11,814 as of December 31, 2019 compared to $8,088 as of December 31, 2018, a change in valuation of $3,726.  The valuation allowance was $8,088 as of December 31, 2018, compared to $7,753 as of December 31, 2017, a change in valuation of $335.

At December 31, 2019 and 2018, the Company had net deferred income tax assets related primarily to net operating loss carry forwards, accruals and reserves and tax credit carryforward that are not currently being recognized of approximately $12,862 and $8,466, respectively, which have been offset by a valuation allowance.

We have not provided U.S. Federal and State income taxes, nor foreign withholding. taxes of undistributed earnings for certain non-US subsidiaries, because such earnings are intended to be indefinitely reinvested. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would not be subject to U.S. income tax due to the transition tax of IRC Section 965 or via the newly enacted Global Intangible Low-Taxed Income (“GILTI”) provision, enacted as part of the 2017 U.S. Tax Act.  The Company would be subject to U.S. state tax and potential foreign withholding taxes on a repatriation of the foreign earnings.   The amount of unrecognized deferred income tax liability related to these earnings is not material.

Estimate of cumulative foreign earnings is as follows as of December 31:

The Company had net operating loss carryovers (NOL) for federal and state income tax purposes of approximately $42,415 and $11,492, respectively, as of December 31, 2019. Approximately $24,367 of federal NOLs will expire beginning in 2020, while approximately $18,048 generated beginning in 2018 have an indefinite life.  The state NOLs will expire if unused in years 2031 through 2039:

The Company had research and development (“R&D”) credit carryforwards as follows as of December 31:

At December 31, 2019, the Company had approximately $632 of federal and $117 of California research and development tax credit and other tax credit carryforwards available to offset future taxable income. The federal credits begin to expire in 2020 and the California research credits have no expiration dates.

Federal and state laws impose restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of a change in ownership of the Company, which constitutes an 'ownership change' as defined by Internal Revenue Code Section 382 and 383. The Company experienced an ownership change in the past that materially impacts the availability of its net operating losses and tax credits. The amounts indicated in the above tables reflect the reduction of net operating losses and credit carryforwards as a result of previous ownership changes that the Company experienced. Should there be additional ownership changes in the future, the Company's ability to utilize existing carryforwards could be substantially restricted.

Uncertain Tax Positions

The Company accounts for uncertainty in income taxes in accordance with the Financial Accounting Standards Board guidance for Income Taxes, as provided in ASC 740, Accounting for Income Taxes. Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognized, in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The following table summarizes the activity related to unrecognized tax benefits as follows as of December 31:

The unrecognized tax benefits of approximately $5,284 as of December 31, 2019 are accounted for as a reduction in the Company’s deferred tax assets. Due to the Company’s valuation allowance, only $1,615 of the $6,900 of unrecognized tax benefits would affect the Company’s effective tax rate, if recognized. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. The Company accrued $229 and $58 of interest and penalties in December 31, 2019 and 2018, respectively, and the Company has accrued a $356 and $126 liability for accrued interest and penalties related to unrecognized tax benefit as of December 31, 2019 and 2018, respectively

The Company's material income tax jurisdictions are the United States (federal and California), China and India. As a result of net operating loss and credit carryforwards, the Company is subject to audit for tax years 2013 and forward for federal and California purposes. The China and India tax years are open under the statute of limitations from 2014 and forward.