Annual report pursuant to Section 13 and 15(d)

Income taxes

Income taxes

12 Months Ended

Dec. 31, 2016

A reconciliation of the federal statutory income tax provision to the Company's actual provision for the years ended December 31, 2016 and 2015 is as follows:



		2016			2015
Pre-tax book income		$	(1,161,245	)	$	(2,800,960	)
Expected tax at 34%		(394,823		)	(952,326		)

Permanent differences:
	Machinery & equipment	5,459			5,251
	Other	754			444

State taxes:
	Current	—			—
	Deferred	(96,754		)	120,931

Other items:
	Federal research and development credits	(15,996		)	(16,504		)
	Change in valuation allowance	96,754			(120,931		)
	Deferred tax past year true-up's	(8,584		)	(47,242		)

Unbenefited operating losses		413,190			1,010,377
Income tax provision		$	—		$	—

The components of net deferred tax assets recognized in the accompanying consolidated balance sheets at December 31, 2016 and 2015 are as follows:



	2016			2015
Net operating loss carryforwards	$	6,885,000		$	6,734,000
R&D and ITC credit carryforwards	145,000			—
Accrued expenses and other	1,740,000			1,297,000
Accounts receivable	11,000			19,000
Inventory	208,000			250,000
Property, plant and equipment	125,000			119,000
Deferred tax assets	9,114,000			8,419,000
Valuation allowance	(9,114,000		)	(8,552,000		)
Deferred tax assets, net	$	—		$	(133,000	)

At December 31, 2016, the Company had approximately $19,099,000 of Federal Loss Carryforwards that expire beginning in the year 2021 through 2036. In addition, the Company has varying amounts of state net operating losses, expiring at various dates starting 2017 through 2036. The Federal net operating losses include approximately $981,000 of deductions related to the exercise of stock options which represent excess tax benefit which will be realized when it results in the reduction of cash income tax in accordance with ASC 718.

Utilization of the loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred previously or could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986, as well as, similar state provisions. Ownership changes may limit the amount of the carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups of stock of a corporation by more than 50 percentage points over a three-year period.

If the Company has experienced a change of control, utilization of its carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the loss carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax provision.

A full valuation allowance has been provided against the company's loss carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required.

The Company did not record a benefit for income taxes related to its operating losses for the years ended December 31, 2016 and 2015.

The Company files tax returns as prescribed by the tax laws of the jurisdiction in which it operates. In the normal course of business the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company is thus still open to examination from tax year 2013 for both federal and state jurisdictions.