Annual report pursuant to Section 13 and 15(d)

Income taxes

Income taxes

12 Months Ended

Dec. 31, 2019

A reconciliation of the federal statutory income tax provision to the Company's actual provision for the years ended December 31, 2019 and 2018 is as follows:



		2019			2018
Pre-tax book income (loss)		(4,779,179		)	(5,768,378		)
Expected tax at 21%		(1,008,353		)	(1,211,359		)

Permanent differences:
	Machinery & equipment	3,728			4,658
	Mark to market	4,133			24,798
	Goodwill impairment	775,572			922,024
	Intangible Amortization	(105,573		)	(180,780		)
	Stock compensation	—			—
	Non-deductible interest	—			—
	Other	(3,044		)	876

State taxes:
	Current	15,194			32,748
	Deferred	(110,517		)	(120,477		)

Other items:
	Federal research and development credits	(48,153		)	(35,550		)
	Change in valuation allowance	1,479,000			(153,000		)
	Deferred tax past year true-up's	(30,981		)	(99,348		)
	True up - ADG NOL IRC Sec 382 limitation	—			817,198
	Other	(955,812		)	30,960
Income tax provision		$	15,194		$	32,748

The components of net deferred tax assets recognized in the accompanying consolidated balance sheets at December 31, 2019 and 2018 are as follows:



	2019			2018
Net operating loss carryforwards	$	8,299,000		$	7,206,000
R&D and ITC credit carryforwards	317,000			244,000
Accrued expenses and other	1,224,000			1,140,000
Accounts receivable	20,000			7,000
Inventory	78,000			73,000
Property, plant and equipment	779,000			568,000
Deferred tax assets	10,717,000			9,238,000
Valuation allowance	(10,717,000		)	(9,238,000		)
Deferred tax assets, net	$	—		$	—

At December 31, 2019, the Company had approximately $33,606,000 of Federal Loss Carryforwards that expire beginning in the year 2023 through 2037. In addition, the Company has varying amounts of state net operating losses, expiring at various dates starting in 2020 through 2039.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. A significant provision of the act was to reduce the statutory Federal tax rate from 34% to 21%. During 2019, the Company’s valuation allowance increased by $1,479,000. This increase is affected by the absorption of deferred tax attributes associated with its acquisition of American DG Energy, Inc. along with permanent book to tax differences and provision to return adjustments.

In accordance with the provisions of the Income Taxes topic of the Codification, the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating losses. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has been established for 2018 and 2019 respectively.

Utilization of the NOL and research and development credit carryforwards are subject to a substantial annual limitation due to ownership changes, 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 NOL and tax credit 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 in the stock of a corporation by more than 50 percentage points over a three-year period.

The Company acquired a new subsidiary, American DG Energy, Inc. during 2017, by acquiring 100 percent of the company's stock. Accordingly, utilization of their consolidated and/or separately computed NOL and/or tax credit carryforwards will be subject to an annual limitation under Internal Revenue Code Section 382. Any such limitation may

result in expiration of a portion of the NOL or tax credit carryforwards before utilization. The extent of the limitation, and related allocation and impact upon the NOL and credit carryforwards has been determined to be $391,940 per year for a 20 year period at the ADGE level. The Company, however, has enough pre-merger NOLs to offset anticipated taxable income for the taxable year ended December 31, 2019 and is not expected to be limited in NOL utilization for the period.

A full valuation allowance has been provided against the Company's loss carryforwards and, if an adjustment is required under Section 382, it would be offset by a corresponding 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 has not recorded any amounts for unrecognized tax benefits as of December 31, 2019 or 2018.

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 2016 for both federal and state jurisdictions.