The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

For the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde, Inc.Inc and Subsidiary

Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity (Deficit)

For the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019

(Unaudited)

PowerVerde, Inc and Subsidiary

Condensed Consolidated Changes in Stockholders’ Equity (Deficit)

For the three and six months ended June 30, 2020 and 2019

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PowerVerde, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

SeptemberJune 30, 20172020

Note 1 – Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report of PowerVerde, Inc. (“PowerVerde,” “we,” “us,” “our,” or the “Company”) as of and for the year ended December 31, 2016.2019. The results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2020, are not necessarily indicative of the results to be expected for the full year or for future periods. The condensed consolidated financial statements include the accounts of PowerVerde, Inc., formerly known as Vyrex Corporation (the “Company”), and PowerVerde Systems, Inc., formerly known as PowerVerde, Inc., its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation.consolidation

Note 2 – Going Concern

We have financed our operations since inception through the sale of debt and equity securities and through Biotech IP licensing revenues.revenues which expired March 2018. As of SeptemberJune 30, 2017,2020, we had a working capital deficit of $128,270$113,187 compared to a working capital deficit of $272,120$63,638 at December 31, 2016. This improvement in working capital is due primarily to reductions in notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.2019.

We expect 2017The Company has historically relied upon unrelated and related party debt and equity financing to fund its cash flow shortages and will require either additional debt or equity financing to sustain its operations. The Company’s revenues through 2018 were derived mainly from royalties under its Biotech IP revenues to approximate the 2016 levels; however, there can be no assurance that this revenue level will be achieved. Further, our contractlicensing agreement, which provides our Biotech IP revenues expiresexpired in March 2018, and we will therefore be without2018. Those factors create substantial doubt about the Company’s ability to continue as a source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9 – Commitments and Contingenciesgoing concern.

In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), which are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source of revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuant to the Liberty Agreement.

We continueThe Company continues to seek funding from private debt and equity investors, as we needit needs to promptly raise substantial additional capital in order to finance ourits plan of operations. There can be no assurance that wethe Company will be able to promptly raise the necessary funds on commercially acceptable terms, if at all. If we dothe Company does not raise the necessary funds, weit may be forced to cease operations.

Note 3 – Summary of Significant Accounting Policies

Nature of Business

The Company is devoting substantially all of its present efforts to establish a new business involving the development and commercialization of clean energy electric power generation systems, and none of its planned principal operations have commenced. However, royalties from licenses unrelated to planned principal operations continue to bewere recognized as revenue. The license will expire inrevenue through March 2018, after which no further royaltywhen the underlying license agreement terminated. No revenues are expected.from this planned principal operation have been generated.

Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable consist of balances due from royalties in connection with the license agreement with VDF FutureCeuticals, Inc.assembly services. The Company monitors accounts receivable and provides allowances when considered necessary. At SeptemberJune 30, 2017,2020 and December 31, 2019, accounts receivable were considered to be fully collectible. Accordingly, no allowance for doubtful accounts was provided.

Notes ReceivableNote 3 – Summary of Significant Accounting Policies (continued)

Note receivable consists of revenues from Liberty Plugins, Inc in connection with the manufacturing assembly agreement dated April 15, 2017. At September 30, 2017, notes receivable were considered to be fully collectible.Revenue Recognition

Revenue Recognition

Revenue from royalty andRoyalties are recognized as earned in the period the sales to which the royalties relate occur. Manufacturing assembly agreements unrelatedservices are recognized as revenue when the assembled product is delivered to the Company’s planned operations is recognized in accordance with the terms of the specific agreements.customer. Revenues recognized under these agreements amount to 100% of total revenues for the ninethree and six months ended SeptemberJune 30, 20172020 and 2016. The Company does not expect any significant impact of the adoption of the standard on our financial statements based on the current sources of revenue.2019.

Intellectual Property

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are expensed as incurred.

Impairment of Long-Lived Assets

Impairment losses are recorded on long-lived assets (property, equipment license and intellectual property) used in operations when impairment indicators are present and the undiscounted expected cash flows estimated to be generated by those assets are less than the carrying value of such assets. NoAs of June 2019, the Company recognized an impairment losses have been recognized during the nine months ended September 30, 2017 or 2016.loss of $69,178. The intellectual property was fully amortized as of December 31, 2019.

Stock-based Compensation

The Company has accounted for stock-based compensation under the provisions of ASCAccounting Standards Codification (ASC) Topic 718 – “Stock Compensation” which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40,815-40, “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”). Based on the provisions of ASC 815- 40,815-40, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company, or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All outstanding warrants as of December 31, 20162019 and SeptemberJune 30, 20172020 were classified as equity.

Accounting for Uncertainty in Income Taxes

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There is no uncertain tax positions as of June 30, 2020 and December 31, 2019.

Note 3 – Summary of Significant Accounting Policies (continued)

Research and Development Costs

The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $172,760$57,440 and $282,339$69,680 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

Earnings (Loss) Per Share

Earnings (loss) per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. Certain common stock equivalents were not included in the earnings (loss) per share calculation as their effect would be anti-dilutive. Warrants exercisable for4,175,000975,000 shares and options for 5,750,50012,180,500 shares were excluded from weighted average common shares outstanding on an anti-diluteda diluted basis.

Financial instruments

The Company carries cash and cash equivalents, accounts receivable, note receivable, accounts payable, and accrued expenses and notes payable, at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable to related parties at historical cost less discounts from warrants issued as loan financing costs. The fair value of such notes is significantly similar to the face value of the notes ($200,000).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Note 4 – Recent Accounting Pronouncements

Refer toThere are several new accounting pronouncements issued or proposed by the consolidated financial statements and footnotes thereto included inFASB. Each of these pronouncements, as applicable, has been or will be adopted by the PowerVerde, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 for recent accounting pronouncements. Other pronouncements have been issued but the CompanyCompany. Management does not believe that their adoptionany of these accounting pronouncements has had or will have a significantmaterial impact on the Company’s condensed consolidated financial position, operating results, or results of operations.cash flow.

Note 5 – Intellectual Property and License Agreement

Intellectual Property partially consists of technology acquired from the purchase of 100% of the membership interests of Cornerstone Conservation Group LLC (“Cornerstone”) on March 30, 2012 for $659,440. Accumulated amortization with respect to this intellectual property was $659,440 at September 30, 2017 and December 31, 2016.

On June 30, 2015, the Company entered into an Assignment Agreement with VyrexIP Holdings Inc., a company owned by Company shareholder Edward Gomez, for the purchase of intellectual property. The net price of these assets was comprised of a down payment of $16,116 and a $58,436 promissory note to the seller due July 15, 2016, partially offset by assignment by the seller to the Company of a $38,000 promissory note due November 14, 2015, issued by the seller’s licensee Epalex Corporation, a company of which Mr. Gomez is chairman and a major stockholder. This note was paid in full as of March 31, 2016. Accumulated amortization with respect to this intellectual property was $27,414 and $18,276 at September 30, 2017 and December 31, 2016, respectively.

On June 1, 2016, the Company entered into a ten-year License Agreement with Helidyne LLC for total consideration of $100,000 to utilize the Helidyne intellectual property in the manufacturing of planetary rotor expanders and the incorporation of same in the Company’s distributed electric power generation systems. The license agreement also grants the Company an exclusive license to sell the expanders whether manufactured by Helidyne or by the Company. The Company’s royalty obligation begins on the earlier of the commercialization of the product or three years from the effective date of the agreement. Once the royalty obligation begins, the minimum annual royalty is $50,000 for each of the first six years, and $100,000, per commercial year, for the remainder of the agreement. Helidyne has defaulted under the agreement. Royalties would be payable only if Helidyne performs as required, or if the Company elects to produce its own expanders using Helidyne technology.

In the second quarter of 2019, management of the Company evaluated the continued default by Helidyne and determined that Helidyne will not be able to perform under the license agreement for the foreseeable future. The Company’s license agreement continues to be active and the Company may utilize the Helidyne intellectual property in marketing its own products. Under the terms of the license agreement, the Company has the right to develop a prototype utilizing the Helidyne technology at its own cost. Due to the continued default by Helidyne and the potential cost of developing its own prototype, the Company has determined that the intangible asset related to the above license agreement is impaired and recognized an impairment charge of $69,178 in the second quarter of 2019, which is 100% of the net carrying value. See Note 9.

For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, amortization expense was $16,638$0 and $12,460, respectively, and accumulated amortization of the intangible assets of intellectual property and license agreement was $700,176 at September 30, 2017.$5,000, respectively.

Future amortization of the intangible assets of intellectual property and license agreement was as follows as of September 30, 2017:

Note 6 – Stockholders’ DeficiencyWarrants

Warrants

A summary of warrants issued, exercised and expired during the ninesix months ended SeptemberJune 30, 20172020 is as follows:

As of September 30, 2017, the options outstanding and exercisable had an intrinsic value of $18,250.

Note 7 – Stock Options

Stock option activity for the ninesix months ended SeptemberJune 30, 2017,2020, is summarized as follows:

Total stock option compensation for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 was $0 and $72,000, respectively.$0. There is no unrecognized compensation expense associated with the options.

Note 8 - Convertible Notes Payable to Related Parties

In 2019, the Company issued Convertible Promissory Notes payabletotaling $300,000 to related parties at September 30, 2017 consist of notes payable to stockholders of $200,000 (issued in 2012).stockholders. The notes had been dueare to be paid in one principal payment, on September 30, 2017, but are now due on April 30, 2018, after extensions grantedalong with any unpaid interest by the Note holders in the third quarter of 2017.December 31, 2021. Interest is payable semiannually at 10%. The notes are collateralized by all receivables now or hereafter existing pursuant toconvertible into common stock at a price of $.20 per share through December 31, 2019, $.30 per share from January 1, 2020 through December 31, 2020, and $.40 per share from January 1, 2021 through the license agreement with VDF FutureCeuticals, Inc. discussed in Notes 3 and 9. maturity date of December 31, 2021.

In April and July 2017,December 2019, the Company made payments totaling $100,000 each month towardissued a Convertible Promissory Note in the principal balanceamount of the Notes.

The notes payable to related parties at December 31, 2016 also includes a promissory note$25,000 to a stockholder for $25,000.in connection with a loan in the same amount. The principal balance and interest at 10% was due March 30, 2016. This note wasis to be paid in full,one principal payment, along with accruedany unpaid interest inby December 31, 2022. Interest is payable semiannually at 10%. The note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 2017.1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2022.

In March 2020, the Company issued a Convertible Promissory Note in the principal amount of $100,000 to a stockholder in connection with a loan in the same amount. The note is to be paid in one principal payment, along with any unpaid interest by December 31, 2022. Interest is payable semiannually at 10%. The note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2022.

In June 2020, the Company issued a Convertible Promissory Note in the principal amount of $25,000 to a stockholder in connection with a loan in the same amount. The note is to be paid in one principal payment, along with any unpaid interest by December 31, 2023. Interest is payable semiannually at 10%. The note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2023.

Consequently, Convertible Promissory Notes have been issued in an aggregate principal amount of $450,000 through June 30, 2020.

Convertible Notes Payable at June 30, 2020 and December 31, 2019 consisted of the following:

Note 9 - Commitments and Contingencies

On June 25, 2015, Company consultant Hank Leibowitz assigned to the Company a patent he obtained for a system and method for using high temperature sources in Rankine cycle power systems. The Company has agreed to pay Mr. Leibowitz a 2% royalty for any and all revenues of products and/or project sales by the Company based on the subject patent.

The Company’s license agreement with VDF FutureCeuticals, Inc., which has generated all of the Company’s revenues since 2012, will terminate in March 2018, when the underlying patents expire.

On June 1, 2016, the Company entered into a ten-year License Agreement with Helidyne LLC to utilize the Helidyne intellectual property in order to use Helidyne expanders in Powerverde systems and to sell Helidyne expanders. As part of the licensing agreement the Company committed to purchase two 50 kW expanders, at a price of $25,000 each, on or before the sixth month anniversary of the agreement. The $50,000 was payable in two monthly installments of $25,000 beginning October 2016. As of September 30, 2017, theThe Company had made payments totaling $38,750, towards the purchase of the expanders, all of which was included in prepaid expense and other current assets in the consolidated balance sheets at December 31, 2016.expanders. Due to Helidyne’s failure to perform under the agreement, the Company has not made any further payments to Helidyne and does not intend to do so unless and until Helidyne performs as required. Helidyne has not objected to the Company’s position, and it is very unlikely that Helidyne will ever be able to perform. Consequently, as of September 30, 2017, the Company wrote off the $38,750 paid to Helidyne.

The Company agreed to pay Helidyne LLC a royalty of 3% of sales, subject to a minimum annual royalty of $50,000 beginning on the earlier of commercialization of the product or three years from the effective date of the agreement. This minimum royalty would be payable only if Helidyne performs as required, which is very unlikely, or if the Company elects to produce its own expanders using Helidyne technology. The Company does intend to produce these expanders directly or through a contract manufacturer in the future. See Note 5.

On April 15, 2017, the Company entered into a manufacturingan assembly agreement with Liberty Plugins, Inc. (“Liberty”) to manufacture and assemble Liberty’s Hydra electronic vehicle charging systems and ship completed Hydras to Liberty’s facility in Santa Barbara, California (the “Liberty Agreement”). Liberty has agreed to pay $1,000 for the first 10 Hydras assembled in a month, $750 per Hydra for the next 10 Hydras assembled per month and $500 per Hydra for each Hydra assembled above 20 per month. No invoices were issuedThe Company has never assembled/shipped more than 10 Hydras in any month and does not expect to Liberty duringdo so in the quarter endedfuture. As of June 30, 2017. As of September 30, 2017,2020, the Company has built and shipped 25 Hydras,108 Hydras. Revenue of $19,999 and these products were invoiced throughout the third quarter of 2017. The revenue$6,000 for these products is reflected in the net revenue on the Company’s condensed consolidated statements of operations for the quartersix months ended SeptemberJune 30, 2017.2020 and 2019, respectively.

On September 30, 2017,1, 2019, the Company convertedhired Daniel Bogar to serve as its President, reporting to the outstanding accounts receivable from Liberty, totaling $25,000, intoCEO. As compensation, Mr. Bogar received a Promissory Notefully-vested non-qualified option to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $.10 per share, with 12% interest and a maturityan expiration date of January 31, 2018.June 30, 2026. In addition, Mr. Bogar will receive an annual salary of $90,000 beginning on the closing of a private financing with gross proceeds of at least $1,000,000; however, the Company will be permitted to defer the salary to the extent required to maintain solvency.

Note 10 - Related Party Transactions

Since July 2010, the accounting firm J.L. Hofmann & Associates, P.A. (“JLHPA”), whose principal is the Company’sour CFO John L. Hofmann, has provided financial consulting and accounting services to the Company. In December 2017, J.L. Hofmann & Associates, P.A. merged with Kabat, Schertzer, De La Torre, Taraboulos & Co, LLC (“KSDT”). The Company paid $20,720$19,100 and $28,815 to JLHPA$18,914 for its services in the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.

The Company’s consultant and shareholder Hank Leibowitz receives compensation of $7,500 per month, totaling $45,000 for the six months ended June 30, 2020 and 2019. Mr. Leibowitz was owed accrued compensation of $90,827 and $52,500 as of June 30, 2020 and December 31, 2019, respectively.

In connection with the convertible notes that were issued in 2019 and the first quarter of 2020, the Company accrued an 8% finder’s fee to its Chief Executive Officer, Richard Davis, totaling $34,000. For the convertible note that was issued in the second quarter of 2020, the Company accrued a 6.4% finder’s fee to Mr. Davis, totaling $1,600.

Mr. Davis was owed accrued compensation of $7,600 and $1,000 as of June 30, 2020 and December 31, 2019, respectively.

Note 11 – Subsequent Events

In October 2017,July 2020, the Company made payments totaling $50,000 towardissued Convertible Promissory Notes in the principal balanceamounts of $40,000 and $25,000, respectively, to a stockholder and an investor in connection with loans in the Notessame amounts. Each note is to be paid in one principal payment, along with any unpaid interest by December 31, 2023. Interest is payable to related parties, discussed in Note 8, leavingsemiannually at 10%. Each note is convertible into common stock at a remaining principal balanceprice of $150,000 as$.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of October 2017.

December 31, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Readers are cautioned that the statements in this Report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Report. When used in this Report, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of the risk factors included in our 2016 Annual Report, or other factors. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

Critical Accounting Policies

The condensed consolidated financial statements of PowerVerde, Inc. are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires our management to make estimates and assumptions about future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. We believe the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statementsstatements.

Accounting for Uncertainty in Income Taxes

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2012, 2013, 2014, 2015, 2016, 2017 and 2015,2018, the tax years which remain subject to examination by major tax jurisdictions as of SeptemberJune 30, 2017.2020.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the condensed consolidated financial statements as general and administrative expense.

Revenue Recognition

Revenue from royaltyroyalties and assembly agreementsservices unrelated to the Company’s planned operations is recognized when the goods or services are transferred to the customer. Royalties are recognized as earned in accordance with the terms ofperiod the specific agreements.sales to which the royalties relate occur. Manufacturing assembly services are recognized as revenue when the assembled product is delivered to the customer. Revenues recognized under these agreements amount to 100% of total revenues for the ninethree and six months ended SeptemberJune 30, 20172020 and 2016. The Company does not expect any significant impact of the adoption of the standard on our financial statements based on the current sources of revenue.2019.

Common Stock Purchase Warrants

The Company accounts for common stock purchase warrants in accordance with ASC Topic 815- 40,815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”). Based on the provisions of ASC 815- 40,815-40, the Company classifies as equity any contracts that (i) require physical settlement or netsharenet-share settlement, or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company,Company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All outstanding warrants as of SeptemberJune 30, 20172020 and 2016December 31, 2019 were classified as equity.

Intellectual Property

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses an estimate of the undiscounted cash flows over the remaining life of its long-lived assets, or related group of assets where applicable, in measuring whether the assets to be held and used will be realizable. In the event of impairment, the Company would discount the future cash flows using its then estimated incremental borrowing rate to estimate the amount of the impairment.

Stock-based compensation.

We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.

Overview

From January 1991 until October 2005, the Company devoted substantially all of its efforts and resources to research and development related to its unsuccessful Biotech Business, in particular the study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. In the most recent years, the Company’s research focused mainly on targeted antioxidant therapeutics and nutraceuticals. The Company, has generated only limited revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its working capital. The Company has been unprofitable since its inception.

Following the cessation of material Biotech Business operations in October 2005, the Company turned its primary focus to seeking an appropriate merger partner for its public shell. This resulted in the February 2008 Merger with Vyrex. In March 2009, we assigned most of our Biotech intellectual property other than our rights under existing licensing agreements (the “Biotech IP”) to an investor in exchange for his agreement to pay all future expenses relating to the Biotech IP and to pay us 20% of any net proceeds received from future sale and/or licensing of the Biotech IP. We do not expect this arrangement to generate material revenues.

Since the Merger, we have focused on the development, testing and commercialization of our electric power systems, in particular, their applicability to thermal and natural gas pipeline operations. Our business is subject to significant risks, including the risks inherent in our research and development efforts, uncertainties associated with obtaining and enforcing patents and intense competition. See “Risk Factors.”Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2020.

Except as specifically noted to the contrary, the following discussion relates only to PowerVerde since, as a result of the Merger, the only historical financial statements presented for the Company in periods following the Merger are those of the operating entity, PowerVerde.

Results of Operations

Three Months Ended SeptemberJune 30, 20172020 as Compared to Three Months Ended SeptemberJune 30, 20162019

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from sales in the third quarter of 2017generated $3,000 and 2016 – but we recorded $108,686 and $89,118 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. Also, we generated $25,000$1,000 in revenue for assembly revenues under the Liberty Agreement in the thirdsecond quarter of 2017.2020 and 2019, respectively. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our general administrative expenses remained consistent in the second quarter of 2020 as compared to the second quarter of 2019. Our research and development expenses decreased by $99,514 in the third quarter of 2017 as compared to the third quarter of 2016,$12,121 (35.0%), primarily because of thea decrease in stock option compensation for services. Our general and administrative expenses decreased by $9,850 in the third quarter of 2017 as compared to 2016, primarily because of the reduction in employee salaries. Our net income was $4,090 in the third quarter of 2017, a reversal of the net loss of $161,590 in the third quarter of 2016.personnel costs. Substantial net losses will continueare expected until we are able to successfully commercialize and market our systems, as to which there can be no assurance.Any taxes that might result from net income for financial reporting purposes would be eliminated through use of a portion of the Company’s net operating loss carryforward.

NineSix Months Ended SeptemberJune 30, 20172020 as Compared to NineSix Months Ended SeptemberJune 30, 20162019

Since inception, we have focused on the development, testing and commercialization of our clean energy electric power generation systems. We had no revenues from salesgenerated $19,000 and $6,000 in the first nine months of 2017 and 2016 – but we recorded $448,484 and $417,074 in Biotech IP licensing fees (based on pre-Merger contracts), respectively. In the 2017 period, we generated $25,000 inrevenue for assembly revenues under the Liberty Agreement in the third quarterfirst six months of 2017.2020 and 2019, respectively. In both years, we had substantial expenses due to our ongoing research and development activities and efforts to commercialize our systems, as well as substantial administrative expenses associated with our status as a public company. Our general administrative expenses remained consistent in the second quarter of 2020 as compared to the second quarter of 2019. Our research and development expenses decreased by $109,579 (38.8%$12,240 (17.6%), primarily because of a decrease in the first nine months of 2017 as compared to 2016. This decrease is due mainly to the stock options issued in July 2016. Our general and administrative expenses decreased by $102,066 (38.9%) in the first nine months of 2017 as compared to 2016, due mainly to the warrants issued in 2016. Our net income was $116,516 in the first nine months of 2017, a reversal of the net loss of $173,761 in the third quarter of 2016.personnel costs. Substantial net losses will continueare expected until we are able to successfully commercialize and market our systems, as to which there can be no assurance.Any taxes that might result from net income for financial reporting purposes would be eliminated through use of a portion of the Company’s net operating loss carryforward.

Liquidity and Capital Resources

We have financed our operations since inception principally through the sale of debt and equity securities andsecurities. Also, from 2012 through March 2018 we received material amounts of Biotech IP licensing revenues.fees. As of SeptemberJune 30, 2017,2020, we had a working capital deficit of $128,270$113,187 compared to a working capital deficit of $272,120$63,638 at December 31, 2016. This improvement in working capital is due primarily to reductions in notes payable to related parties, accounts payable and accrued expenses resulting from positive operating cash flows during this period.2019.

We expect 2017Our Biotech IP revenues to approximate the 2016 levels; however, there can be no assurance that this revenue level will be achieved. Further, our contract which provides our Biotech IP revenues expireslicense agreement expired in March 2018 anddue to the expiration of our underlying patents. Consequently, we will therefore be without ahave no further material source of working capital at that time unless we can generate material revenues from operations and/or the Liberty Agreement or raise substantial additional capital, as to which there can be no assurance. See Note 9- Commitments and Contingencies

In order to meet our obligations under the $150,000 balance (as of October 2017) of our secured notes payable to related parties due April 30, 2018 (the “Notes”), whichrevenues. We are collateralized by our Biotech IP receivables, we intend to apply most of the Biotech IP revenues received in 2017 and 2018 toward payment of the interest and principal due on the Notes, after reserving the minimum amount necessary to maintain our operations. We intend to reduce our salary and consulting fee expenses until the Notes are paid in full, and we are also commencing a new source ofgenerating some revenue by using our employee to provide part-time skilled manufacturing services to a third party pursuantparties; however, we expect this arrangement to generate no more than $5,000 per month. We expect to generate substantial revenue from the Liberty Agreement.374 Water/Duke project in 2020 if we receive the expected purchase order; however, there can be no assurance that we will receive the purchase order.

We continue to seek funding from private debtequity and equitydebt investors, as we need to promptly raise substantial additional capital in order to finance our plan of operations.operations and commercialize our systems. There can be no assurance that we will be able to promptly raise the necessary funds on commercially acceptable terms if at all.funds. If we do not promptly raise the necessary funds, we may be forced to cease operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements.

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. Because of its inherent limitations, internal controls over financial reporting may also fail to prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework. Based on this evaluation, our management concluded that, as of SeptemberJune 30, 2017,2020, our internal control over financial reporting was effective.

No Attestation Report

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.

Changes in Internal Control Over Financial Reporting

There were no significant changes in internal control over financial reporting during the thirdsecond quarter of 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 20162019 Annual Report. Please refer to that section for disclosure regarding the risks and uncertainties related to our business.

A novel strain of coronavirus (“Covid-19”) emerged globally in December 2019 and has been declared a pandemic. The extent to which Covid-19 will impact our customers, business, results and financial condition will depend on current and future developments, which are highly uncertain and cannot be predicted at this time

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.All of PowerVerde’s sales of unregistered securities since inception have been made pursuant to private offerings to accredited investors. The sales set forth below were made pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. Except as otherwise noted below, no placement agent fees or commissions were paid on these offerings, and net proceeds were used for working capital.

In June 2020, we issued a Convertible Promissory Note in the principal amount of $25,000 to a stockholder in connection with a loan in the same amount. The note is to be paid in one principal payment, along with any unpaid interest by December 31, 2023. Interest is payable semiannually at 10%. The note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2023.

In July 2020, we issued Convertible Promissory Notes in the principal amounts of $40,000 and $25,000, respectively, to a stockholder and an investor in connection with loans in the same amounts. Each note is to be paid in one principal payment, along with any unpaid interest by December 31, 2023. Interest is payable semiannually at 10%. Each note is convertible into common stock at a price of $.20 per share through December 31, 2020, $.30 per share from January 1, 2021 through December 31, 2021, and $.40 per share from January 1, 2022 through the maturity date of December 31, 2023.

In connection with the June 2020 convertible note, we accrued a 6.4% finder’s fee to our Chief Executive Officer, Richard Davis, totaling $1,600.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

SIGNATURES

In accordance with Section 13(a) or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit Index

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