UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





Form 10-Q





þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended ................................................. June 30, 2011


or





o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from .......................... to .............................





Commission File Number 001-32636





SULPHCO, INC.


(Exact name of registrant as specified in its charter)





Nevada

(State or other jurisdiction of 
incorporation or organization)

88-0224817

(I.R.S. Employer

Identification No.)





4333 W. Sam Houston Pkwy N., Suite 190

Houston, TX

(Address of principal executive offices)

77043

(Zip Code)





(713) 896-9100


(Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes þ  No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes o  No þ





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large Accelerated Filer o
Accelerated Filer o
Non-accelerated Filer þ
Smaller Reporting Company o




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No þ





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:





Class

Outstanding at July 31, 2011Common Stock, par value $.001

120,989,624 shares








SulphCo, Inc.




PagePart I – Financial InformationItem 1. Financial StatementsCondensed Balance Sheets (unaudited)

3Condensed Statements of Operations (unaudited)

4Condensed Statements of Cash Flows (unaudited)

5Notes to Condensed Financial Statements (unaudited)

6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

11Item 3. Quantitative and Qualitative Disclosures About Market Risk

16Item 4. Controls and Procedures

16Part II – Other InformationItem 1. Legal Proceedings

17Item 1A. Risk Factors

17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

17Item 3. Defaults Upon Senior Securities

17Item 4. (Removed and Reserved)

17Item 5. Other Information

17Item 6. Exhibits

17Signatures

18


2


PART I. FINANCIAL INFORMATION





Item 1.  Financial Statements.





SULPHCO, INC.


(A Company in the Development Stage)


CONDENSED BALANCE SHEETS


June 30, 2011 and December 31, 2010


(unaudited)




ASSETS

June 30,

2011


December 31,

2010Current AssetsCash and cash equivalents

$
248,487


$
329,661Prepaid expenses and other


288,984



536,382Total current assets


537,471



866,043Property and Equipment(net of accumulated depreciation of  $1,334,269and $1,307,636, respectively)


95,892



157,258Other AssetsIntangible assets (net of accumulated amortization of $272,259and $246,343, respectively)


607,860



625,337Other


12,600



12,600Total other assets


620,460



637,937Total assets

$
1,253,823


$
1,661,238LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)Current LiabilitiesAccounts payable and accrued expenses

$
483,326


$
493,367Refundable deposit


550,000



550,000Late registration penalty (including accrued interest)


437,578



419,417Total current liabilities


1,470,904



1,462,784Long-Term LiabilitiesWarrant liabilities


124,531



-Total liabilities


1,595,435



1,462,784Commitments and Contingencies (Note 7)Stockholders' Equity (Deficit)Preferred stock: 10,000,000 shares authorized ($0.001 par value) none issued


-



-Common stock: 150,000,000 shares authorized ($0.001 par value)120,989,624 and 101,708,741 shares issued and outstanding, respectively


120,989



101,709Additional paid-in capital


165,984,032



164,966,996Deficit accumulated during the development stage


(166,446,633
)


(164,870,251
)Total stockholders' equity (deficit)


(341,612
)


198,454Total liabilities and stockholders' equity (deficit)

$
1,253,823


$
1,661,238





The Accompanying Notes are an Integral Part of the Financial Statements.


3


SULPHCO, INC.


(A Company in the Development Stage)


CONDENSED STATEMENTS OF OPERATIONS


For the Three and Six Month Periods Ended June 30, 2011 and 2010


and for the Period from Inception to June 30, 2011


(unaudited)




Three Months Ended


Six Months EndedJune 30,


June 30,


Inception to2011


2010


2011


2010


June 30, 2011RevenueSales

$
-


$
-


$
-


$
-


$
42,967ExpensesSelling, general, and administrative expenses


(665,761
)


(1,407,527
)


(1,900,993
)


(3,022,625
)


(82,658,671
)Research and development expenses:Fujairah facility


(7,135
)


(7,421
)


(14,324
)


(23,773
)


(23,903,237
)Other research and development


(46,670
)


(694,813
)


(371,301
)


(1,421,507
)


(22,749,294
)Other


-



-



-



-



(591,706
)Total operating expenses


(719,566
)


(2,109,761
)


(2,286,618
)


(4,467,905
)


(129,902,908
)Loss from operations


(719,566
)


(2,109,761
)


(2,286,618
)


(4,467,905
)


(129,859,941
)Other income (expense)Interest income


8



661



47



1,158



1,203,388Interest expense


(9,131
)


(9,284
)


(18,161
)


(18,481
)


(8,894,727
)Change in fair value of warrant liabilities


1,156,355



-



978,157



-



978,157Other


(3,190
)


-



(3,190
)


-



(770,058
)Net income (loss)


424,476



(2,118,384
)


(1,329,765
)


(4,485,228
)


(137,343,181
)Deemed dividend


(65,656
)


-



(246,617
)


-



(29,103,452
)Net income (loss) attributable to commonStockholders

$
358,820


$
(2,118,384
)

$
(1,576,382
)

$
(4,485,228
)

$
(166,446,633
)Income (loss) per share: basic and diluted

$
0.00


$
(0.02
)

$
(0.01
)

$
(0.04
)Weighted average shares: basic and diluted


115,695,652



101,708,741



112,792,400



100,018,782




The Accompanying Notes are an Integral Part of the Financial Statements.


4


SULPHCO, INC.


(A Company in the Development Stage)


CONDENSED STATEMENTS OF CASH FLOWS


For the Six Month Periods Ended June 30, 2011 and 2010


and for the Period from Inception to June 30, 2011


(unaudited)





Six Months EndedJune 30,


Inception to2011


2010


June 30, 2011Cash Flows From Operating ActivitiesNet loss

$
(1,329,765
)

$
(4,485,228
)

$
(137,343,181
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


81,017



167,766



2,202,418Accretion of convertible notes payable discount


-



-



6,736,550Stock-based compensation


(52,586
)


227,837



21,263,815Change in fair value warrant liabilities


(978,157
)


-



(978,157
)Other


6,265



85,708



1,451,153Changes in:Prepaid expenses and other


247,398



317,188



(301,584
)Accounts payable and accrued expenses


(10,041
)


133,091



483,326Refundable deposit


-



-



550,000Late registration penalty (including accrued interest)


18,161



11,119



437,578Net cash used in operating activities


(2,017,708
)


(3,542,519
)


(105,498,082
)Cash Flows From Investing ActivitiesPurchase of property and equipment


-



(34,552
)


(1,561,261
)Investments in joint ventures and subsidiaries


-



-



(361,261
)Investments in intangible assets


(8,439
)


(29,552
)


(1,304,534
)Net cash used in investing activities


(8,439
)


(64,104
)


(3,227,056
)Cash Flows from Financing ActivitiesProceeds from sales of stock, net of offering costs


1,944,973



5,391,677



106,735,769Proceeds from  related party notes payable


-



-



11,000,000Proceeds from issuance of line of credit


-



-



750,000Principal payments on related party notes payable


-



-



(5,441,285
)Decrease in related party receivable


-



-



1,359,185Principal payments on line of credit


-



-



(750,000
)Principal payments on convertible notes payable


-



-



(4,680,044
)Net cash provided by financing activities


1,944,973



5,391,677



108,973,625Net change in cash and cash equivalents


(81,174
)


1,785,054



248,487Cash and cash equivalents at beginning of period


329,661



1,658,823



-Cash and cash equivalents at end of period

$
248,487


$
3,443,877


$
248,487Supplemental informationCash paid for interest

$
-


$
3,612


$
1,513,412Cash paid for income taxes

$
-


$
-


$
-The Company had the following non-cash

investing and financing activities:Extinguishment of related party note payable

$
-


$
-


$
5,000,000Extinguishment of convertible notes payable


-



-



4,680,044Issuance of stock for convertible notes payable


-



-



319,956Non-cash deemed dividend


246,617



-



29,103,452





The Accompanying Notes are an Integral Part of the Financial Statements.


5


SULPHCO, INC.


(A Company in the Development Stage)


NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS


June 30, 2011


(unaudited)





1.
Basis of Presentation





The accompanying unaudited condensed financial statements of SulphCo, Inc. (the “Company” or “SulphCo”) were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements.





In the opinion of management, the unaudited interim financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods. The results of operations for any interim period are not necessarily indicative of the results for a full year.  The accompanying condensed financial statements are unaudited and should be read in conjunction with the Company’s most recent annual report on Form 10-K.





Use of Estimates




The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the related reported amounts of revenues and expenses during the reporting period. The significant estimates made by management in the accompanying financial statements include allowances for doubtful accounts, determination of income taxes, contingent liabilities, useful lives used in depreciation and amortization and the assumptions utilized to compute stock-based compensation. Actual results could differ from those estimates.





Fair Value of Financial Instruments




The carrying amounts of financial instruments held by the Company, which include cash, accounts payable, and accrued liabilities, approximate fair values due to their short maturity.





Warrant Liabilities





The Company evaluates financial instruments for freestanding and embedded derivatives. Warrant liabilities do not have readily determinable fair values and therefore require significant management judgment and estimation. The Company uses the Black-Scholes option-pricing model to estimate the fair value of warrant liabilities at the end of each applicable reporting period. Changes in the fair value of warrant liabilities during each reporting period are included in the statement of operations. Inputs into the Black-Scholes option-pricing model require estimates, including such items as estimated volatility based upon historical volatilities of the Company’s stock and the estimated life of the financial instruments being fair valued.




6




Going Concern





The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  As reflected in the accompanying financial statements, the Company has no revenues, has incurred substantial losses from operations and has an accumulated deficit of approximately $166.4 million.  These factors raise substantial doubt about its ability to continue as a going concern.  The ability of the Company to continue as a going concern is dependent on the Company’s ability to implement its business plan and raise additional funds. In the event the Company is unable to secure additional financing or to otherwise execute on other strategic arrangements, including the potential sale of its technology, the Company may have to take additional actions, up to and including a Chapter 7 bankruptcy filing.





2.
Income (Loss) Per Share




The computations of basic and diluted income (loss) per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  Potentially dilutive securities include options and warrants to acquire the Company’s common stock.  As of June 30, 2011 and 2010, there were approximately 21.6 million and 23.0 million shares issuable in connection with these potentially dilutive securities, respectively.  These potentially dilutive securities were disregarded in the computations of diluted net income (loss) per share for the three and six month periods ended June 30, 2011 and 2010, because inclusion of such potentially dilutive securities would have been anti-dilutive.







3.
Capital Stock





On February 4, 2011, the Company completed the sale of 13,333,334 equity units at a price of $0.15 per unit for aggregate gross proceeds to the Company of approximately $2.0 million (the “February 2011 Offering”).  Each equity unit consists of (i) one share of common stock, (ii) a warrant to purchase approximately 0.45 shares of SulphCo common stock at a price of $0.20 with a term of five years and (iii) a warrant to purchase approximately 0.24 shares of SulphCo common stock at a price $0.20 with a term of 66 months but not exercisable until 181 days after the closing date of the transaction (together hereinafter referred to as the “2011 Warrants”). In addition, the Company agreed to amend and re-issue two 2010 warrants to purchase 2,745,098 shares (the “Modified Warrants”) of SulphCo common stock currently held by one of the investors. The Modified Warrants – equal in number to the original warrants – will allow the holder to purchase shares of SulphCo common stock at a price of $0.20 per share with a term of 54 months. The Modified Warrants are not exercisable until 181 days after the closing date of the transaction.  The shares of common stock and shares of common stock issuable upon the exercise of the warrants that comprise the equity units and the re-issued warrant are registered on a shelf registration statement on Form S-3 declared effective by the SEC on October 20, 2010.  Net proceeds to the Company from this transaction were approximately $1.83 million.





On June 20, 2011, the Company and the investors holding the 2011 Warrants and the Modified Warrants executed an agreement whereby the Company agreed to reduce the exercise price for all such warrants to $0.02 per share from $0.20 per share and where applicable to make all such warrants immediately exercisable (the “June 2011 Offering”).  In return, the investors agreed to immediately exercise 50% of all such warrants resulting in the issuance of 5,947,549 shares of the Company’s common stock.  The shares of common stock issued and issuable upon the exercise of these warrants were and are registered on a shelf registration statement on Form S-3 declared effective by the SEC on October 20, 2010.  Net proceeds to the Company from this transaction were approximately $112,000.





For the six-month period ended June 30, 2011, net proceeds to the Company raised in connection with the February 2011 Offering and the June 2011 Offering were approximately $1.9 million.




7





4.
Warrant Liabilities





In connection with the February 2011 Offering discussed in Note 3, the Company issued the 2011 Warrants and the Modified Warrants.  Both the 2011 Warrants and the Modified Warrants contained a “down-round” price protection feature that provides that in the event SulphCo subsequently issues other equity instruments at a price less than the stated exercise price of these warrants, the stated exercise of these warrants would be reset to the lower price established in the subsequent transaction.  Based on guidance included in the FASB’s Accounting Standards Codification, SulphCo concluded that the 2011 Warrants and the Modified Warrants should be recorded as liabilities on the balance sheet at an amount equal to their fair value determined by the Black-Scholes option valuation model.  Prospectively at each balance sheet date, changes in the fair value of the warrant liability will be recognized in the statement of operations.  As of June 30, 2011, the warrant liabilities were approximately $125,000.  For the three and six-month periods ended June 30, 2011, the Company recognized a benefit relating to the change in the fair value of warrant liabilities of approximately $1.2 million and $1.0 million, respectively.




5.
Deemed Dividend





In connection with the February 2011 Offering discussed in Note 3, the Company agreed to reset the exercise price of certain 2010 warrants held by one of the investors as an inducement to encourage said investor to participate in the February 2011 Offering.  Specifically, SulphCo agreed to reduce the exercise price on one warrant to acquire 1,372,549 shares of SulphCo stock held by the investor from $0.70 per share to $0.20 per share and to reduce the exercise price on another warrant to acquire 1,372,549 shares of SulphCo stock held by the investor from $1.00 per share to $0.20 per share.  As a result, the SulphCo issued the investor the Modified Warrant to acquire 2,745,098 shares of SulphCo common stock at an exercise price of $0.20 per share with a term of 54 months.





In connection with the June 2011 Offering discussed in Note 3, the Company agreed to reduce the exercise price of the 2011 Warrants and the Modified Warrants to $0.02 per share from $0.20 per share and where applicable to make all such warrants immediately exercisable.





Given the preferential nature of the modifications discussed above in connection with the February 2011 Offering and the June 2011 Offering, SulphCo concluded that a non-cash deemed dividend should be recorded to account for the fair value of the modifications to arrive at the net loss available to common shareholders and similarly adjust earnings per share.  The amount of the deemed dividend was computed by measuring the incremental fair value conveyed to the investor whose warrants were modified (i.e., via the reduction of the exercise price and extension of the term) was determined as provided in the Stock Compensation Topic of the FASB ASC (determined using Black-Scholes).  Based on the valuation analyses prepared for these modifications, SulphCo determined that for the three and six month periods ended June 30, 2011, the amount of the deemed dividend was approximately $66,000 and $247,000, respectively.




6.
Stock Plans and Stock-Based Compensation





In accordance with the Stock Compensation Topic of the FASB Accounting Standards Codification, the Company records stock-based compensation expense for all share-based payment arrangements, including stock options, warrants and restricted stock grants. The fair value of each option award granted is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the Company’s stock. The expected term of options granted to employees is derived utilizing the simplified method which represents the period of time that options granted are expected to be outstanding. The Company utilizes the simplified method because it does not have historical exercise data which is sufficient to provide a reasonable basis to estimate the expected term. The Company expects to continue utilizing the simplified method to determine the expected term until such time as it accumulates historical exercise data that will provide a sufficient basis for the Company to begin estimating the expected term for option exercises. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The stock-based compensation expense for the three and six month periods ended June 30, 2011 and 2010 was a negative expense of approximately $52,000 and $53,000 and an expense $0.1 million and $0.2 million, respectively.  The negative expense for 2011 resulted from the reversal of previously recognized stock-based compensation expense relating to employees whose un-vested stock options were forfeited upon resignation and/or termination during the six-month period ended June 30, 2011.




8





During the three and six month periods ended June 30, 2011 and 2010, the Company granted zero, zero, zero and 968,541 stock options, respectively, to its directors, officers and employees.  The fair value of these stock options was estimated using the Black-Scholes options pricing model with the following assumptions:





Six Months Ended June 30, 2011 and 2010

2011


2010Valuation Assumptions:Expected Term (years)


-



5.0-5.5Expected Volatility


-



124
%Expected Dividend Rate


-



-Risk Free Interest Rate


-



2.39
%Grant Date Fair Value


-


$
0.31





Of the 1,350,000 stock options granted to the Company’s directors, officers and employees during the three month period ended March 31, 2010, 1,150,000 were performance-based stock options granted to the Company’s directors and executive officers.  The performance-based stock options had an exercise price of $0.37 with a grant date fair value of approximately $360,000, a term of ten years from the grant date and vest on a graduated basis over the 12 month period following the date of grant, subject to the achievement of certain commercial milestones. If the commercial milestones are not achieved within the graduated vesting periods, these performance-based stock options will be forfeited. The Company will assess the probability of the achievement of the commercial milestones at the end of each reporting period. If the Company determines that achievement of the commercial milestones before the end of a vesting period is probable, future accruals of stock-based compensation expense will be adjusted and a cumulative catch-up adjustment will be recorded in that reporting period.  As of March 31, 2011, the Company has not recorded any stock-based compensation expense related to the performance-based stock options granted during the three month period ended March 31, 2010.  In addition, since none of the commercial milestones that were established for vesting purposes were achieved with in the 12 month period following the date of grant, all of these performance-based stock options were forfeited during the quarter ended March 31, 2011.





7.
Commitments and Contingencies





Concentrations of Credit Risk





Substantially all of the Company’s cash and cash equivalents are maintained with two major U.S. financial institutions.  The majority of the Company’s cash equivalents are invested in a money market fund that invests primarily in U.S. Treasury securities and repurchase agreements relating to those instruments. Investments in this fund are not insured by or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.  Generally, these deposits may be redeemed upon demand and therefore, management believes that they bear minimal risks.  The Company has not experienced any losses in such accounts, nor does management believe it is exposed to any significant credit risk.




9


Litigation and Other Contingencies





From time to time, the Company may be subject tovarious claims and lawsuits arising in the ordinary course of the Company’s business.





The following paragraphs set forth the status of litigation and other contingencies as of June 30, 2011.





NYSE Amex LLC De-Listing





On June 7, 2011, the Company was notified by the NYSE Amex LLC (the “Exchange”) of the intent of the Exchange to strike the Company’s common stock from the Exchange by filing a delisting application with the Securities and Exchange Commission (the “SEC”) pursuant to Section 1009(d) of the NYSE Amex LLC Company Guide (the “Company Guide”).  Specifically, the written notice from the Exchange stated that the Company was not in compliance with Section 1003(a)(i) of the Company Guide with stockholders’ equity of less than $2 million and losses from continuing operations and/or net losses in two out of its three most recent fiscal years; Section 1003(a)(ii) of the Company Guide with stockholders’ equity of less than $4 million and losses from continuing operations and/or net losses in three out of its four most recent fiscal years; and Section 1003(a)(iii) of the Company Guide with stockholders’ equity of less than $6 million and losses from continuing operations and/or net losses in its five most recent fiscal years.  The Company did not appeal the Exchange’s determination to delist the Company’s common stock and as a result, prior to the open of trading on June 15, 2011 the Company’s common stock ceased trading on the Exchange.  Coincident with the open of trading on June 15, 2011, the Company’s common stock began trading on the OTCQB Marketplace under the new trading symbol “SLPH.”





Since the Company’s common stock is not listed on a national exchange and because our public float remains below $75 million, the Company will be limited in its ability to file new shelf registration statements on Form S-3 and/or to fully use one or more registration statements on Form S-3 that have been filed with the Securities and Exchange Commission.  Such limitations may have a material adverse effect on the Company’s ability to raise the capital needed to continue its operations.


10





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





Overview





SulphCo is an energy technology company focused on the development and commercialization of an oxidative desulfurization (“ODS”) process for crude oil products, crude oils, natural gasoline and condensate streams.  SulphCo’s oxidative desulfurization process consists of (1) the ultrasound assisted conversion of the sulfur compounds to their oxidized analogs employing its patented and proprietary SonocrackingTM technology, and (2) the subsequent removal of these oxidized compounds via adsorption, extraction, water wash or other similar separation techniques (the “SulphCo Process”).





Ever increasing environmental regulations are mandating the reduction of sulfur content in many fuels, including gasoline, diesel fuel, and bunker fuel.  For example, the sulfur specification for finished diesel fuel in certain jurisdictions is less than 10 parts per million (“ppm”), while typical starting concentrations are in the thousands of ppm. The currently practiced method for desulfurization is hydrodesulfurization (“HDS”).  HDS requires a large capital investment and suffers from high hydrogen and energy consumption as severe operating conditions have to be employed to treat the most refractory sulfur compounds. In contrast, the SulphCo Process allows for  comparably mild reaction conditions such as ambient temperatures and mild pressures, resulting in a potentially more cost effective and energy efficient alternative to HDS for certain applications within the refining, transportation, and blending market segments.





Recent Developments





Since March 31, 2011, the Company has experienced a number of negative developments.  Specifically, on May 31, 2011, the Company issued a press release disclosing further workforce reductions on top of those previously disclosed in a press release issued on April 15, 2011.  The employees affected by the last round of workforce reductions represented the Company’s remaining scientific, engineering and technical staff.  Following the latest round of workforce reductions, the Company only has four employees and is severely limited in its ability to conduct research and development and marketing activities.





The Company is continuing to pursue various alternatives that may include, among other things, secured convertible debt, additional equity issuances or any combination thereof, the proceeds of which would be used to fund future research and development and marketing activities.  The Company is also exploring strategic arrangements and a potential sale of its technology.  There can be no assurance that the Company will be successful in any of these endeavors.





On June 14, 2011, the Company issued a press release disclosing that its common stock would cease trading on the NYSE-Amex Exchange prior to market open on June 15, 2011 and that its common stock would commence trading on the OTCQB Marketplace coincident with the market open on June 15, 2011 under the new trading symbol “SLPH.”





As of June 30, 2011, we had approximately $248,000 in available cash reserves. Taking this amount together with our forecasted monthly cash burn rate, we anticipate that our cash reserves will be sufficient to fund our cash requirements only into the latter part of August or the early part of September.  In the event the Company is unable to secure additional financing or to otherwise execute on other strategic arrangements, including the potential sale of its technology, the Company may have to take additional actions, up to and including a Chapter 7 bankruptcy filing.




11




Liquidity and Capital Resources





On February 4, 2011, the Company completed the sale of 13,333,334 equity units at a price of $0.15 per unit for aggregate gross proceeds to the Company of approximately $2.0 million (the “February 2011 Offering”).  Each equity unit consists of (i) one share of common stock, (ii) a warrant to purchase approximately 0.45 shares of SulphCo common stock at a price of $0.20 with a term of five years and (iii) a warrant to purchase approximately 0.24 shares of SulphCo common stock at a price $0.20 with a term of 66 months but not exercisable until 181 days after the closing date of the transaction (together the “2011 Warrants”). In addition, the Company agreed to amend and re-issue warrants to purchase 2,745,098 shares of SulphCo common stock held by one of the investors (the “Modified Warrants”). The Modified Warrants – equal in number to the original warrants – will allow the holder to purchase shares of SulphCo common stock at a price of $0.20 per share with a term of 54 months. The Modified Warrants are not exercisable until 181 days after the closing date of the transaction.  The shares of common stock and shares of common stock issuable upon the exercise of the warrants that comprise the equity units and the Modified Warrants are registered on a shelf registration statement on Form S-3 declared effective by the SEC on October 20, 2010.  Net proceeds to the Company from this transaction were approximately $1.83 million.





On June 20, 2011, the Company and the investors holding the 2011 Warrants and the Modified Warrants executed an agreement whereby the Company agreed to reduce the exercise price for all such warrants to $0.02 per share from $0.20 per share and where applicable to make all such warrants immediately exercisable (the “June 2011 Offering”).  In return, the investors agreed to immediately exercise 50% of all such warrants resulting in the issuance of 5,947,549 shares of the Company’s common stock.  The shares of common stock issued and issuable upon the exercise of these warrants were and are registered on a shelf registration statement on Form S-3 declared effective by the SEC on October 20, 2010.  Net proceeds to the Company from this transaction were approximately $112,000.





For the six-month period ended June 30, 2011, net proceeds to the Company raised in connection with the February 2011 Offering and the June 2011 Offering were approximately $1.9 million.





As of June 30, 2011, we had approximately $248,000 in available cash reserves. Taking this amount together with our forecasted monthly cash burn rate, we anticipate that our cash reserves will be sufficient to fund our cash requirements only into the latter part of August or the early part of September.  Historically, we have been able to raise capital to continue with our research and development and it is likely that we will need to raise additional funds before we can generate enough revenue to become profitable. The Company is evaluating various financing alternatives that may include, among other things, secured convertible debt and additional equity issuances or any combination thereof, the proceeds of which would be used to fund future research and development activity.  There can be no assurance that the Company will be successful in raising such financing.  If the Company is unable to raise additional financing, its ability to continue to operate will be significantly curtailed.  In addition, since the Company is not listed on a national exchange and because its public float remains below $75 million, it will be limited in its ability to file new shelf registration statements on Form S-3 and/or to fully use one or more registration statements on Form S-3 that have been filed with the SEC.  These limitations may have a material adverse effect on the Company’s ability to raise the funding needed to continue its operations.  In addition, the Company has only a minimal amount of shares of common stock available to be issued under its authorized shares as set forth in its charter. Accordingly, the Company will need to seek shareholder approval to increase its authorized shares of common stock.  Until this situation is addressed, the Company’s ability to raise financing will be negatively impacted.





Following the completion of previously announced workforce reductions, the Company had four (4) remaining employees and is severely limited in its ability to conduct research and development and marketing activities.  As discussed below, the Company continues to be cash constrained and unless new financing is obtained in the immediate future, the Company’s operations and efforts to continue to develop our technology will have to be curtailed further and possibly terminated. Although the Company continues to work to raise additional funding, there can be no assurance that such a financing will be available, or if it is available, that it can be obtained on terms that are deemed to be acceptable to the Company.  Such funding, if obtained, may take the form of secured convertible debt, equity or any combination thereof.  In the event the Company is unable to secure additional financing or to otherwise execute on other strategic arrangements, including the potential sale of its technology, the Company may have to take additional actions, up to and including a Chapter 7 bankruptcy filing.




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On June 7, 2011, the Company was notified by the NYSE Amex LLC (the “Exchange”) of the intent of the Exchange to strike the Company’s common stock from the Exchange by filing a delisting application with the Securities and Exchange Commission (the “SEC”) pursuant to Section 1009(d) of the NYSE Amex LLC Company Guide (the “Company Guide”).  Specifically, the written notice from the Exchange stated that the Company was not in compliance with Section 1003(a)(i) of the Company Guide with stockholders’ equity of less than $2 million and losses from continuing operations and/or net losses in two out of its three most recent fiscal years; Section 1003(a)(ii) of the Company Guide with stockholders’ equity of less than $4 million and losses from continuing operations and/or net losses in three out of its four most recent fiscal years; and Section 1003(a)(iii) of the Company Guide with stockholders’ equity of less than $6 million and losses from continuing operations and/or net losses in its five most recent fiscal years.  The Company did not appeal the Exchange’s determination to delist the Company’s common stock and as a result, prior to the open of trading on June 15, 2011 the Company’s common stock ceased trading on the Exchange.  Coincident with the open of trading on June 15, 2011, the Company’s common stock began trading on the OTCQB Marketplace under the new trading symbol “SLPH.”





Future Capital Requirements





The extent and timing of our future capital requirements will depend primarily upon whether we are successful in obtaining funding to allow continued development and commercialization of our technologies and the timing of future customer orders, if any.





As of June 30, 2011, we had an accumulated deficit of approximately $166.4 million and we incurred a net loss of approximately $1.6 million for the six-month period ended June 30, 2011. This loss is principally associated with ongoing research and development of our SonocrackingTM technology and related marketing activity.





To date, we have generated no material revenues from our business operations.  We are unable to predict when or if we will be able to generate future revenues from commercial activities or the amounts expected from such activities.  These revenue streams may be generated by us or in conjunction with collaborative partners or third party licensing arrangements, and may include provisions for one-time, lump sum payments in addition to ongoing royalty payments or other revenue sharing arrangements.  We presently have no binding commitments for any such revenues.





Other possible sources of additional capital include the exercise of the remaining warrants issued to investors in conjunction with previous financing transactions, future collaborative arrangements, licensing arrangements and debt and equity financings.  We do not know whether additional financing will be available on commercially acceptable terms when needed.  If we cannot raise funds on acceptable terms when needed, we may not be able to successfully commercialize our technologies, take advantage of future opportunities or respond to unanticipated requirements.  If we are unable to secure such additional financing when needed, we may have to curtail or suspend all or a portion of our business activities.  Further, if we issue additional equity securities, our shareholders may experience severe dilution of their ownership percentage.




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Results of Operations




As a development stage company, we have not generated any material revenues since we commenced our current line of business in 1999.  When we emerge from the development stage, our reporting will change to reflect costs of sales against revenues.




Three and six-months ended June 30, 2011 compared to the three and six-months ended June 30, 2010





Selling, General and Administrative Expenses





For the three and six-month periods ended June 30, 2011, we incurred expenses of approximately $0.7 million and $1.9 million, respectively, in selling, general and administrative expenses. This compares to expenses of approximately $1.4 million and $3.0 million for the comparable periods in 2010.





For the three and six-month periods ended June 30, 2011, the Company recognized negative stock-based compensation expense of approximately $52,000 and $53,000, respectively, resulting from the reversal of previously recognized stock-based compensation expenses relating to  employees whose un-vested stock options were forfeited upon termination or resignation. This compares to stock-based compensation expense of approximately $0.1 million and $0.2 million for the comparable periods in 2010.





Salaries, wages and benefits were approximately $0.2 million and $0.7 million for the three and six-month periods ending June 30, 2011.  This compares to costs of approximately $0.6 million and $1.3 million for the comparable period in 2010.  The decrease salaries, wages and benefits is due to fewer employees in the 2011 periods when compared to the 2010 periods.





Legal fees were approximately $0.1 million and $0.3 million for the three and six-month periods ended June 30, 2011.  This compares to expenses of approximately $0.2 million and $0.3 million for the comparable periods in 2010.





The Company incurred approximately $0.1 million and $0.2 million in director fees for the three and six-month periods ended June 30, 2011, compared to $0.1 million for both of the comparable periods in 2010.





Operating expenses due to normal recurring activities such as travel, consulting and accounting fees, marketing and investor relations were approximately $32,000 and $0.1 million for the three and six-month periods ended June 30, 2011.  This compares to expenses of approximately $0.1 million and $0.2 million for the comparable periods in 2010.





Research and Development Expenses





For the three and six-month periods ended June 30, 2011, we incurred expenses of approximately $0.1 million and $0.4 million related to research and development of our SonocrackingTM technology. This compares to expenses of approximately $0.7 million and $1.4 million for the comparable periods in 2010.





Interest Expense





For the three and six-month periods ended June 30, 2011, the Company recognized total interest expense of approximately $9,000 and $18,000, respectively.  This compares to expenses of approximately $9,000 and $18,500, respectively, for the comparable periods in 2010. The interest expense recognized during these periods related to the late registration statement penalty.





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Warrant Liabilities





In connection with the February 2011 Offering discussed in above, the Company issued the 2011 Warrants and the Modified Warrants.  Both the 2011 Warrants and the Modified Warrants contained a “down-round” price protection feature that provides that in the event SulphCo subsequently issues other equity instruments at a price less than the stated exercise price of these warrants, the stated exercise of these warrants would be reset to the lower price established in the subsequent transaction.  Based on guidance included in the FASB’s Accounting Standards Codification, SulphCo concluded that the 2011 Warrants and the Modified Warrants should be recorded as warrant liabilities on the balance sheet at an amount equal to their fair value determined by the Black-Scholes option valuation model.  Prospectively at each balance sheet date, changes in the fair value of the warrant liabilities will be recognized in the statement of operations.  As of June 30, 2011, warrant liabilities were approximately $125,000.  For the three and six-month periods ended June 30, 2011, the Company recognized a benefit relating to the change in the fair value of warrant liabilities of approximately $1.2 million and $1.0 million, respectively.





Deemed Dividend





In connection with the February 2011 Offering discussed above, the Company agreed to reset the exercise price of certain 2010 warrants held by one of the investors as an inducement to encourage said investor to participate in the February 2011 Offering.  Specifically, SulphCo agreed to reduce the exercise price on one warrant to acquire 1,372,549 shares of SulphCo stock held by the investor from $0.70 per share to $0.20 per share and to reduce the exercise price on another warrant to acquire 1,372,549 shares of SulphCo stock held by the investor from $1.00 per share to $0.20 per share.  As a result, SulphCo issued the investor the Modified Warrant to acquire 2,745,098 shares of SulphCo common stock at an exercise price of $0.20 per share with a term of 54 months.





In connection with the June 2011 Offering discussed above, the Company agreed to reduce the exercise price of the 2011 Warrants and the Modified Warrants to $0.02 per share from $0.20 per share and where applicable to make all such warrants immediately exercisable.





Given the preferential nature of the modifications discussed above in connection with the February 2011 Offering and the June 2011 Offering, SulphCo concluded that a non-cash deemed dividend should be recorded to account for the fair value of the modifications to arrive at the net loss available to common shareholders and similarly adjust earnings per share.  The amount of the deemed dividend was computed by measuring the incremental fair value conveyed to the investor whose warrants were modified (i.e., via the reduction of the exercise price and extension of the term) was determined as provided in the Stock Compensation Topic of the FASB ASC (determined using Black-Scholes).  Based on the valuation analyses prepared for these modifications, SulphCo determined that for the three and six-month periods ended June 30, 2011, the amount of the deemed dividend was approximately $66,000 and $247,000, respectively.





Net Income (Loss) and Net Income (Loss) Attributable to Common Stockholders





The difference between net income (loss) and net income (loss) attributable to common stockholders for the three and six-month periods ended June 30, 2011, is solely attributable to the deemed dividends recorded in those periods.





Forward-Looking Statements





This report contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms.




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In addition, these forward-looking statements include, but are not limited to, statements regarding implementing our business strategy; development, commercialization and marketing of our products; our intellectual property; our estimates of future revenue and profitability; our estimates or expectations of continued losses; our expectations regarding future expenses, including research and development, sales and marketing, manufacturing and general and administrative expenses; difficulty or inability to raise additional financing, if needed, on terms acceptable to us; our estimates regarding our capital requirements and our needs for additional financing; attracting and retaining customers and employees; sources of revenue and anticipated revenue; and competition in our market.





Forward-looking statements are only predictions.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  All of our forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in “Item 1A. Risk Factors” section contained herein, as well as the risk factors and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”).  These documents are available through our website, http://www.sulphco.com, or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (“EDGAR”) at http://www.sec.gov.





References in this report to “we,” us,” “our company,” and “SulphCo” refer to SulphCo, Inc., a Nevada corporation.




Item 3. Quantitative and Qualitative Disclosures About Market Risk.




We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates and interest rates.





Item 4. Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “1934 Act”)) as of June 30, 2011, the end of the period covered by this Form 10-Q.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, the Company’s disclosure controls and procedures were effective.




Changes in Internal Controls





There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the period ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II. OTHER INFORMATION





Item 1. Legal Proceedings





See Note 7 of the Notes to the Financial Statements – Commitments and Contingencies (Part I, Item 1) for information regarding legal proceedings involving the Company.





Item 1A. Risk Factors





We are a development stage company with a limited operating history, which makes it more difficult to predict whether we will be able to successfully commercialize our technology and implement our business plan.  Our auditors have included a “going-concern” emphasis paragraph in their audit report.  We may have to declare bankruptcy.





We are a development stage company with a limited operating history, and our principal technologies and products are not yet commercially proven.  Accordingly, there is a limited operating history upon which to base an assumption that we will be able to successfully implement our business plan.  In addition to this, our auditors have included a “going-concern” emphasis paragraph in their audit report relating to our financial statements as of December 31, 2010, indicating that as a result of significant recurring losses, substantial doubt exists about our ability to continue as a going concern.  The Company is continuing to pursue various alternatives that may include, among other things, secured convertible debt, additional equity issuances or any combination thereof, the proceeds of which would be used to fund future research and development and marketing activities.  The Company is also exploring strategic arrangements and a potential sale of its technology.  There can be no assurance that the Company will be successful in any of these endeavors.  In the event the Company is unable to secure additional financing or to otherwise execute on other strategic arrangements, including the potential sale of its technology, the Company may have to take additional actions, up to and including a Chapter 7 bankruptcy filing.





As of the date of this filing and other than the risk factor described above, there have been no material changes from the risk factors previously disclosed in our “Risk Factors” in the Form 10-K for the period ended December 31, 2010.  An investment in our common stock involves various risks. When considering an investment in our common stock, you should consider carefully all of the Risk Factors described in our most recent Form 10-K. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our Company.





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





The Form 8-Ks filed by the Company on February 7, 2011 and June 21, 2011, are hereby incorporated by reference as a response to this Item 2.





Item 3. Defaults Upon Senior Securities – None.





Item 4. (Removed and Reserved)





Item 5. Other Information. -None.





Item 6. Exhibits





31.1
Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.




32.1
Certifications of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.




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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




SULPHCO, INC.(Registrant)Date: August 12, 2011
By:
/s/ Stanley W. FarmerStanley W. FarmerPresident, Chief Financial Officer,Treasurer and Corporate Secretary(Principal Executive, Financialand Accounting Officer)




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