Sulphco (SUF) 10-Q/A 2006 Q1 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

_____

Amendment No. 2

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

For the quarterly period ended................................................. March 31, 2006

OR

[   ] 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 Number)

850 Spice Islands Drive, Sparks, NV (Address of principal executive offices) 89431 (Zip Code)

(775) 829-1310

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   X    No ___

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

Large Accelerated Filer ___ Accelerated Filer   X   Non-accelerated filer ___

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

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

Class   Common Stock, par value $.001 Outstanding at March 21, 2007   76,355,478 shares

EXPLANATORY NOTE

SulphCo, Inc. (the "Company") is filing this Form 10-Q/A ("Amendment No. 2") to amend its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, in order to refile in its entirety Part I. Item 1, Financial Statements, to charge as research and development expense, the costs associated with test facility in Fujairah under construction since 2006.

In connection with the preparation of the Company’s unaudited financial statements at March 31, 2006, and June 30, 2006, and for the periods then ended, the Company’s management, at the time, and its Audit Committee originally concluded that the construction and purchase of equipment being installed in Fujairah, UAE, and the building to house it, were beyond the development stage and thus not subject to expense under the Statement of Financial Accounting Standards (“FAS”) No. 2. Accordingly, these items were capitalized in the first and second quarters of 2006. By the third quarter, however, the Company's management reassessed its capitalization of the equipment and its related building for the Fujairah facility and determined that it was not appropriate to continue capitalization of costs incurred on this project. This judgment was based on the difficulties ultimately reported on the construction of the facility, the long delays in the readiness for commercial operations, and the absence of a commercial history for this type of facility. Specifically, the Company had yet to complete the following:

·       Building and infrastructure.

·       Successful testing of the probe transducer assembly.

·       Contracting for testing oil and trucking thereof.

The inability to achieve these specified goals cast doubt on the Company's original assessments of the project that commenced since the year ended December 31, 2005, and the original judgments of compliance with criteria under FAS No. 2 and the capitalization of costs for what was a test facility, rather than one ready for full commercial operation. Accordingly, the Company determined that it is appropriate to restate and write off these construction costs in the first two quarters of 2006 to research and development expense.

Additionally the Company discovered that it had reflected the full value of options issued to Mustang International, L.P. rather than allocating them over the service period. As these services were originally capitalized as part of construction, the restatement includes the necessary adjustments to expense them over the service period from April through September 2006.

This Amendment No. 2 also amends Part I. Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part I. Item 4, Controls and Procedures. The Original Filing is hereby superseded and amended with respect to the information set forth in this Amendment No. 2.

2

PART I

Item 1.   Financial Statements

3

SULPHCO, INC.

(A Company in the Development Stage)

BALANCE SHEETS

March 31, 2006 and December 31, 2005

(unaudited)

	March 31, 2006			December 31, 2005
	(restated)
Current Assets:
Cash and cash equivalents	$	35,193,006		$	6,874,653
Loan and accrued interest receivable		100,547			-
Prepaid expenses and other		96,572			137,577
Total current assets		35,390,125			7,012,230
Property and Equipment (net of accumulated depreciation of $885,786)		360,418			397,416
Other Assets
Intangible assets (net of accumulated amortization of $23,088)		437,626			355,218
Investment in Joint Venture		138,774			139,550
Deposits		48,672			140,822
Deferred tax asset (net of valuation allowance of $10,347,231)		-			-
Total other assets		625,072			635,590
Total assets	$	36,375,615		$	8,045,236
Current Liabilities
Accounts payable and accrued liabilities	$	1,570,077		$	779,413
Refundable deposit		550,000			550,000
Accrued fees and interest		1,231,595			1,035,572
Related party note payable		500,000			500,000
Total current liabilities		3,851,672			2,864,985
Long Term Related Party Note Payable		7,000,000			7,000,000
Commitments and Contingencies		-			-
Total liabilities		10,851,672			9,864,985
Stockholders' Equity (Deficiency)
Preferred stock: 10,000,000 shares authorized ($0.001 par value) none issued		-			-
Common stock: 100,000,000 shares authorized ($0.001 par value)
72,470,910 shares issued and outstanding at March 31, 2006		72,471			60,537
Paid in capital		67,115,761			30,604,342
Stock subscriptions receivable		(744,500	)		(744,500	)
Deficit accumulated during the development stage		(40,919,789	)		(31,740,128	)
Total stockholders' equity (deficiency)		25,523,943			(1,819,749	)
Total liabilities and stockholders' equity (deficiency)	$	36,375,615		$	8,045,236

The Accompanying notes are an Integral Part of the Financial Statements

4

SULPHCO, INC.

(A Company in the Development Stage)

STATEMENTS OF OPERATIONS

For the Three Months ended March 31, 2006 and 2005 and from Inception

(unaudited)

	Three Months Ended
	March 31						Inception
	2006			2005			to date
	(restated)						(restated)
Revenue
Sales	$	-		$	-		$	42,967
Expenses
Selling, general, and administrative expenses		(3,475,486	)		(1,220,025	)		(30,366,599	)
Research and development expenses:
Fujairah test facility		(5,117,640	)		-			(5,117,640	)
Other		(514,429	)		(400,124	)		(3,697,238	)
Loss on disposal of asset		-			-			(221,711	)
Loss on impairment of asset		-			(233,900	)		(233,900	)
Total operating expenses		(9,107,555	)		(1,854,049	)		(39,637,088	)
Loss from operations		(9,107,555	)		(1,854,049	)		(39,594,121	)
Other income (expense)
Interest income		53,092			39,377			303,691
Interest expense		(125,199	)		(70,750	)		(869,119	)
Late registration fees		-			(438,000	)		(760,240	)
Loss before taxes		(9,179,662	)		(2,323,422	)		(40,919,789	)
Income tax benefit (provision)		-			-			-
Net loss	$	(9,179,662	)	$	(2,323,422	)	$	(40,919,789	)
Loss per share - basic and diluted	$	(0.14	)	$	(0.04	)	$	(1.05	)
Weighted average shares - basic and diluted		65,354,635			56,529,385			38,934,386

The Accompanying notes are an Integral Part of the Financial Statements

5

SULPHCO, INC.

(A Company in the Development Stage)

STATEMENTS OF CASH FLOWS

For the Three Months ended March 31, 2006 and 2005 and from Inception

(unaudited)

	Three Months Ended
	March 31						Inception
	2006			2005			to date
Cash Flows From Operating Activities	(restated)						(restated)
Net loss	$	(9,179,662	)	$	(2,323,422	)	$	(40,919,789	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation & amortization		63,312			44,519			948,678
Stock and options issued for services		1,214,250			509,675			8,583,767
Stock issued for interest expense		-			-			296,000
Contribution from stockholder		-			-			555,000
Loss from joint venture		776			-			776
Loss on disposal of subsidiary		-			-			221,711
Loss on impairment of asset		-			233,900			233,900
Deposit used for expense		100,000						100,000
(Increase) decrease in receivables		(547	)		317,800			(547	)
(Increase) decrease in prepaid expenses		41,005			11,683			(96,572	)
Increase (decrease) in accounts payable and accrued liabilities		790,665			(354,620	)		1,570,078
Increase in refundable deposit		-			300,000			550,000
Increase in accrued fees and interest		115,199			438,000			936,184
Net cash used in operating activities		(6,855,002	)		(822,465	)		(27,020,814	)
Cash Flows From Investing Activities
Advances for loan receivable		(100,000	)		-			(100,000	)
Purchase of property and equipment		(20,648	)		(133,565	)		(1,141,736	)
Investments in joint ventures and subsidiaries		-			-			(361,261	)
Payment of deposits		(7,850	)		-			(148,672	)
Investments in intangible assets		(88,074	)		(88,522	)		(476,556	)
Net cash used in investing activities		(216,572	)		(222,087	)		(2,228,225	)
Cash Flows from Financing Activities
Proceeds from issuance of stock		35,389,927			-			51,151,685
Proceeds from stock subscriptions		-			-			4,240,887
Proceeds from issuance of related party notes payable		-			-			11,000,000
Proceeds from issuance of line of credit		-			-			750,000
Return on capital		-			-			(118,427	)
Principal payments on related party notes payable		-			-			(750,000	)
Decrease in related party receivable		-			-			1,359,185
Payments on contract payable		-			-			(250,000	)
Principal payments on line of credit		-			-			(750,000	)
Principal payments on advance from related party		-			-			(2,191,285	)
Net cash provided by financing activities		35,389,927			-			64,442,045
Net increase (decrease) in cash and cash equivalents		28,318,353			(1,044,552	)		35,193,006
Cash and cash equivalents at beginning of period		6,874,653			9,872,839			-
Cash and cash equivalents at end of period	$	35,193,006		$	8,828,287		$	35,193,006
Supplemental Information and non cash transactions
Total interest payments included in operations	$	135,199		$	70,750
The Company paid no income taxes during the three months ended March 31, 2006 and 2005.
							��
Noncash investing and financing activity:
The Company incurred fees payable of $411,039 in issuing securities.
The Company issued stock in exchange for a payable of $330,215.

The Accompanying notes are an Integral Part of the Financial Statements

6

SULPHCO, INC.

(A Company in the Development Stage)

NOTES TO THE INTERIM FINANCIAL STATEMENTS

March 31, 2006 (unaudited)

1. Basis of Presentation

The accompanying unaudited interim financial statements of SulphCo, Inc., (the “Company”) have been prepared by the Company in accordance with generally accepted accounting principles for interim financial statements in the United States of America, pursuant to the Securities and Exchange Commission rules and regulations. In management’s opinion, all adjustments necessary for a fair presentation of the results for the interim periods have been reflected in the interim financial statements. The results of operations for any interim period are not necessarily indicative of the results for a full year. All adjustments to the financial statements are of a normal recurring nature.

Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles for audited financial statements have been condensed or omitted. Such disclosures are those that would substantially duplicate information contained in the most recent audited financial statements of the Company, such as recent accounting pronouncements. Management presumes that users of the interim statements have read or have access to the audited financial statements and notes thereto included in the Company’s most recent annual report on Form 10-KSB.

Restatement of Construction Work-in-Progress to Research and Development

In connection with the preparation of the Company’s unaudited financial statements at March 31, 2006, and June 30, 2006, and for the periods then ended, the Company’s management and its Audit Committee originally concluded that the construction and purchase of equipment being installed in Fujairah, UAE (see Note 5), and the building to house it, were beyond the development stage and thus not subject to expense under the Statement of Financial Accounting Standards (“FAS”) No. 2. Accordingly, these items were capitalized in the first and second quarters of 2006. For the third quarter, however, the Company reassessed its position with respect to the capitalization of the equipment and its related building for the Fujairah facility and determined that the project in Fujairah was better characterized as a test facility because the building had not progressed to the point that processing equipment could be installed. Successful testing of the probe transducer assembly had not been completed .Contracting for testing oil and trucking thereof was not secure. The Company had reflected the full value of options issued to Mustang International, L.P. (see Note 10) rather than allocating them over the service period. Because they were originally capitalized as part of construction work-in-progress, the restatement includes the necessary adjustments to expense them over the service period from April 1, through September 30, 2006.

The restatements for the first quarter of 2006 as reflected in the accompanying financial statements are as follows:

7

SulphCo, Inc. (a Company in the Development Stage)
Balance Sheet (unaudited)	March 31, 2006			Adjustments			March 31, 2006
	(as reported)						(as restated)
Current Assets:
Cash and cash equivalents	$	35,193,006		$	-		$	35,193,006
Loan and accrued interest receivable		100,547			-			100,547
Prepaid expenses and other		96,572			-			96,572
Total current assets		35,390,125			-			35,390,125
Property and Equipment (net of accumulated depreciation of $885,786)		5,035,583			(4,675,165	)		360,418
Other Assets
Intangible assets (net of accumulated amortization of $23,088)		437,626			-			437,626
Investment in Joint Venture		938,774			(800,000	)		138,774
Deposits		48,672			-			48,672
Deferred tax asset (net of valuation allowance of $10,347,231)		-			-			-
Total other assets		1,425,072			(800,000	)		625,072
Total assets	$	41,850,780		$	(5,475,165	)	$	36,375,615
Current Liabilities
Accounts payable and accrued liabilities	$	1,570,077		$	-		$	1,570,077
Refundable deposit		550,000			-			550,000
Accrued fees and interest		1,231,595			-			1,231,595
Related party note payable		500,000			-			500,000
Total current liabilities		3,851,672			-			3,851,672
Long Term Related Party Note Payable		7,000,000			-			7,000,000
Commitments and Contingencies		-			-			-
Total liabilities		10,851,672			-			10,851,672
Stockholders' Equity (Deficiency)
Preferred stock: 10,000,000 shares authorized ($0.001 par value) none issued		-			-			-
Common stock: 100,000,000 shares authorized ($0.001 par value) 72,470,910 shares issued and outstanding		72,471			-			72,471
Paid in capital		67,473,286			(357,525	)		67,115,761
Stock subscriptions receivable		(744,500	)		-			(744,500	)
Deficit accumulated during the development stage		(35,802,149	)		(5,117,640	)		(40,919,789	)
Total stockholders' equity (deficiency)		30,999,108			(5,475,165	)		25,523,943
Total liabilities and stockholders' equity (deficiency)	$	41,850,780		$	(5,475,165	)	$	36,375,615

8

SulphCo, Inc. (A Company in the Development Stage) Statement of Operations (unaudited)	Three Months Ended March 31, 2006			Adjustments			Three Months Ended March 31, 2006
	(as reported)						(as restated)
Revenue
Sales	$	-		$	-		$	-
Expenses
Selling, general, and administrative expenses		(3,770,144	)		294,658			(3,475,486	)
Research and development expenses:
Test facility		-			(5,117,640	)		(5,117,640	)
Other		(219,771	)		(294,658	)		(514,429	)
Loss on disposal of asset		-			-			-
Loss on impairment of asset		-			-			-
		(3,989,915	)		(5,117,640	)		(9,107,555	)
Loss from operations		(3,989,915	)		(5,117,640	)		(9,107,555	)
Other income (expense)
Interest income		53,092			-			53,092
Interest expense		(125,199	)		-			(125,199	)
Late registration fees		-			-			-
Loss before taxes		(4,062,022	)		(5,117,640	)		(9,179,662	)
Income tax benefit (provision)		-			-			-
Net loss	$	(4,062,022	)	$	(5,117,640	)	$	(9,179,662	)
Loss per share - basic and diluted	$	(0.06	)	$	(0.08	)	$	(0.14	)
Weighted average shares - basic and diluted		65,354,635			65,354,635			65,354,635

9

SulphCo, Inc. (A Company in the Development Stage) Statement of Operations (unaudited)	Inception to date			Adjustments			Inception to date
	(as reported)						(as restated)
Revenue
Sales	$	42,967		$	-		$	42,967
Expenses
Selling, general, and administrative expenses		(30,661,257	)		294,658			(30,366,599	)
Research and development expenses:
Test facility		(5,475,165	)		357,525			(5,117,640	)
Other		(3,402,580	)		(294,658	)		(3,697,238	)
Loss on disposal of asset		(221,711	)		-			(221,711	)
Loss on impairment of asset		(233,900	)		-			(233,900	)
Total operating expenses		(39,994,613	)		357,525			(39,637,088	)
Loss from operations		(39,951,646	)		357,525			(39,594,121	)
Other income (expense)
Interest income		303,691			-			303,691
Interest expense		(869,119	)		-			(869,119	)
Late registration fees		(760,240	)		-			(760,240	)
Loss before taxes		(41,277,314	)		357,525			(40,919,789	)
Income tax benefit (provision)		-			-			-
Net loss	$	(41,277,314	)	$	357,525		$	(40,919,789	)
Loss per share - basic and diluted	$	(1.06	)	$	0.01		$	(1.05	)
Weighted average shares - basic and diluted		38,934,386			38,934,386			38,934,386

10

Reclassification

For comparative purposes, certain amounts previously included in selling, general and administrative expenses have been reclassified as research and development expenses for prior periods from the beginning of 2005. The reclassifications do not require any adjustments to assets, liabilities, equity, or income.

The following summarizes the reclassifications made:

Quarter ended	March, 2005			June, 2005			September, 2005			December, 2005			March, 2006
Sales, general, & administrative expenses													(restated)
Original filing	$	1,434,115		$	1,660,431		$	1,070,379		$	2,479,202		$	3,770,144
Depreciation & amortization (separately stated in original filing)		44,519			62,993			39,359			-			-
Reclassifications		(258,609	)		(276,061	)		(275,196	)		(266,053	)		(294,658	)
Reclassified	$	1,220,025		$	1,447,363		$	834,542		$	2,213,149		$	3,475,486
Research & development
Original filing	$	141,515		$	246,119		$	655,188		$	399,274		$	219,771
Reclassifications		258,609			276,061			275,196			266,053			294,658
Reclassified	$	400,124		$	522,180		$	930,384		$	665,327		$	514,429

2.             Loan and Receivable and Accrued Interest

On February 16, 2006 the Company committed to a loan agreement with SulphCo KorAsia (formerly known as OIL-SC, Ltd.) of South Korea. The agreement called for advances of up to $150,000. $100,000 was advanced through March 31, 2006. Interest accrues at Prime rate plus 1%. Repayment is contingent upon SulphCo KorAsia having revenue streams. Although SulphCo KorAsia has never had material revenue streams, the Company believes that the full amounts of principal and interest will be collected and that no allowance for doubtful collection is necessary.

3.             Prepaid Expenses and Other

Prepaid expenses and other include $85,971 in prepaid insurance which is amortized over the duration of the policies, a $10,000 retainer for a consulting agreement, and an account receivable of $601. The insurance policies expire in 2006 and the consulting agreement expires in October of 2006.

4.             Property and Equipment

The following is a summary of property, plant, and equipment - at cost, less accumulated depreciation:

	March 31, 2006			Adjustments			March 31,2006
	(as reported)						(as restated)
Construction - Work-in-progress	$	4,675,165		$	(4,675,165	)		-
Equipment	$	913,306			-		$	913,306
Computers		193,972			-			193,972
Office furniture		55,551			-			55,551
Leasehold improvements		83,375			-			83,375
		5,921,369			-			1,246,204
Less: Accumulated depreciation		(885,786	)		-			(885,786	)
Total	$	5,035,583		$	(4,675,165	)	$	360,418

Depreciation expense (as originally reported and as restated) was $57,646 for the three months ended March 31, 2006 and $41,921 for the three months ended March 31, 2005.

11

5.             Investment in Joint Venture

In November 2005 the Company and Trans Gulf Petroleum Co., a Government of Fujairah company, formed Fujairah Oil Technology LLC (the “LLC”), a United Arab Emirates limited liability company, to implement the Company’s Sonocracking™ desulfurization technology. The LLC is 50% owned by Trans Gulf Petroleum and 50% owned by SulphCo, Inc. Fujairah is one of the seven Emirates of the United Arab Emirates.

The formation agreement called for each shareholder to contribute 500,000 Dirhams for a 50% ownership in the LLC. On December 14, 2005, the Company wired to the LLC its 500,000 Dirhams, ($139,550). The 50% contribution by Trans Gulf Petroleum was received by the LLC in January, 2006.

The LLC’s operations began in 2006. In the three months ended March 31, 2006 its only financial activities were deposits totaling 151,496 Dirhams, equivalent to approximately $41,000, for acquiring office space and equipment, and the commencement of the lease on March 15, 2006. There was a loss of which 50% has been reflected by the Company.

The Company entered into an agreement to construct a building for $1,600,000 for the LLC operations. The Company paid $800,000 to the construction company. Subsequently the building plans were expanded which will require an additional $600,000 for construction. As specified in Note 1 the Company restated and expenses the entire investment in the building as research and development expense.

Building and equipment being constructed by the Company for use in Fujairah will be owned by the Company, and the Company anticipates that it will lease the equipment to the LLC. The Facility is on land owned by the Government of Fujairah and the Government anticipates that it will lease the land to the LLC.

The Company’s 50% share of distributions made by the joint venture will also be subject to other costs and expenses incurred directly by the Company from time to time, including commissions payable directly by the Company to third parties, presently estimated at up to 20% of the Company’s net joint venture profits.

As of March 31, 2006, and for the six months then ended, the LLC had the following condensed balance sheet and operating statement converted to US dollars:

Condensed Balance Sheet, March 31, 2006:	(unaudited)
Current assets	$	236,845
Other assets		42,294
Total assets	$	279,139
Liabilities	$	1,591
Members’ equity	$	277,548
Operating Statement, Three Months Ended March 31, 2006:
Revenue	$	-
Operating expenses	$	(1,552	)
Net loss	$	(1,552	)

Based on the restatement as further explained in Footnote 1, there is uncertainty that the company can recover its investment in the LLC.

6.             Deposits

The Company had the following deposits as of March 31, 2006: $36,822 on the lease of facilities in Nevada, and $11,850 for architectural design of future office space in Nevada.

12

7.              Notes Payable

The Company’s notes payable consist of the following as of March 31, 2006:

The Company had outstanding a short-term note payable due to the Chairman and CEO Dr. Rudolf Gunnerman in the amount of $500,000. The note carries an annual interest rate of 8%, payable quarterly, and matures on the earlier of December 30, 2006, or upon the demand of Dr. Gunnerman. Interest of $10,000 has been paid for the three months ended March 31, 2006.

On December 31, 2004, under the Board’s approval, the Company borrowed $7,000,000 in the form of a long-term note from the Chairman and CEO. Interest on the note is adjusted quarterly based on a London Inter-Bank Offering Rate (“LIBOR”) plus 0.5% per annum, with payments due on December 31 of 2005, and 2006, and the remaining accrued interest and principal due on December 31, 2007 when the note matures. As of March 31, 2006, interest payable of $85,488 has been accrued on this note at the adjusted rate for the quarter of 4.885%. Beginning April 1, 2006 the rate was adjusted to 5.32563%.

8.             Capital Stock

Other than the related party transactions disclosed in Note 12 and the compensation transactions disclosed in Note 10, the Company had the following transactions related to its common stock during the three months ended March 31, 2006:

Additional Investment Rights and Warrants for 7,866,612 shares were exercised in 2006 through March 31, generating $8,531,858. These rights and warrants relate to a June 2004 private placement.

On March 29, 2006, the Company completed a private placement to a small number of accredited investors for the sale of 4,000,000 units, each unit consisting of one share of the Company’s Common Stock and one Warrant to purchase a share of Common Stock. Each unit was sold at a price of $6.805 per share, resulting in gross proceeds at closing of $27.2million. The Warrants are exercisable, in whole or in part, at a fixed price equal to $6.805 per share, and are exercisable for a period of 18 months following their issuance. The Company filed a Registration Statement with the SEC following the closing covering the resale of the shares of Common Stock issued at closing and shares issuable upon exercise of Warrants. The Company is required to pay a late registration penalty of 1.5% per month from June 27, 2006, computed on the amount of the investment, if the registration is not declared effective by the SEC by June 27, 2006.

A fee of $100,000 was paid to an unrelated third party in consideration of introducing an investor to the Company relative to the March 29, 2006 placement. This amount was reflected as a reduction of the proceeds and a payable at March 31, 2006. It was paid in April.

The Company is obligated to pay $760,240 in late registration fees due to the registration statement related to a private placement in June of 2004 not having become effective on time, as per the agreement with the investors. The agreement requires the Company to pay late registration fees to the selling security holders at the rate of 2% per month of the invested amount if the registration covering the placement shares is not declared effective by the SEC within 90 days of the date of the investment. As of March 31, 2006, the full amount of fees has been accrued plus $90,457 of accrued interest at 18% per annum on the balance of unpaid fees since the registration date. The registration statement was declared effective by the SEC on June 27, 2005.

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9.             Loss Per Share

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include stock options and unvested shares of restricted stock. Options to purchase 6,135,390 and 10,083,106 shares of common stock were not included in the March 31, 2006 and 2005 computations of diluted net loss per share, respectively, because inclusion of such shares would have an anti-dilutive effect on net loss per share.

10.           Stock Plans and Share-Based Compensation

The Company records compensation in the form of grants of common stock and options for common stock at fair value in accordance with the Statement of Financial Accounting Standards No. 123R.

Effective January 1, 2006 in consideration of Michael Applegate’s agreement to join the Company as Chief Operating Officer, he was granted 50,000 restricted shares of the Company’s common stock valued at $636,000 or $12.72 per share, the closing value on January 3, 2006, the first trading day after the effective date of the contract. This grant vested at the end of the 90 day period beginning January 1, 2006, thus is an expense for the first quarter of 2006.

In February 2006 the Company granted to Michael Heffner 50,000 restricted shares of common stock at $8.80 per share, the closing value on February 6, 2005, the effective date of his appointment to the Board of Directors, for services valued at $440,000.

Effective February 1, 2006, the Company entered into a consulting agreement with Thomas J. Nardi to provide engineering-construction consulting services on a month-to-month basis.  The consulting agreement provides that for each month the consulting agreement is in effect, Mr. Nardi will receive options to purchase 1,000 shares of our common stock, exercisable within one year, at an exercise price of $7.00 per share. During the quarter ended March 31, 2006, Mr. Nardi earned options to purchase 2,000 shares at $7.00 per share under this agreement. The fair value of these options totaled $8,050 based on the Black-Scholes valuation model using the assumptions described below.

On March 29, 2006 the Company entered into a contract with Mustang International, L.P. (“Mustang”) for program management, engineering, procurement, construction management, and other services to be performed. Initially it oversaw engineering and construction for the project in Fujairah, United Arab Emirates. The fee for these services included grants of stock and options as follows: (i) 17,500 of its shares of common stock, with a provision for reimbursement to the Company by Mustang of the value of the grant if the contract is terminated by Mustang, and (ii) options to acquire 52,500 shares of common stock at $6.00 per share, exercisable by April 1, 2010. The value of these services is includable in research and development expense as it relates to plant and equipment construction-in-progress which has been restated (see Note 1). The expense is being accrued over the expected service period through September 2006. The 17,500 shares were valued at the $7.44 closing price on March 29, 2006, or $130,200. The options were valued at $357,525 based on the Black-Scholes valuation model using the assumptions described below.

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The following table describes the assumptions used in the Black-Scholes calculations:

	Nardi	Nardi	Mustang
Date of option	2/28/2006	3/31/2006	3/29/2006
Term	One year	One year	Until 4/1/2010
Expected volatility (based upon calculated historical volatility of stock over the same term)	131%	129%	162%
Expected dividends	None	None	None
Risk-free interest rate	5%	5%	5%
Discount for post-vesting restrictions	None	None	None
Vesting date	2/28/2006	3/31/2006	9/29/2006

11.           Commitments and Contingencies

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist mainly of cash equivalents. The Company maintains amounts in two U.S. accounts, a checking account and a money market account, on deposit with one financial institution which exceed federally insured limits by approximately $34.9 million at March 31, 2006, and an account in Saudi Arabia. The Company has not experienced any significant losses in such accounts, nor does management believe it is exposed to any significant credit risk.

At March 31, 2006 the Company had a $550,000 refundable deposit in connection with an agreement with SulphCo KorAsia (formerly OIL-SC) for a pilot plant in South Korea. Until SulphCo KorAsia accepts in writing the results of the pilot plant, the $550,000 is refundable at their option. The Company has agreed to receive the remaining payment of $450,000 within seven days after the first commercial license agreement for the Sonocracking™ technology between the Company and a Korean refining company, provided that SulphCo KorAsia uses the funds for continued marketing activities regarding the Sonocracking technology in Korea.

The Company has had planned to spend approximately $25.5 million for the production of equipment and building for the Fujairah project. Through March 31, 2006 $5.5 million has been expended.

There are various claims and lawsuits pending against the Company arising in the normal course of the Company’s business. Although the amount of liability at March 31, 2006, cannot be ascertained, management is of the opinion that any resulting liability will not materially affect the Company’s financial position. We have and will continue to devote significant resources to our defense, as necessary.

12.           Related Party Transactions

The CEO was paid $90,000 during the quarter, under a consulting agreement. The current agreement is set to terminate on July 1, 2006.

See Note 10 for share-based payments to Michael Applegate, an officer.

Dr. Rudolf Gunnerman personally granted to Mr. Kirk Schumacher, upon his termination December 28, 2004, an option to acquire 100,000 shares of the Company’s Common Stock owned by Dr. Gunnerman at an exercise price of $0.55 per share. Those 100,000 options were exercised in February 2006. As Dr. Gunnerman is the Chairman, CEO, and controlling shareholder of the Company, the Company recognized an expense in 2004 of $555,000, the difference between the exercise price of the option and the market price on the date of grant, on December 28, 2004. Mr. Schumacher takes the position that the options received in 2004 were not for compensation for tax purposes.  The Company is maintaining an accrued liability for payroll taxes until it is reasonably certain of its position.

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In March 2006, an interest payment of $10,000 was made to the Chairman and CEO in connection with an outstanding note payable.

The Company has a consulting agreement with Peak One Consulting, Inc., a company owned 100% by a Director Richard Masica, which was paid $29,311 in fees for management and technical consulting and reimbursed $2,784 in travel related expenses in the first quarter of 2006.

The Company has a consulting arrangement with a Director, Michael Heffner, who was reimbursed $5,216 in travel related expenses, and technical consulting fees of $30,000 were accrued for his services in the first quarter of 2006.

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

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. As revenue increases and prior tax losses are offset, the deferred tax estimate will require revision.

In 2005, we received $550,000 from SulphCo KorAsia (formerly known as OIL-SC, Ltd.), pursuant to our Equipment Sale and Marketing Agreement. As this amount is fully refundable if the pilot plant does not meet the agreed specifications, no portion of the purchase price has been or will be recorded as revenue in our financial statements until the pilot plant meets all agreed specifications. We do not have an equity interest in SulphCo KorAsia.

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Three months ended March 31, 2006 compared to the three months ended March 31, 2005

Research and Development Expenses

For the three months ended March 31, 2006, we incurred approximately $5.6 million in expenses related to research and development of our Sonocracking™ technology. This compares to approximately $400,000 in expenses for the three months ended March 31, 2005 as reclassified (see note 1 of the financial statements). Approximately $5.1 million was spent on the test facility in Fujairah, UAE. The remaining increase of approximately $100,000 reflects our ongoing efforts to transition from research and development activities into commercial production.

For the three months ended March 31, 2006, approximately $212,000 represents amounts paid to our engineers and other research and development employees as wages and related benefits and for design and testing of our Sonocracker™ units. Approximately $63,000 was paid for the procurement of control panels, probes, centrifuges, and generators related to the 2,000 bbl/day unit shipped to SulphCo KorAsia and the 5,000 and 15,000 bbl/day units currently located at our Sparks, Nevada facility. The remainder of our research and development costs relate to recurring monthly expenses related to the maintenance of our warehouse facilities.

In addition to the construction of the test facility in Fujairah, we expect our research and development expenses to continue at their current level until we successfully transition into generating sustained revenue. Thereafter, research and development will continue as needed to enhance our technology. We expect to incur an additional $15 million in associated with the test facility in Fujairah.

Selling, General and Administrative Expenses

For the three months ended March 31, 2006, we incurred approximately $3,475,000 in selling, general and administrative expenses. This compares to approximately $1,220,000 for the same period last year.

Legal fees were approximately $1,150,000 for the three months ended March 31, 2006, reflecting an increase of approximately $1,055,000. This increase was primarily due to litigation fees relating to the discovery phase of lawsuits against us. We expect to continue to incur significant litigation fees relating to these lawsuits through 2006.

Consulting fees, payroll and related expenses were approximately $1.3 million for the three months ended March 31, 2006, reflecting an increase of approximately $740,000. Salaries in these periods include the grant of 50,000 shares in each such quarter to new officers, $636,000 in 2006 and $204,000 in 2005. The increase in the amounts recorded for these grants including the related payroll taxes was approximately $433,000, which was due to the increase in the value of our stock. Otherwise our consulting fees, payroll and related expenses increased 90% which reflect the increased number and quality of our work force.

Travel and travel related expenses were approximately $280,000 for the three months ended March 31, 2006, reflecting an increase of approximately $174,000. This increase was due to meetings of the Board of Directors, meetings with the European manufacturers of our equipment, and meetings with our joint venture partner in Fujairah, United Arab Emirates.

Director fees were approximately $440,000 for the three months ended March 31, 2006, reflecting an increase of approximately $166,000, from the first quarter of 2005. Director fees in each of these periods represent the issuance of 50,000 shares in each such quarter to new directors. Therefore, the increase in the amount recorded for these fees was due to the increase in the value of our stock.

The remainder of the amounts incurred relate to normal recurring operating expenses such as lease expense, utilities, marketing, and investor relations.

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Interest Expense

Interest expense was approximately $125,000 for the three months ended March 31, 2006, reflecting an increase of approximately $54,000, or 43% from the first quarter of 2005. Of the increase, approximately $30,000 is due to the interest on the late registration (see “Late Registration” below). In addition, the interest rate on our $7 million note payable to Dr. Rudolf Gunnerman increased in the first quarter of 2006 as it is indexed to a LIBOR rate.

Late Registration

In accordance with the terms of our 2004 private placement, we accrued late fees of approximately $438,000, during the first quarter of 2005, due to a delay in the effective date of our registration statement filed with the SEC. Our registration statement was declared effective by the SEC in June 2005. Accordingly, we have not accrued any amounts for the first quarter of 2006 other than interest of approximately $30,000 which accrues on the unpaid amount at the rate of 18% per annum. However, as of the date of this report no formal demands have been made by investors to pay these fees.

Depreciation and Amortization

For the three months ended March 31, 2006, we expended approximately $109,000 for equipment and to maintain exclusivity for the sale and/or licensing of our Sonocracking™ technology in the United States and abroad. Our depreciation and amortization expense related to these additions, and to our previously capitalized equipment and rights, for the three months ended March 31, 2006 was approximately $63,000, reflecting an increase over the first quarter of 2005 of approximately $19,000 or 43%. We expect to continue our pursuit of exclusive distribution and licensing of our technology and purchasing equipment for the manufacture and upgrading of our Sonocracking technology.

Loss on Impairment of Asset

In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long Lived Assets we determined in the first quarter of 2005 that a previously capitalized prototype no longer reflected the value of our current test unit resulting in an impairment loss of approximately $234,000. There was no comparable item in the first quarter of 2006.

Net Loss

We incurred a net loss of approximately $9.54 million for the three-month period ending March 31, 2006, compared to approximately $2.32 million for the comparable three-month period in 2005. The increase in net loss in the 2006 period primarily reflects the construction of a test facility in Fujairah, UAE, which has been expensed as research and development in 2006, as indicated above under the heading “Research and Development.”

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Liquidity and Capital Resources

As of March 31, 2006, we had approximately $35 million in available cash reserves, which includes $27 million received from the March 2006 private placement described below under “Recent Financing Activities.” Also included in this amount is approximately $8 million received in the first quarter of 2006 from the exercise of warrants and investment rights sold to investors in our 2004 private placement.

In December 2005, we formed Fujairah Oil Technology, LLC, a 50/50 joint venture with the Government of Fujairah, one of the United Arab Emirates. Under the terms of the joint venture, SulphCo is responsible for contributing its Sonocracking unit, and the facility that houses it. Operation and maintenance of the Fujairah facility is the responsibility of the joint venture. Until Fujairah Oil Technology, LLC generates revenues, operating expenses of the Fujairah Sonocracking facility are expected to be funded from capital contributions of the Company.

Additional funding requirements during the next 12 months may arise to fund the completion of the test facility and/or the joint venture, or other development activities.

Recent Financing Activities

On March 29, 2006, we completed a private placement to a small number of accredited investors for the sale of 4,000,000 units, each unit consisting of one share of the Company’s Common Stock and one Warrant to purchase one share of Common Stock. Each unit was sold at a price of $6.805 per share, resulting in gross proceeds at closing of $27.2million. The Warrants are exercisable, in whole or in part, at a fixed price equal to $6.805 per share, and are exercisable for a period of 18 months following their issuance. Up to an additional $27.2 million may be generated upon exercise of warrants by these investors. We filed a registration statement with the SEC registering the resale of common stock acquired by these investors.

In 2004 we conducted two private placements with institutional and other third party investors for the sale of units consisting of our common stock, warrants, and rights to acquire additional stock and warrants, generating net cash proceeds of approximately $4.6 million. An additional amount of approximately $3.8 million was generated in 2005, approximately $7.8 million was generated in the first quarter of 2006 from the exercise of outstanding rights and warrants, and up to approximately $2.6 million may be generated upon exercise of warrants and rights in the future if investors in the June 2004 private placements exercise all of the remaining outstanding warrants.

In December 2004, Dr. Gunnerman advanced $7 million to us as a loan. The loan is evidenced by a promissory note which bears interest at the rate of 0.5% above the 30 day “LIBOR” rate, adjusted quarterly and payable annually, and the entire principal amount is due and payable in December 2007.

We anticipate that our existing capital resources will be sufficient to fund our cash requirements through at least the next 12 months from cash presently on hand, based upon our expected levels of expenditures and anticipated needs during this period. The extent and timing of our future capital requirements will depend primarily upon the rate of our progress in the development and commercialization of our technologies, including the successful implementation of our venture with Fujairah Oil Technology, LLC and other third parties, and the timing of future customer orders.

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. Future revenues and profits from Fujairah Oil Technology, LLC are dependent upon the successful implementation of our Sonocracking technology.

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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.

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 “Part II, Item 1A. Risk Factors” section contained in the Company’s Form 10-Q and the first Form 10-Q/A for the quarter ended March 31, 2006 and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”). These documents are available through our web site, http://www.sulphco.com, or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (“EDGAR”) at http://www.sec.gov.

Item 4.   Controls and Procedures

The Company strives to maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods and that such information is accumulated and communicated to management to allow timely decisions on required disclosure.

After a thorough reexamination of the events that have led to the restatement, the Chief Executive Officer and Interim Chief Financial Officer believe that the Company’s disclosure controls and procedures were not effective during the period ended March 31, 2006.  There were deficiencies in the communications between previous management to the board of directors and the Audit Committee. The Company also lacked personnel with sufficient financial expertise and experience to make appropriate judgments resulting in appropriate accounting and financial reporting. The Company has attempted to address these issues as part of the transitions to new management. The Company has hired a new CEO and President and intends to hire additional personnel with the financial expertise it currently lacks. Our CFO resigned effective March 23, 2007 and we are actively seeking a replacement. In the interim Michael Abend our Controller is the acting CFO.

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Our management and our independent registered public accounting firm identified deficiencies in disclosure controls and procedures including the following:

·We did not have adequate controls over the accounting, review and processing of transactions involving decisions to expense or capitalize certain items involving research and development, fixed assets and patent maintenance.

·We did not have adequate transaction controls over the accounting, review and processing of liability recognition at the end of accounting periods.

·We did not have adequate controls over the accounting, review and processing of transactions involving issuances of stock and options or cash commitments.

In order to correct these material weaknesses and improve the effectiveness of our disclosure controls and procedures, management of the Company, in consultation with the Audit Committee, reviewed policies and procedures in place with a view towards supplementing existing procedures and adopting new procedures. The Company's management and Audit Committee have discussed the matters disclosed in this Item 8A with the Company's independent registered public accounting firm.

At the end of March, 2006 we began, and since such time we have subsequently completed, written policies for all areas wherein material weaknesses in disclosure controls and procedures had been identified. These were submitted for review by the Audit Committee and the Company’s registered public accounting firm in May, 2006. The accounting staff was apprised of these policies and the Chief Financial Officer was charged with assigning specific tasks to accounting personnel to execute such policies. Mangement will continue to monitor the effectiveness of the remedial actions it has designed.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6.   Exhibits

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

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

32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-OxleyAct 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: March 27, 2007	By:	/s/ Larry Ryan
		Larry Ryan
		Chief Executive Officer

By:	/s/ Michael A. Abend
	Michael A. Abend
	Interim Chief Financial Officer (Principal Financial and Accounting Officer)

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