UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
______
Amendment No. 2
[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended................................................. June 30, 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 ü 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 ü 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 ü
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Class | Outstanding at March 21, 2007 |
| | |
| Common Stock, par value $.001 | 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 June 30, 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.
PART I
Item 1. Financial Statements
SULPHCO, INC.
(A Company in the Development Stage)
BALANCE SHEETS
June 30, 2006 and December 31, 2005
(unaudited)
| | | June 30, 2006 | | December 31, 2005 | |
| | | (restated) | | | |
Current Assets: | | | | | | | |
| Cash and cash equivalents | | $ | 16,310,160 | | $ | 6,874,653 | |
| Loan and accrued interest receivable | | | 203,985 | | | - | |
| Prepaid expenses and other | | | 97,600 | | | 137,577 | |
| | | | | | | | |
| Total current assets | | | 16,611,745 | | | 7,012,230 | |
| | | | | | | | |
| | | | | | | | |
Property and Equipment (net of accumulated depreciation of $936,818) | | | 327,139 | | | 397,416 | |
| | | | | | | | |
Other Assets | | | | | | | |
| Intangible assets (net of accumulated amortization of $30,310) | | | 451,540 | | | 355,218 | |
| Investment in Joint Venture | | | 123,375 | | | 139,550 | |
| Deposits | | | 48,672 | | | 140,822 | |
| Deferred tax asset (net of valuation allowance of $16,703,199) | | | - | | | - | |
| | | | | | | | |
| Total other assets | | | 623,587 | | | 635,590 | |
| | | | | | | | |
| Total assets | | $ | 17,562,471 | | $ | 8,045,236 | |
| | | | | | | | |
Current Liabilities | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 2,921,840 | | $ | 779,413 | |
| Refundable deposit | | | 550,000 | | | 550,000 | |
| Accrued fees and interest | | | 1,115,266 | | | 1,035,572 | |
| Related party note payable | | | - | | | 500,000 | |
| | | | | | | | |
| Total current liabilities | | | 4,587,106 | | | 2,864,985 | |
| | | | | | | | |
Long Term Related Party Note Payable | | | 5,000,000 | | | 7,000,000 | |
| | | | | | | | |
| Total liabilities | | | 9,587,106 | | | 9,864,985 | |
| | | | | | | | |
Commitments and Contingencies | | | - | | | - | |
| | | | | | | | |
| | | | | | | | |
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) | | | | | | | |
| 72,520,910 shares issued and outstanding at March 31, 2006 | | | 72,521 | | | 60,537 | |
| Paid in capital | | | 68,122,339 | | | 30,604,342 | |
| Stock subscriptions receivable | | | (744,500 | ) | | (744,500 | ) |
| Deficit accumulated during the development stage | | | (59,471,539 | ) | | (31,740,128 | ) |
| Accumlated other comprehensive loss | | | (3,456 | ) | | - | |
| | | | | | | | |
| Total stockholders' equity (deficiency) | | | 7,975,365 | | | (1,819,749 | ) |
| | | | | | | | |
| Total liabilities and stockholders' equity (deficiency) | | $ | 17,562,471 | | $ | 8,045,236 | |
The Accompanying Notes are an Integral Part of the Financial Statements
SULPHCO, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS
For the Three and Six Months ended June 30, 2006 and 2005 and from Inception
(unaudited)
| | | Three Months Ended | | Six Months Ended | | | |
| | | June | | June | | Inception | |
| | | 2006 | | 2005 | | 2006 | | 2005 | | to date | |
| | | (restated) | | | | (restated) | | | | (restated) | |
Revenue | | | | | | | | | | | | | | | | |
| Sales | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 42,967 | |
| | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | |
| Selling, general, and administrative expenses | | | (4,632,823 | ) | | (1,447,363 | ) | | (8,107,533 | ) | | (2,667,388 | ) | | (36,072,799 | ) |
| Research and development expenses: | | | | | | | | | | | | | | | | |
| Fujairah test facility | | | (12,234,653 | ) | | - | | | (17,352,293 | ) | | - | | | (17,352,293 | ) |
| Other | | | (1,651,402 | ) | | (522,180 | ) | | (2,265,832 | ) | | (977,297 | ) | | (4,374,486 | ) |
| Loss on investment in joint venture | | | (11,944 | ) | | - | | | (12,720 | ) | | - | | | (12,720 | ) |
| Loss on disposal of asset | | | (423 | ) | | - | | | (423 | ) | | - | | | (222,134 | ) |
| Loss on impairment of asset | | | - | | | - | | | - | | | (233,900 | ) | | (233,900 | ) |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | (18,531,245 | ) | | (1,969,543 | ) | | (27,738,801 | ) | | (3,878,585 | ) | | (58,268,332 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (18,531,245 | ) | | (1,969,543 | ) | | (27,738,801 | ) | | (3,878,585 | ) | | (58,225,365 | ) |
| | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
| Interest income | | | 194,440 | | | 54,576 | | | 247,533 | | | 93,954 | | | 498,132 | |
| Interest expense | | | (114,947 | ) | | (79,213 | ) | | (240,146 | ) | | (149,963 | ) | | (984,066 | ) |
| Late registration fees | | | - | | | (322,240 | ) | | - | | | (760,240 | ) | | (760,240 | ) |
| | | | | | | | | | | | | | | | | |
| Loss before taxes | | | (18,451,752 | ) | | (2,316,420 | ) | | (27,731,414 | ) | | (4,694,834 | ) | | (59,471,539 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax benefit (provision) | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | |
Net loss | | $ | (18,451,752 | ) | $ | (2,316,420 | ) | $ | (27,731,414 | ) | $ | (4,694,834 | ) | $ | (59,471,539 | ) |
| | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | | | | | | | |
| Foreign currency translation loss | | | (3,456 | ) | | - | | | (3,456 | ) | | - | | | (3,456 | ) |
| | | | | | | | | | | | | | | | | |
Net comprehensive loss | | $ | (18,455,208 | ) | $ | (2,316,420 | ) | $ | (27,734,870 | ) | $ | (4,694,834 | ) | $ | (59,474,995 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Loss per share - basic and diluted | | $ | (0.25 | ) | $ | (0.04 | ) | $ | (0.40 | ) | $ | (0.08 | ) | $ | (1.48 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average shares - basic and diluted | | | 72,520,910 | | | 56,627,718 | | | 68,937,781 | | | 56,578,552 | | | 40,256,027 | |
The Accompanying Notes are an Integral Part of the Financial Statements
SULPHCO, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005 and from Inception
(unaudited)
| | | Six Months Ended | | | |
| | | June 30 | | Inception | |
| | | 2006 | | 2005 | | to date | |
Cash Flows From Operating Activities | | (restated) | | | | (restated) | |
| Net loss | | $ | (27,731,414 | ) | $ | (4,694,834 | ) | $ | (59,471,539 | ) |
| Adjustments to reconcile net loss to cash used | | | | | | | | | | |
| in operating activities: | | | | | | | | | | |
| | | | | | | | | | | |
| Depreciation & amortization | | | 123,039 | | | 107,512 | | | 1,008,405 | |
| Stock issued for services | | | 2,292,513 | | | 1,091,500 | | | 9,662,030 | |
| Stock issued for interest expense | | | - | | | - | | | 296,000 | |
| Contribution from stockholder | | | - | | | - | | | 555,000 | |
| Loss from joint venture | | | 12,720 | | | - | | | 12,720 | |
| Losses on disposal and impairment of assets | | | 423 | | | 233,900 | | | 456,034 | |
| Deposit used for expense | | | 100,000 | | | | | | 100,000 | |
| (Increase) decrease in receivables | | | (3,384 | ) | | 317,800 | | | (3,384 | ) |
| (Increase) decrease in prepaid expenses | | | 39,376 | | | 12,806 | | | (98,201 | ) |
| Increase (decrease) in accounts payable | | | | | | | | | | |
| and accrued liabilities | | | 2,136,820 | | | (320,517 | ) | | 2,916,233 | |
| Increase in refundable deposit | | | - | | | 500,000 | | | 550,000 | |
| Increase in accrued fees and interest | | | 79,811 | | | 760,240 | | | 900,796 | |
| | | | | | | | | | | |
| Net cash used in operating activities | | | (22,950,096 | ) | | (1,991,593 | ) | | (43,115,906 | ) |
| | | | | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | | | |
| Advances for loan receivable | | | (200,000 | ) | | - | | | (200,000 | ) |
| Purchase of property and equipment | | | (40,298 | ) | | (238,186 | ) | | (1,161,386 | ) |
| Investments in joint ventures and subsidiaries | | | - | | | - | | | (361,261 | ) |
| Payment of deposits | | | (7,850 | ) | | 10,000 | | | (148,672 | ) |
| Investments in intangible assets | | | (103,602 | ) | | (125,982 | ) | | (492,084 | ) |
| | | | | | | | | | | |
| Net cash used in investing activities | | | (351,750 | ) | | (354,168 | ) | | (2,363,403 | ) |
| | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | |
| Net proceeds from issuance of stock | | | 35,237,353 | | | - | | | 50,999,109 | |
| 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 | | | (2,500,000 | ) | | - | | | (3,250,000 | ) |
| 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 | | | 32,737,353 | | | - | | | 61,789,469 | |
| | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 9,435,507 | | | (2,345,761 | ) | | 16,310,160 | |
| | | | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 6,874,653 | | | 9,872,839 | | | - | |
| | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 16,310,160 | | $ | 7,527,078 | | $ | 16,310,160 | |
| | | | | | | | | | | |
Supplemental Information and non cash transactions | | | | | | | | | | |
| | | | | | | | | | | |
| Total interest payments included in operations | | $ | 160,335 | | $ | 149,963 | | | | |
| | | | | | | | | | | |
| The Company paid no income taxes during the three months ended June 30, 2006 and 2005. | | | | | | | | | | |
| | | | | | | | | | | |
| The Company had the following noncash investing and financing activities in 2006: | | | | | | | | | | |
| Incurred fees payable for issuing securities | | $ | 330,098 | | | | | | | |
| Issued stock in exchange for a payable | | | 330,215 | | | | | | | |
| Incurred a payable for intangible assets | | | 5,607 | | | | | | | |
The Accompanying Notes are an Integral Part of the Financial Statements
SULPHCO, INC.
(A Company in the Development Stage)
NOTES TO THE INTERIM FINANCIAL STATEMENTS
June 30, 2006 (unaudited)
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, 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 and second quarters of 2006 as reflected in the accompanying financial statements are as follows:
SulphCo, Inc. | | | | | | | |
(a Development Stage Company) | | | | | | | |
Balance Sheet (unaudited) | | June 30, 2006 | | Adjustments | | June 30, 2006 | |
| | | (as reported) | | | | (as restated) | |
Current Assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 16,310,160 | | $ | - | | $ | 16,310,160 | |
| Loan and accrued interest receivable | | | 203,985 | | | - | | | 203,985 | |
| Prepaid expenses and other | | | 97,600 | | | - | | | 97,600 | |
| Total current assets | | | 16,611,745 | | | - | | | 16,611,745 | |
Property and Equipment (net of accumulated depreciation of $936,818) | | | 16,208,194 | | | (15,881,055 | ) | | 327,139 | |
Other Assets | | | | | | | | | | |
| Intangible assets (net of accumulated amortization of $30,310) | | | 451,540 | | | - | | | 451,540 | |
| Investment in Joint Venture | | | 947,740 | | | (824,365 | ) | | 123,375 | |
| Deposits | | | 48,672 | | | - | | | 48,672 | |
| Deferred tax asset (net of valuation allowance of $16,703,199) | | | - | | | - | | | - | |
| Total other assets | | | 1,447,952 | | | (824,365 | ) | | 623,587 | |
| | | | | | | | | | | |
| Total assets | | $ | 34,267,891 | | $ | (16,705,420 | ) | $ | 17,562,471 | |
| | | | | | | | | | | |
Current Liabilities | | | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 2,921,840 | | $ | - | | $ | 2,921,840 | |
| Refundable deposit | | | 550,000 | | | - | | | 550,000 | |
| Accrued fees and interest | | | 1,115,266 | | | - | | | 1,115,266 | |
| Related party note payable | | | - | | | - | | | - | |
| Total current liabilities | | | 4,587,106 | | | - | | | 4,587,106 | |
| | | | | | | | | | | |
Long Term Related Party Note Payable | | | 5,000,000 | | | - | | | 5,000,000 | |
| Total liabilities | | | 9,587,106 | | | - | | | 9,587,106 | |
Commitments and Contingencies | | | - | | | - | | | - | |
| | | | | | | | | | | |
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) 72,520,910 shares issued and outstanding | | | 72,521 | | | - | | | 72,521 | |
| Paid in capital | | | 68,301,101 | | | (178,763 | ) | | 68,122,339 | |
| Stock subscriptions receivable | | | (744,500 | ) | | - | | | (744,500 | ) |
| Deficit accumulated during the development stage | | | (42,944,246 | ) | | (16,527,293 | ) | | (59,471,539 | ) |
| Accumlated other comprehensive loss | | | (4,091 | ) | | 635 | | | (3,456 | ) |
| | | | | | | | | | | |
| Total stockholders' equity (deficiency) | | | 24,680,785 | | | (16,705,420 | ) | | 7,975,365 | |
| | | | | | | | | | | |
| Total liabilities and stockholders' equity (deficiency) | | $ | 34,267,891 | | $ | (16,705,420 | ) | $ | 17,562,471 | |
SulphCo, Inc. | | | | | | | |
(a Develoment Stage Company) | | | | | | | |
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 | | | (4,632,823 | ) | | - | | | (4,632,823 | ) |
| Research and development expenses: | | | | | | | | | | |
| Fujairah test facility | | | - | | | (12,234,653 | ) | | (12,234,653 | ) |
| Other | | | (1,651,402 | ) | | - | | | (1,651,402 | ) |
| Loss on investment in joint venture | | | (836,944 | ) | | 825,000 | | | (11,944 | ) |
| Loss on disposal of asset | | | (423 | ) | | - | | | (423 | ) |
| Loss on impairment of asset | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Total operating expenses | | | (7,121,592 | ) | | (11,409,653 | ) | | (18,531,245 | ) |
| | | | | | | | | | | |
| Loss from operations | | | (7,121,592 | ) | | (11,409,653 | ) | | (18,531,245 | ) |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | |
| Interest income | | | 194,440 | | | - | | | 194,440 | |
| Interest expense | | | (114,947 | ) | | - | | | (114,947 | ) |
| Late registration fees | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Loss before taxes | | | (7,042,099 | ) | | (11,409,653 | ) | | (18,451,752 | ) |
| | | | | | | | | | | |
| Income tax benefit (provision) | | | - | | | - | | | - | |
| | | | | | | | | | | |
Net loss | | $ | (7,042,099 | ) | $ | (11,409,653 | ) | $ | (18,451,752 | ) |
| | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | |
| Foreign currency translation loss | | | (3,456 | ) | | - | | | (3,456 | ) |
| | | | | | | | | | | |
Net comprehensive loss | | $ | (7,045,555 | ) | $ | (11,409,653 | ) | $ | (18,455,208 | ) |
| | | | | | | | | | | |
| Loss per share - basic and diluted | | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.25 | ) |
| | | | | | | | | | | |
| Weighted average shares - basic and diluted | | | 72,520,910 | | | 72,520,910 | | | 72,520,910 | |
SulphCo, Inc. | | | | | | | |
(a Develoment Stage Company) | | | | | | | |
Statement of Operations (unaudited) | | | | | | | |
| | | Six Months Ended June 30, 2006 | | Adjustments | | Six Months Ended June 30, 2006 | |
| | | (as reported) | | | | (as restated) | |
Revenue | | | | | | | | | | |
| Sales | | $ | - | | $ | - | | $ | - | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | |
| Selling, general, and administrative expenses | | | (8,107,533 | ) | | - | | | (8,107,533 | ) |
| Research and development expenses: | | | | | | | | | | |
| Fujairah test facility | | | - | | | (17,352,293 | ) | | (17,352,293 | ) |
| Other | | | (2,265,832 | ) | | - | | | (2,265,832 | ) |
| Loss on investment in joint venture | | | (837,720 | ) | | 825,000 | | | (12,720 | ) |
| Loss on disposal of asset | | | (423 | ) | | - | | | (423 | ) |
| Loss on impairment of asset | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Total operating expenses | | | (11,211,508 | ) | | (16,527,293 | ) | | (27,738,801 | ) |
| | | | | | | | | | | |
| Loss from operations | | | (11,211,508 | ) | | (16,527,293 | ) | | (27,738,801 | ) |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | |
| Interest income | | | 247,533 | | | - | | | 247,533 | |
| Interest expense | | | (240,146 | ) | | - | | | (240,146 | ) |
| Late registration fees | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Loss before taxes | | | (11,204,121 | ) | | (16,527,293 | ) | | (27,731,414 | ) |
| | | | | | | | | | | |
| Income tax benefit (provision) | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Net loss | | $ | (11,204,121 | ) | $ | (16,527,293 | ) | $ | (27,731,414 | ) |
| | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | |
| Foreign currency translation loss | | | (3,456 | ) | | - | | | (3,456 | ) |
| | | | | | | | | | | |
| Net comprehensive loss | | $ | (11,207,577 | ) | $ | (16,527,293 | ) | $ | (27,734,870 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loss per share - basic and diluted | | $ | (0.16 | ) | $ | (0.24 | ) | $ | (0.40 | ) |
| | | | | | | | | | | |
| Weighted average shares - basic and diluted | | | 68,937,781 | | | 68,937,781 | | | 68,937,781 | |
SulphCo, Inc. | | | | | | | |
(a Develoment Stage Company) | | | | | | | |
Statement of Operations (unaudited) | | | | | | | |
| | | From Inception | | Adjustments | | From Inception | |
| | | (as reported) | | | | (as restated) | |
Revenue | | | | | | | | | | |
| Sales | | $ | 42,967 | | $ | - | | $ | 42,967 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Expenses | | | | | | | | | | |
| Selling, general, and administrative expenses | | | (36,072,799 | ) | | - | | | (36,072,799 | ) |
| Research and development expenses: | | | | | | | | | | |
| Fujairah test facility | | | - | | | (17,352,293 | ) | | (17,352,293 | ) |
| Other | | | (4,374,486 | ) | | - | | | (4,374,486 | ) |
| Loss on investment in joint venture | | | (837,720 | ) | | 825,000 | | | (12,720 | ) |
| Loss on disposal of asset | | | (222,134 | ) | | - | | | (222,134 | ) |
| Loss on impairment of asset | | | (233,900 | ) | | - | | | (233,900 | ) |
| Total operating expenses | | | | | | | | | | |
| | | | (41,741,039 | ) | | (16,527,293 | ) | | (58,268,332 | ) |
| Loss from operations | | | | | | | | | | |
| | | | (41,698,072 | ) | | (16,527,293 | ) | | (58,225,365 | ) |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | |
| Interest income | | | 498,132 | | | - | | | 498,132 | |
| Interest expense | | | (984,066 | ) | | - | | | (984,066 | ) |
| Late registration fees | | | (760,240 | ) | | - | | | (760,240 | ) |
| | | | | | | | | | | |
| Loss before taxes | | | (42,944,246 | ) | | (16,527,293 | ) | | (59,471,539 | ) |
| | | | | | | | | | | |
| Income tax benefit (provision) | | | - | | | - | | | - | |
| | | | | | | | | | | |
| Net loss | | $ | (42,944,246 | ) | $ | (16,527,293 | ) | $ | (59,471,539 | ) |
| | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | |
| Foreign currency translation loss | | | (3,456 | ) | | - | | | (3,456 | ) |
| | | | | | | | | | | |
| Net comprehensive loss | | $ | (42,947,702 | ) | $ | (16,527,293 | ) | $ | (59,474,995 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loss per share - basic and diluted | | $ | (1.07 | ) | $ | (0.41 | ) | $ | (1.48 | ) |
| | | | | | | | | | | |
| Weighted average shares - basic and diluted | | | 40,256,027 | | | 40,256,027 | | | 40,256,027 | |
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 | | June, 2006 | |
| | | | | | | | | | | | | | | (restated) | | | (restated) | |
Sales, general, & administrative expenses | | | | | | | | | | | | | | | | | | | |
| Original filing | | $ | 1,434,115 | | $ | 1,660,431 | | $ | 1,070,379 | | $ | 2,479,202 | | $ | 3,770,144 | | $ | 4,632,823 | |
| 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 | | $ | 4,632,823 | |
| | | | | | | | | | | | | | | | | | | | |
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 | | | 12,234,653 | |
| Reclassified | | $ | 400,124 | | $ | 522,180 | | $ | 930,384 | | $ | 665,327 | | $ | 514,429 | | $ | 12,234,653 | |
| 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 $50,000 per month through May 15, 2006. A total of $150,000 was advanced through May, 2006. An additional $50,000 was advanced June 6, 2006, with a revision to the loan agreement that the full $200,000 in advances and related interest would be immediately repaid from revenues or from proceeds of any equity financings. Interest accrues at prime rate plus 1%. 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.
Prepaid expenses include $46,152 in prepaid insurance, which is amortized over the duration of the policies, and a $40,000 payment to RWG, Inc. for July 2006 pursuant to the consulting agreement as specified in Note 12. The insurance policies expire in 2006 and 2007.
The following is a summary of property, plant, and equipment - at cost, less accumulated depreciation:
| | | June 30, 2006 | | Adjustments | | June 30,2006 | |
| | | (as reported) | | | | (as restated) | |
| Construction Work-in-Progress | | $ | 15,881,055 | | $ | (15,881,055 | ) | $ | 0 | |
| Equipment | | | 923,884 | | | - | | | 923,884 | |
| Computers | | | 199,582 | | | - | | | 199,582 | |
| Office furniture | | | 57,116 | | | - | | | 57,116 | |
| Leasehold improvements | | | 83,375 | | | - | | | 83,375 | |
| | | | 17,145,012 | | | (15,881,055 | ) | | 1,263,957 | |
| Less: Accumulated depreciation | | | (936,818 | ) | | - | | | (936,818 | ) |
| Total | | $ | 16,208,194 | | $ | (15,881,055 | ) | $ | 327,139 | |
Depreciation (as originally reported and as restated) expense was $51,033 and $108,678 for the three and six ended June 30, 2006, respectively, and $59,642 and $101,563 for the three and six months ended June 30, 2005, respectively.
| 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 six months ended June 30, 2006 its financial activities consisted primarily of leasing office space and acquiring leasehold improvements and office furniture and equipment. The lease commenced March 15, 2006. There was a loss of 93,466 Dirhams of which 50% ($12,720) 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 expensed the entire investment in the building as research and development expense.
The test facility 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 June 30, 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, June 30, 2006: | | (unaudited) | |
| Current assets | | $ | 132,377 | |
| Depreciable assets (net) | | | 112,740 | |
| Other assets | | | 1,633 | |
| Total assets | | $ | 246,750 | |
| | | | | |
| Liabilities | | $ | - | |
| Members’ equity | | $ | 246,750 | |
| | | | | |
Operating Statement, Six Months Ended June 30, 2006: | | | | |
| Revenue | | $ | - | |
| Operating expenses | | | (22,043 | ) |
| Non-operating expense | | | (3,397 | ) |
| Net loss | | $ | (25,440 | ) |
| | | | | |
| Operating Statement, Three Months Ended June 30, 2006: | | | | |
| Revenue | | $ | - | |
| Operating expenses | | | (20,491 | ) |
| Non-operating expense | | | (3,397 | ) |
| Net loss | | $ | (23,888 | ) |
A foreign currency translation loss of $3,456 has also been recognized as other comprehensive loss relative to this investment.
Based on the restatement as further explained in Footnote 1, there is uncertainty that the company can recover its investment in the LLC.
The Company had the following deposits as of June 30, 2006: $36,822 on the lease of facilities in Nevada, and $11,850 for architectural design of future office space in Nevada.
The Company’s note payable as of June 30, 2006 is as follows:
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. On May 15, 2006, under Board approval, the Company paid $2,000,000 in principal on the note. Also the accrued interest through May 15, 2006 of $133,809 was paid. As of June 30, 2006, interest payable of $20,057 has been accrued on this note at the adjusted rate for the quarter of 5.32563%. Beginning July 1, 2006 the rate was adjusted to 5.84625%.
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 six months ended June 30, 2006:
Additional Investment Rights and Warrants for 7,866,612 shares were exercised in 2006 through June 30, 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 covering the resale of the shares of common stock issued at closing and shares issuable upon exercise of warrants. The registration statement was declared effective by the SEC on June 23, 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.
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 $120,499 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.
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 7,260,390 and 10,133,106 shares of common stock were not included in the June 30, 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. 123 R.
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 valued at $8.80 per share, the closing price on February 6, 2006, 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 the Company’s 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 the Company’s common stock at $6.00 per share and are fully vested at project completion, 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.
On June 19, 2006 the stockholders of the Company approved the 2006 Stock Option Plan (“Plan”), which authorizes the granting of options for up to 2,000,000 shares of the Company’s common stock. The Plan is administered by an Option Committee comprised of three independent directors. Effective May 23, 2006, subject to stockholder approval of the Plan, the Option Committee granted an option for 125,000 shares to Vice Chairman of the Board Robert van Maasdijk and an option for 1,000,000 shares to Chairman and CEO Rudolf Gunnerman. Each option has a term of three years and an exercise price of $9.03 per share.
Robert van Maasdijk’s option was valued at $687,500 based on the Black-Scholes valuation model using the assumptions described below.
Dr. Gunnerman’s option provides that he may not exercise it until the Company has reported at least $50 million in annual revenues or there is a “change in control” of the Company as defined in the Plan. This option was valued at $3.72 million based on the Black-Scholes valuation model using the assumptions described below. This is restated from the amount of $5.5 million previously reported in the quarter ending June 30, 2006, as the term of the option previously used in the calculation was for the full term of the option. It should have been for the expected term of 646 days based upon the history of employees of the Company exercising options.
For purposes of determining the period over which Dr. Gunnerman’s option will be expensed, the Company had made the assumption in the second quarter of 2006 that it would generate at least $50 million in revenue by the end of the first quarter of 2007. For the second quarter of 2006, the option value is expensed pro-rata over the period from the effective grant date of June 19, 2006, to March 31, 2007, the implicit vesting period. In the second quarter of 2006, $212,000 was expensed based on the value previously calculated. The second quarter expense as recalculated is $144,000. The difference of $68,000 is considered immaterial enough to leave the second quarter as reported and the third quarter amount was adjusted accordingly.
The following tables describe the assumptions used in the Black-Scholes calculations:
For options fully vested when issued:
| | Nardi | Mustang | van Maasdijk |
| Dates of options | 2/28/06 & 3/31/06 | 3/29/06 | 6/19/06 |
| Term | One year | to 4/1/10 | to 5/22/09 |
| Expected volatility | 129% - 131% | 162% | 147% |
| Expected dividends | None | None | None |
| Risk-free interest rate | 5% | 5% | 5.2% |
| Discount for post-vesting restrictions | None | None | None |
| Vesting date | 2/28/2006 | 3/31/2006 | 9/29/2006 |
For Dr. Gunnerman’s option:
| Date of option | 6/19/2006 |
| Term | to 5/22/09 |
| Expected term used to calculate value | 646 Days |
| Expected volatility | 117% |
| Expected dividends | None |
| Risk-free interest rate | 5.2% |
| Discount for post-vesting restrictions | None |
| 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 three U.S. accounts, two checking accounts and a money market account on deposit with two financial institutions, which exceed federally insured limits by approximately $16 million at June 30, 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 June 30, 2006 the Company had a $550,000 refundable deposit in connection with an agreement with KorAsia (formerly OIL-SC) for a pilot plant in South Korea. Until 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 KorAsia uses the funds for continued marketing activities regarding the Sonocracking technology in Korea.
The Company had planned to spend approximately $20 million for the production of equipment for the Fujairah project. Through June 30, 2006 $15.9 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 June 30, 2006, cannot be ascertained, management is of the opinion that these claims and lawsuits 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 |
Under agreements entered into on July 1, 2004, and July 1, 2005, the Company was obligated to pay a consulting fee of $480,000 annually to RWG, Inc., a company wholly owned by Dr. Rudolf Gunnerman, the Chairman and CEO. Effective November 1, 2004, this amount was reduced by mutual agreement from $40,000 to $30,000 per month until the Company received substantial additional funds. On May 8, 2006, the Company’s Board of Directors approved the reinstatement of RWG, Inc.’s consulting fees to $40,000 per month effective April 1, 2006. Under the agreement $90,000 and $120,000, respectively, were paid during the first and second quarters of 2006. The agreement terminated on July 1, 2006, and on July 5, 2006 the Board of Directors approved a new agreement effective July 1, 2006, wherein the Company is obligated to pay RWG, Inc. $40,000 per month through June 30, 2007. Under the new agreement, RWG, Inc. is also entitled to receive amounts it previously waived under prior engagement agreements, totaling $170,000. This was paid in June, 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.
The Company had a consulting agreement with Peak One Consulting, Inc., a company wholly-owned by Director Richard Masica, which was paid $29,711 in fees for management and technical consulting and reimbursed $2,784 in travel related expenses in the first half of 2006.
The Company had a consulting arrangement with a Director, Michael Heffner, who was paid $5,216 in travel related expense reimbursements and $48,871 in technical consulting fees, which were accrued in the first half of 2006.
The Company had a short-term note payable due to the Chairman and CEO Dr. Rudolf Gunnerman in the amount of $500,000. The note carried an annual interest rate of 8%, payable quarterly, and matured on the earlier of December 30, 2006, or upon the demand of Dr. Gunnerman. The note was paid in full on May 15, 2006. Interest of $10,000 was paid for the first quarter of 2006 and $5,000 for the second quarter when paid in full.
See Note 7 for other related party debt and interest.
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. In the first half of 2006, we loaned SulphCo KorAsia $200,000 repayable when they receive income or from proceeds of any equity financings. Interest accrues at prime rate plus 1% on this loan.
Three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005
Research and Development Expenses
For the three and six months ended June 30, 2006, we incurred approximately $1.7 million and $2.3 million in expenses, respectively, related to research and development of our Sonocracking technology. This compares to approximately $500,000 and $1 million in expenses for the three and six months ended June 30, 2005, respectively, as reclassified (see note 1 of the financial statements). For the three and six months ended June 30, 2006, approximately $11.1 million and $16.3 million, respectively, was spent on the test facility in Fujairah, UAE. Approximately $1.1 million in construction of a testing unit to be utilized in Austria was also expensed in the second quarter of 2006.
For the three and six months ended June 30, 2006, approximately $183,000 and $395,000, respectively, 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. For those periods approximately $66,000 and $129,000, respectively, were incurred for the procurement of control panels, probes, centrifuges, and generators related to the ongoing research and development of our units. The remainder of our research and development costs are 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 approximately an additional $4 million in 2006 in connection with the test facility in Fujairah.
Selling, General and Administrative Expenses
For the three and six months ended June 30, 2006, we incurred approximately $4,633,000 and $8,108,000, respectively, in selling, general and administrative expenses. This compares to approximately $1,447,000 and $2,667,000, respectively, for comparable periods in 2005 as reclassified (see note 1 of the financial statements).
Legal fees were approximately $2,139,000 and $3,274,000 for the three and six months ended June 30, 2006, respectively, reflecting increases over comparable periods in 2005 of approximately $1,961,000 and $2,995,000, respectively. These increases were primarily due to litigation fees relating to the discovery phase of lawsuits against us, which discovery was completed in the second quarter of 2006. We expect to continue to incur significant litigation fees relating to these lawsuits through the end of 2006.
Consulting fees, payroll and related expenses were approximately $1.14 million and $2.45 million for the three and six months ended June 30, 2006, respectively, reflecting increases over comparable periods in 2005 of approximately $688,000 and $1,432,000, respectively. Salaries in the six month periods include grants of 50,000 shares to new officers, $636,000 in the first quarter of 2006 and $204,000 in the first quarter of 2005. In the second quarter of 2006, $212,000 in stock option expense was incurred with related payroll taxes of approximately $10,000. Excluding the stock grants and options, our consulting fees, payroll and related expenses increased 102% and 97% for the respective periods which reflect the increased number and quality of our work force.
Travel and travel related expenses were approximately $278,000 and $558,000 for the three and six months ended June 30, 2006, respectively, reflecting increases over comparable periods in 2005 of approximately $171,000 and $346,000, respectively. These increases were 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 $687,500 and $1,127,500 for the three and six months ended June 30, 2006, respectively, reflecting increases over comparable periods in 2005 of $226,500 and $393,000, respectively. Director fees in these periods represent grants to each new director of 50,000 shares of common stock each and a grant of options to Robert van Maasdijk, a director, in the second quarter of 2006. Specifically, in the first quarter of 2005, 50,000 shares valued at $273,500 were granted; in the second quarter of 2005, 100,000 shares valued at $461,000 were granted; in the first quarter of 2006, 50,000 shares valued at $440,000 were granted; and in the second quarter of 2006, options valued at $687,500 were granted to acquire 125,000 shares.
The remainder of the amounts incurred relate to normal recurring operating expenses such as lease expense, utilities, marketing, and investor relations.
Interest Expense
Interest expense was approximately $115,000 and $240,000 for the three and six months ended June 30, 2006, respectively, reflecting increases of approximately $36,000 or 45% and $90,000 or 60%, respectively, over comparable periods in 2005. Of the increases, approximately $30,000 and $60,000, respectively, are 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 both the first and second quarters of 2006 as it is indexed to a LIBOR rate. We paid $2.5 million of debt principal to Dr. Gunnerman in the second quarter of 2006, which will reduce interest expense in the future. If no decrease or increase in debt occurs in the third quarter, interest expense for that quarter will be approximately $103,000.
Late Registration
In accordance with the terms of our 2004 private placement, we accrued late fees of approximately $760,000, during the first two quarters 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 such amounts for 2006 other than interest of approximately $60,000 ($30,000 per quarter) 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 and six months ended June 30, 2006, we expended approximately $35,000 and $144,000, respectively, 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 and six months ended June 30, 2006 were approximately $60,000, and $123,000, respectively, reflecting a decrease relative to the comparable three month period in 2005 of approximately $3,000 or 5% and an increase over the comparable six month period in 2005 of approximately $16,000 or 14%. 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 either in the second quarter of 2005 or in the first two quarters of 2006.
Net Loss
We incurred net losses of approximately $18.4 million and $27.9 million for the three and six month periods ending June 30, 2006, respectively, compared to approximately $2.4 million and $4.7 million, respectively, for comparable periods in 2005. These increases in net loss in the 2006 periods primarily reflect 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.
Liquidity and Capital Resources
As of June 30, 2006 we had approximately $16.3 million in available cash reserves, which includes funds received from the March 2006 private placement described below under “Recent Financing Activities.”
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.
During the first two quarters of 2006 we incurred approximately $17.6 million of expenditures relating to the development of the Fujairah facility.
We anticipate that our existing capital resources will be sufficient to fund our cash requirements through June, 2007 from cash presently on hand, based upon our expected levels of expenditures and anticipated needs during this period. Our future capital requirements will depend primarily upon debt and equity financings, and proceeds from future exercises of outstanding warrants and options. Presently, we have no binding commitments for additional financings. 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.
Additional funding requirements during the next 12 months may arise to fund 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 a share of Common Stock. Each unit was sold at a price of $6.805 per share, resulting in gross proceeds at closing of $27.2 million. 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. On June 23, 2006 the SEC approved a registration for the resale of the 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 in the future if investors in the June 2004 private placements exercise all of the remaining 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. In April, 2006 we repaid $2 million of loan principal.
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 herein, as well as the risk factors described in the Company’s Form 10-Q and Form 10-Q/A for the quarter ended March 31, 2006, this report 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
We strive 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 determined that the Company’s disclosure controls and procedures were not effective during the period ended June 30, 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 necessary judgments resulting in appropriate accounting and financial reporting. The Company 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.
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.
There were changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. At the end of March, 2006 we began and since such time 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 management to the Audit Committee and the Company’s registered public accounting firm in May, 2006. The accounting staff has been apprised of these policies and the Chief Financial Officer has been charged with assigning specific tasks to accounting personnel to execute such policies. In June, 2006 we also developed a timetable for conforming to section 404 of the Sarbanes-Oxley Act within the timeframe allowed by the SEC.
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-Oxley Act of 2002.
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.
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| | SULPHCO, INC. (Registrant) |
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| Date: March 27, 2007 | By: | /s/ Larry Ryan |
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| | Larry Ryan Chief Executive Officer |
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| | By: | /s/ Michael A. Abend |
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| | Michael A. Abend Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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