CleanTech Biofuels, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION - CleanTech Biofuels, Inc.	clth_ex311.htm
EX-31.2 - CERTIFICATION - CleanTech Biofuels, Inc.	clth_ex312.htm
EX-32.1 - CERTIFICATION - CleanTech Biofuels, Inc.	clth_ex321.htm
EX-32.2 - CERTIFICATION - CleanTech Biofuels, Inc.	clth_ex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

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

FOR THE TRANSITION PERIOD FROM _______TO _________

Commission file number 333-145939

CLEANTECH BIOFUELS, INC.

(Exact name of registrant as specified in its charter)

Delaware		33-0754902
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7386 Pershing Ave., University City, Missouri		63130
(Address of principal executive offices)		(Zip Code)

(Registrant's telephone number): (314) 802-8670

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	þ

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

As of May 10, 2011, 69,077,151 shares of the Company's common stock were outstanding.

CLEANTECH BIOFUELS, INC.

TABLE OF CONTENTS

PART I	Financial Information	PAGE

Item 1	Consolidated Financial Statements	3
	Consolidated Balance Sheets – March 31, 2011 and December 31, 2010	3
	Consolidated Statements of Operations - Three months ended March 31, 2011 and 2010 and Inception to March 31, 2011	4
	Consolidated Statements of Stockholders’ Equity (Deficit) – March 31, 2011	5
	Consolidated Statements of Cash Flows – Three months ended March 31, 2011 and 2010 and Inception to March 31, 2011	6
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4T	Controls and Procedures	24

PART II	Other Information

Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3	Defaults upon Senior Securities	25
Item 4	Reserved	25
Item 5	Other Information	25
Item 6	Exhibits	25
Signatures		26
Index to Exhibits		27

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CLEANTECH BIOFUELS, INC.

(formerly Alternative Ethanol Technologies, Inc.)

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	40,641		$	5,973
Prepaids and other current assets		33,014			39,905
		73,655			45,878

Property and equipment, net		8,529			9,777

Non-Current Assets:
Technology licenses, net		1,521,250			1,521,250
Patents		600,000			600,000
Total Assets	$	2,203,434		$	2,176,905

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable	$	399,244		$	392,950
Accrued interest		145,240			121,260
Accrued professional fees and other		540,192			487,835
Notes payable, net		1,976,437			1,871,669
Deferred revenue		50,000			50,000
Capital lease		-			1,211
Total Current Liabilities		3,111,113			2,924,925

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value; 10,000,000 authorized shares; no shares
issued or outstanding		-			-
Common stock, $0.001 par value; 240,000,000 authorized shares;
69,077,151 and 68,309,679 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively		69,077			68,310
Additional paid-in capital		6,361,400			6,301,726
Notes receivable - restricted common stock		(298,889	)		(295,057	)
Deficit accumulated during the development stage		(7,039,267	)		(6,822,999	)
Total Stockholders' Equity (Deficit)		(907,679	)		(748,020	)
Total Liabilities and Stockholders' Equity (Deficit)	$	2,203,434		$	2,176,905

The accompanying notes are an integral part of these financial statements

CLEANTECH BIOFUELS, INC.

(formerly Alternative Ethanol Technologies, Inc.)

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

							July 14, 2004
	Three months ended						(inception) to
	March 31,						March 31,
	2011			2010			2011
General and administrative	$	117,843		$	195,401		$	2,964,910
Professional fees		43,264			41,524			1,183,955
Research and development		-			-			1,217,847
Operating Loss		161,107			236,925			5,366,712

Other expense (income):
Interest expense		58,993			119,518			1,619,183
Amortization of technology license		-			-			35,000
Deposit forfeiture		-			-			(25,000	)
Other income		-			-			(32,000	)
Interest income		(3,832	)		(4,291	)		(58,976	)
		55,161			115,227			1,538,207

Income tax benefit		-			-			-

Net loss applicable to common stockholders	$	216,268		$	352,152		$	6,904,919


Basic and diluted net loss per common share		**		$	0.01		$	0.13
Weighted average common shares outstanding		68,810,350			66,356,824			51,401,599

** - less than $0.01

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

CLEANTECH BIOFUELS, INC.

(formerly Alternative Ethanol Technologies, Inc.)

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT) (unaudited)

					Additional		Notes Rec -			July 14, 2004
	Common Stock				Paid-in		restricted			(inception) to
	Shares		Amount		Capital		common stock			March 31, 2011
Balances at December 31, 2010		68,309,679	$	68,310	$	6,301,726	$	(295,057	)	$	(6,822,999	)

Conversion of Convertible Note in Jan-11 at $0.06		350,805		350		20,698		-			-
per share
Conversion of Convertible Note in Feb-11 at $0.06		416,667		417		24,583		-			-
per share
Interest on Notes Receivable		-		-		-		(3,832	)		-
Stock-based compensation		-		-		14,393		-			-
Net loss		-		-		-		-			(216,268	)
Balances at March 31, 2011		69,077,151	$	69,077	$	6,361,400	$	(298,889	)	$	(7,039,267	)

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

CLEANTECH BIOFUELS, INC.

(formerly Alternative Ethanol Technologies, Inc.)

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

							July 14, 2004
	Three months ended						(inception) to
	March 31,						March 31,
Operating Activities	2011			2010			2011
Net loss applicable to common stockholders	$	(216,268	)	$	(352,152	)	$	(6,904,919	)
Adjustments to reconcile net loss applicable to common
stockholders to net cash used by operating activities:
Items that did not use (provide) cash:
Common stock issued for organizational costs		-			-			100
Depreciation		1,248			6,203			59,827
Amortization		-			-			35,000
Interest income		(3,832	)		(4,291	)		(31,589	)
Amortization of discounts (interest expense) and
other financing charges		27,736			92,658			1,270,180
Share-based compensation expense		14,393			41,457			752,596
Write-off of technology license		-			-			790,545
Fair value of RAM warrant settlement		-			-			125,027
Changes in operating assets and liabilities that provided
(used) cash, net:
Prepaids and other current assets		6,891			8,473			(640	)
Technology license		-			-			(132,500	)
Accounts payable		6,294			18,535			399,244
Other assets and other liabilities		29,849			26,671			338,023
Accrued liabilities		52,357			75,446			540,192
Net cash used by operating activities		(81,332	)		(87,000	)		(2,758,914	)

Cash Flows Provided (Used) by Investing Activities
Acquisition of patent, net		-			-			(150,000	)
Merger of Biomass North America Licensing, Inc., net		-			-			(20,000	)
Acquisition of HFTA technology, net		-			-			-
Expenditures for equipment		-			-			(54,237	)
Net cash used by investing activities		-			-			(224,237	)

Cash Flows Provided (Used) by Financing Activities
Advances - related parties		-			(7,909	)		(32,373	)
Payments on capital lease, including interest		-			(1,267	)		(13,903	)
Series A Convertible Debentures, including interest		-			-			1,424,900
Issuance of Note Payable		-			-			100,000
Issuance of Convertible Notes Payable		141,000			140,000			2,091,500
Payments on Note Payable		(25,000	)		(30,000	)		(571,332	)
Sale of common stock		-			-			25,000
Net cash provided by financing activities		116,000			100,824			3,023,792
Net increase (decrease) in cash and cash equivalents		34,668			13,824			40,641
Cash and cash equivalents at beginning of period		5,973			912			-
Cash and cash equivalents at end of period	$	40,641		$	14,736		$	40,641

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

CLEANTECH BIOFUELS, INC.

(formerly Alternative Ethanol Technologies, Inc.)

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS cont'd (unaudited)

					July 14, 2004
	Three months ended				(inception) to
	March 31,				March 31,
	2011		2010		2011

Supplemental disclosure of cash flow information:
Cash paid for interest	$	197	$	255	$	10,501

Supplemental disclosure of noncash investing and
financing activities:
Promissory notes receivable related to Series A Convertible Debentures	$	-	$	-	$	450,000
Capital lease related to the purchase of equipment	$	-	$	-	$	14,119
Common stock issued for organizational costs	$	-	$	-	$	100
Common stock issued for promissory notes	$	-	$	-	$	133,596
Common stock issued for Convertible notes converted	$	46,048	$	10,678	$	228,818
Common stock issued for Debentures converted	$	-	$	-	$	1,498,887
Common stock and note payable issued for acquistion of Biomass	$	-	$	-	$	1,501,250
Common stock issued for HFTA	$	-	$	-	$	693,045

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

CLEANTECH BIOFUELS, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 – Organization and Business

Alternative Ethanol Technologies, Inc. (the “Company”), was incorporated in Delaware on December 20, 1996. Effective August 2, 2007, the Company changed its name to CleanTech Biofuels, Inc.

On March 27, 2007, the Company acquired SRS Energy, Inc., a Delaware corporation (“SRS Energy”), pursuant to an Agreement and Plan of Merger and Reorganization. In accordance with the merger agreement, SRS Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, merged with and into SRS Energy. The merger was consummated on May 31, 2007 and resulted in SRS Energy becoming a wholly-owned subsidiary of the Company. As a result of the merger, the stockholders of SRS Energy surrendered all of their issued and outstanding common stock and received shares of the Company’s common stock, $.001 par value per share (“Common Stock”). The former parent of SRS Energy, Supercritical Recovery Systems, Inc., immediately prior to the merger, distributed 78.8% of its 96% ownership in SRS Energy to its shareholders on a pro rata basis.

For accounting purposes, because the Company had been a public shell company prior to the merger, the merger was treated as an acquisition of the Company and a recapitalization of SRS Energy. As a result, the historical information of the Company prior to the merger is that of SRS Energy. In addition, historical share amounts have been restated to reflect the effect of the merger.

The Company is a development stage company that has been engaged in technology development and pre-operational activities since its formation. The Company is currently in the process of raising capital to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects. These projects plan to focus on cleaning and separating municipal solid waste (also referred to as MSW) into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics).

The Company has no operating history as a producer of biomass or energy sources and has not constructed any plants to date. We have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products. Our current cash is not sufficient to fund our current operations. Our liabilities are substantially greater than our current available funds. Although we continue to seek additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies, we have not had recent success securing meaningful amounts of financing. The Company will require substantial additional capital to implement its business plan and it may be unable to obtain the capital required to do so. If we are not able to immediately and successfully raise additional capital and/or achieve profitability or positive cash flow, we may not be able to continue operations.

The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items considered necessary for a fair presentation, have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. For further information, refer to the Company’s audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 29, 2011.

Note 2 – Recent Accounting Pronouncements

In December 2010, the FASB issued accounting guidance on Business Combinations regarding how public entities disclose supplemental pro forma information for business combinations that occur during the year. Entities that present comparative financial statements for business combinations must disclose the revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the prior annual reporting period. The authoritative guidance also expanded the disclosures for entities to provide the nature and amount of material, nonrecurring pro forma adjustments directly related to the business combination that is included in the reported pro forma revenue and earnings. The authoritative guidance is effective for business combinations completed in the periods beginning after December 15, 2010 and is applied prospectively as of the date of adoption. We adopted the authoritative guidance on January 1, 2011.

In December 2010, the FASB issued accounting guidance on Intangibles—Goodwill and Other, which requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that a goodwill impairment exists. If so, the entity must perform step 2 of the goodwill impairment test. The authoritative guidance does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test. The authoritative guidance is effective for impairment tests performed for fiscal years beginning after December 15, 2010. We adopted the authoritative guidance on January 1, 2011.

Note 3 – Mergers/Acquisitions

On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc. (“Biomass”) pursuant to a merger between Biomass and a wholly-owned subsidiary of the Company (with Biomass as the surviving subsidiary of the Company) in accordance with an Agreement and Plan of Merger by and between the Company and Biomass. By virtue of the merger, the Company acquired a license agreement pursuant to which the Company holds a license in the United States and Canada to use patented technology licensed from Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate municipal solid waste, also known as MSW (the “Biomass Recovery Process”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”).

Upon consummation of the merger, the Company paid $20,000 in cash and issued a promissory note in the original principal amount of $80,000 bearing interest at an annual rate of 6% (the “Note”) to a shareholder of the Licensor. This note has been paid in full. Additionally, the Company issued to the four shareholders of the Licensor a total of 1,895,000 shares of Common Stock and deposited an additional 4,000,000 shares of Common Stock into an escrow account (collectively, the “Shares”). The Shares were issued as part of the merger consideration received by the shareholders of the Licensor. The escrowed shares will be released to the Licensor’s shareholders if and when the Company commences a commercial development that utilizes the Biomass Recovery Process. The Company recorded a long-term asset of $1.5 million which it will begin to amortize upon utilizing the license in our operations. If the escrowed shares are released based on the specified future events, an increase to the value of the asset will be recorded at that time. Based on the market value of Common Stock as of March 31, 2011, it would result in an increase of approximately $280,000 to the asset. Any future increase in the value of the asset would depend on the market value of our Common Stock at the time of utilization.

Note 4 – Patent

The Company owns US Patent No. 6,306,248 (the “PSC Patent”), which is the underlying technology upon which the BRP Patent is based. The Company acquired the PSC Patent on October 22, 2008 pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). As part of the acquisition of the PSC Patent, we also became the licensor of such technology to Bio-Products International, Inc. Upon signing the Agreement, the Company paid WWT $150,000, issued a note in the amount of $450,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and to purchase an additional 900,000 shares of Common Stock at a price of $0.45 per share contingent on payment of the note by July 22, 2009 (the original maturity date). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. (“Vertex”) as a result of a merger in March 2009. We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000 shares) were reissued at a price of $0.11 per share with no contingencies and (iii) the remaining payments on the note were scheduled to be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). We entered into amendments dated October 22, 2009 whereby: (i) the October 22, 2009 payment was deferred until November 22, 2009 and (ii) we issued additional warrants to Vertex for 500,000 shares of Common Stock at a price of $0.10 per share. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The cost of the PSC Patent acquisition of $600,000 is recorded as a long-term asset on the Balance Sheet. The value of the warrants had been recorded as a contra-balance amount with the note and has been fully amortized through interest expense. The note had been recorded as short-term debt (notes payable) in the financial statements, net of the discount for the warrant feature. This note was paid in full in September 2010. For the three months ended March 31, 2011 and 2010, amortization of this discount of $-0- and approximately $7,000, respectively, has been recorded in interest expense. The discount was fully amortized as of March 31, 2010.

On September 1, 2010, the Company issued a promissory note to CMS Acquisition, LLC (“CMS”) in the amount of $100,000 and bearing interest at 6.0% per annum. The note is secured with a security interest in the PSC Patent. In connection with the financing, the Company issued a warrant to CMS to purchase 2,000,000 shares of the Company’s Common Stock at a price of $0.05 per share. The warrant is exercisable at any time for five years from the date of issuance. The Note was originally to mature on February 28, 2011. On February 11, 2011, the Company and CMS entered into an amendment extending the due date to May 15, 2011 while paying $25,000 towards accrued interest to date and principal on the Note.

Note 5 - Technology Licenses

Biomass North America Licensing, Inc.

We own a license in the United States and Canada to use the Biomass Recovery Process (See Note 3 – Mergers/Acquisitions). We recorded a long-term asset of $1.5 million for the value of this license when we acquired the license on September 15, 2008. Amortization of this asset will begin upon commencement of the use of the Biomass Recovery Process. The Company also deposited an additional 4,000,000 shares of the Company’s Common Stock into an escrow account for the benefit of the Licensor. For accounting purposes, the shares remaining in escrow are not considered issued and outstanding as a project has not started using the Biomass Recovery Process. The shares are not deemed issued or vested until that time as described above.

The license requires that the Company pay a royalty in the amount of $1.00 per ton of bone-dry biomass produced using the Biomass Recovery Process. The license agreement is for a term of 21 years or the life of any patent issued for the Biomass Recovery Process. The Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process, except that a principal owner of the Licensor has the right of first offer to manage and operate with respect to any development commenced using the licensed technology within 100 miles of the City of Chicago, Illinois. The license agreement further provides that the Company and the Licensor will work in good faith to complete a commercial development in the City of Chicago using the Biomass Recovery Process.

Bio-Products International, Inc.

On August 17, 2005, the Company entered into a license agreement with Bio-Products International, Inc. (“Bio-Products”) giving the Company limited exclusive rights to use the PSC Patent to process MSW and convert the cellulosic component of that waste to a homogenous feedstock to produce ethanol in the United States, subject to the right of Bio-Products to request five sites to construct MSW-to-ethanol plants in the United States. The Company’s license with Bio-Products was for a period of twenty years. Under the license, Bio-Products was to be paid a process royalty of $1.50 for every ton of waste received and processed at each facility to be constructed and operated under the agreement. The Company also was required to pay a by-product royalty of 2.5 percent of the gross sales price in excess of $10 per ton obtained from the sale of recyclable by-products, excluding the cellulosic biomass. Bio-Products would also have been paid a monthly fee for technical services to be provided by Bio-Products for each facility to be constructed and operated which initially would have been $10,000 per month and increase to $20,000 per month when vessels for processing waste are ordered for the facility. The $20,000 per month fee would have continued until construction of a facility was completed. The Company’s litigation involving Bio-Products was settled in March 2009 and as a result, this sublicense has been mutually terminated by all parties.

As disclosed in Note 4 - Patent, the Company acquired the PSC Patent. The Company is now the licensor to Bio-Products for the PSC Patent. Bio-Products (a wholly-owned subsidiary of Clean Earth Solutions, Inc., “CES”) is the exclusive licensee of the PSC Patent and has the right to sublicense the technology that is part of the PSC Patent (but not the BRP Patent) to any party. Under the Master License Agreement, we are entitled to be paid 5% of any revenue derived by Bio-Products from the use of the technology and 40% of any sublicensing fees paid to Bio-Products for the use of the technology. The Master License Agreement is for a term of 20 years that commenced on August 18, 2003. On September 22, 2010, the Company sent a Notice of Breach to the licensee of our PSC Patent. We received a response from the licensee on November 5, 2010. In February 2011, we became aware that the licensee effected a transfer of the license in violation of the License Agreement. As a result, on March 21, 2011, we sent a notice of termination to the licensee and the transferee terminating the License Agreement.

All intangible assets are reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. An impairment charge is recognized if the carrying amount of an intangible asset exceeds its implied fair value.

Note 6 – Debt

	March 31,			December 31,
	2011			2010
Convertible Notes Payable (2009 Offering), net of discounts of $8,551 and $26,596
at March 31, 2011 and December 31, 2010, respectively, which are made up of
various individual notes with an aggregate face value of $1,647,329 and
$1,703,329 at March 31, 2011 and December 31, 2010, respectively, due in one
year from date of note, interest at 6.0%	$	1,638,778		$	1,676,733
Convertible Notes Payable (11/10 Offering), net of discounts of $-0- and $-0- at
March 31, 2011 and December 31, 2010, respectively, which are made up of
various individual notes with an aggregate face value of $190,336 and $35,000
March 31, 2011 and December 31, 2010, respectively, due in one year from
date of note, interest at 6.0%		190,336			35,000
CMS Acquisition, LLC Note Payable, net of discount of $-0- and $3,492 at
March 31, 2011 and December 31, 2010, respectively, with a face value of
$77,696 and $100,000 at March 31, 2011 and December 31, 2010, respectively,
due on May 15, 2011, interest at 6.0%		77,696			96,508
Convertible Note Payable (6/10 Offering), net of discounts of $5,373 and $11,573
March 31, 2011 and December 31, 2010, respectively, which is made up of one
note with a face value of $75,000 at March 31, 2011 and December 31, 2010,
due in one year from date of note, interest at 12.0%		69,627			63,427
Total debt		1,976,437			1,871,668
Current maturities		(1,976,437	)		(1,871,668	)
Long-term portion, less current maturities	$	-		$	-

Convertible Notes Payable

Since September 2008, the Company has conducted four offerings of units comprised of a one-year convertible promissory note and a warrant having the terms set forth below:

Offering	Note Interest Rate	Note Conversion Price	Warrant Exercise Price
2008 Offering	6.0%	$0.25	$0.45
2009 Offering	6.0%	$0.08	$0.30
6/10 Offering	12.0%	$0.08	$0.30
11/10 Offering	6.0%	$0.06	$0.30

Each note may be converted, at the note holder’s option, at any time during the one-year term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million), into shares of Common Stock at the conversion price noted above.

2008 Offering - During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. This offering is closed. As of March 31, 2010, all of these notes had either been converted to shares of our common stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange). These notes had been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts were being amortized on a straight-line basis over the term of each note and were fully expensed as of March 31, 2010. For the three months ended March 31, 2011 and 2010, amortization of $-0- and approximately $7,000, respectively, for these discounts has been recorded in interest expense.

2009 Offering - During April 2009, the Company commenced an offering of units. As of March 31, 2011, the Company had raised a total of $1,198,500 of investment proceeds and this offering is closed. One note was converted to shares of Common Stock during the second quarter of 2009 and one note was converted to shares of Common Stock during the second quarter 2010. Beginning in March 2011, certain notes were exchanged into our 11/10 Offering. As a result, as of March 31, 2011, we had $1,647,329 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. The first of these notes matured in April 2010. We are working with the noteholders to either: repay the notes, refinance to our 11/10 Offering or convert the notes to shares of our Common Stock. See Subsequent Events footnote for further disclosure regarding our notes. These notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the three months ended March 31, 2011 and 2010, amortization of approximately $18,000 and $79,000, respectively, for these discounts has been recorded in interest expense.

6/10 Offering - During June 2010, the Company commenced an offering of units. As of March 31, 2011, the Company had raised a total of $75,000 of investment proceeds in one note and this offering is closed. This note has a payback provision of the note if $250,000 or more in the aggregate is raised by the Company in future offerings. The note has been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of the note. For the three months ended March 31, 2011 and 2010, amortization of approximately $6,000 and $-0-, respectively, for these discounts has been recorded in interest expense.

11/10 Offering - During November 2010, the Company commenced an offering of units. As of March 31, 2011, the Company had raised a total of $176,000 of investment proceeds. Two notes were converted during the first quarter of 2011. As a result, as of March 31, 2011, we had $190,336 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering. These notes have been recorded as short-term debt (notes payable) in the financial statements and carry no discounts. See the Subsequent Events footnote for an update on the continuation of this offering.

CMS Acquisition, LLC Note Payable

In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) May 15, 2011 pursuant to an amendment on February 11, 2011 whereby the Company paid $25,000 towards accrued interest to date and principal on the note or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense. For the three months ended March 31, 2011 and 2010, amortization of approximately $3,000 and $-0-, respectively, for this discount has been recorded in interest expense.

Vertex (formerly WWT) Note Payable

As disclosed previously, as part of the purchase of the PSC Patent, the Company issued a note in the amount of $450,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and to purchase an additional 900,000 shares of Common Stock at a price of $0.45 per share contingent on payment of the note by July 22, 2009 (the original maturity date). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009. We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000 shares) were reissued at a price of $0.11 per share with no contingencies and (iii) the remaining payments on the note were scheduled to be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). We entered into amendments dated October 22, 2009 whereby: (i) the October 22, 2009 payment was deferred until November 22, 2009 and (ii) we issued additional warrants to Vertex for 500,000 shares of Common Stock at a price of $0.10 per share. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants had been recorded as a contra-balance amount discount with the note and has been fully amortized through interest expense. For the three months ended March 31, 2011 and 2010, amortization of this discount of $-0- and approximately $7,000, respectively, has been recorded in interest expense. The discount was fully amortized as of March 31, 2010. This note was paid in full in September 2010.

Series A Convertible Debentures

In April 2007, the Company sold $1,400,000 of Series A Convertible Debentures (“Debentures”), due April 16, 2010, that convert into shares of the Company’s Common Stock at $0.15 per share. The Company filed a registration statement with regard to the sale of these shares of Common Stock, which was declared effective by the Securities and Exchange Commission on January 2, 2008. The debentures accrued interest at 6% per annum. The interest is payable in cash or shares of Common Stock at the Company’s option.

During March 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,433,067 shares of our common stock. During April 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,455,844 shares of our common stock. The remaining $140,000 of Debentures matured on April 16, 2010 and, with interest earned, were converted into 2,069,375 shares of our common stock.

Note 7 - Stockholders' Equity (Deficit)

In February 2010, the Company issued 150,000 restricted shares of our common stock at $0.10 per share to our newly elected director. The director issued a promissory note to the Company in exchange for the stock purchases similar to the restricted share grants to all other directors. See the Share-Based Payments footnote for further details.

In April 2010, the Company issued 2,069,375 shares of Common Stock ($0.08 per share) upon the conversion of $140,000 of the Company’s Debentures and accrued interest of approximately $25,000.

In June 2010, the Company issued 133,480 shares of Common Stock ($0.08 per share) to an investor upon the conversion of a Convertible Note.

In August 2010, certain notes receivable from former and current members of our Board of Directors matured. The notes were originally issued in August 2007 to purchase shares of our common stock. Two of the former directors declined to pay these notes or extend the due date. As a result, 300,000 shares of restricted stock, issued at $0.15 per share, were forfeited and cancelled. The two other Directors agreed to extend the due date of their notes to August 2012. As the notes were carried in additional paid-in capital, there was no effect on our financial results for the period from the write-off of these notes.

In January 2011 and February 2011, the Company issued 350,805 and 416,667 shares of Common Stock ($0.06 per share), respectively, to investors upon their conversion of Convertible Notes.

Net Loss per share – The Company calculates basic loss per share (“EPS”) and diluted EPS. EPS is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS would reflect the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. As of March 31, 2011 and 2010, the Company had options, warrants and other convertible securities to purchase an aggregate of approximately 48 million and 39 million shares of our common stock, respectively, that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive. Therefore, the Company only presents basic loss per share on the face of the statement of operations.

Note 8 - Related Party Transactions

In February 2010, the Company entered into stock purchase agreements with a member of the Board of Directors. The director issued a note to the Company in exchange for the stock purchase. See Share-Based Payments footnote for further discussion. The note and accumulated interest are recorded as notes receivable in Stockholders’ Deficit.

The Company had engaged the law firm of Sauerwein, Simon and Blanchard (“SSB”) related to various issues including our reverse merger, our SB-2 registration statement, litigation matters and general business activity. A member of our board of directors is a partner of SSB. We no longer use SSB as legal counsel and have incurred less than $100 in legal fees since January 2010. As of March 31, 2011, all amounts have been paid to SSB except for approximately $90,000.

The Company uses the Crane Agency (“Crane”) as its broker for business and property insurance. Our CEO’s brother was employed by Crane and involved in the negotiation of coverage and premiums related to policies purchased through December 31, 2010 (when his employment with Crane ended). For the three months ended March 31, 2011 and 2010, the Company paid less than $3,000 and $3,000, respectively, in commissions on policies placed by Crane.

Beginning in 2009, the Company has provided advances to two employees – Ed Hennessey and Mike Kime. Mr. Kime resigned from his positions with the Company effective June 21, 2010. As of March 31, 2011 and December 31, 2010, the aggregate balances of advances totaled approximately $20,000. The balances are included in Prepaids and Other Current Assets on the Balance Sheet.

Three members of our Board of Directors, Dr. Jackson Nickerson, Mr. Jose Bared, Sr. and David Bransby are parties in investments made in our convertible note offerings. As of March 31, 2011 and December 31, 2010, the aggregate amount due on these investments, including interest, is approximately $622,000 and $613,000, respectively.

Note 9 – Share-based Payments

The Company recognizes share-based compensation expense for all share-based payment awards including stock options and restricted stock issued to employees, directors and consultants and is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company has no awards with market or performance conditions.

In March 2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its employees, directors and consultants, which includes an equity compensation plan for non-employee directors pursuant to which stock options and shares of restricted stock may be granted. The Company currently has reserved a maximum of 14,000,000 shares of common stock to be issued for stock options or restricted shares awarded under the Stock Plan.

In January 2010, the Company granted options under the Stock Plan to purchase an aggregate of 120,000 shares of Common Stock to a consultant that vested immediately, with an exercise price of $0.07 per share. In February 2011, the Company granted options under the Stock Plan to purchase an aggregate of 250,000 shares of Common Stock to consultants in which half vested immediately and half vested in February 2012, with an exercise price of $0.07. As of March 31, 2011, none of these options were cancelled or expired and 245,000 of these options were vested.

In February 2010, the Company issued 150,000 shares of restricted Common Stock to our new director, Jose Bared, Sr. Under the agreement Mr. Bared agreed to purchase 150,000 shares of restricted Common Stock of the Company at a cost of $0.10 per share. Mr. Bared issued a promissory note to the Company in exchange for the stock purchase. The shares purchased under the agreement are restricted shares subject to a right, but not obligation, of repurchase by the Company. The Company may exercise its repurchase right only during the 60 day period following a director’s termination of service on the Board of Directors. Commencing on February 28, 2010, the Company’s repurchase rights lapse at the rate of 8,333 shares per month of continuous service by each director through January 31, 2011, when the Company’s repurchase rights lapse on 4,167 shares per month of continuous board service until the repurchase rights have lapsed on all restricted shares. At March 31, 2011, 41,670 shares remain subject to a right of repurchase on all outstanding restricted stock grants to our directors. Additionally, the Company granted options under the Stock Plan to purchase 40,000 shares of Common Stock to Mr. Bared, with an exercise price of $0.10, that vest ratably over two years. As of March 31, 2011, none of these options were cancelled or expired and 20,000 of these options were vested.

In January 2011, the Company granted options under the Stock Plan to purchase an aggregate of 750,000 shares of Common Stock to an employee in which one-third vested immediately and the remaining options vest ratably in August 2011 and August 2012, with an exercise price of $0.05. As of March 31, 2011, none of these options were cancelled or expired and 250,000 of these options were vested.

The Company has recorded stock-based compensation expense of approximately $14,000 and $41,000 for the three months ended March 31, 2011 and 2010, respectively, for the issued stock option grants. Related to these grants, the Company will record future compensation expense of approximately $19,000 for the remaining nine months of 2011. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements totaled approximately $293,000 and $287,000 at March 31, 2011 and December 31, 2010, respectively. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently. As of March 31, 2011, there was approximately $20,000 of unrecognized compensation cost related to all current share-based payment arrangements, which will be recognized over a remaining period of approximately 1.5 years.

A summary of the Company's stock option activity and related information is set forth in the following table:

	Shares Under Option			Weighted Average Exercise Price		Aggregate intrinsic value
Options outstanding at December 31, 2010		5,537,000		$	0.16		(1	)

Granted		1,000,000		$	0.06
Exercised		-
Forfeited		(25,000	)	$	0.10
Options outstanding at March 31, 2011		6,512,000		$	0.14		(1	)

Options exercisable at March 31, 2011		5,293,667		$	0.14		(1	)

Unvested Options at March 31, 2011		1,218,333		$	0.12		(1	)

(1) The weighted-average exercise price at March 31, 2011 and December 31, 2010 for all outstanding and exercisable options was greater than the fair value of the Company's common stock on that date, resulting in an aggregate intrinsic value of $-0-.

The following table summarizes information about the Company's issuances of restricted stock:

	Restricted Shares Issued		Weighted Average Exercise Price
Balance as of December 31, 2010		2,180,000	$	0.12

Granted		-
Exercised		-
Forfeited		-
Balance as of March 31, 2011		2,180,000	$	0.12

Restricted stock vested at March 31, 2011		2,096,660	$	0.13

Note 10 – Commitments and Contingencies

Leases – The Company’s lease to rent approximately 1,800 square feet of office space for use as our corporate office, located at 7386 Pershing Ave. in St. Louis, Missouri has expired. We are currently in the process of extending this lease while occupying the space. Our monthly rent under the lease is $1,800 plus the cost of utilities. We entered into a lease for office furniture in January 2008. The final lease payments are now due and total approximately $3,000. This lease is accounted for as a capital lease for accounting purposes.

Note 11 – Subsequent Events

In connection with our 11/10 Offering, which is still open, we have raised a total of $176,000 of investment proceeds as of May 10, 2011.

Certain promissory notes in our 2009 Offering came due in April 2010 through March 2011 totaling approximately $1,650,000 (including approximately $140,000 of accrued interest). As of May 10, 2011, approximately $1,155,000 has been refinanced to our 11/10 Offering. We are working with each remaining noteholder to exchange, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these noteholders and we may be required to repay such amounts.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward-Looking Information

From time to time, we make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports to stockholders. The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, provide a safe harbor for such forward-looking statements. All statements, other than statements of historical facts, included herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans, objectives and other future events and circumstances are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “would,” “should” and similar expressions or negative expressions of these terms. Such statements are only predictions and, accordingly, are subject to substantial risks, uncertainties and assumptions.

Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee our future results, levels of activity, performance or achievements. Refer to our Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 29, 2011, for a full description of factors we believe could cause actual results or events to differ materially from the forward-looking statements that we make. These factors include:

	·	our ability to raise additional capital on favorable terms,
	·	our ability to continue operating and to implement our business plan;
	·	the commercial viability of our technologies,
	·	our ability to maintain and enforce our exclusive rights to our technologies,
	·	the demand for and production costs of various energy products made from our biomass,

competition from other alternative energy technologies, and

other risks and uncertainties detailed from time to time in our filings with the SEC.

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.

Company Overview

The following discussion of our company overview and plan of operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Information.”

We are a development stage company focused on being a provider of: (i) cellulosic biomass derived from municipal solid waste, also known as MSW, as a feedstock for producing energy and other chemical products and (ii) recyclables (metals, plastics, glass) from the MSW.

We were originally incorporated in 1996 as Long Road Entertainment, Inc., and were formed to operate as a holding company for businesses in the theater, motion picture and entertainment industries. We ceased conducting that business in 2005 and were dormant until the fall of 2006, at which time our founder and then controlling stockholder decided to pursue the sale of the company. In anticipation of that sale, we changed our name to Alternative Ethanol Technologies, Inc.

On March 27, 2007, we entered into an Agreement and Plan of Merger and Reorganization in which we agreed to acquire SRS Energy, Inc., a Delaware corporation that is the holder of the technology licenses. Pursuant to the merger agreement, SRS Acquisition Sub, our wholly-owned subsidiary, merged into SRS Energy with SRS Energy as the surviving corporation. We consummated the merger on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary. Effective August 2, 2007, we changed our name to CleanTech Biofuels, Inc.

SRS Energy was originally formed as a wholly-owned subsidiary of Supercritical Recovery Systems, Inc., a Delaware corporation, in July 2004. At that time, Supercritical Recovery Systems, Inc. was a licensee of various technologies for the processing of waste materials into usable products. Prior to our acquisition of SRS Energy, Supercritical Recovery Systems, Inc. distributed approximately 80% of its ownership of SRS Energy to the stockholders of Supercritical Recovery Systems, Inc. Since our acquisition of SRS Energy, Supercritical Recovery Systems, Inc. has ceased its business activities with respect to licensing other technologies.

In September 2008, we acquired the exclusive licensing rights, in the United States and Canada, to use the Biomass Recovery System developed by Anthony Noll. We refer to this technology as our Biomass Recovery Process. Our rights to use the Biomass Recovery Process technology permit us to use the biomass we derive from MSW to produce all energy products. In addition, in October 2008, we acquired the patent for the pressurized steam classification (“PSC”) technology from World Waste Technologies (“WWT”), who previously had purchased the patent from the University of Alabama Huntsville. As a result we became the licensor of the PSC technology to Bio-Products International, Inc. (“Bio-Products”) under its Master License Agreement. Prior to then, Bio-Products was the sublicensor of the PSC technology to us.

Since early 2008, we had been in litigation against Bio-Products regarding our use of the PSC technology as a sublicensee. In March 2009, we entered into a Settlement Agreement with Bio-Products settling all claims. Pursuant to the Settlement Agreement, in addition to a customary mutual release, Bio-Products entered into a covenant not to sue whereby Bio-Products and its related parties agreed to permit us to use the Biomass Recovery Process technology worldwide, for any product that we desire and with no royalty due to Bio-Products. We also terminated the License Agreement pursuant to which we were the sublicensee of Bio-Products and have no further obligations thereunder. We continue to be the licensor to Bio-Products under the Master License Agreement and we continue to own the patent for the PSC technology. As a result of the Settlement Agreement, we are now capable of using the Biomass Recovery Process technology to produce any energy product that we desire and are no longer limited to production of fuel grade ethanol in the United States.

We have no operating history as a producer of biomass feedstocks or any energy products and have not constructed any operating plants to date. We have not earned any revenues to date and our current capital and other existing resources are not sufficient to fund the implementation of our business plan or our required working capital. We will require substantial additional capital to implement our business plan and we may be unable to immediately obtain the capital required to continue operating.

Recent Developments

Beginning in November 2010, the Company commenced an offering of units comprised of a convertible promissory note and a warrant (our 11/10 Offering). As of May 10, 2011, the Company has received $176,000 in investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.06 per share, at the Note holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the Note at a price of $0.30 per share.

In July 2010, we entered into an agreement with Fiberight LLC (Fiberight) to move our test vessel (formerly in Kentucky) to Fiberight’s cellulosic ethanol pilot plant in Lawrenceville, Virginia. We originally anticipated that our vessel would have been installed and operational during the second quarter 2011. However, Fiberight is continuing to evaluate alternative technologies to provide feestock for their process, which we expect they will complete during the third quarter 2011. If and when installed, our vessel is expected to produce cellulosic biomass feedstock for Fiberight’s Targeted Fuel Extraction process. We expect such production should further validate our licensed Biomass Recovery Process. Additionally, we may have access to biomass produced at the Lawrenceville plant for delivery to other companies interested in testing it as feedstock in their conversion technologies.

Certain promissory notes in our 2009 Offering of units comprised of a convertible promissory note and a warrant came due in April 2010 through March 2011 totaling approximately $1,650,000 (including approximately $140,000 of accrued interest). As of May 10, 2011, approximately $1,155,000 has been refinanced into our 11/10 Offering. We are working with each remaining noteholder to exchange, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these noteholders and we may be required to repay such amounts.

On September 22, 2010, the Company sent a Notice of Breach to the licensee of our PSC Patent. We received a response from the licensee on November 5, 2010. In February 2011, we became aware that the licensee effected a transfer of the license in violation of the License Agreement. As a result, on March 21, 2011, we sent a notice of termination to the licensee and the transferee terminating the License Agreement.

Plan of Operation

The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance. These risks and other factors include, among others, those listed under “Statement Regarding Forward-Looking Information.”

Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described further in this section. We currently do not have sufficient capital to continue operations. All of our developments/projects require a significant amount of capital that we currently do not have. While we continue to aggressively pursue capital, we have not had recent success securing meaningful amounts of financing. As a result, we can provide no assurance that we will secure any capital in the immediate time frame required and the failure to do so will likely result in an inability to continue operations.

Our company was initially conceived as a fully-integrated producer of cellulosic ethanol from MSW. Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we re-focused our business to the commercialization of our Biomass Recovery Process technology for cleaning and separating MSW into its component parts and initiated a plan to consolidate the ownership and/or rights to use intellectual property around this technology. The technology is currently in use by another operator in a commercial setting in Australia. As a result, we believe this technology is ready for commercial implementation in the United States and elsewhere. In furtherance of our new focus, we are currently in the process of raising capital to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel research firms for evaluation. In addition to this capital raise for plant development, the Company is also working towards licensing and/or developing potential commercial projects as they present themselves. All of our developments plan to focus on cleaning and separating MSW into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics).

Biomass Feedstock Production

The Company plans to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation and trial purchases. Initially, the biomass feedstock output will be sold or provided to electric utilities, power and steam producers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company is also working towards licensing and/or developing potential commercial projects.

We completed construction of a small test vessel in Kentucky and, beginning in April 2009, this vessel has processed approximately 12 tons of MSW into approximately 4-5 tons of biomass. We have provided the biomass produced during this testing phase to a number of fuel producers who are evaluating whether they can use our biomass as a feedstock for their technologies. In July 2010, we entered into an agreement with Fiberight to move this test vessel to Fiberight’s cellulosic ethanol pilot plant in Lawrenceville, Virginia. We originally anticipated that our vessel would have been installed and operational during the second quarter 2011. However, Fiberight is continuing to evaluate alternative technologies to provide feedstock for their process, which we expect they will complete during the third quarter 2011. If and when installed, our vessel is expected to produce cellulosic biomass feedstock for Fiberight’s Targeted Fuel Extraction process. We expect such production should further validate our licensed Biomass Recovery Process. Additionally, we may have access to biomass produced at the Lawrenceville plant for delivery to other companies interested in testing it as feedstock in their conversion technologies.

We are also seeking to develop a plant in a major metropolitan area. We are working to develop one or more locations where waste collected would be processed using our technology and the biomass produced used to create heat and/or power.

In addition to the developments we are currently contemplating, other development opportunities are presented to us and we evaluate those potential developments. Upon operating a plant and after refining our know-how with respect to implementation of the technology, we intend to seek to partner with waste haulers, landfill owners and municipalities to implement the technology across the United States and internationally.

The further development of commercial plants and/or implementation of the licensing of our technology described above will require significant additional capital, which we currently do not have. We cannot provide any assurance that we will be able to raise this additional capital. While we anticipate that financing for the commercial biomass recovery plant and these other potential projects could also be provided in part via tax exempt bond financing or through the use of loan guarantees from local, state and federal authorities, we have not secured any such financing and there can be no assurance that we will be able to secure any such financing.

Diesel Fuel Production

We previously anticipated completing an agreement with Green Power, Inc. (“Green Power”) to provide biomass for testing at Green Power’s facility and if that proves successful, to build a 200 ton per day MSW processing station to provide biomass for an existing 100 ton per day diesel fuel production plant. To date we have not been able to reach an agreement as to the nature and amount of biomass to be produced or other key terms of this relationship that are required for us to proceed. These issues and a number of other items will be required to be resolved before we are able to complete any agreement with Green Power. We have not completed an agreement to date and there can be no assurance that we will complete any agreement and proceed with this development.

Bio-Fuel and Bio-Chemical Joint Testing/Research

As soon as we are able to process MSW into biomass through our future biomass recovery plant, and/or in future commercial vessels, we plan to enter into joint research agreements with companies looking to process biomass in their system(s) for various types of energy and chemical production. This testing and research will provide possible revenue streams, projects and additional opportunities for use of our biomass.

In May 2010, we entered into a joint research agreement with Ze-Gen, Inc., a developer of technology for converting biomass into a variety of fuel products and other chemical products, whereby we agreed to provide biomass to Ze-Gen, Inc. for testing in their proprietary processes.

New Technologies; Commercializing Existing Technologies

Because of our unique ability to produce a clean, homogenous biomass feedstock, we are frequently presented with the opportunity to partner with or acquire new technologies. In addition to developing our current technologies, we will continue to add technologies to our suite of solutions that complement our core operations. We believe that our current technologies and aspects of those in development will enable us to eventually expand our business to use organic material from other waste streams such as municipal bio-solids from waste water facilities and animal waste for fuel production.

To commercialize our technology, we intend to:

·	construct and operate a commercial plant that: (i) processes MSW into cellulosic biomass for conversion into energy or chemical products and (ii) separates recyclables (metals, plastics, glass) for single-stream recycling;

·	identify and partner with landfill owners, waste haulers and municipalities to identify locations suitable for our technology; and

·	pursue additional opportunities to implement our technology in commercial settings at transfer stations and landfills in the United States and elsewhere in the world.

Our ability to implement this strategy will depend on our ability to raise significant amounts of additional capital and to hire appropriate managers and staff. Our success will also depend on a variety of market forces and other developments beyond our control.

Results of Operations

The following table set forth the amounts of expenses and changes in our consolidated statements of operations for the three months ended March 31, 2011 and 2010:

	Three months ended
	March 31, 2011			March 31, 2010			Change
General and administrative	$	117,843		$	195,401		$	(77,558	)
Professional fees		43,264			41,524			1,740
Operating loss		161,107			236,925			(75,818	)

Other expense (income):
Interest expense		58,993			119,518			(60,525	)
Interest income		(3,832	)		(4,291	)		459

Net Loss	$	216,268		$	352,152		$	(135,884	)

General and administrative – The decrease in expense in 2011 is due primarily to a reduction in expense of approximately $42,000 in payroll and $27,000 in share-based compensation.

Interest expense – The decrease in 2011 is due primarily to a reduction in the amortization of discounts related to various notes of approximately $65,000. These notes were issued from October 2008 through September 2010 and mature in one year, and thus some discounts have been fully expensed.

Liquidity and Capital Resources

As a development-stage company, we have no revenues and will be required to raise additional capital to in order to execute our business plan and commercialize our products. Beginning in September 2008 and as of May 10, 2011, we raised an aggregate of approximately $2.2 million, in separate offerings of units comprised of a convertible note and warrants. We are continuing to explore opportunities to raise cash through the issuance of these units and other financing opportunities. As of May 10, 2011, our current cash is not sufficient to fund our operations. Our liabilities are substantially greater than our current available funds. We are seeking additional financing through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies. We have retained Houlihan Capital to assist the Company in exploring and evaluating a range of strategic financing alternatives and/or other transactions. However, we may not be successful in securing additional capital. If we are not able to obtain additional financing in the immediate future, we will be required to delay our development until such financing becomes available and may be required to cease operations. Further, even assuming that we secure additional funds, we may never achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will not have sufficient capital resources to implement our business plan or to continue our operations.

Debt

Convertible Notes Payable

Since September 2008, the Company has conducted four offerings of units comprised of a one-year convertible promissory note and a warrant having the terms set forth below:

Offering	Note Interest Rate	Note Conversion Price	Warrant Exercise Price
2008 Offering	6.0%	$0.25	$0.45
2009 Offering	6.0%	$0.08	$0.30
6/10 Offering	12.0%	$0.08	$0.30
11/10 Offering	6.0%	$0.06	$0.30

Each note may be converted, at the note holder’s option, at any time during the one-year term of the note or prior to the closing of any “Qualifying Equity Financing (minimum capital received of $5 million) into shares of Common Stock at the conversion price noted above.

2009 Offering - During April 2009, the Company commenced an offering of units. As of March 31, 2011, the Company had raised a total of $1,198,500 of investment proceeds and this offering is closed. One note was converted to shares of Common Stock during the second quarter of 2009 and one note was converted to shares of Common Stock during the second quarter 2010. Beginning in March 2011, certain notes were exchanged into our 11/10 Offering. As a result, as of March 31, 2011, we had $1,647,329 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. The first of these notes matured in April 2010. We are working with the noteholders to either: repay the notes, refinance to our 11/10 Offering or convert the notes to shares of our Common Stock. These notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the three months ended March 31, 2011 and 2010, amortization of approximately $18,000 and $79,000, respectively, for these discounts has been recorded in interest expense.

CMS Acquisition, LLC Note Payable

In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) May 15, 2011 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The Company and CMS Acquisition, LLC entered into an amendment in February 2011 that extended the due date of the note from February 28, 2011 to May 15, 2011 for payment of $25,000 towards the accrued interest to date and principal of the note. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense. For the three months ended March 31, 2011, amortization of approximately $3,000 for this discount has been recorded in interest expense.

Summary of Cash Flow Activity

	Three months ended March 31,
	2011			2010
Net cash used by operating activities	$	(81,332	)	$	(87,000	)
Net cash used by investing activities		-			-
Net cash provided by financing activities		116,000			100,824

Net cash used by operating activities

During the three months ended March 31, 2011 and 2010, cash used by operating activities was impacted primarily by increases in accounts payable and other accrued liabilities.

Net cash provided by financing activities

Net cash provided by financing activities for the three months ended March 31, 2011 and 2010, were primarily due to the issuance of notes payable for investment, net of payments on other notes payable.

Contractual Obligations and Commitments

In the table below, we set forth our obligations as of March 31, 2011. Some of the figures we include in this table are based on our estimates and assumptions about these obligations, including their durations, anticipated actions by third parties and other factors. The obligations we may pay in future periods may vary from those reflected in this table because of estimates or actions of third parties as disclosed in the notes to the table.

	Payments due by Period
	Total		Less than 1 year		1 to 3 years		4 to 5 years		More than 5 years
Convertible Notes (1)	$	2,032,000	$	2,032,000	$	-	$	-	$	-
CMS Acquition Note (2)		78,000		78,000		-		-		-
Capital Lease (3)		3,000		3,000		-		-		-
Operating Lease (4)		-		-		-		-		-
Total contractual obligations	$	2,113,000	$	2,113,000	$	-	$	-	$	-

(1) Amount represents value of principal amount of notes and estimates for interest. These notes are with various individuals, carry one-year terms and are convertible into shares of Common Stock at the noteholders option. The first of these notes matured in April 2010. We are working with the noteholders to refinance their notes, convert their notes into shares of Common Stock or repay the Notes.

(2) Amount represents value of principal amount of note and interest and is secured by a security interest in the PSC Patent. Final payment on this note is due May 15, 2011.

(3) Represents lease on office furniture.

(4) The lease for our office space has expired and we are currently working on a new lease while we occupy the space.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

We believe that the estimates, assumptions and judgments relating to long-lived assets, convertible notes and warrants, fair-value measurement, share-based compensation and income tax matters have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting estimates. Our critical accounting policies and estimates are more fully described in our annual report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 29, 2011. Our critical accounting policies and estimate assumptions have not changed during the three months ended March 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Effectiveness of Disclosure Controls and Procedures – We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Security and Exchange Commission’s rules and regulations. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls and procedures will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives outlined above. Based on their most recent evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level at March 31, 2011. Further, the design of a control system must reflect the fact that there are resource constraints, including, but not limited to having two total employees (chief executive officer and chief financial officer), and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

Changes in Internal Control Over Financial Reporting – During the three months ended March 31, 2011, there were no material changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS –

During November 2010 (11/10 Offering), the Company commenced an offering of units comprised of a convertible promissory note and a warrant. As of March 31, 2011, the Company raised a total of $176,000 of investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.06 per share at the holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the principal amount of the associated note at a price of $0.30 per share. Two notes were converted during the first quarter of 2011 leaving $130,000 face value of notes outstanding. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 506 of Regulation D promulgated under the Securities Act (“Rule 506”) and/or Section 4(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES – Certain promissory notes in our offering of units comprised of a convertible promissory note and a warrant, commenced in April 2009 (2009 Offering) came due in April 2010 through March 2011 totaling approximately $1,650,000 (including approximately $140,000 of accrued interest). Approximately $1,155,000 has been refinanced to our 11/10 Offering beginning in March 2011 to May 10, 2011. We plan to work with each remaining noteholder to exchange, or convert, these promissory notes. There can be no assurance that we will reach agreements with any or all of these noteholders and we may be required to repay such amounts.

ITEM 4. RESERVED.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

(a) The following documents are filed as a part of this Report.

EXHIBIT NO.		DESCRIPTION

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32.1		Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive Officer.

32.2		Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer.

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.

	CLEANTECH BIOFUELS, INC.

Date: May 10, 2011	By:	/s/ Edward P. Hennessey, Jr.
		Edward P. Hennessey, Jr.
		Chief Executive Officer

Date: May 10, 2011	By:	/s/ Thomas Jennewein
		Thomas Jennewein
		Chief Financial Officer and
		Principal Accounting Officer

INDEX TO EXHIBITS

EXHIBIT NO.		DESCRIPTION

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32.1		Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive Officer.

32.2		Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer.

CleanTech Biofuels, Inc. - FORM 10-Q - May 10, 2011

Attached files

CleanTech Biofuels, Inc. Reports