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EX-31.2 - CERTIFICATION - CleanTech Biofuels, Inc.clth_ex312.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 SEPTEMBER 30, 2012

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 Smaller reporting company þ
(Do not check if a smaller reporting company)      
 
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 November 5, 2012, 72,486,647 shares of the Company's common stock were outstanding.
 


 
 

 
CLEANTECH BIOFUELS, INC.
 
TABLE OF CONTENTS
 
 
 
  PAGE  
PART I - Financial Information
           
Item 1
Consolidated Financial Statements
    3  
 
Consolidated Balance Sheets – September 30, 2012 and December 31, 2011
    3  
 
Consolidated Statements of Operations - Three and Nine months ended September 30, 2012 and 2011 and Inception to September 30, 2012
    4  
 
Consolidated Statements of Stockholders’ Equity (Deficit) – September 30, 2012
    5  
 
Consolidated Statements of Cash Flows – Nine months ended September 30, 2012 and 2011 and Inception to September 30, 2012
    6  
 
Notes to Consolidated Financial Statements
    8  
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    18  
Item 3
Quantitative and Qualitative Disclosures About Market Risk
    27  
Item 4T
Controls and Procedures
    27  
           
PART II - Other Information
           
Item 1
Legal Proceedings
    28  
Item 1A
Risk Factors
    28  
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
    28  
Item 3
Defaults upon Senior Securities
    29  
Item 4
Reserved
    29  
Item 5
Other Information
    29  
Item 6
Exhibits
    29  
           
Signatures     30  
           
Index to Exhibits
    31  
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
 
 CLEANTECH BIOFUELS, INC.
 (formerly Alternative Ethanol Technologies, Inc.)
 (A Development Stage Company)
 CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
Current Assets:
Cash and cash equivalents
  $ 17,398     $ -  
Prepaids and other current assets
    37,663       41,599  
      55,061       41,599  
                 
Property and equipment, net
    1,496       4,783  
                 
Non-Current Assets:
               
Technology license
    1,521,250       1,521,250  
Patents
    600,000       600,000  
Total Assets
  $ 2,177,807     $ 2,167,632  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
               
Accounts payable
  $ 452,547     $ 370,410  
Accrued interest
    190,140       105,009  
Accrued professional fees and other
    862,463       716,427  
Notes payable
    2,157,682       2,242,299  
Total Current Liabilities
    3,662,832       3,434,145  
                 
Notes Payable - Long-Term
    250,000       -  
                 
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;
               
72,486,647 and 69,760,667 shares issued and outstanding at
               
September 30, 2012 and December 31, 2011, respectively
    72,487       69,761  
Additional paid-in capital
    6,524,811       6,366,823  
Notes receivable - restricted common stock
    (141,901 )     (159,385 )
Deficit accumulated during the development stage
    (8,190,422 )     (7,543,712 )
Total Stockholders' Equity (Deficit)
    (1,735,025 )     (1,266,513 )
Total Liabilities and Stockholders' Equity (Deficit)
  $ 2,177,807     $ 2,167,632  
 
The accompanying notes are an integral part of these financial statements
 
 
3

 
 
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
                           
July 14, 2004
 
   
Three months ended
   
Nine months ended
   
(inception) to
 
   
September 30,
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
   
2012
 
                                         
General and administrative
  $ 93,846     $ 142,755     $ 282,323     $ 358,079     $ 3,596,100  
Professional fees
    44,553       31,395       135,042       92,699       1,401,599  
Research and development
    70,000       -       120,000       -       1,337,847  
Operating Loss
    208,399       174,150       537,365       450,778       6,335,546  
                                         
Other expense (income):
                                       
Interest expense
    37,638       34,951       108,361       141,140       1,845,116  
Amortization of technology license
    -       -       -       -       35,000  
Deposit forfeiture
    -       -       -       -       (25,000 )
Other income
    -       -       -       -       (82,000 )
Interest income
    5,453       (2,953 )     984       (2,827 )     (52,588 )
      43,091       31,998       109,345       138,313       1,720,528  
                                         
Income tax benefit
    -       -       -       -       -  
                                         
Net loss applicable to common stockholders
  $ 251,490     $ 206,148     $ 646,710     $ 589,091     $ 8,056,074  
                                         
                                         
Basic and diluted net loss per common share
    **       **     $ 0.01     $ 0.01     $ 0.15  
Weighted average common shares outstanding
    72,536,647       69,096,595       71,639,098       68,925,254       54,878,207  
 
** - less than $0.01
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
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
   
Sep 30, 2012
 
                               
Balances at December 31, 2011
    69,760,667     $ 69,761     $ 6,366,823     $ (159,385 )   $ (7,543,712 )
                                         
Conversion of Convertible Note in Jan-12 at $0.06
                                       
per share
    83,333       83       4,917       -       -  
Conversion of Convertible Notes in Apr-12 at $0.06
                                       
per share
    2,564,055       2,564       151,279       -       -  
Issuance of restricted shares in Apr-12 at $0.06 per
                                       
share for certain accounts payable
    78,592       79       4,637       -       -  
Issuance of restricted shares to Director in June-12
                                       
at $0.04 per share
    150,000       150       5,850       (6,000 )        
Expiration of Note Receivable in Aug-12 at $0.15/share
    (150,000 )     (150 )     (22,350 )     30,021          
Interest on Notes Receivable
    -       -       -       (6,537 )     -  
Stock-based compensation
    -       -       13,655       -       -  
Net loss
    -       -       -       -       (646,710 )
Balances at September 30, 2012
    72,486,647     $ 72,487     $ 6,524,811     $ (141,901 )   $ (8,190,422 )
 
The accompanying notes are an integral part of these financial statements.
 
 
5

 
 
CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
               
July 14, 2004
 
   
Nine months ended
   
(inception) to
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
 
Operating Activities                  
Net loss applicable to common stockholders
  $ (646,710 )   $ (589,091 )   $ (8,056,074 )
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
    3,287       3,745       66,860  
Amortization
    -       -       35,000  
Interest income
    984       (2,827 )     (25,201 )
Amortization of discounts (interest expense) and other financing charges
    -       41,661       1,284,106  
Share-based compensation expense
    13,655       34,681       791,847  
Issuance of restricted common stock
    -       63,000       63,000  
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
    5,914       (8,309 )     (6,020 )
Technology license
    -       -       (132,500 )
Accounts payable
    86,853       (37,952 )     457,263  
Other assets and other liabilities
    107,645       97,735       498,947  
Accrued liabilities
    146,036       151,944       862,463  
Net cash used by operating activities
    (282,336 )     (245,413 )     (3,244,637 )
                         
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
    (1,978 )     (1,500 )     (31,643 )
Payments on capital lease, including interest
    -       -       (13,903 )
Series A Convertible Debentures, including interest
    -       -       1,424,900  
Issuance of Note Payable
    -       -       100,000  
Issuance of Convertible Notes Payable
    301,712       332,500       2,617,213  
Payments on Note Payable
    -       (88,963 )     (635,295 )
Sale of common stock
    -       -       25,000  
Net cash provided by financing activities
    299,734       242,037       3,486,272  
Net increase (decrease) in cash and cash equivalents
    17,398       (3,376 )     17,398  
Cash and cash equivalents at beginning of period
    -       5,973       -  
Cash and cash equivalents at end of period
  $ 17,398     $ 2,597     $ 17,398  
 
 
6

 

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS cont'd (unaudited)
 
               
July 14, 2004
 
   
Nine months ended
   
(inception) to
 
    September 30,    
September 30,
 
   
2012
   
2011
   
2012
 
 Supplemental disclosure of cash flow information:
                 
Cash paid for interest
  $ 717     $ 12,140     $ 23,856  
                         
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 to consultant, director and former employee
  $ -     $ 63,000     $ 63,000  
Common stock issued for promissory notes
  $ -     $ -     $ 133,596  
Common stock issued for Convertible notes converted
  $ 155,551     $ 46,048     $ 435,980  
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.

 
7

 
 
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, aluminum).

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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. 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, 2011, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2012.
 
 
8

 

Note 2 – Recent Accounting Pronouncements

In May 2011, the FASB issued updated guidance on fair value measurements. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This guidance is effective during interim and annual periods beginning after December 15, 2011. This guidance did not have an impact on our consolidated financial statements or disclosures.

In June 2011, the FASB issued accounting guidance on the Presentation of Comprehensive Income, which requires entities to present reclassification adjustments included in other comprehensive income on the face of the financial statements and allows entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It also eliminates the option for entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This guidance is effective for fiscal years (and interim periods within those years) beginning after December 15, 2011. The adoption of this guidance did not impact the presentation of the Company's consolidated financial statements.

In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment, Intangibles—Goodwill and Other. This guidance provides companies with the option to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The authoritative guidance is effective for fiscal years beginning after December 15, 2011. This guidance did not have an impact on our consolidated financial statements.

In July 2012, the FASB issued updated authoritative guidance to amend previous guidance on the annual and interim testing of indefinite-lived intangible assets for impairment. The guidance provides entities with the option of first assessing qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If it is determined, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not less than the carrying amount, a quantitative impairment test would still be required. The Company performs annual impairment tests. The authoritative guidance is effective for fiscal 2013 and is not expected to have a significant impact on the Company’s consolidated financial statements.

There were various other accounting standards updates recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

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 September 30, 2012, it would result in an increase of approximately $120,000 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.
 
 
9

 

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 under the existing license agreement between Bio-Products International, Inc, the licensee (“Bio-Products”) and WWT. The Company has paid WWT $600,000 and issued warrants to purchase 1,800,000 shares of Common Stock at a price of $0.10 per share. 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. 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, as of March 31, 2010, through interest expense.

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.  The Company and CMS have entered into various amendments extending the due date, the most recent of which was November 1, 2012, which extended the due date to December 22, 2012. As consideration in these amendments, the Company has: (i) paid $25,000 in February 2011 towards accrued interest to date and principal on the Note (ii) increased the interest rate to 10% as of May 15, 2011 and (iii) re-dated the warrants to November 7, 2011.

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.
As disclosed in Note 4 - Patent, the Company acquired the PSC Patent in 2008 and as a result, became the licensor to Bio-Products for the PSC Patent pursuant to a Master License Agreement dated as of August 18, 2003 (the “PSC License Agreement”). Pursuant to the terms of the PSC License Agreement, 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. In addition, 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 Bio-Products, which included removing the exclusivity of the license. We received a response from Bio-Products on November 5, 2010 disputing our claims. In February 2011, we became aware that Bio-Products affected a transfer of the license in violation of the PSC License Agreement. As a result, on March 21, 2011, we sent a notice of termination to Bio-Products and the transferee terminating the License Agreement. In June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to void our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. The court granted our demurrer to dismiss Cleantech from this lawsuit on December 8, 2011. See Note 10 – Commitments and Contingencies for a further update.
 
 
10

 

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
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Convertible Notes Payable (2009 Offering), net of discount of $-0- at September 30,
           
2012 and December 31, 2011, which are made up of various individual notes with
           
an aggregate face value of $254,738 and $279,738 at September 30, 2012 and
           
December 31, 2011, respectively, due one year from date of note, interest at 6.0%
  $ 254,738     $ 279,738  
                 
Convertible Notes Payable (11/10 Offering), net of discount of $-0- at September 30, 2012
         
and December 31, 2011, which are made up of various individual notes with an
               
aggregate face value of $1,825,247 and $1,884,865 at September 30, 2012 and
               
December 31, 2011, respectively, due one year from date of note, interest at 6.0%
    1,825,247       1,884,865  
                 
Convertible Notes Payable (5/12 Offering), net of discount of $-0- at September 30, 2012
         
and December 31, 2011, which are made up of various individual notes with an
               
aggregate face value of $250,000 and $-0- at September 30, 2012 and December
               
31, 2011, respectively, due 18 months from date of note, interest at 6.0%
    250,000       -  
                 
CMS Acquisition, LLC Note Payable, net of discount of $-0- at September 30, 2012
               
and December 31, 2011, with a face value of $77,696 at September 30, 2012 and
               
December 31, 2011, due on October 27, 2012, interest at 10.0%
    77,696       77,696  
                 
Total debt
    2,407,681       2,242,299  
                 
Current maturities
    (2,157,681 )     (2,242,299 )
                 
Long-term portion, less current maturities
  $ 250,000     $ -  

 
11

 

Convertible Notes Payable

Since September 2008, the Company has conducted five offerings of units comprised of a convertible promissory note and a warrant having the terms set forth below:
 
Offering
 
Note Interest
Rate
   
Note Conversion
Price
   
Warrant Exercise
Price
   
Term
   
Closed or
Open
 
                                     
2008 Offering
    6.0 %   $ 0.25     $ 0.45    
One-year
   
Closed
 
2009 Offering
    6.0 %   $ 0.08     $ 0.30    
One-year
   
Closed
 
6/10 Offering
    12.0 %   $ 0.08     $ 0.30    
One-year
   
Closed
 
11/10 Offering
    6.0 %   $ 0.06     $ 0.30    
One-year
   
Closed
 
5/12 Offering
    6.0 %   $ 0.10     $ 0.35    
18 months
   
Open
 

Each note may be converted, at the note holder’s option, at any time during the 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. All notes have been recorded as debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features (except for the 11/10 and 5/12 Offerings which carried no discounts).

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. 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).

2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. 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 September 30, 2012, we had $254,738 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We are working with the remaining 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.

6/10 Offering - During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due on this offering is $-0-.

11/10 Offering - During November 2010, the Company commenced an offering of units and, as of September 30, 2012, had raised a total of $451,713 of investment proceeds. Three notes were converted to shares of common stock in 2011 and four in 2012. As of September 30, 2012, we had $1,825,247 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering. See Subsequent Events footnote for further disclosure regarding our notes.

5/12 Offering - During May 2012, the Company commenced an offering of units and, as of September 30, 2012, had raised a total of $250,000 of investment proceeds. See Subsequent Events footnote for further disclosure regarding our notes.
 
 
12

 

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 through May 15, 2011 and 10.0% thereafter, 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) December 22, 2012 pursuant to an amendment on November 1, 2012 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 (November 7, 2011). The value of these warrants has been recorded as a contra-balance amount discount with the note and was amortized (interest expense) through February 28, 2011 (the original due date).

The discounts on all notes payable have been amortized on a straight-line basis over the term of each note. All discounts were fully amortized and expensed as of June 30, 2011. For the three and nine months ended September 30, 2011, amortization of the discounts (included in interest expense in the financial statements) was $-0- and $41,661.

Note 7 - Stockholders' Equity (Deficit)

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.

In June and December 2011, separate notes receivable from a consultant matured and were not paid. The notes were originally issued in June and December 2009 to purchase shares of our common stock. As a result, 625,000 shares of restricted stock, issued at $0.12 per share, and 625,000 shares of restricted stock, issued at $0.06 per share, were forfeited and cancelled.

In July 2011, the Company issued 333,333 restricted shares of Common Stock ($0.06 per share) to a consultant in exchange for $20,000 owed in consulting fees to the consultant.

In August 2011, the Company issued 150,000 restricted shares of our Common Stock ($0.055 per share) to each of our non-management Directors (600,000 shares in the aggregate) in recognition of their additional service and assistance to the Company outside of their duties as a member of the Company’s board of directors.

In September 2011, the Company issued 200,000 restricted shares of our Common Stock ($0.05 per share) to a former employee as part of a final settlement agreement.

In December 2011, the Company issued 860,183 shares of Common Stock ($0.06 per share) to an investor upon the conversion of a Convertible Note.

In January 2012, the Company issued 83,333 shares of Common Stock ($0.06 per share) to an investor upon the conversion of a Convertible Note.

In April 2012, the Company issued 2,564,055 shares of Common Stock ($0.06 per share) to an investor upon the conversion of Convertible Notes.

In April 2012, the Company issued 78,592 restricted shares of Common Stock ($0.06 per share) in exchange for $4,715.55 related to certain accounts payable.

In June 2012, the Company issued 150,000 restricted shares of our Common Stock ($0.04 per share) to our newly elected non-management director. The director issued a promissory note to the Company in exchange for the stock purchase similar to the restricted share grants to all other newly elected directors.
 
 
13

 

In August 2012, a note receivable from a former director matured and was not paid. The note was originally issued in August 2007 to purchase shares of our common stock. As a result, 150,000 shares of restricted stock, issued at $0.15 per share were forfeited and cancelled.

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 September 30, 2012 and December 31, 2011, the Company had options, warrants and other convertible securities to purchase an aggregate of approximately 65 million and 62 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 statement of operations.

Note 8 - Related Party Transactions

The Company has entered into stock purchase agreements with the executive officers and certain members of the Board of Directors. The executive officers and directors issued notes to the Company in exchange for their stock purchases. These notes 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. As of September 30, 2012, all amounts have been paid to SSB except for approximately $90,000.

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 September 30, 2012 and December 31, 2011, the aggregate balances of advances totaled approximately $32,000 and $30,000, respectively. The balances are included in Prepaids and Other Current Assets on the Balance Sheet.

Four members of our Board of Directors, Dr. Jackson Nickerson, Mr. Jose Bared, Sr., David Bransby and James Russell are parties in investments made in our convertible note offerings. As of September 30, 2012 and December 31, 2011, the aggregate amount of these investments, including interest, is approximately $933,000 and $650,000, respectively. Dr. Nickerson has agreed to exchange all of his notes into our 11/10 Offering, except one for $50,000. He has put the company on notice of his demand for payment and intent not to exchange this note. As of September 30, 2012, this note has not been repaid.

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.
 
 
14

 
 
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. In March 2012, 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 March 2013, with an exercise price of $0.04. As of September 30, 2012, none of these options were cancelled or expired and 375,000 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 September 30, 2012, none of these options were cancelled or expired and all shares of these options were vested.

In August 2011, the Company granted options under the Stock Plan to purchase an aggregate of 2,950,000 shares of Common Stock to employees in which one-third vest annually beginning in August 2012, with an exercise price of $0.055. As of September 30, 2012, none of these options were cancelled or expired and 983,333 were vested. Additionally, the Company issued 150,000 restricted shares of our Common Stock ($0.055 per share) to each of our non-management Directors (600,000 shares in the aggregate) in recognition of their additional service and assistance to the Company outside of their duties as a member of the Company’s board of directors.

In June 2012, the Company granted options under the Stock Plan to purchase 40,000 shares of Common Stock to our newly elected director in which one half vests annually beginning in June 2013, with an exercise price of $0.04. As of September 30, 2012, none of these options were cancelled, expired or vested.

The following table provides a summary of the Company's share-based expense:
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Pre-tax compensation expense:
                       
Stock options
  $ 3,831     $ 9,428     $ 13,655     $ 34,681  
Warrants
    -       -       -       -  
Total expense
    3,831       9,428       13,655       34,681  
Tax benefit, net
    -       -       -       -  
After-tax compensation expense
  $ 3,831     $ 9,428     $ 13,655     $ 34,681  

Related to these grants, the Company will record future compensation expense of approximately $2,000 for the remainder of 2012. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements totaled approximately $308,000 and $300,000 at September 30, 2012 and December 31, 2011, respectively. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently. As of September 30, 2012, there was approximately $11,000 of unrecognized compensation cost related to all current share-based payment arrangements, which will be recognized over a remaining period of approximately 2.25 years.
 
 
15

 

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, 2011
    9,822,000     $ 0.11       (1 )
                         
Granted
    290,000     $ 0.04          
Exercised
    -                  
Forfeited
    (120,000 )   $ 0.07          
                         
Options outstanding at September 30, 2012
    9,992,000     $ 0.11       (1 )
                         
Options exercisable at September 30, 2012
    7,500,333     $ 0.12       (1 )
                         
Unvested Options at September 30, 2012
    2,491,667     $ 0.05       (1 )
 
(1) The weighted-average exercise price at September 30, 2012 and December 31, 2011 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, 2011
    1,470,000     $ 0.10  
                 
Granted
    150,000     $ 0.04  
Exercised
    -          
Forfeited
    (150,000 )   $ 0.15  
                 
Balance as of September 30, 2012
    1,470,000     $ 0.09  
                 
Restricted stock vested at September 30, 2012
    1,470,000     $ 0.09  
 
 
16

 

Note 10 – Commitments and Contingencies

Contingencies
As disclosed previously in Note 5 – Technology Licenses, in June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to avoid our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss Cleantech was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla v. Cleantech Biofuels, Inc. CCT is asking that the Company’s termination of the license agreement is void. The Company filed a motion to compel arbitration, which was denied. The Company has filed an appeal on the motion to compel arbitration.  On January 30, 2012, CCT filed an anti-trust lawsuit against the Company and Mr. Vande Vegte alleging monopolistic and anti-competitive acts to conspire to completely eliminate competition in an emerging line of commerce known as PSC conversion, which is a patented process owned by Cleantech (the PSC technology). On March 26, 2012, the Company filed a motion to dismiss which the court has denied. The court has set the early neutral evaluation conference for November 9, 2012.

We intend to vigorously defend our rights. In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of these matters, or the eventual loss, fines or penalties related to each pending matter. We believe that these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, an adverse outcome could be material to the Company’s results of operations or cash flows for any particular reporting period.

Commitments
Lease – 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.

Note 11 – Subsequent Events

Since September 2008, the Company has conducted five offerings of units comprised of a convertible promissory note and a warrant. In connection with our 5/12 Offering, which is the only offering still open, we have raised a total of $250,000 of investment proceeds as of November 5, 2012.

All of the promissory notes in our 2009 Offering and certain notes in our 11/10 Offering are now due. As of November 5, 2012, approximately $1.7 million is currently due, including interest. We are working with each remaining noteholder to exchange, convert or repay these promissory notes.

Effective November 1, 2012, the Company terminated the Engagement Letter with Bauhaus Capital Partners (“Bauhaus”), originally dated April 23, 2012. Bauhaus was engaged to assist the Company with financial advisory and business development services with the objective of raising funds from a private equity or strategic investment source for Company growth and development uses. The Company will continue to explore and evaluate financing alternatives and/or other transactions, including potentially retaining a new financial advisor.

The Company and CMS have entered into various amendments extending the due date of the Company’s Note Payable to CMS, the most recent of which was November 1, 2012, which extended the due date to December 22, 2012.
 
 
17

 

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, 2011, filed with the SEC on March 29, 2012, 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, Recent Developments 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.
 
 
18

 

We are the exclusive licensee in the United States and Canada of patented technology in the United States that we refer to as our Biomass Recovery Process that cleans and separates MSW and generates a clean, homogeneous biomass feedstock that we believe can be converted into various energy products. Our license permits us to use the biomass we derive from MSW to produce all energy products. In addition, we own the patent for a pressurized steam classification technology originally developed by the University of Alabama Huntsville that we refer to as our PSC technology. The PSC technology is the underlying technology upon which the Biomass Recovery Process was based. Prior to March 2011, we had licensed the PSC technology to Bio-Products International, Inc. (“Bio-Products”) pursuant to the terms of a settlement agreement we entered into with Bio-Products in March 2009, whereby, 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 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 at that time was seeking to commercialize various technologies for the processing of waste materials into usable products. 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.

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

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. Fiberight is continuing to evaluate alternative technologies to provide feedstock for their process, which we expect they will complete during the second half of 2012. 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.

In June 2011, we entered into a Confidential Disclosure and Sampling Agreement with Novozymes North America, Inc., a developer of industrial enzymes, microorganisms, and biopharmaceutical ingredients for conversion into a variety of energy and chemical products. In July 2011, we supplied a sample of our biomass product for testing in their enzymatic hydrolysis process. Some initial testing was completed during the 3rd Quarter of 2011. We expect further testing to occur upon securing the requisite financing.

In February 2012, we entered into a Confidentiality Agreement and Material Transfer Agreement with Sweetwater Energy, Inc., (“Sweetwater”) a renewable energy company with patent-pending technology to produce sugars from several types of biomass for use in the biofuel, biochemical and bioplastics markets. Cleantech has agreed and has coordinated with the facility in Coffs Harbor, Australia to ship 10 pounds of biomass produced at the Coffs Harbor facility to the Sweetwater lab for testing. The shipment arrived in May 2012. Sweetwater has completed their initial testing and we expect additional testing to occur on future samples upon securing our requisite funding.

All of the promissory notes in our 2009 Offering and certain notes in our 11/10 Offering are now due. As of November 5, 2012, approximately $1.7 million is currently due, including interest. 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.
 
 
19

 

On September 22, 2010, we notified Bio-Products that it was in breach of the license agreement governing our license of the PSC technology to Bio-Products, which included removing the exclusivity of the license. We received a response from Bio-Products on November 5, 2010 disputing our claims. In February 2011, we became aware that Bio-Products affected 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 Bio-Products and the transferee terminating the license agreement. In June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various parties, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to void our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss Cleantech was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla asking that the Company’s termination of the sub-license agreement is void. The Company filed a motion to compel arbitration, which was denied. The Company has filed an appeal on the motion to compel arbitration.

Additionally, on January 30, 2012, CCT filed an anti-trust lawsuit alleging monopolistic and anti-competitive acts to conspire to completely eliminate competition in an emerging line of commerce known as PSC conversion, which is a patented process owned by Cleantech (the PSC technology). On March 26, 2012, the Company filed a motion to dismiss which the court has denied. The court has set the early neutral evaluation conference for November 9, 2012. We intend to vigorously defend our rights.

In April 2012, the Company entered into an Engagement Letter with Bauhaus Capital Partners (“Bauhaus”) whereby Bauhaus would assist the Company with financial advisory and business development services with the objective of raising funds from a private equity or strategic investment source for Company growth and development uses. Effective November 1, 2012, the Company terminated the Engagement Letter with Bauhaus. The Company will continue to explore and evaluate financing alternatives and/or other transactions, including potentially retaining a new financial advisor.

Beginning in May 2012, the Company commenced an offering of units comprised of a convertible promissory note and a warrant (our 5/12 Offering). As of November 5, 2012, the Company has received $250,000 in investment proceeds. Each convertible promissory note carries an 18-month 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 $0.10 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 $0.35 per share.

In May 2012, the Company entered into an Engagement Agreement with Fenton Engineering International (“Fenton”) whereby Fenton will provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station to process municipal solid waste into biomass and recyclables for conversion into renewable fuels, power and bio-based chemicals. This engineering phase will define the infrastructure required, locate utility tie-ins, locate existing and new structures, select materials handling equipment, develop an equipment arrangement and provide a cost estimate for the project.

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.
 
 
20

 

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 continue to evaluate 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. Fiberight is continuing to evaluate alternative technologies to provide feedstock for their process, which we expect they will complete during the second half of 2012. 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.

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 February 2012, we entered into a Confidentiality Agreement and Material Transfer Agreement with Sweetwater Energy, Inc., (“Sweetwater”) a renewable energy company with patent-pending technology to produce sugars from several types of biomass for use in the biofuel, biochemical and bioplastics markets. Cleantech has agreed and has coordinated with the facility in Coffs Harbor, Australia to ship 10 pounds of biomass produced at the Coffs Harbor facility to the Sweetwater lab for testing. The shipment arrived in May 2012. Sweetwater has completed their initial testing and we expect additional testing to occur on future samples upon securing our requisite funding.
 
 
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In June 2011, we entered into a Confidential Disclosure and Sampling Agreement with Novozymes North America, Inc., a developer of industrial enzymes, microorganisms, and biopharmaceutical ingredients for conversion into a variety of energy and chemical products. In July 2011, we supplied a sample of our biomass product for testing in their enzymatic hydrolysis process. Some initial testing was completed during the 3rd Quarter of 2011. We expect further testing to occur upon securing the requisite financing.

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 our licensed territories.

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 tables set forth the amounts of expenses and changes in our consolidated statements of operations for the three months ended September 30, 2012 and 2011:
 
   
Three months ended September 30,
       
   
2012
   
2011
   
Change
 
                         
General and administrative
  $ 93,846     $ 142,755     $ (48,909 )
Professional fees
    44,553       31,395       13,158  
Research and development
    70,000       -       70,000  
Operating loss
    208,399       174,150       34,249  
                         
Other expense (income):
                       
Interest expense
    37,638       34,951       2,687  
Interest income
    5,453       (2,953 )     8,406  
                         
Net Loss
  $ 251,490     $ 206,148     $ 45,342  
 
 
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General and administrative – The decrease in 2012 is due primarily to a reduction in share-based compensation.

Professional Fees – The increase in 2012 is due to increased legal fees.

Research and Development – The increase in 2012 is due to an engagement with an engineering firm to provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station.

Interest Income - A note receivable to purchase shares of our common stock, originally issued in August 2007, matured in August 2012 and was not paid. As a result, the accrued interest income of approximately $7,000 and the note were written-off and the shares were forfeited and cancelled.

The following tables set forth the amounts of expenses and changes in our consolidated statements of operations for the nine months ended September 30, 2012 and 2011:
 
   
Nine months ended September 30,
       
   
2012
   
2011
   
Change
 
                         
General and administrative
  $ 282,323     $ 358,079     $ (75,756 )
Professional fees
    135,042       92,699       42,343  
Research and development
    120,000       -       120,000  
Operating loss
    537,365       450,778       86,587  
                         
Other expense (income):
                       
Interest expense
    108,361       141,140       (32,779 )
Interest income
    984       (2,827 )     3,811  
                         
Net Loss
  $ 646,710     $ 589,091     $ 57,619  

General and administrative – The decrease in 2012 is due primarily to a reduction in share-based compensation.

Professional Fees – The increase in 2012 is due to increased legal fees of approximately $48,000 offset by a reduction in consulting and accounting fees of approximately $6,000.

Research and Development – The increase in 2012 is due to an engagement with an engineering firm to provide the front-end engineering for the Company’s first operating commercial plant at an existing transfer station.

Interest expense – The decrease in 2012 is due to the fact that amortization of all discounts related to various notes was fully expensed by June 2011.

Interest Income - A note receivable to purchase shares of our common stock, originally issued in August 2007, matured in August 2012 and was not paid. As a result, the accrued interest income of approximately $7,000 and the note were written-off and the shares were forfeited and cancelled.
 
 
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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 November 5, 2012, we raised an aggregate of approximately $2.7 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 November 5, 2012, 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. Effective November 1, 2012, the Company terminated the Engagement Letter with Bauhaus Capital Partners (“Bauhaus”), originally dated April 23, 2012. Bauhaus was engaged to assist the Company with financial advisory and business development services with the objective of raising funds from a private equity or strategic investment source for Company growth and development uses. The Company will continue to explore and evaluate financing alternatives and/or other transactions, including potentially retaining a new financial advisor. 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 five offerings of units comprised of a convertible promissory note and a warrant having the terms set forth below:


Offering
 
Note Interest
Rate
   
Note Conversion
Price
   
Warrant Exercise
Price
   
Term
   
Closed or
Open
 
                                     
2008 Offering
    6.0 %   $ 0.25     $ 0.45    
One-year
   
Closed
 
2009 Offering
    6.0 %   $ 0.08     $ 0.30    
One-year
   
Closed
 
6/10 Offering
    12.0 %   $ 0.08     $ 0.30    
One-year
   
Closed
 
11/10 Offering
    6.0 %   $ 0.06     $ 0.30    
One-year
   
Closed
 
5/12 Offering
    6.0 %   $ 0.10     $ 0.35    
18 months
   
Open
 

Each note may be converted, at the note holder’s option, at any time during the 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. All notes have been recorded as debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features (except for the 11/10 and 5/12 Offerings which carried no discounts). The discounts have been amortized on a straight-line basis over the term of each note. All discounts were fully amortized and expensed as of June 30, 2011. For the three and nine months ended September 30, 2011, amortization of the discounts (included in interest expense in the financial statements) was $-0- and $41,661.

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.  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).
 
 
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2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. 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 September 30, 2012, we had $254,738 face value of notes outstanding, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We are working with the remaining noteholders to either: repay the notes, refinance to our 11/10 Offering or convert the notes to shares of our Common Stock.

6/10 Offering - During June 2010, the Company commenced an offering of units and raised a total of $75,000 of investment proceeds in one note. Upon maturity in June 2011, this note was exchanged into our 11/10 Offering. As a result, the balance due on this offering is $-0-.

11/10 Offering - During November 2010, the Company commenced an offering of units, and as of September 30, 2012, had raised a total of $451,713 of investment proceeds. Three notes were converted to shares of common stock in 2011and four in 2012. As of September 30, 2012, we had $1,825,247 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering.

5/12 Offering - During May 2012, the Company commenced an offering of units and, as of September 30, 2012, had raised a total of $250,000 of investment proceeds.

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 through May 15, 2011 and 10.0% thereafter 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) December 22, 2012 (extended from February 28, 2011 through various amendments) 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 (November 7, 2011). The value of these warrants has been recorded as a contra-balance amount discount with the note and was amortized (interest expense) through the original due date of February 28, 2011.

Summary of Cash Flow Activity
 
   
Nine months ended September 30,
 
   
2012
   
2011
 
                 
Net cash used by operating activities
  $ (282,336 )   $ (245,413 )
Net cash used by investing activities
    -       -  
Net cash provided by financing activities
    299,734       242,037  

Net cash used by operating activities

During the nine months ended September 30, 2012 and 2011, cash used by operating activities was impacted primarily by increases in accounts payable and other accrued liabilities.
 
 
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Net cash provided by financing activities

Net cash provided by financing activities for the nine months ended September 30, 2012 and 2011, were primarily due to the issuance of notes payable for investment, net of payments on other notes payable in 2011.

Contractual Obligations and Commitments

In the table below, we set forth our obligations as of September 30, 2012. 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)
  $ 2,508,000     $ 2,255,000     $ 253,000     $ -     $ -  
CMS Acquition Note (2)
    90,000       90,000       -       -       -  
Operating Lease (3)
    -       -       -       -       -  
Total contractual obligations
  $ 2,598,000     $ 2,345,000     $ 253,000     $ -     $ -  
 
(1) Amount represents value of principal amount of notes and estimates for interest. These notes are with various individuals, carry one-year or 18-month 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 December 22, 2012.
 
(3) The lease for our office space has expired and we are currently working on a new lease while we occupy the space.
 
 
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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, 2011, filed with the Securities and Exchange Commission on March 29, 2012. Our critical accounting policies and estimate assumptions have not changed during the three months ended September 30, 2012.

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 September 30, 2012. 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 September 30, 2012, 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.
 
 
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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Steve Vande Vegte v. various individuals and companies, including Cleantech Biofuels, Inc. - On September 22, 2010, we notified Bio-Products International, Inc. (“Bio-Products”) that it was in breach of the license agreement governing our license of the PSC technology to Bio-Products (a wholly-owned subsidiary of CES) , which included removing the exclusivity of the license. We received a response from Bio-Products on November 5, 2010 disputing our claims. In February 2011, we became aware that Bio-Products affected 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 Bio-Products and the transferee terminating the license agreement. In June 2011, Steve Vande Vegte, a shareholder in CES, filed a lawsuit against various individuals and companies, including the Company. The only Cause of Action against the Company is for Declaratory Relief seeking to avoid our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss Cleantech was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla v. Cleantech Biofuels, Inc. CCT is asking that the Company’s termination of the sub-license agreement is void. The Company filed a motion to compel arbitration, which was denied. The Company has filed an appeal on the motion to compel arbitration. We intend to vigorously defend our rights.

Clean Conversion Technologies, Inc. v. Cleantech Biofuels, Inc. and Steve Vande Vegte - On January 30, 2012, CCT filed an anti-trust lawsuit against the defendants alleging monopolistic and anti-competitive acts to conspire to completely eliminate competition in an emerging line of commerce known as PSC conversion, which is a patented process owned by Cleantech (the PSC technology). On March 26, 2012, the Company filed a motion to dismiss which the court has denied. The court has set the early neutral evaluation conference for November 9, 2012. We intend to vigorously defend our rights.

Blue Springs Communications (BSC) v. Cleantech Biofuels, Inc. - On April 17, 2012, BSC filed a lawsuit against the Company for approximately $8,000 due BSC for marketing services. The court date is currently set for November 8, 2012.

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, 2011, 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 May 2012 (5/12 Offering), the Company commenced an offering of units comprised of a convertible promissory note and a warrant. As of September 30, 2012, the Company raised a total of $250,000 of investment proceeds. Each convertible promissory note carries an 18-month 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 $0.10 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 $0.35 per share. 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.
 
 
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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 and 11/10 Offering) are due. As of September 30, 2012, approximately $1.7 million (including approximately $165,000 of accrued interest) was due and payable. 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

Amendment No.7 dated November 1, 2012 to a Promissory Note issued in favor of CMS Acquisition, LLC dated September 1, 2010.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
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.
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.
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  CLEANTECH BIOFUELS, INC.  
       
Date: November 5, 2012
By:
/s/ Edward P. Hennessey, Jr.  
    Edward P. Hennessey, Jr.  
    Chief Executive Officer  
 
 
Date: November 5, 2012
By:
/s/ Thomas Jennewein  
    Thomas Jennewein  
    Chief Financial Officer and  
    Principal Accounting Officer  
 
 
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INDEX TO EXHIBITS

EXHIBIT NO.
 
DESCRIPTION

Amendment No.7 dated November 1, 2012 to a Promissory Note issued in favor of CMS Acquisition, LLC dated September 1, 2010.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
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.
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.

 
 
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