UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

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

(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 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.

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 August 13, 2008, 58,232,591 shares of the Company’s common stock were outstanding.

 

 

CLEANTECH BIOFUELS, INC.
TABLE OF CONTENTS

		PAGE
PART I Financial Information
Item 1 Financial Statements (Unaudited)
Balance Sheets — June 30, 2008 and December 31, 2007			3
Statements of Operations — Three and six months ended June 30, 2008 and 2007 and Inception to June 30, 2008			4
Statements of Stockholders’ Deficit — June 30, 2008			5
Statements of Cash Flows — Six months ended June, 2008 and 2007 and Inception to June 30, 2008			6
Notes to Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3 Quantitative and Qualitative Disclosures About Market Risk			18
Item 4T Controls and Procedures			18
PART II Other Information
Item 1 Legal Proceedings			19
Item 1A Risk Factors			19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3 Defaults upon Senior Securities			20
Item 4 Submission of Matters to a Vote of Security Holders			20
Item 5 Other Information			20
Item 6 Exhibits			20
Signatures			21
Index to Exhibits			22
Exhibit 2.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

See accompanying notes to financial statements .

See accompanying notes to financial statements.

See accompanying notes to financial statements.

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 $.001 par value 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 disclosed in this report 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. Its business strategy is to develop, own and operate renewable energy facilities with a primary focus on the conversion of cellulose feed stocks to fuel ethanol and other combustible fuels. The Company has limited exclusive licenses to technology designed to convert cellulosic feed stocks, including municipal solid waste (also referred to as MSW), into ethanol and other combustible sources of energy. The Company has no operating history as a producer of ethanol and has not constructed any ethanol plants to date. It has no revenues to date and expects that its current capital and other existing resources will be sufficient only to provide a limited amount of working capital. 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.

Note 2 — Interim Financial Statements

The accompanying unaudited, 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 Article 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 six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the Company’s audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 28, 2008.

Note 3 — Technology Licenses

Brelsford Engineering, Inc.

On April 1, 2005, the Company entered into a license agreement with Brelsford Engineering, Inc. (“Brelsford”) giving the Company the exclusive right to use Brelsford’s technology (Patent No. 5,411,594) to convert cellulosic biomass into fuel grade ethanol in the United States. This agreement was amended in November 2005 to extend the initial evaluation period for the technology. Under the terms of the license with Brelsford, the Company paid an initial fee of $50,000 and monthly fees for the trial option premium totaling $67,500 (recorded as a long-term asset in the aggregate on the balance sheet). The Company also pays a minimum annual fee of $15,000 and a project fee of $30,000 for each project that commences for the manufacture of a plant. On August 30, 2007, the Company paid the first project fee in the amount of $30,000 to Brelsford with the respect to the commencement of the design of our pilot plant and Brelsford simultaneously acknowledged that the Company had met all requirements to maintain the exclusivity of its license. In addition, the Company will pay a royalty fee equal to 4 percent of sales resulting from use of the licensed product less any applicable taxes. Brelsford may terminate the license agreement on sixty days’ notice if the Company fails to make any payment due under our license agreement. Commencing with the first project payment, the Company began amortizing costs previously capitalized over the remaining term of the license. Amortization expense for the three and six months ended June 30, 2008 is $3,750 and $7,500, respectively. There was no amortization expense for the three and six months ended June 30, 2007. The license, issued by Brelsford, terminates simultaneously with the expiration of the patent, in May 2015.

Bio-Products International, Inc.

On August 17, 2005, the Company entered into a license agreement with Bio-Products International, Inc. (“Bio-Products”) giving the Company limited exclusive rights to use Bio-Products technology (Patent No. 6,306,248) to process MSW and convert the cellulosic component of that waste to a homogenous feedstock to produce ethanol in the United States, subject to the right of Bio-Products to request five sites to construct MSW to ethanol plants in the United States. The Company’s license with Bio-Products is for a period of twenty years. Under the license, Bio-Products is paid a process royalty of $1.50 for every ton of waste received and processed at each facility to be constructed and operated under the agreement. The Company also is required to pay a by-product royalty of 2.5 percent of the gross sales price in excess of $10 per ton obtained from the sale of recyclable byproducts, excluding the cellulosic biomass. Bio-Products will also be paid a monthly fee for technical services to be provided by Bio-Products for each facility to be constructed and operated which initially will be $10,000 per month and will increase to $20,000 per month when vessels for processing waste are ordered for the facility. The $20,000 per month fee continues until construction of the facility is completed.

HFTA, Inc.

On March 20, 2008, the Company entered into a license agreement with HFTA, Inc. (“HFTA”) granting the Company the exclusive worldwide right to use the HFTA technology for the production of ethanol from MSW. The terms set out in the agreement required us to pay an initial license fee of $25,000 to HFTA on execution of the agreement and a second license fee in the amount of $150,000 on September 1, 2009 if we are using the technology at that time.

Additionally, we deposited 2,887,687 shares of our common stock into an escrow account on May 12, 2008. The shares held in escrow will be released to HFTA as follows: one-third upon completion of the proof of concept phase if at that time we elect to continue to use the HFTA technology in the demonstration phase and two-thirds upon completion of the demonstration phase if at that time we elect to incorporate the HFTA technology into the small commercial plant. For accounting purposes, the shares held in escrow are not considered issued and outstanding as the Company has the option to use or not use the technology and the shares are not deemed issued or vested until that time as described above. As of June 30, 2008, the approximate expense to be recorded upon issuing the first third of the shares, based on the market value of our common stock at June 30, 2008, would be approximately $1.1 million.

In addition, we are required to pay a process royalty of 4% of the sales price of ethanol less taxes and applicable fees if the sales price is in excess of $1.50 per gallon, 3% of the sales price if it is between $1.50 and $1.30 per gallon, and 2% of the sales price if it is less than $1.30 per gallon. We are also required to pay certain minimum royalties, less the amount of any process royalties paid, commencing in the calendar year ending December 31, 2010 and in subsequent years as follows: (i) 2010 -$25,000; (ii) 2011 — $25,000; (iii) 2012 — $60,000; (iv) increasing by $20,000 per year for each year thereafter until it reaches $120,000 per year; and (v) $120,000 per year thereafter.

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 4 — Series A Convertible Debentures

In April 2007, the Company sold $1,400,000 of Series A Convertible Debentures (“Debentures”), due April 16, 2010, that convert into shares of the Company’s common stock at $.15 per share. The Company filed a registration statement with regard to the sale of these shares of common stock, which was declared effective by the Securities and Exchange Commission on January 2, 2008. The debentures accrue interest at 6% per annum. The interest is payable in cash or shares of the Company’s common stock at the Company’s option. The Debenture Holders can convert their amount into shares at any time until the due date. The maximum number of shares that would be issued at the due date is 11,013,333.

The Company received cash of $950,000 and Promissory Notes (“Notes”) with an aggregate principal amount of $450,000 that accrue interest at 6.0%. Effective with the listing of our common stock on the OTCBB on March 13, 2008 (previously traded on Pink Sheets) we received full payment on all principal and accrued interest on the Notes totaling approximately $475,000 on March 14, 2008.

During March 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,433,067 shares of our common stock. During April 2008, various debenture holders converted an aggregate amount of $630,000 of our Debentures, plus interest earned, into 4,455,844 shares of our common stock. These transactions converted in the aggregate $1,260,000 of our Debentures, leaving $140,000 remaining to be converted. As of June 30, 2008 and August 5, 2008, $140,000 of our Debentures remained outstanding and eligible for conversion.

Note 5 — Stockholders’ Deficit

In May 2007, the Company acquired SRS Energy through a reverse merger. Pursuant to the merger, the Company issued 38,624,784 shares of the Company’s common stock and a warrant exercisable until August 31, 2009 to purchase 1,923,495 shares of common stock at $.13 per share to the former stockholders of SRS Energy in exchange for the cancellation of all of the outstanding capital stock of SRS Energy and cancellation of an option to acquire 5% of the outstanding capital stock of SRS Energy. The Company affected a reverse split of its common stock at a ratio of 100 to 1 in January 2007. 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 such, the historical information prior to the merger of the Company disclosed in the report is that of SRS Energy. Historical share amounts have been restated to reflect the effect of the merger.

In May 2007, the Company issued 9,366,800 shares of common stock ($.014 per share) upon the conversion of three promissory notes totaling $114,681 and accrued interest of $18,915.

In March 2008, the Company issued 4,433,067 shares of common stock ($0.15 per share) upon the conversion of an aggregate amount of $630,000 of the Company’s Debentures and accrued interest of approximately $35,000.

In April 2008, the Company issued 4,455,844 shares of common stock ($0.15 per share) upon the conversion of an aggregate amount of $630,000 of the Company’s Debentures and accrued interest of approximately $38,000.

Note 6 — Related Party Transactions

For the three and six months ended June 30, 2008, the Company incurred corporate and administrative fees of approximately $160 and $510, respectively, for expenses paid by its president on behalf of the Company. For the three and six months ended June 30, 2007, the Company incurred corporate and administrative fees of approximately $-0- and $4,000, respectively, for expenses paid by its president on behalf of the Company. The Company had been using the office of its president for corporate and administrative purposes until entering into a lease for office space which we occupied and began paying rent in January 2008.

The Company had a $72,103 advance from one of its board of director members at December 31, 2006 evidenced by a promissory note that accrued interest at 9.5% per annum. The promissory note also contained an option to acquire 5% of the outstanding capital stock of SRS Energy at a price of $250,000. In April 2007, the indebtedness under the promissory note was repaid and the promissory note was cancelled. Under its terms, the right to exercise the option to purchase shares survived after the repayment of the indebtedness under the note. As part of the merger consideration issued by the Company pursuant to the acquisition of SRS Energy, the Company issued a warrant exercisable until August 31, 2009 to purchase 1,923,495 shares of its common stock at $.13 per share to replace the option included in the promissory note on substantially similar terms as the option.

In August 2007, the Company entered into stock purchase agreements with certain members of the Board of Directors pursuant to which the members acquired shares of restricted stock. The directors issued notes to the Company in exchange for their stock purchases. See Note 7 for further discussion. These notes are recorded as notes receivable in Stockholders’ Deficit.

The Company engages 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. For the three and six months ended June 30, 2008, we incurred approximately $58,000 and $113,000, respectively, in legal fees with SSB. For the three and six months ended June 30, 2007, we incurred approximately $105,000 in legal fees with SSB. As of June 30, 2008, all amounts have been paid to SSB except for approximately $58,000.

The Company uses Arthur J. Gallagher (“AJG”) as its broker for business and property insurance. Our CEO’s brother is employed by AJG and is involved in the negotiation of coverage and premiums related to policies placed for the Company. For the three and six months ended June 30, 2008, the Company paid approximately $0 and $3,000, respectively, in commissions on policies placed by AJG. The Company placed no policies and paid no commissions in 2007.

Note 7 — Share-based Payments

The Company accounts for stock options and restricted stock issued to employees and directors under SFAS No. 123(R), in which share-based compensation cost to employees and directors 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, officers, 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 has reserved a maximum of 9,000,000 shares of common stock to be issued for the exercise of options or shares awarded under the Stock Plan. A proposal to increase the maximum share amount to 9,000,000 from 7,000,000 was approved by the Company’s stockholders at the Company’s Annual Stockholder Meeting, held on June 17, 2008.

In August 2007, the Company granted options under the Stock Plan to purchase an aggregate 3,850,000 shares of common stock to various employees that vest ratably over three years and options to purchase an aggregate 160,000 shares of common stock to directors that vest ratably over two years. All of these options have an exercise price of $0.15. The Company also issued an aggregate of 600,000 shares of restricted common stock to our directors. Under the agreements, each of our four directors agreed to purchase 150,000 shares of restricted common stock of the Company at a cost of $0.15 per share. The directors issued promissory notes to the Company in exchange for their stock purchases. The shares purchased by the directors under the agreements are restricted shares subject to a right, but not obligation, of repurchase by the Company. The Company may exercise its repurchase right only during the 60 day period following a director’s termination of service on the Board of Directors. Commencing on September 21, 2007, the Company’s repurchase rights lapse at the rate of 8,333 shares per month of continuous service by each director through September 21, 2008, when the Company’s repurchase rights lapse on 4,167 shares per month of continuous board service until the repurchase rights have lapsed on all restricted shares. At June 30, 2008, 266,680 shares remain subject to a right of repurchase. No outstanding options were cancelled, expired or exercisable as of June 30, 2008.

Additionally, upon commissioning of the pilot plant, an option to purchase 1,200,000 shares of common stock will be issued to our Chief Executive Officer. This option has not yet been granted, but if and when granted, will vest ratably over three years beginning on August 31, 2009.

The estimated fair value of stock option grants is computed using the binomial option-pricing model. Generally, expected volatility is based on historical periods commensurate with contractual term of options. However, since we have no history of stock price volatility as a public company at the time of the grants, we calculated volatility by considering historical volatilities of public companies in our industry. Due to the short history of our industry, the historical period used in our calculations is shorter than the contractual term of the options. The fair value for options granted was estimated as of June 30, 2008 to be $1.05 per share assuming a contract term of 6.1 years, a risk-free interest rate of 3.6%, expected volatility of 43.1% and no expected dividends. Stock option expense is recognized in the statements of operations ratably over the vesting period based on the number of options that are expected to ultimately vest. We currently use a forfeiture rate of zero percent for all existing share-based compensation awards since we have no historical forfeiture experience under our share-based payment plans. Our options have characteristics significantly different from those of traded options and changes in the assumptions can materially affect the fair value estimates.

During the three and six months ended June 30, 2008, the Company recorded, as general and administrative expenses, stock based compensation of approximately $572,000 and $1,158,000 for stock options, respectively. No expense was recorded for the three and six months ended June 30, 2007 as the Company’s Stock Plan was adopted in March 2007 and grants were first made in August 2007. Related to these grants, the Company will record future compensation expense for stock options of approximately $760,000 for the remaining six months of 2008.

The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements totaled approximately $236,000 for the six months ended June 30, 2008. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently.

As of June 30, 2008, there was approximately $3,021,000 of unrecognized compensation cost related to 4,010,000 nonvested stock options that we expect to ultimately vest. These options have a weighted average exercise price of $0.15. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.96 years.

Pursuant to a settlement agreement, RAM Resources, L.L.C. obtained the right to acquire an aggregate of 1,923,495 shares of our common stock at a price of $0.13 per share. This warrant is exercisable during a two year term that started on August 29, 2007 and ends on August 29, 2009. RAM Resources, L.L.C. agreed to terminate the Letter Agreement and release all claims to acquire any shares of our stock. The fair value of $125,027 has been recorded in the Company’s general and administrative expenses for the year ended December 31, 2007 and additional paid in capital at December 31, 2007.

Note 8 — Commitments and Contingencies

Project management — The Company entered into an engagement agreement with Merrick & Company to develop a complete project management plan for the pilot development plan. For the three and six months ended June 30, 2008, we incurred approximately $17,000 and $74,000, respectively, for engineering, design and consulting services. After completing the project management plan, we engaged Merrick & Company to construct, test, and evaluate the HFTA equipment and the demonstration plant. As part of the testing and evaluation, Merrick & Company will provide construction observation of the demonstration unit in conjunction with Hazen Research, Inc. The system will demonstrate the efficacy of using biomass derived from municipal waste to produce ethanol using our licensed technologies and will allow us to develop the engineering data to design and construct a small commercial plant. Our engagement calls for further payments to Merrick & Company on an as billed basis as they proceed with the engineering review and testing of our technology.

In December 2007, the Company entered into an agreement with Hazen Research, Inc. (“Hazen”) to install and operate the HFTA equipment at Hazen’s facility in Golden, Colorado. The agreement also contemplates the expansion of the scope of work to include the construction and operation of the demonstration plant. We are billed at an hourly rate for time used by Hazen employees in connection with our projects. For the three and six months ended June 30, 2008, we incurred approximately $25,000 and $115,000, respectively, for the proof of concept phase with Hazen. We are currently working with Hazen to develop an estimate of the costs to construct and operate the demonstration unit at their facility.

Leases — We entered into a lease on October 16, 2007 (and took occupancy in January 2008) 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 for a term of three years. Our monthly rent under the lease is $1,800 plus the cost of utilities. We entered into a lease for office furniture in January 2008. The lease payments are approximately $420 plus applicable taxes per month for 36 months. This lease is accounted for as a capital lease for accounting purposes.

Note 9 — Subsequent Events

Regulation S Offering

On July 3, 2008, the Company entered into a letter agreement (the “Agreement”) with Concord Business Development (“Concord”) to commence an offering of our common stock pursuant to and in reliance upon the exemption from securities registration afforded by the provisions of Regulation S as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, in which we seek to raise up to $5.0 million (the “Offering”). Under the agreement, the Company will be paid an amount equal to 60% of the total offering proceeds. As of August 13, 2008, the Company is working with Concord on the necessary documents for closing on the first round of funding. We cannot be assured of closing on the Offering in part or in its entirety. Without this funding on a timely basis, the development of our technologies, facilities and products will be delayed and we could be forced to limit or terminate our operations altogether.

Simultaneous with our entry into the Agreement, we agreed to issue warrants to purchase shares of our common stock at a price of $1.25 per share to Carlton Phips, Ltd. (“Carlton”) in an amount equal to 24% of the total shares issued in the Offering as compensation to Carlton for introducing the Company to Concord. These warrants may be exercised at any time within five years after the date of issuance.

There is no assurance that the Company will raise a portion of or the full $5.0 million under the Offering. Please see the Risk Factor relating to this issue under Part II, Item 1A for further information.

Acquisition of Biomass North America Licensing, Inc.

On July 15, 2008, we entered into an Agreement and Plan of Merger with Biomass North America Licensing, Inc. (“Biomass”) whereby Biomass will be merged with and into a wholly-owned subsidiary of CleanTech Biofuels, Inc. The merger agreement is subject to certain conditions to closing, including approval of the Boards of Directors of both companies. Biomass holds an exclusive license to use patent pending technology to clean and separate municipal solid waste.

Pursuant to the terms of this agreement, we will be required to issue 2,000,000 shares of our common stock to the shareholders of Biomass at closing and deposit an additional 4,000,000 shares of our common stock into an escrow account. The 4,000,000 shares of our common stock held in escrow will be released upon commencement of a commercial project that utilizes the technology owned by Biomass.

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-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 28, 2008, 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:

	•		the commercial viability of our technologies,
	•		our ability to maintain and enforce our exclusive rights to our technologies,
	•		our ability to raise additional capital on favorable terms to continue developing our technologies,
	•		our disputes and resulting litigation with the licensor of our PSC technology,
	•		the demand for and production costs of ethanol,
	•		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

We are a development stage company that intends to:

	•		complete the research and development of our licensed technologies, which we believe when combined can convert municipal solid waste into ethanol; and
	•		explore, develop and/or license additional technologies for processing waste into energy products as opportunities to do so present themselves.

Our licensed technologies are:

	•		the Pressurized Steam Classification technology, which we refer to as our “PSC” technology, invented at the University of Huntsville, Alabama, that uses a pressurized steam classification vessel to convert municipal solid waste, also known as MSW, into cellulosic material while simultaneously segregating and eliminating any inorganic materials in the solid waste and cleaning recyclable materials in the MSW;
	•		the sulfuric acid hydrolysis process, which we refer to as our “Brelsford” technology, developed by Brelsford Engineering, Inc., that employs an acid hydrolysis process to convert cellulosic material into fermentable sugars, which can then be fermented into ethanol; and
	•		the nitric acid hydrolysis process, which we refer to as our “HFTA” technology, developed by scientists working at the University of California, Berkeley, that incorporates anticipated improvements in chemical reaction by which acid hydrolysis occurs.

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 (“SRS Energy”), which is the holder of the technology licenses. Pursuant to the merger agreement, SRS Acquisition Sub Inc. our wholly-owned subsidiary, merged into SRS Energy with SRS Energy as the surviving corporation. We consummated the merger on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary. Today, SRS Energy is our principal operating company. Effective August 2, 2007, we changed our name to CleanTech Biofuels, Inc.

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

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.”

The license to the PSC technology grants SRS Energy limited exclusive rights to use the technology to process municipal solid waste and convert the cellulosic component of that waste to a homogenous feedstock to produce ethanol in the United States, subject to the right of Bio-Products to request five sites to construct solid waste to ethanol plants in the United States. SRS Energy’s license to the Brelsford technology is limited to the production of fuel grade ethanol in the United States. The license is exclusive with regard to the conversion of MSW to cellulosic biomass and non-exclusive with respect to the conversion of other feedstock for the production of ethanol. The license to the HFTA technology provides us an exclusive worldwide license to use the technology for the production of energy products from MSW and a non-exclusive license to use the technology to produce energy products from other feedstocks. By coupling these technologies, we believe we may have the ability to extract biomass from curbside solid waste (among other potential sources of cellulosic material) and convert it into fuel grade ethanol.

We have no operating history as a producer of ethanol and have not constructed any ethanol plants to date. We have not earned any revenues to date and expect that our current capital and other existing resources will be sufficient only to complete a portion of the testing of our technologies and to provide a limited amount of working capital. We will require substantial additional capital to implement our business plan and we may be unable to obtain the capital required to build any commercial plants. Our strategy is to build our company in several phases with the ultimate goal of becoming a leading producer of ethanol and other combustible fuels from municipal waste and other feedstocks.

We are currently focusing on testing, demonstrating and commercializing our existing licensed technologies. On an ongoing basis, we intend to continue investigating opportunities to develop or acquire complementary technologies, especially those that would allow us to improve our existing processes or to add value to the various byproducts produced by those processes. In addition, we will look for opportunities to combine our technologies with other synergistic processes in innovative energy parks, where some of our byproducts, such as lignin, could be used as inputs to other processes, such as gasifiers, that could produce inputs for us, such as steam. We have structured our Strategic Plan on the following three phases with respect to the development and commercialization of our existing technologies:

Proof of Concept/Demonstration Phase

In our current stage of our development, we are seeking to prove that biomass derived using the PSC technology does not include any contaminants or residue that prohibit the chemical or biologic reactions necessary to complete the sacchrification and fermentation processes required to produce fuel grade ethanol. We believe that the HFTA technology may prove useful as a pretreatment for a variety of other hydrolysis technologies being developed to separate hemicelluloses and then using commercially available enzymes to separate the remaining cellulose and lignin. In order to determine whether this is true, we also are testing the HFTA equipment as a first-stage to separate hemicellulose and then using commercially available enzymes to separate the cellulose. In addition to using the HFTA technology for hydrolyzing biomass, we are using the HFTA equipment to test a variety of other feedstocks, including corn stover, switch grass and wood waste using these same methods of hydrolyzing biomass. We believe the hydrolsate derived from these various processes and feedstocks can be fermented into alcohol.

Concurrent with the proof of concept, we are completing the design and engineering of a demonstration unit that would incorporate all of our technologies for sacchrification and fermentation into a continuously operating unit. We project that this unit will process approximately four tons of MSW, or about one ton of dry biomass per operating day, which on average is eight hours. The purpose of the unit is to demonstrate the complete system for converting biomass derived from MSW into ethanol. Final details of the demonstration plant design will depend on results of the proof of concept phase; however, we have substantially completed these designs and believe we will be able to move to fabrication, procurement and construction of the demonstration unit upon completing the proof of concept testing provided we are able to obtain the financing necessary to do so. After completing construction of the demonstration unit, we intend to operate the unit for a period of time, currently anticipated to be two to three months, in order to conduct testing and evaluation necessary to complete the design of a small commercial plant. While we have not yet completed the project management plan for the demonstration phase of the project, we anticipate the demonstration phase of the project will require nine to twelve months following the end of the testing phase to complete.

Commercialization Phase

Before we attempt to implement our technology on a larger scale, we anticipate building and operating a small commercial plant that will process a minimum of 100 tons of MSW per operating day. The final size of this small scale commercial plant will be determined based on a number of factors that we are currently evaluating. The purpose of building a small scale commercial plant is to demonstrate at a small commercial level the workings of the integrated system, including the PSC technology, in order to have sufficient information with respect to materials handling and operation of the technology to enable us to utilize more traditional project financing for the implementation of the technology on a larger scale.

Replication and Rollout Phase

We intend to follow a systematic evaluation process in identifying and selecting additional sites for the construction of full-scale operating plants in order to focus on those with the best near-term and long-term potential. If market conditions are not favorable for the construction of new plants, we may consider licensing our technology to third parties with existing waste-to-energy facilities. To date, we have not identified any sites for a full-scale facility or commenced any material discussions with any party regarding building a full-scale operating plant and/or licensing our technology to a third-party. We have only preliminarily begun to explore these possibilities.

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.

General

Prior to April 2007, we had limited operations. In April 2007, we raised $1,400,000 and commenced implementing our plan of operation. As a result, our increased operating activities and the issuance of options under the 2007 Stock Option Plan (and the resulting expense in accordance with FAS 123R) are the primary reasons we experienced significant increases in our costs and expenses when comparing the three and six months ended June 30, 2008 with the three and six months ended June 30, 2007. In particular, we experienced the following specific changes in our operations:

Three months ended June 30, 2008 compared to the three months ended June 30, 2007

Costs and expenses:

General and administrative — The increase in 2008 is due primarily to recording approximately $572,000 in share-based compensation expense (FAS 123R) and expenses for our office lease and related expenses which commenced in January 2008.

Professional fees — The decrease in 2008 is due to costs in 2007 incurred for legal, consulting and accounting fees primarily related to our reverse merger and related Securities and Exchange Commission registration filing.

Research and development — The increase in 2008 is due to payments made to Merrick & Company and Hazen Research, Inc. as we continued to progress through our proof of concept/demonstration phase which began during the third quarter of 2007. Both parties are involved in the testing, evaluation, design and construction of our proof of concept / demonstration phase and commercialization phase of our technologies.

Other expense (income):

Interest expense — The decrease in 2008 is due primarily to the conversion of $1.26 million of our $1.4 million Series A Convertible Debentures, which were originally issued in April 2007. Subsequent to these conversions during the second quarter of 2008, interest no longer accrues on the debentures which were converted. Interest continues to accrue at 6.0% per annum on the remaining $140,000 of debentures outstanding. Interest on the debentures for the three months ended June 30, 2008 and 2007 is $3,750 and $17,500, respectively.

Amortization of technology license — As the proof of concept/demonstration phase began during the third quarter 2007 we have begun to amortize the technology license fees previously capitalized.

Interest income — The income in 2007 is primarily interest on $450,000 of promissory notes issued to us as part of the consideration for the issuance of the Series A Convertible Debentures. We received the $450,000 plus accrued interest on March 14, 2008 and thus no longer earn interest at 6% per annum on those notes.

Six months ended June 30, 2008 compared to the six months ended June 30, 2007

Costs and expenses:

General and administrative — The increase in 2008 is due primarily to recording approximately $1.16 million in share-based compensation expense (FAS 123R), salary paid to our Chief Executive Officer and expenses for our office lease and related expenses which commenced in January 2008.

Professional fees — The increase in 2008 is due to increased costs incurred for legal, consulting and accounting fees related to various filings with the Securities and Exchange Commission (as we became a reporting company in January 2008), litigation matters and an increase in general business activities.

Research and development — The increase in 2008 is due to payments made to Merrick & Company, Hazen Research, Inc. and HFTA as we continue to progress through our proof of concept/demonstration phase which began during the third quarter of 2007.

Other expense (income):

Amortization of technology license — As the proof of concept/demonstration phase began during the third quarter 2007 we have begun to amortize the technology license fees previously capitalized.

Liquidity and Capital Resources

As a development-stage company, we have no revenues and will be required to raise additional capital in order to execute our business plan and commercialize our products.

On July 3, 2008, the Company entered into a letter agreement (the “Agreement”) with Concord Business Development (“Concord”) to commence an offering of our common stock pursuant to and in reliance upon the exemption from securities registration afforded by the provisions of Regulation S as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, in which we seek to raise up to $5.0 million (the “Offering”). Under the agreement, the Company will be paid an amount equal to 60% of the total offering proceeds. As of August 13, 2008, the Company is working with Concord on the necessary documents for closing on the first round of funding. We cannot be assured of closing on the Offering in part or in its entirety. Without this funding on a timely basis, the development of our technologies, facilities and products will be delayed and we could be forced to limit or terminate our operations altogether.

Simultaneous with our entry into the Agreement, we agreed to issue warrants to purchase shares of our common stock at a price of $1.25 per share to Carlton Phips, Ltd. (“Carlton”) in an amount equal to 24% of the total shares issued in the Offering as compensation to Carlton for introducing the Company to Concord. These warrants may be exercised at any time within five years after the date of issuance.

There is no assurance that the Company will raise a portion of or the full $5.0 million under the Offering. Please see the Risk Factor relating to this issue under Part II, Item 1A for further information.

We expect cash raised through our agreement with Concord will be sufficient to fund approximately the next six months of our plan of operation. Thereafter, we anticipate requiring additional capital to complete the demonstration and commercialization phases of our plan of operation. These costs will be substantially greater than our current available funds. We currently expect attempting to obtain additional financing through the sale of additional equity and/or possibly through strategic alliances with larger energy or waste management companies. However, we may not be successful in securing additional capital. If we are not able to obtain additional financing in the near-term future, we will be required to delay our development until such financing becomes available. We anticipate that the current dispute with Bio-Products will make it significantly more difficult for us to raise capital. 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.

Off-Balance Sheet Arrangements

There are 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 research and development costs, 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-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 28, 2008. Our critical accounting policies and estimate assumptions have not changed during 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None.

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 (the “Act”), is recorded, processed, summarized and reported within the time periods specified by the Security and Exchange Commission’s (the “SEC”) 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 June 30, 2008. Further, the design of a control system must reflect the fact that there are resource constraints, including, but not limited to having three total employees (chief executive officer, general counsel 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 June 30, 2008, there were no material changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CLEANTECH BIOFUELS, INC.
Date: August 13, 2008		/s/ Edward P. Hennessey, Jr.   Edward P. Hennessey, Jr.
		Chief Executive Officer
Date: August 13, 2008		/s/ Thomas Jennewein   Thomas Jennewein
		Chief Financial Officer and
		Principal Accounting Officer

INDEX TO EXHIBITS

EXHIBIT NO.				DESCRIPTION
	2.1			Agreement and Plan of Merger and Reorganization by and among Cleantech Biofuels, Inc., Biomass NA Acquisition Subsidiary, Inc. and Biomass North America Licensing, Inc. dated as of July 14, 2008
	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	31.2			Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	32.1			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive Officer.
	32.2			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer.