CleanTech Biofuels, Inc. - Quarter Report: 2009 June (Form 10-Q)

 

 

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

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

Commission file number 333-145939

CLEANTECH BIOFUELS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0754902 (I.R.S. Employer Identification No.)
7386 Pershing Ave., University City, Missouri (Address of principal executive offices)		63130 (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 August 5, 2009, 61,704,753 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)			3
Balance Sheets – June 30, 2009 and December 31, 2008			3
Statements of Operations – Three months and six months ended June 30, 2009 and 2008 and Inception to June 30, 2009			4
Statements of Stockholders’ Equity (Deficit) – June 30, 2009			5
Statements of Cash Flows – Six months ended June 30, 2009 and 2008 and Inception to June 30, 2009			6 – 7
Notes to Financial Statements			8 – 16
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3 Quantitative and Qualitative Disclosures About Market Risk			25
Item 4T Controls and Procedures			26
PART II Other Information
Item 1 Legal Proceedings			26
Item 1A Risk Factors			27
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3 Defaults upon Senior Securities			27
Item 4 Submission of Matters to a Vote of Security Holders			27
Item 5 Other Information			27
Item 6 Exhibits			28
Signatures			29
Index to Exhibits			30
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited)

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)

		June 30,				December 31,
		2009				2008
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	102,540			$	96,617
Prepaids and other current assets			23,372				68,345
			125,912				164,962
Property and equipment, net			32,714				18,826
Non-current assets:
Technology licenses, net			2,021,782				2,021,782
Patents			600,000				600,000
Total Assets		$	2,780,408			$	2,805,570
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	244,896			$	238,925
Accrued interest			63,426				26,660
Accrued professional fees and other			109,913				66,250
Notes Payable, net			1,089,208				456,712
Series A Convertible Debentures			140,000				—
Deferred revenue			50,000				—
Capital lease			4,758				4,649
Total current liabilities			1,702,201				793,196
Capital Lease			3,707				6,117
Series A Convertible Debentures			—				140,000
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; 61,704,753 and 61,270,153 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			61,705				61,270
Additional paid-in capital			5,104,700				4,675,098
Notes receivable — restricted common shares issued to Directors and Employees			(167,074	)			(162,567	)
Deficit accumulated during the development stage			(3,924,831	)			(2,707,544	)
Total Stockholders’ Equity			1,074,500				1,866,257
Total Liabilities and Stockholders’ Equity		$	2,780,408			$	2,805,570

See accompanying notes to financial statements.

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)

																		July 14, 2004
		Three months ended								Six months ended								(inception) to
		June 30,								June 30,								June 30,
		2009				2008				2009				2008				2009
General and administrative		$	345,004			$	155,107			$	588,827			$	301,330			$	1,656,577
Professional fees			83,161				78,946				192,574				190,892				952,015
Research and development			—				53,812				101				236,916				524,802
Operating Loss			428,165				287,865				781,502				729,138				3,133,394
Other expense (income):
Interest expense			246,165				4,136				472,292				23,887				718,750
Amortization of technology license			—				3,750				—				7,500				35,000
Deposit forfeiture			—				—				—				—				(25,000	)
Other income			(27,333	)			—				(32,000	)			—				(32,000	)
Interest income			(2,266	)			(252	)			(4,507	)			(5,979	)			(39,661	)
			216,566				7,634				435,785				25,408				657,089
Net loss applicable to common stockholders		$	644,731			$	295,499			$	1,217,287			$	754,546			$	3,790,483
Basic and diluted net loss per common share		$	0.01			$	0.01			$	0.02			$	0.01			$	0.08
Weighted average common shares outstanding			61,600,586				57,489,950				61,476,070				53,786,237				45,884,839

See accompanying notes to financial statements.

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)

														Notes Rec -
														restricted
														common				July 14, 2004
										Additional				shares issued				(inception) to
		Common Stock								Paid-in				to Directors				June 30,
		Shares				Amount				Capital				and Employees				2009
Balances at December 31, 2008			61,270,153			$	61,270			$	4,675,098			$	(162,567	)		$	(2,707,544	)
Conversion of convertible note in February 2009 at $.25 per share			122,100				122				11,533
Conversion of convertible note in May 2009 at $.08 per share			312,500				313				24,687
Discounts on Notes Payable											164,071
Interest on Notes Receivable															(4,507	)
Stock-based compensation											229,311
Net loss																			(1,217,287	)
Balances at June 30, 2009			61,704,753			$	61,705			$	5,104,700			$	(167,074	)		$	(3,924,831	)

See accompanying notes to financial statements.

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)

										July 14, 2004
		Six months ended								(inception) to
		June 30,								June 30,
		2009				2008				2009
Operating Activities
Net loss applicable to common stockholders		$	(1,217,287	)		$	(754,546	)		$	(3,790,483	)
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			6,814				12,796				35,642
Amortization			—				7,500				35,000
Interest income			(4,507	)			—				(12,274	)
Amortization of discounts (interest expense) and other financing charges			432,311				—				571,262
Share-based compensation expense			229,311				134,360				487,432
Write-off of technology license			—				—				97,500
Fair value of RAM warrant settlement			—				—				125,027
Changes in operating assets and liabilities that provided (used) cash, net:
Prepaids and other current assets			44,973				22,461				(23,372	)
Technology license			—				—				(132,500	)
Accounts payable			5,971				35,329				244,896
Other assets and other liabilities			87,514				17,719				163,045
Accrued liabilities			43,663				—				109,913
Net cash used by operating activities			(371,237	)			(524,381	)			(2,088,812	)
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			(20,702	)			(26,679	)			(54,237	)
Net cash used by investing activities			(20,702	)			(26,679	)			(224,237	)
Cash Flows Provided (Used) by Financing Activities
Advances — related parties			—				—				—
Payments on capital lease, including interest			(2,524	)			(1,104	)			(6,311	)
Series A Convertible Debentures, including interest			—				474,900				1,424,900
Issuance of Convertible Notes Payable			445,000				—				1,052,000
Payments on Note Payable			(44,614	)			—				(80,000	)
Sale of common stock			—				—				25,000
Net cash provided by financing activities			397,862				473,796				2,415,589
Net increase (decrease) in cash and cash equivalents			5,923				(77,264	)			102,540
Cash and cash equivalents at beginning of period			96,617				120,356				—
Cash and cash equivalents at end of period		$	102,540			$	43,092			$	102,540

CLEANTECH BIOFUELS, INC.
(formerly Alternative Ethanol Technologies, Inc.)
(A Development Stage Company)

										July 14, 2004
		Six months ended								(inception) to
		June 30,								June 30,
		2009				2008				2009
Supplemental disclosure of cash flow information:
Cash paid for interest		$	2,691			$	694			$	9,901
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			$	14,119
Common stock issued for organizational costs						$	—			$	100
Common stock issued for promissory notes						$	—			$	133,596
Common stock issued for Convertible notes converted		$	36,655			$	—			$	36,655
Common stock issued for Debentures converted						$	1,333,337			$	1,333,337
Common stock and note payable issued for acquistion of Biomass						$	—			$	1,501,250
Common stock issued for HFTA						$	—			$	500,532

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 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 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, however the Company has begun evaluating 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 a homogenous feedstock of cellulosic biomass and plastics for energy production. The Company has limited exclusive licenses to technology designed to convert cellulosic feedstocks, including MSW, into combustible sources of energy.

The Company has no operating history as a producer of biomass or energy sources and has not constructed any commercial plants to date. It has no operating 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. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will be required to delay our development and may not be able to implement our business plan.

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 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 six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. 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, 2008, filed with the Securities and Exchange Commission on March 30, 2009.

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 patent pending technology owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate municipal solid waste (the “Biomass Recovery Process”).

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 approximately $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 June 30, 2009, it would result in an approximate increase of approximately $600,000 to the asset. Any future increase in the value of the asset would depend on the market value of our Common Stock at the time of utilization.

Note 4 – Patent

On October 22, 2008, the Company completed the purchase of Patent No. 6,306,248 (the “Patent”) pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). The Patent is the basis for a pressurized steam classification technology from which our Biomass Recovery Process was developed. As part of the acquisition of the Patent, we also became the licensor of such technology to Bio-Products International, Inc. Upon signing the Agreement, the Company paid WWT $150,000, issued a note in the amount of $450,000 and issued warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share. The note bears interest at 6.0% per annum and is secured by a security interest in the Patent. The note matured July 22, 2009 and has been amended – see update in Subsequent Events footnote. The warrants are exercisable at any time for five years from the date of issuance. The value of these warrants has been recorded as a contra-balance amount with the note and is being amortized through interest expense over the life of the note. In addition, the Company issued a contingent warrant to purchase 900,000 shares of Common Stock at a price of $0.45 per share. The contingent warrant becomes exercisable if the Company defaults on its obligations under the note and remains exercisable for five years from the date of such default. This note has been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the warrant features. For the three and six months ended June 30, 2009, amortization of this discount of approximately $60,000 and $120,000, respectively, has been recorded in interest expense. At June 30, 2009, the notes payable balance, net of the discount, related to this note is approximately $436,000.

Note 5 – Technology Licenses

Biomass North America Licensing, Inc.

On September 15, 2008, in connection with the acquisition of Biomass described in Note 3 – Mergers/Acquisitions, we acquired a license in the United States and Canada to use patent pending technology owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”), to clean and separate MSW, which we refer to as the Biomass Recovery Process. As a result of the merger, a long-term asset of approximately $1.5 million was recorded for the value of this license. 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 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 Biomass and Licensor will work in good faith to complete a commercial development in the City of Chicago using the Biomass Recovery Process.

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 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 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 the earlier of six months from the date of the license agreement or the 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. The first third of the shares (962,562 shares) were released from escrow on September 20, 2008. As a result, the Company recorded an asset for the value of this share payment of approximately $500,000 and will begin amortizing this asset upon use of the technology. For accounting purposes, the shares remaining 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, 2009, the approximate license to be recorded upon issuing the remaining shares, based on the market value of our Common Stock at June 30, 2009, would be approximately $290,000. Any future increase in the value of the asset would depend on the market value of our Common Stock at the time of utilitzation.

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.

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 was for a period of twenty years. Under the license, Bio-Products was to be paid a process royalty of $1.50 for every ton of waste received and processed at each facility to be constructed and operated under the agreement. The Company also was required to pay a by-product royalty of 2.5 percent of the gross sales price in excess of $10 per ton obtained from the sale of recyclable by-products, excluding the cellulosic biomass. Bio-Products would also have been paid a monthly fee for technical services to be provided by Bio-Products for each facility to be constructed and operated which initially would have been $10,000 per month and increase to $20,000 per month when vessels for processing waste are ordered for the facility. The $20,000 per month fee would have continued until construction of a facility was completed. The Company’s litigation involving Bio-Products was settled in March 2009 and as a result, this sublicense has been mutually terminated by all parties.

As disclosed in a previous footnote, the Company purchased Patent No. 6,306,248 (the “Patent”) pursuant to an Agreement with WWT. The Patent is the basis for the pressurized steam classification technology that cleans and separates MSW into its component parts, which we refer to as the PSC technology. The Company is now a licensor to Bio-Products for this Patent. Bio-Products is the exclusive licensee of the PSC technology (but not the Biomass Recovery Process) and has the right to sublicense the PSC technology to any party. Under the Master License Agreement, we are entitled to be paid 5% of any revenue derived by Bio-Products from the use of the technology and 40% of any sublicensing fees paid to Bio-Products for the use of the technology. The Master License Agreement is for a term of 20 years that commenced on August 18, 2003.

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 was required to pay 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 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. Brelsford had the right to terminate the license agreement on sixty days’ notice if the Company failed 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. During the fourth quarter of 2008, the Company received a termination notice from Brelsford for non-payment of certain fees. The Company has decided not to use this technology going forward in our operations and thus has written off the remaining asset as of December 31, 2008. The impairment loss of $97,500 was included in research and development expense on the statement of operations for the year ended December 31, 2008.

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

		June 30,				December 31,
		2009				2008
Convertible Notes Payable, net of discounts of $228,628 and $514,797 at June 30, 2009 and December 31, 2008, respectively, which are made up of various individual notes with an aggregate face value of $612,000 and $607,000 at June 30, 2009 and December 31, 2008, respectively, due in one year from date of note, interest at 6.0%		$	383,372			$	92,203
Convertible Notes Payable, net of discounts of $115,064 and $-0- at June 30, 2009 and December 31, 2008, respectively, which are made up of various individual notes with an aggregate face value of $385,000 and $-0- at June 30, 2009 and December 31, 2008, respectively, due in one year from date of note, interest at 6.0%			269,936				—
WWT Note Payable, net of discount of $14,100 and $130,105 at June 30, 2009 and December 31, 2008, respectively, with a face value of $450,000, due July 22, 2009, interest at 6.0%			435,900				319,895
Note Payable, repaid May 1, 2009, interest at 6.0%			—				44,614
Series A Convertible Debentures, due April 16, 2010, interest at 6.0%			140,000				140,000
Total debt			1,229,208				596,712
Current maturities			(1,229,208	)			(456,712	)
Long-term portion, less current maturities		$	—			$	140,000

Convertible Notes Payable

During September 2008, the Company commenced an offering of units comprised of a convertible promissory note and a warrant. The Company raised a total of $642,000 of investment proceeds and this offering is now closed. One note was converted during the first quarter of 2009 leaving $612,000 face value of notes outstanding. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.25 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock equal to the principal amount of the promissory note at a price of $0.45 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the three and six months ended June 30, 2009, amortization of approximately $150,000 and $300,000, respectively, for these discounts has been recorded in interest expense.

During April 2009, the Company commenced another offering of units comprised of a convertible promissory note and a warrant. As of June 30, 2009, the Company raised a total of $410,000 of investment proceeds. One note was converted during the second quarter of 2009 leaving $385,000 face value of notes outstanding. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of Common Stock at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide for 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the three and six months ended June 30, 2009, amortization of approximately $15,000 for these discounts has been recorded in interest expense. This offering is continuing — see the Subsequent Events footnote for further information.

WWT Note Payable

As disclosed previously, the Company issued to WWT a note in the amount of $450,000 and warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share related to the purchase of the Patent. The note bears interest at 6.0% per annum and is secured by a security interest in the Patent. The note matured on July 22, 2009 and has been amended – see update in Subsequent Events footnote. The warrants are exercisable at any time for five years from the date of issuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense over the life of the note. For the three and six months ended June 30, 2009, amortization of approximately $60,000 and $120,000, respectively, for this discount has been recorded in interest expense.

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 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 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 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 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, 2009, $140,000 of our Debentures remained outstanding and eligible for conversion.

Note 7 – Stockholders’ Deficit

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.

In September 2008, the Company released 962,562 shares of Common Stock ($0.52 per share) to HFTA in accordance with the previously disclosed licensing agreement with HFTA representing one-third of the total shares escrowed as part of the compensation for the licensing agreement.

In September 2008, the Company issued 1,895,000 shares of Common Stock ($0.75 per share) to Biomass in accordance with the previously disclosed merger agreement.

In February 2009, the Company issued 122,100 shares of Common Stock ($0.25 per share) to an investor upon their conversion of a Convertible Note.

In May 2009, the Company issued 312,500 shares of Common Stock ($0.08 per share) to an investor upon their conversion of a Convertible Note.

Net Loss per Common 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 June 30, 2009 and 2008, the Company had options, warrants and other convertible securities to purchase an aggregate of 27,593,406 and 11,746,610 shares of Common Stock, respectively, that were excluded from the calculation of diluted loss per share as their effects would have been anti-dilutive. Therefore, the Company only presents basic loss per share on the face of the statement of operations.

Note 8 – Related Party Transactions

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. In December 2008, the Company entered into stock purchase agreements with the executive officers. The directors and executive officers issued notes to the Company in exchange for their stock purchases. See Share-Based Payments footnote for further discussion. 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. For the three and six months ended June 30, 2009 and 2008, we incurred $-0- and approximately $10 and $59,000 and $113,000, respectively, in legal fees with SSB. As of June 30, 2009, all amounts have been paid to SSB except for approximately $90,000.

Note 9 – Share-based Payments

The Company accounts for stock options and restricted stock issued to employees, directors and consultants under SFAS No. 123(R), in which share-based compensation cost to employees, directors and consultants 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 currently has reserved a maximum of 9,000,000 shares of Common Stock to be issued for stock options or restricted shares awarded under the Stock Plan.

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, 2009, 33,336 shares remain subject to a right of repurchase. No outstanding options were cancelled or expired as of June 30, 2009.

In November 2008, the Company granted options under the Stock Plan to purchase an aggregate 100,000 shares of Common Stock to a consultant. The options vest ratably monthly over a one-year period beginning in December 2008 and have an exercise price of $0.58. In December 2008, the Company: (i) granted options under the Stock Plan to purchase an aggregate 1,200,000 shares of Common Stock to employees that vest in thirds on August 31, 2009, 2010 and 2011 and have an exercise price of $0.36, (ii) granted options under the Stock Plan to purchase 1,200,000 shares of Common Stock to our Chief Executive Officer (“CEO”) (that replaces options that were to be issued to our CEO upon commissioning of the pilot plant), that vest in thirds on August 31, 2009, 2010 and 2011 and have an exercise price of $0.15 and (iii) issued an aggregate of 180,000 shares of restricted Common Stock to our employees. Under the restricted stock agreements, each of our three employees agreed to purchase 60,000 shares of restricted Common Stock of the Company at a cost of $0.36 per share. The employees issued promissory notes to the Company in exchange for their stock purchases. As of June 30, 2009, 1,421,665 options were vested and exercisable.

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.

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 determined at the date of grant. The following assumptions were used for options granted in the corresponding year.

		For the years ended December 31,
		2008				2007
Risk-free interest rate			1.57	%			4.25	%
Dividend yield			0	%			0	%
Volatility			36.91	%			61.49	%
Expected term			4.8				5.0
Fair market value		$	0.12			$	0.08

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. The following table presents the components of share-based compensation recorded as general and administrative expense.

		Three months ended								Six months ended
		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Pre-tax compensation expense:
Stock options		$	146,019			$	51,680			$	229,311			$	134,361
Warrants			—				—				—				—
Total expense			146,019				51,680				229,311				134,361
Tax benefit, net			—				—				—				—
After-tax compensation expense		$	146,019			$	51,680			$	229,311			$	134,361

Related to these grants, the Company will record future compensation expense for stock options of approximately $130,000 for the remaining six months of 2009. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements totaled approximately $190,000 and $100,000 at June 30, 2009 and December 31, 2008, respectively. However, due to the uncertainty that the tax benefits will be realized, these potential benefits were not recognized currently.

As of June 30, 2009, there was approximately $275,000 of unrecognized compensation cost related to all share-based payment arrangements, which will be recognized over a remaining period of approximately 2 years. There are 5,088,335 options granted that are not yet vested as of June 30, 2009. These options have a weighted average exercise price of $0.20.

						Weighted
		Shares Under				Average				Aggregate
		Option				Exercise Price				intrinsic value
Options outstanding at December 31, 2008			6,510,000			$	0.20				(1	)
Granted			—
Exercised			—
Forfeited			—
Options outstanding at June 30, 2009			6,510,000			$	0.20				(1	)
Options exercisable at June 30, 2009			1,421,665			$	0.17				(1	)

Note 10 – Commitments and Contingencies

Project management – We have entered into an engagement agreement with Merrick & Company to develop a complete project management plan. For the three and six months ended June 30, 2009 and 2008, we incurred approximately $100 and $100 and $17,000 and $74,000, respectively, for engineering, design and consulting services. In 2008, we completed our initial project plan with Merrick & Company. We intend to continue to engage Merrick & Company on an as needed basis as we proceed with engineering review and testing of our technologies.

Duluth Litigation – Until a settlement was reached in July 2009, we were a defendant in a lawsuit filed on January 6, 2009 on behalf of Duluth Venture Capital Partners, L.L.C. (“Duluth”), one of our stockholders. The suit was filed in Superior Court for the State of California. The other defendants to the suit were our officers and directors, our transfer agent, Keith Mazer and World Capital Funding. The suit alleged among other things that Duluth Venture Capital Partners, L.L.C. was entitled to transfer certain shares of the Common Stock of the Company for which stop orders had been previously issued. The case was subsequently moved to Federal court in the Southern District of California. On March 10, 2009, we filed a motion to dismiss the lawsuit. In July 2009, we reached a settlement in this litigation pursuant to which all claims against the Company and its officers and directors were dismissed with prejudice. The settlement agreement required the Company to remove stop transfer orders previously placed on shares of its Common Stock registered in the name of Duluth and make a payment of $25,000 to Duluth. The $25,000 payment was advanced by the Company but is to be recouped by the Company pursuant to an agreement with its insurance carrier.

Leases – The Company 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 $450 per month for 36 months. This lease is accounted for as a capital lease for accounting purposes.

Note 11 – Subsequent Events

Beginning in April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and a warrant. As of August 11, 2009, the Company has received $475,000 in investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of Common Stock at $0.08 per share, at the Note holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the Note at a price of $0.30 per share. Under the first offering of units comprised of a convertible promissory note and warrants, which is now closed, the Company received $642,000 in investment proceeds.

The Company had a note payable to WWT in the amount of $450,000 and warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and warrants to purchase an additional 900,000 shares of Common Stock at a price of $0.45 contingent on payment of the note by July 22, 2009 (the original maturity date). We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000) were reissued at a price of $0.11 with no contingencies and (iii) the remaining payments on the note will be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). The warrants are exercisable at any time for five years from the date of reissuance (July 23, 2009). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009.

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, 2008, filed with the SEC on March 30, 2009, 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;
	•		the demand for and production costs of various energy products made from our biomass,
	•		competition from other alternative energy technologies, and
	•		other risks and uncertainties detailed from time to time in our filings with the SEC.

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

Company Overview

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

We are a development stage company that has recently changed its focus from being a fully integrated cellulosic ethanol producer to being a provider of cellulosic biomass derived from municipal solid waste, also known as MSW, for any energy product. Previously, our business focused on utilizing the following technologies to produce ethanol:

•

a pressurized steam classification technology, which we refer to as the “PSC” technology, invented at the University of Alabama, Huntsville that used a pressurized steam classification vessel to convert MSW into cellulosic material while simultaneously segregating and eliminating any inorganic materials in the solid waste and cleaning recyclable materials in the MSW;

•

a sulfuric acid hydrolysis process, which we refer to as the “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;

•

a 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.

In January 2008, we purchased a small scale unit designed to operate the HFTA technology from the University of California Berkeley and moved this unit to the Hazen Research facility in Golden Colorado. The unit was reconstructed and used to analyze the sugar content obtainable from a variety of biomass derived from different sources of garbage and waste paper. Based on these results, we determined that there are sufficient amounts of sugars obtainable from the biomass we derive from garbage to warrant further development and potential commercialization of the HFTA technology.

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

During the fourth quarter of 2008, Brelsford Engineering, Inc. terminated our license to the Brelsford technology for non-payment of certain fees. We have decided not to use this technology going forward in our operations and thus have written off the remaining asset as of December 31, 2008. The impairment loss of $97,500 is included in research and development expense on the statement of operations for the year ended December 31, 2008.

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

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

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

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

We have no operating history as a producer of biomass feedstocks or any energy products and have not constructed any commercial operating plants to date. We have no operating 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. 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 timely and successfully raise additional capital and/or achieve profitability or positive cash flow, we will be required to delay our development and may not be able to implement our business plan.

Recent Developments

Beginning in April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and a warrant. As of August 11, 2009, the Company has received $475,000 in investment proceeds. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.08 per share, at the Note holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the Note at a price of $0.30 per share. Under the first offering of units comprised of a convertible promissory note and warrants, which is now closed, the Company received $642,000 in investment proceeds.

During the first quarter of 2009, we constructed a small-scale test vessel. This vessel has operated in Kentucky beginning in April 2009 processing approximately 12 tons of MSW. The biomass will be tested as a feedstock in energy conversion technologies that are ready for commercialization.

In July 2009, the Company entered into a joint research agreement with Fiberight, LLC (“Fiberight”), to establish the anticipated yields and operating costs from using biomass produced by us for the production of ethanol using Fiberight’s proprietary enzymatic processes. Under the agreement, we provided approximately 2000 pounds of biomass feedstock derived from MSW from the City of Chicago to use in Fiberight’s conversion technology.

In August 2009, the Company entered into a joint research agreement with GeoSyn Fuels, L.L.C. (“GeoSyn”) whereby the Company will provide GeoSyn with biomass feedstock derived from MSW from the City of Chicago for GeoSyn’s testing of their proprietary process for converting biomass into ethanol and other products.

In July 2009, we reached a settlement in the litigation with Duluth Venture Capital Partners, L.L.C. (“Duluth”) pursuant to which all claims against the Company and its officers and directors were dismissed with prejudice. The settlement agreement required the Company to remove stop transfer orders previously placed on shares of its Common Stock registered in the name of Duluth and make a payment of $25,000 to Duluth. This payment was advanced by the Company and has been recouped by the Company pursuant to an agreement with its insurance carrier.

The Company had a note payable to WWT in the amount of $450,000 and warrants to purchase 900,000 shares of Common Stock at a price of $0.45 per share and warrants to purchase an additional 900,000 shares of Common Stock at a price of $0.45 contingent on payment of the note by July 22, 2009 (the original maturity date). We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000) were reissued at a price of $0.11 with no contingencies and (iii) the remaining payments on the note will be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). The warrants are exercisable at any time for five years from the date of reissuance (July 23, 2009). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009.

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 company was initially conceived as a fully-integrated producer of cellulosic ethanol using a technology for cleaning and separating municipal solid waste, also known as MSW, into its component parts, which we refer to as the PSC technology and a dilute acid hydrolysis technology developed by Brelsford Engineering, Inc. To further enhance our ability to produce ethanol, in 2008 we licensed a technology that uses nitric acid to hydrolize biomass into ethanol. The technology developed at the University of California Berkeley is controlled by HFTA, Inc. pursuant to a Master License Agreement with the University of California Berkeley and sublicensed to us for the production of ethanol from MSW.

Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we have re-focused our business on the commercialization of our technology for cleaning and separating MSW into its component parts through the acquisition of further technology to clean and separate MSW, which we refer to as the Biomass Recovery Process and is currently in use 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 have begun evaluating potential commercial projects using our technology.

Biomass Feedstock Production

We are seeking sites to develop a facility in Chicago, Illinois including negotiating a lease for a facility to construct an operating commercial plant in Chicago, Illinois. The site we intend to lease currently has a commercial waste transfer station in operation by a third party. In anticipation of completing the lease, the owner of the property has commenced the permitting process to obtain the permits necessary for us to convert the commercial waste transfer station into a residential MSW transfer station and install our vessels for processing the waste delivered to the transfer station into cellulosic biomass. We will be required to pay the expenses incurred to date for permitting at the site upon completing our lease. Any new site we seek to develop may require us to seek permits or licenses to operate such sites. The biomass we expect to produce will be sold to utilities or other energy producers operating near the plant for combustion in existing co-fired boilers. We have provided our biomass to different utility owners for testing the BTU value and emissions profile and universally have been advised by the utilities that our biomass can be used as a feedstock for combustion together with coal.

We have completed construction of a small test vessel in Kentucky. Beginning in April 2009, this vessel has processed approximately 12 tons of MSW into approximately 4-5 tons of biomass. We are providing the biomass produced during this testing phase to a variety of fuel producers who are evaluating the biomass we produce from MSW as a feedstock for their technologies. We continue to evaluate opportunities to construct a larger scale plant in the Chicago area. Additionally, other development opportunities outside of Chicago have been presented to us and we are currently evaluating those potential developments in addition to pursuing the Chicago market. Also, a variety of federal, state and local stimulus funds, grant opportunities, loan guarantees and other programs have recently been announced or are expected to be announced in the near-term that have opened a variety of new development opportunities for the Company. Upon operating a plant in Chicago or at one of the other places we are evaluating 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 implementation of the commercial plant 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. We anticipate that financing for this project will be provided in large part via tax exempt bond financing. In addition we intend to seek funding and loan guarantees from local, state and federal authorities. On January 23, 2009, our partner in the Chicago project submitted an application to the City of Chicago for a $100,000 grant to develop an organic waste processing station in the city. We believe that further opportunities to utilize governmental assistance will become available for this project.

Diesel Fuel Production.

We are working to complete an agreement with Green Power, Inc. (“Green Power”) to build a 200 ton per day MSW processing station to provide biomass for an existing 100 ton per day diesel fuel production plant. We have not completed an agreement to date and there can be no assurance that we will complete any agreement and proceed with this development. Green Power has constructed a facility in Pasco, Washington capable of processing up to 100 tons of organic biomass material per day into diesel. The diesel produced is not biodiesel, but rather a high grade fuel diesel. Green Power has tested the system with wood waste and other organic matter and the results have proven superior, however it is difficult and costly to obtain long term supplies of organic matter to operate the plant on a continuous basis. We believe that the organic matter we derive from MSW (biomass and plastics) will provide an excellent feedstock for the Green Power process.

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 this technology, we intend to:

•

construct and operate a commercial plant that processes MSW into cellulosic biomass for combustion in existing co-fired boilers for power;

•

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

•

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

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

Results of Operations

The following tables set forth the amounts of expenses and changes represented by certain items reflected in our consolidated statements of operations for the three and six months ended June 30, 2009 and 2008:

		Three months ended
		June 30, 2009				June 30, 2008				Change
General and administrative		$	345,004			$	155,107			$	189,897
Professional fees			83,161				78,946				4,215
Research and development			—				53,812				(53,812	)
Operating loss			428,165				287,865				140,300
Other expense (income):
Interest expense			246,165				4,136				242,029
Amortization of technology license			—				3,750				(3,750	)
Other income			(27,333	)			—				(27,333	)
Interest income			(2,266	)			(252	)			(2,014	)
Net loss applicable to common stockholders		$	644,731			$	295,499			$	349,232

General and administrative – The increase in expense in 2009 is due primarily to accruing salaries for all employees in 2009 compared to salary earned only by the CEO in 2008, an increase of approximately $50,000 in share-based compensation expense and $25,000 in increased marketing expenses.

Research and Development – The decrease in 2009 is due primarily to a shift in focus in our plan of operation from a fully-integrated producer of cellulosic ethanol to the commercialization of our technology for cleaning and separating MSW into its component parts as described earlier in this report.

Interest expense – The increase in 2009 is due primarily to the amortization of approximately $225,000 of discounts related to various notes and approximately $18,000 in interest on those notes. These notes were issued from September 2008 through June 2009 and thus no interest was incurred during the three months ended June 30, 2008.

Amortization – The asset related to this amortization was written off as of December 31, 2008 as we no longer plan to use the technology in our plan of operations going forward. As we have not yet commenced our operations, we have no amortization in 2009 for our current technology assets.

Other income – The income in 2009 is for the leasing of our HFTA equipment, which expired on May 31, 2009, and the subsequent sale of this equipment.

Interest income – The interest income in 2009 is for interest earned on the notes receivable from our directors and executive officers related to the issuance of restricted stock.

		Six months ended
		June 30, 2009				June 30, 2008				Change
General and administrative		$	588,827			$	301,330			$	287,497
Professional fees			192,574				190,892				1,682
Research and development			101				236,916				(236,815	)
Operating loss			781,502				729,138				52,364
Other expense (income):
Interest expense			472,292				23,887				448,405
Amortization of technology license			—				7,500				(7,500	)
Other income			(32,000	)			—				(32,000	)
Interest income			(4,507	)			(5,979	)			1,472
Net loss applicable to common stockholders		$	1,217,287			$	754,546			$	462,741

General and administrative – The increase in expense in 2009 is due primarily to accruing salaries for all employees in 2009 compared to salary earned only by the CEO in 2008, an increase of approximately $135,000 in share-based compensation expense and $40,000 in increased marketing expenses.

Research and Development – The decrease in 2009 is due primarily to a shift in focus in our plan of operation from a fully-integrated producer of cellulosic ethanol to the commercialization of our technology for cleaning and separating MSW into its component parts as described earlier in this report.

Interest expense – The increase in 2009 is due primarily to the amortization of approximately $430,000 of discounts related to various notes and approximately $34,000 interest on those notes. These notes were issued from September 2008 through March 2009 and thus no interest was incurred during the six months ended June 30, 2008. This increase in interest was offset partially by reduced interest expense in 2009 on our Series A Convertible Notes as all but $140,000 of the notes were converted by the end of April 2008.

Amortization – The asset related to this amortization was written off as of December 31, 2008 as we no longer plan to use the technology in our plan of operations going forward. As we have not yet commenced our operations, we have no amortization in 2009 for our current technology assets.

Other income – The income in 2009 is for the leasing of our HFTA equipment, which expired on May 31, 2009, and the subsequent sale of this equipment.

Interest income – The income in 2008 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. The interest in 2009 is for interest earned on the notes receivable from our directors and executive officers related to the issuance of restricted stock.

Liquidity and Capital Resources

We have no operating revenues to date and will be required to raise additional capital in order to execute our business plan and commercialize our products.

Beginning in September 2008 and as of August 11, 2009, we raised $642,000 and $475,000, respectively, in separate note issuances from investors in exchange for 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 August 11, 2009, our current cash will be sufficient to fund approximately the next month. Thereafter, we anticipate requiring additional capital to continue 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, various government funding opportunities 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. 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.

Debt

Convertible Notes Payable

During September 2008, the Company commenced an offering of units comprised of a convertible promissory note and warrants. As of June 30, 2009, the Company raised a total of $642,000 of investment proceeds. One note was converted during the first quarter of 2009 leaving $612,000 face value of notes outstanding. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.25 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock equal to the principal amount of the promissory note at a price of $0.45 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. This offering is now closed. The discounts are being amortized on a straight-line basis over the term of each note. For the three and six months ended June 30, 2009, amortization of approximately $150,000 and $300,000 for these discounts has been recorded in interest expense.

During April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and warrants. As of June 30, 2009, the Company raised a total of $410,000 of investment proceeds. One note was converted during the second quarter of 2009 leaving $385,000 face value of notes outstanding. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted, at the note holder’s option, at any time during the one-year term into shares of the Company’s Common Stock, at $0.08 per share, or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million). Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the promissory note at a price of $0.30 per share. These promissory notes have been recorded as short-term debt (notes payable) in the financial statements, net of discounts for the conversion and warrant features. The discounts are being amortized on a straight-line basis over the term of each note. For the three and six months ended June 30, 2009, amortization of approximately $15,000 for these discounts has been recorded in interest expense.

WWT Note Payable

On October 22, 2008, the Company completed the purchase of Patent No. 6,306,248 (the “Patent”) pursuant to a Patent Purchase Agreement (“Agreement”) with World Waste Technologies, Inc. (“WWT”). The Patent is the basis for the pressurized steam classification technology that cleans and separates municipal solid waste into its component parts, which the Company had licensed from Bio-Products International, Inc. Pursuant to the Agreement, the Company issued to WWT a note in the amount of $450,000 and a warrant to purchase 900,000 shares of Common Stock at a price of $0.45 per share and warrants to purchase an additional 900,000 shares of Common Stock at a price of $0.45 contingent on payment of the note by July 22, 2009 (the original maturity date). We entered into amendments dated July 23, 2009 whereby: (i) the Company paid 10% of the original note and all accrued interest to date, (ii) all previous warrants (totaling 1,800,000) were reissued at a price of $0.11 with no contingencies and (iii) the remaining payments on the note will be paid on October 22, 2009 (50% of principal plus accrued interest to date not yet paid) and January 22, 2010 (remaining principal and accrued interest to date). The warrants are exercisable at any time for five years from the date of reissuance (July 23, 2009). WWT assigned all of its rights, title and interest in the note, warrants, security agreement and purchase agreement to Vertex Energy, Inc. as a result of a merger in March 2009. The value of these warrants has been recorded as a contra-balance amount discount with the note and is being amortized through interest expense over the life of the note. For the three and six months ended June 30, 2009, amortization of approximately $60,000 and $120,000 for this discount has been recorded in interest expense.

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.

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 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 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, 2009, $140,000 of our Debentures remained outstanding and eligible for conversion.

Summary of Cash Flow Activity

		Six Months Ended June 30,
		2009				2008
Net cash used by operating activities		$	(371,237	)		$	(524,381	)
Net cash used by investing activities			(20,702	)			(26,679	)
Net cash provided by financing activities			397,862				473,796

Net cash used by operating activities

During the six months ended June 30, 2009, cash used by operating activities was impacted primarily by increases in accounts payable and other accrued liabilities.

Net cash used by investing activities

During 2009, cash used by investing activities was for the purchase of a small-scale vessel. In 2008, cash used by investing activities was for the purchase of office furniture and the HFTA equipment.

Net cash provided by financing activities

During 2009, cash provided by financing activities was primarily from the issuance of convertible notes of $445,000 offset by payments against a note payable. In 2008, cash provided by financing activities was primarily from the remaining portion of the Series A Convertible Debentures plus interest of $474,900.

Contractual Obligations and Commitments

In the table below, we set forth our obligations as of June 30, 2009. 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
						Less than 1												More than 5
		Total				year				1 to 3 years				4 to 5 years				years
Convertible Notes (1)		$	1,083,320			$	1,083,320			$	—			$	—			$	—
WWT Note (2)			470,250				470,250				—				—				—
Series A Convertible Debentures (3)			140,000				140,000				—				—				—
Capital Lease (4)			9,450				5,400				4,050				—				—
Operating Lease (5)			32,400				21,600				10,800				—				—
Total contractual obligations		$	1,735,420			$	1,720,570			$	14,850			$	—			$	—

Additionally, we have the following commitment that will require us to make payments as set forth below:

Merrick & Company. We have entered into an engagement agreement with Merrick & Company to develop a complete project management plan. For the three and six months ended June 30, 2009 and 2008, we incurred approximately $100 and $100, and $17,000 and $74,000, respectively, for engineering, design and consulting services. In 2008, we completed our initial project plan with Merrick & Company. We intend to continue to engage Merrick & Company on an as needed basis as we proceed with engineering review and testing of our technologies.

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 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-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 30, 2009. Our critical accounting policies and estimate assumptions have not changed during the six months ended June 30, 2009.

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 (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, 2009. 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, 2009, there were no material changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings

Duluth Venture Capital Partners, L.L.C. v. Cleantech Biofuels, Inc., et al. Until a settlement was reached in July 2009, we were a defendant in a lawsuit filed on January 6, 2009 on behalf of Duluth Venture Capital Partners, L.L.C. (“Duluth”), one of our stockholders. The suit was filed in Superior Court for the State of California. The other defendants to the suit were our officers and directors, our transfer agent, Keith Mazer and World Capital Funding. The suit alleged among other things that Duluth was entitled to transfer certain shares of the common stock of the Company for which stop orders had been previously issued. The case was subsequently moved to Federal court in the Southern District of California. On March 10, 2009, we filed a motion to dismiss the lawsuit.

The lawsuit also alleged that World Capital Funding and/or Keith Mazer is the beneficial owner of certain shares of our Common Stock owned by Brite Star Associates, L.L.C., Fountain Consulting, L.L.C., St. Ives Consulting, Inc., Trinity Enterprises, and Padstow Estates, Inc. Each of these entities is a Selling Stockholder who had completed and delivered a Selling Stockholder Questionnaire to the Company representing the beneficial ownership of the shares as set forth in our public filings.

In the interest of caution, given the subject matter of the allegations, we issued a Stop Order for all shares of Common Stock owned by the entities set forth in the lawsuit filed on behalf of Duluth. After conducting further investigation of this matter, we determined that we did not have sufficient evidence to verify the validity or invalidity of the claims made in the lawsuit and the information set out in the Selling Stockholder Questionnaires obtained from the stockholders named in that lawsuit.

In order to prevent any unwarranted transfers of our common stock while the issue of correct beneficial ownership of these shares was being resolved, we suspended the registration rights for the following Selling Stockholders. On February 24, 2009, we filed a Supplement to our prospectus dated January 2, 2008 and the prospectus supplement dated January 10, 2008, removing such stockholders from our Selling Stockholders, thereby making the shares restricted:

Selling Stockholder		Shares Suspended
Brite Star Associates, Inc.			1,777,867
Fountain Consulting, Inc.			1,482,000
St Ives Consulting, Inc.			1,368,000
Trinity Enterprises, L.L.C.			1,966,667
Padstow Estates, Inc.			1,966,667

In July 2009, we reached a settlement in this litigation pursuant to which all claims against the Company and its officers and directors were dismissed with prejudice. The settlement agreement required the Company to remove stop transfer orders previously placed on shares of its Common Stock registered in the name of Duluth and make a payment of $25,000 to Duluth. This payment was advanced by the Company and has been recouped by the Company pursuant to an agreement with its insurance carrier.

Ram Resources, L.L.C. v. CleanTech Biofuels, Inc. On November 6, 2008 RAM Resources, L.L.C. filed a request for temporary injunction in the Circuit Court of St. Louis County seeking to have us remove the restrictive legend on 552,335 shares of our Common Stock owned by RAM Resources, L.L.C. The shares held by RAM Resources, L.L.C. we reissued in private transactions and as such are subject to the requirements of Rule 144 of Regulation D of the Securities Act of 1933, including Rule 144(i). Based on our understanding of Rule 144(i) and conversations with the United States Securities and Exchange Commission, we believe that it is not permissible to remove a restrictive legend on shares of our stock in advance of a sale of those shares. On November 7, 2008, an order requiring us to authorize the removal of the restrictive legend on 552,335 shares of our Common Stock owned by RAM Resources, L.L.C. was entered. This order was later reaffirmed by the court after a preliminary injunction hearing. We have complied with this order and we understand that RAM Resources, L.L.C. has obtained a certificate for 552,335 shares of stock without restrictive legend. We have established a procedure for clearing shares of our stock for removal of restrictive legends that complies with the requirements of Rule 144(i) and are seeking to settle this litigation by developing a mutually satisfactory process to enable RAM Resources, L.L.C. to comply with Rule 144(i). If RAM Resources, L.L.C. does not agree to comply with the procedures we have established to ensure that all of the conditions of Rule 144(i) are met at the time of sales of previously restricted stock, we will be required to defend this claim and seek a resolution that ensures compliance with Rule 144(i) by RAM Resources, L.L.C.

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, 2008, 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 April 2009, the Company commenced a second offering of units comprised of a convertible promissory note and a warrant. As of June 30, 2009, the Company had issued promissory notes having an aggregate original principal amount of $410,000. Each convertible promissory note carries a one-year term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at $0.08 per share at the holder’s option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide 100% coverage of the principal amount of the associated note at a price of $0.30 per share. One note, having a face value of $25,000, was converted into Common Stock at a per share conversion price of $0.08 during the second quarter of 2009 leaving $385,000 face value of notes outstanding. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 506 of Regulation D promulgated under the Securities Act and/or Section 4(2) of the Securities Act.

Item 3.		Defaults Upon Senior Securities – None.

Item 4.		Submission of Matters to a Vote of Security Holders – None.

Item 5.		Other Information – None.

Item 6.		Exhibits

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

EXHIBIT NO.				DESCRIPTION
	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	31.2			Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	32.1			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive Officer.
	32.2			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEX TO EXHIBITS

EXHIBIT NO.				DESCRIPTION
	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	31.2			Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
	32.1			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive Officer.
	32.2			Certification (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer.