CleanTech Biofuels, Inc. - Annual Report: 2017 (Form 10-K)

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 this report 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:

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.

PART I

The following description of our business should be read in conjunction with the consolidated financial statements and related notes to the consolidated 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.”

Company Overview

The Company is in its development stage and is focused on being a provider of: (i) cellulosic biomass derived from municipal solid waste, also known as MSW, as a feedstock for producing energy and other chemical products and (ii) recyclables (metals, plastics, glass) from the MSW. We are the exclusive licensee in the United States and Canada of patented technology, which we refer to as our Biomass Recovery Process, that cleans and separates MSW and generates a clean, homogeneous biomass feedstock that we believe can be converted into various energy products. Our license permits us to use the biomass we derive from MSW to produce all energy products. In addition, we own the patent for a pressurized steam classification technology originally developed by the University of Alabama in Huntsville that we refer to as our PSC technology. The PSC technology is the underlying technology upon which the Biomass Recovery Process is based. Prior to March 2011, we had licensed the PSC technology to Bio-Products International, Inc. (“Bio-Products”). However, pursuant to a settlement agreement with Bio-Products in March 2009, we had the right to use the Biomass Recovery Process technology worldwide, for any product that we desired and with no royalty due to Bio-Products. We terminated the license to Bio-Products in March 2011 as further described in the section entitled “Intellectual Property Terms.” The Company has spent $-0- on research and development activities during 2017 and 2016.

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

On March 27, 2007, we entered into an Agreement and Plan of Merger and Reorganization in which we agreed to acquire SRS Energy, Inc., a Delaware corporation that at that time was seeking to commercialize various technologies for the processing of waste materials into usable products. We consummated the merger on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary. Effective August 2, 2007, we changed our name to CleanTech Biofuels, Inc.

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

Plan of Operation

Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described further in this section. We have had an ongoing lack of liquidity, and currently do not have sufficient capital to continue to fund our proposed operations, and are relying on the minimal assets on hand to fund our limited operations and corporate existence. All of our on-going and proposed developments/projects require a significant amount of capital that we currently do not have. While we continue to pursue outside sources of funding, we have not had success securing meaningful amounts of outside capital in recent years. As a result, we can provide no assurance that we will secure any source of funding in the immediate time frame required and the failure to do so will likely result in an inability to continue operations.

Our company was initially conceived as a fully-integrated producer of cellulosic ethanol from MSW. Based on our investigation and acquisition of new technologies and research and development of our existing technologies in 2008, we re-focused our business to the commercialization of our Biomass Recovery Process technology for cleaning and separating MSW into its component parts and initiated a plan to consolidate the ownership and/or rights to use intellectual property around this technology. The technology is currently in commercial use in Coffs Harbor, Australia by an operator not owned by the Company (the “Third-Party Operator”). As a result, we believe this technology could be implemented commercially in the United States and elsewhere. In furtherance of our focus, we are continuing our ongoing search for an outside source of financing that will provide the capital for us to design, build, and operate a commercial biomass recovery plant that will allow us to produce biomass feedstock for customer evaluation, trial purchases, and/or be used in equipment selection for power generation and possibly combined heat and power (CHP). Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, power and CHP equipment suppliers, and biofuel research firms for evaluation. In addition to seeking a source of funding for plant development, the Company hopes to license and/or develop potential commercial projects as they present themselves. All of our developments plan to focus on cleaning and separating MSW into its component parts in order to obtain: (i) a homogenous feedstock of cellulosic biomass for producing energy and other chemical products and (ii) recyclable products (metals, plastics). Our plans may also include possibility of operating a MSW transfer station where we could install our technology.

Biomass Feedstock Production

The Company strives to design and build a commercial biomass recovery plant to provide biomass feedstock for customer evaluation, trial purchases, and/or power generation. Initially, the biomass feedstock output is expected to be sold or provided to electric utilities, power and steam producers, power and CHP equipment suppliers, and biofuel and chemical research firms for evaluation. In addition to research and development, the Company also plans to license and/or develop potential commercial projects.

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

In addition to the developments we are currently contemplating, from time to time other development opportunities are presented to us and we evaluate those potential developments. If we are able to operate a plant, and thereafter refine 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.

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

In October 2014, we entered into a nonbinding Memorandum of Understanding (“MOU”) with various parties (combined, the “Parties”) which memorializes the Parties’ intent for CleanTech to develop and operate a MSW transfer station and biomass recovery plant on land in Jersey City, NJ not owned by CleanTech. All Parties agree to work towards Definitive Agreements, as soon as reasonably practicable, including but not limited to: an escrow agreement whereby CleanTech would fund engineering and legal expenses incurred during the permitting application process, an option agreement providing CleanTech the right to purchase the permit applicant, a lease agreement for a period of not less than 20 years, including two 5 year options to extend the term of the lease to 30 years, and non-compete agreements from the parties. This MOU will terminate upon the earlier of: (i) execution of the Definitive Agreements, (ii) mutual agreement between the Parties, and (iii) 5 PM (EST) on June 29, 2015. While this MOU has expired, we continue to work towards a Definitive Agreement.

On June 23, 2016, we entered into an Acquisition Agreement with 25 Van Keuren LLC, a New Jersey Limited Liability Company (“Van Keuren”), pursuant to which the Company acquired 99% of the outstanding membership interests in Van Keuren with the former members of Van Keuren retaining a 1% interest.

The New Jersey Sports and Exposition Authority has received certification of an amendment to the Solid Waste Management Plan from the New Jersey Department of Environmental Protection (“DEP”) to include the proposed operation of a municipal solid waste transfer station and material recovery facility (“TS/MRF”) at a site located in Jersey City, New Jersey. CleanTech Biofuels and Van Keuren intend to seek the necessary permits and approvals from the New Jersey DEP to build, own and operate the TS/MRF. As part of the acquisition, CleanTech acquired an option to lease the property in Jersey City within 30 days after the final permit issues from the New Jersey DEP. The Company intends to: (1) install its Biomass Recovery Process on the site, and (2) operate the TS/MRF.

Van Keuren has had no operations or revenue since inception and has solely been working towards obtaining the permits required to operate the TS/MRF. As payment for the acquisition, the Company issued in the aggregate 1,000,000 shares of restricted common stock of the Company (par value $0.001) to certain holders of membership interests in Van Keuren. As of the close of business on June 23, 2016, the Company stock quote was $0.05. The total assets of Van Keuren at the time of the acquisition were $51,000 (2.3% of the Company’s assets). The liabilities and equity consisted of accounts payable of $27,000 and member equity of $24,000. The assets consist solely of costs incurred towards obtaining the required permits and have been recorded as an intangible asset on our consolidated financial statements. This intangible will be expensed if and when the Company and Van Keuren complete the permit process and begin operations.

On December 6, 2016, the Company entered into a non-binding Memorandum of Understanding (“MOU”) with Mercer Group International, Inc. which memorializes the Parties intent for CleanTech to lease 4 acres inside of Mercer Groups’ solid waste transfer station facility where CleanTech intends to install its Biomass Recovery Process technology. The MOU also includes a provision for Mercer Group to supply MSW and pay a tipping fee to the CleanTech operation. This MOU was for an initial term of 90 days and expired on March 6, 2017. The Parties continue to work toward a definitive lease and supply agreement.

Bio-Fuel and Bio-Chemical Joint Testing/Research

If we are able to process MSW into biomass through our potential future biomass recovery plant and/or in future commercial vessels, we hope to enter into joint research agreements with companies looking to process biomass in their system(s) for various types of energy and chemical production. We believe that this testing and research could provide possible revenue streams, projects and additional opportunities for use of our biomass.

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

New Technologies; Commercializing Existing Technologies

Because of our 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 intend to continue to add technologies to our suite of solutions that complement our core operations. We believe that our current technologies and aspects of technologies in development or contemplation will enable us to eventually expand our business to use organic material from other waste streams such as municipal bio-solids from waste water facilities and animal waste for fuel production.

To commercialize our technology, we anticipate we will need to:

Our ability to implement this strategy is heavily dependent 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.

Industry Overview 

There are two types of MSW Disposal:

Municipal Solid Waste Landfills

MSWLFs primarily receive household waste and commercial waste. MSWLFs can also receive non-hazardous sludge, industrial solid waste, and construction and demolition debris. All MSWLFs must comply with various federal, state and local laws and regulations.

Disposing of waste in a landfill involves burying waste, and this remains a common practice in most countries. Historically, landfills were often established in disused quarries, mining voids or borrow pits. A properly-designed and well-managed landfill can be a hygienic and relatively inexpensive method of disposing of waste materials. Older, poorly-designed or poorly-managed landfills can create a number of adverse environmental impacts such as wind-blown litter, attraction of vermin, and generation of liquid leachate. Another common byproduct of landfills is gas (mostly composed of methane and carbon dioxide), which is produced as organic waste breaks down anaerobically. This gas can create odor problems, kill surface vegetation, and contributes to global warming.

Waste haulers or municipalities pay tipping fees, or gate rates, on a per ton basis to dispose of garbage at a landfill. Gate rates operate in a manner similar to the published prices for airline tickets or hotels, before discounts or contract prices (which could be higher or lower) are considered. The gate rate is the true daily market value of the tipping fee.

Mass Burn/Incineration Plants

Mass Burn - Mass burn is combusting MSW generally without any pre-processing or separation. The resulting steam is employed for industrial uses or for generating electricity. Mass burn facilities are sized according to the daily amount of solid waste they expect to receive. Most mass burn plants can remove non-combustible steel and iron for recycling before combustion using magnetic separation processes. Other non-ferrous metals can be recovered from the leftover ash.

Waste-to-Energy (WTE) Plants - Current operating WTE plants burn MSW in a controlled environment to create steam or electricity. Through this process the volume of solid waste is reduced by about 90%.

Modular Incinerators - Modular incinerators are small mass burn plants, with a capacity of 15 to 100 tons per day. The boilers for modular incinerators are built in a factory and shipped to the WTE site, rather than being built on the WTE site itself. The advantage of a modular WTE incinerator is flexibility. If more capacity is needed, modular WTE units can be added. These facilities are used primarily by small communities and industrial sites. Costs limit the use of this technology because the return on investment in terms of energy produced over time is much lower than in mass burn plants.

Refuse-Derived Fuel (RDF) Plants - RDF plants process solid waste before it is burned. A typical plant will remove non-combustible items, such as glass, metals and other recyclable materials. The remaining solid waste is then shredded into smaller pieces for burning. RDF plants require significantly more sorting and handling than mass burn, but can recover recyclables and remove some potentially environmentally harmful materials prior to combustion. RDF can be burned in power boilers at factories or even at large housing complexes. Sometimes RDF materials are "densified" (compacted at high pressure) to make fuel pellets. The "pellet fuel" may also include various sludges, by-products of municipal or industrial sewage treatment plants.

MSW contains a diverse mix of waste materials, some benign and some very toxic. Effective environmental management of MSW plants aims to exclude toxics from the MSW-fuel and to control air pollution emissions from the WTE plants. Toxic materials include trace metals such as lead, cadmium and mercury, and trace organics, such as dioxins and furans. Such toxins pose an environmental problem if they are released into the air with plant emissions or if they are dispersed in the soil and allowed to migrate into ground water supplies and work their way into the food chain. The control of such toxics and air pollution are key features of environmental regulations governing MSW fueled electric generation.

U.S. EPA rules are among the most stringent environmental standards for WTE facilities in the world. These rules mandate that all facilities use the most modern air pollution control equipment available to ensure that WTE smokestack emissions are as clean as possible, and are safe for human health and the environment.

Burning any fuel, including MSW, can produce a number of pollutants, such as carbon monoxide, sulfur dioxide, and fine particles containing heavy metals. Other toxic organic compounds, such as dioxins, are also potential emissions from any combustive activity where certain chemical compounds are present, a situation that could take place in the WTE process. Air emission control devices in a WTE facility usually include:

Incinerators and RDF processors are paid tipping fees for the garbage that they accept. Typically, these fees are costlier than the fees paid to landfill operators, largely because of the high capital and operating costs at combustion facilities.

Competition

Competition in our industry will primarily come from Mass Burn, RFD, and/or WTE plants if we produce power and steam. All of these types of plants use MSW for their feedstock.

Many of these plants are operational and have been operating for years in the United States, and thus have substantially more operating experience than our company. We believe our Biomass Recovery Process may produce a cleaner, more homogenous fuel for boilers and gasifiers.

Environmental Matters

We believe our operations will be subject to international, federal, state and local laws and regulations with regard to air and water quality, hazardous and solid waste disposal and other environmental matters upon operation. There is always a risk that the federal agencies may enforce certain rules and regulations differently than state and local environmental administrators. Federal, state and local rules and regulations are subject to change, and any such changes could result in greater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the areas arising from possible foul smells, noise or other air or water discharges from the plant. We do not know the potential cost of these requirements or potential claims. Environmental laws and regulations that may affect us in the future may include, but are not limited to:

Government Approvals

The Company is not currently subject to any government approvals or oversight for its current operations other than normal corporate governance and taxes. However, if we are able to begin developing commercial production facilities, we will be subject to multiple federal, state and local environmental laws and regulations, such as those described above and for employee health and safety. In addition, some of these laws and regulations will require our prospective facilities to operate under permits that are subject to renewal or modification. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Our Technology

We believe we can convert MSW into cellulosic material using our Biomass Recovery Process, which can then be used by a variety of third party technologies as a feedstock to process that cellulosic material into a variety of energy and chemical products.

Biomass Recovery Process

MSW contains valuable resources if they can be recovered economically. Waste haulers often bring unsorted waste by truck to material recovery facilities, also known as MRFs, for sorting and removal of selected materials prior to disposal in sanitary landfills. In addition, certain customers of waste haulers separate recyclables prior to collection. Per a February 2016 U.S. Environmental Protection Agency (“EPA”) update on MSW, approximately 34.3% of MSW was recycled or composted in 2013.

The PSC technology was developed at the University of Alabama in Huntsville and improved by Anthony Noll into the technology we refer to as the Biomass Recovery Process. The process separates curbside MSW into organic and inorganic materials using a patented and proprietary process that involves a unique combination of steam, pressure and agitation. The separation is accomplished by placing waste material in a rotating pressure vessel, or autoclave. In the autoclave, the material is heated to several hundred degrees, which sterilizes the waste material, while the pressure and agitation cause a pulping action. This combination is designed to result in a large volume reduction, yielding the following two sterilized resource streams for further manufacturing of new products:

The process also creates residual waste (fines, rocks, soil, textiles and non-recyclable fractions), which we expect will represent the remaining 15 to 25 percent of the MSW input. We do not expect to be able to recover any value in this residual waste. We will be required to deliver this waste to landfills and incur the tipping fees expense.

The process is currently used in a commercial plant operated by a Third-Party Operator in Coffs Harbor, Australia that has been in operation for over seven years. We believe that our process represents significant improvement over other autoclave technologies currently in use because of:

If we are able to continue to develop our business and pursue opportunities, we may incur research and development costs. We incurred no costs in 2017 and 2016 for research and development.

Principal Products or Services and their Markets

If we determine that our licensed technologies are commercially viable and we are able to raise a significant amount of additional capital, we may be in a position to begin to license and/or enter into long-term contracts with municipalities, solid waste haulers, and operators of landfills and materials recovery facilities to process a large portion of their waste streams into biomass and recyclable materials.

Energy/Chemicals

We expect the primary product we will sell will be biomass from our Biomass Recovery Process to be used for conversion to energy or chemical products. We believe our potential biomass product can be used in multiple varieties of energy production systems. We expect the uses for our biomass product to potentially expand as new energy production technologies are developed.

MSW Processing Services

We believe that the opportunity to help communities, haulers and landfill managers reduce the amount of material transported and deposited in landfills is large and growing. The Resource Conservation and Recovery Act of 1991, referred to as RCRA, requires landfills to install expensive liners and other equipment to control leaching toxics. Due to the increased costs and expertise required to manage landfills under RCRA, many small, local landfills closed during the 1990’s. Larger regional landfills were built requiring increased transportation costs for the waste haulers. As a result, landfill space is increasingly scarce and disposal costs have been increasing.

Currently, landfill operators charge a tipping fee to deliver MSW to a landfill, waste-to-energy facility, recycling facility, transfer station or similar facility. Tipping fees vary widely based on geographic location and the number of available places to dispose of MSW in a given location. Because of the increasing cost pressures on waste haulers and based on current tipping fee pricing, we believe we will be able to negotiate a payment of part of their tipping fee from waste haulers who deliver MSW to us for processing that would range from as low as $15 per ton in some central parts of the country to over $90 per ton in the Northeast and parts of the Southeast. The availability of tipping fees at favorable rates will be a key component of our business.

Recyclable Byproducts

We anticipate that our Biomass Recovery Process will generate other recyclable byproducts from the processing of MSW, such as aluminum, metals, tin, steel, glass and plastic (typically 20 to 25 percent of the total waste stream). The markets for these recovered products are volatile and subject to rapid and unpredictable market changes making it impossible at this time to provide estimated per ton cost to revenue information.

Sources and Availability of Raw Materials

We believe the emergence of technologies to convert MSW to energy or chemicals is opening new opportunities. What was once perhaps the greatest sanitation and health challenge for communities may eventually become an economic and environmental asset. Instead of adding to landfills already nearing capacity limits, converting MSW into biomass may provide one of the building blocks to a more sustainable energy future.

Americans produce more than 250 million tons of MSW annually. About 35% of this waste is currently recovered and recycled. We estimate that approximately up to an additional 45-50% could potentially be recovered. As various waste processing technologies are refined, competition for this future resource will likely intensify. As a result, it will be important for us to attempt to secure access to as much MSW as possible through long-term feedstock supply agreements with operators of materials recovery facilities and landfills.

Intellectual Property Terms

Biomass North America Licensing, Inc.

On September 15, 2008, the Company consummated the acquisition of Biomass North America Licensing, Inc., an Illinois corporation (“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 the patented technology that cleans and separates MSW that we refer to as the Biomass Recovery Process, which is owned by Biomass North America, LLC, the former parent of Biomass (the “Licensor”). In July 2010, the United States Patent and Trademark Office issued US patent number 7,745,208 for this process (the “BRP Patent”). The BRP Patent expires in June 2028.

In accordance with a November 2013 amendment, the Company has an exclusive license in the United States and Canada to use the Biomass Recovery Process and includes no performance requirements on the Company; the license agreement is for a term of 21 years from the date of the amendment or the life of any patent issued for the Biomass Recovery Process, including any amendments, modifications or extensions; the license requires that the Company pay a royalty in the amount of $2.00 per ton of MSW used in the Biomass Recovery Process to the Licensor; and the Company released the 4,000,000 shares of common stock to the Licensor previously held in escrow since the merger.

PSC Patent

The Company owns U.S. Patent No. 6,306,248 (the “PSC Patent”), which is the underlying technology upon which the BRP Patent is based. The Company acquired the PSC Patent on October 22, 2008, pursuant to a Patent Purchase Agreement with World Waste Technologies, Inc. (“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 PSC Patent expired in November 2017. Pursuant to a Master License Agreement with Bio-Products that the Company acquired in connection with the acquisition of the PSC Patent (the “Bio-Products License Agreement”), Bio-Products was the exclusive licensee of the PSC technology (but not the Biomass Recovery Process), although pursuant to a settlement agreement with Bio-Products in March 2009, the Company has the right to use the Biomass Recovery Process worldwide, for any product and with no royalty due to Bio-Products. On September 22, 2010, the Company sent a Notice of Breach to the licensee of our PSC Patent. We received a response from the licensee on November 5, 2010. In February 2011, we became aware that the licensee affected a transfer of the license in violation of the Bio-Products License Agreement. As a result, on March 21, 2011, we sent a notice of termination to the licensee and the transferee terminating the Bio-Products License Agreement. On June 16, 2011, Steve Vande Vegte, a shareholder of the parent of Bio-Products, filed a lawsuit against various individuals and companies, including the Company. The only Cause of Action against the Company was for Declaratory Relief seeking to void our March 2011 termination of the license to which Mr. Vande Vegte is not a party. On August 5, 2011, the Company filed a demurrer requesting that the court dismiss the case on the grounds that Mr. Vande Vegte lacks standing to pursue a claim concerning the license and that the claim raised in the complaint is not ripe. On December 8, 2011, the demurrer to dismiss the Company was granted. In October 2011, a Cross-Complaint was filed by Clean Conversion Technologies, Inc. (“CCT”) and Michael Failla against the Company. CCT was seeking to void the Company’s termination of the Bio-Products License Agreement. This case was voluntarily dismissed per the filing with the court in February 2014. Additionally, CCT filed suit against the Company and Steve Vande Vegte alleging anti-trust violations. This case was voluntarily dismissed per the filing with the court in August 2013.

Employees

The Company currently has one full-time employee, its Chief Executive Officer and Interim Chief Financial Officer, Edward P. Hennessey, Jr., and two part-time employees, its Chief Technology Officer, David Fenton and its VP-Business Development, Scott Fenton. Both David and Scott Fenton are continuing their engineering consulting business, Fenton Engineering International, on a full-time basis and are available to the Company as needed. Neither David nor Scott Fenton receive a salary from the Company, but they are eligible for stock awards.

Access to SEC Filings

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Interested readers can access, free of charge, all of our filings with the SEC and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the About Us/Investor Relations/SEC Filings section of our website at www.cleantechbiofuels.net as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. We will also provide a copy of these documents, free of charge, to any stockholder upon written request addressed to: CleanTech Biofuels, Inc., 7386 Pershing Ave, University City, MO 63130.

You should carefully consider the following risk factors and other information contained in this annual report on Form 10-K when evaluating our business and financial condition. Additional risks not presently known to us and risks that we currently deem immaterial may also impair our business operations and prospects.

Risks Related to Our Business

We need to obtain significant additional capital to fund our current and planned operations and complete the implementation of our business plan, and the failure to secure additional capital will prevent us from commercializing our technology and executing our plan of operation.

We have a history of losses and working capital deficits. We do not currently have enough cash or other liquid assets to fund our proposed business operations, although to date we have been able to fund our basic corporate obligations. If we are not able to obtain additional financing in the immediate future, we will be required to further delay our development until such financing becomes available and may be required to cease operations. In order to fund the development of our business plan, we will be required to identify and execute upon some form of outside funding, such as to:

The amount of funding needed to complete the development and implementation of our business plan will be very substantial and may be in excess of the amount of funding we may be able to obtain. We are continuing to attempt to identify the sources for additional financing that we will require, but currently do not have binding commitments from any third parties to provide this financing. Our ability to obtain additional funding will be subject to a number of factors, including market conditions, acceptance of our business plan, the quality of our biomass and investor sentiment. These factors may make the timing, amount, terms and conditions of additional funding unattractive. For these reasons sufficient funding, whether on terms acceptable to us or not, may not be available. If we are unable to obtain sufficient financing on a timely basis, the development of our technology, facilities and/or products will be further delayed and we could be forced to limit or terminate our operations altogether. Further, any additional funding that we obtain in the form of equity will reduce the percentage ownership held by our existing stockholders.

We have no operating experience and may not be able to implement our business plan.

As a company in the development stage, there is no material operating history upon which to evaluate our business and prospects. We do not expect to commence any significant operations until we test and refine information from a commercial plant for biomass production and/or develop or license an operating facility. As a result, we expect to sustain losses without corresponding revenues, which could result in the Company incurring a net operating loss that will increase continuously for the foreseeable future. We cannot provide any assurance that we will be profitable in any given period or at all.

In addition, we currently have only one full-time employee, our Chief Executive Officer who is acting as the Company’s Interim Chief Financial Officer, who spends at least 40 hours a week on our business. Collectively, he has less experience in operating an alternative energy company compared to many of our competitors. Moreover, given the rapid changes in the industry, we face challenges in planning and forecasting accurately. Our lack of expertise and resources may have a negative impact on our ability to implement our strategic plans, which may result in our inability to commence meaningful operations, achieve profitable operations or otherwise succeed in other aspects of our business plan.

Our consolidated financial statements reflect a “going concern” qualification.

Because of our lack of revenues, lack of working capital, and lack of any assured financing sources, our consolidated financial statements raise doubt about our ability to continue as a going concern because of our financial condition, and substantial losses. The opinion of our auditors for the year ended December 31, 2017 expressed a qualification about our ability to continue as a going concern. This condition has continued since those consolidated financial statements, and we expect that these conditions will continue for the foreseeable future unless we are able to raise a substantial amount of additional financing. In view of the matters described, our ability to continue to pursue our plan of operations as described herein is dependent upon our ability to raise the capital necessary to meet our financial requirements on a continuing basis.

Our Biomass Recovery Process technology may have design and engineering issues that may increase the costs of using the technology.

The Biomass Recovery Process technology involves the use of a rotating pressure vessel, or autoclave, to combine heat, pressure and agitation to convert MSW into biomass. Although technologies that involve the separation and processing of MSW using large-scale autoclaves have not been widely adapted in commercial applications, two vessels using this process are currently operating in Australia. We have completed a small-scale research and testing vessel that initially processed MSW for testing purposes.

Although we believe the autoclaves will operate properly on a commercial scale, we may encounter design and engineering problems when we try to implement this technology on a large-scale for biomass and energy production. Any design, engineering or other issue may cause delays, increase production and development costs and require us to shut down our operation.

We may not have sufficient legal protection of our technologies and other proprietary rights, which could result in the loss of some or all of our rights or the use of our intellectual properties by our competitors.

Our success depends substantially on our ability to use our owned and/or licensed technologies and to keep our licenses in full force, and for us and our technology licensor to maintain our patents, maintain trade secrecy and not infringe the proprietary rights of third parties. There can be no assurance that the patents of others will not have an adverse effect on our ability to conduct our business. Further, we cannot be sure that others will not independently develop similar or superior technologies, duplicate elements of our technologies or design around them. Even if we are able to obtain or license patent protection for our process or products, there is no guarantee that the coverage of these patents will be sufficiently broad to protect us from competitors or that we will be able to enforce our patents against potential infringers. Patent litigation is expensive, and we may not be able to afford the costs. Third parties could also assert that our process or products infringe patents or other proprietary rights held by them.

We also rely on trade secrets, proprietary know-how and technology that we will seek to protect, in part, by confidentiality agreements with our prospective joint venture partners, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.

We will be dependent on our ability to negotiate favorable feedstock supply and biomass off-take agreements.

In addition to proving and commercializing our technology, the viability of our business plan will depend on our ability to develop long-term supply relationships with municipalities, municipal waste haulers, MRF operators, and/or landfills to provide us with the necessary waste streams on a long-term basis. We also will depend on these haulers, operators and facilities to take residual waste streams from our plants and to deliver or accept these streams for land filling. Additionally, we will need to develop off-take agreements with conversion technology companies and/or energy companies for the consumption of our biomass. We currently have no such relationships or agreements and there can be no assurance that we will be able to enter into any such relationships or agreements. If we are unable to create these relationships and receive supply agreements and/or off-take agreements on terms favorable to us, we may not be able to implement our business plan and achieve profitability.

We may not be able to attract and retain management and other personnel we need to succeed.

We currently have one full-time employee, our Chief Executive Officer who is also the Company’s Interim Chief Financial Officer. If we are able to implement our business plan, part of our success is expected to depend on our ability to recruit senior management and other key technology development, construction and operations employees. Especially given our lack of financial resources, we cannot be certain that we will be able to attract, retain and motivate such employees. The inability to hire and retain one or more of these employees could cause delays or prevent us from implementing our business strategy. The majority of our new hires could be engineers, project managers and operations personnel. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot attract and retain, on acceptable terms, the qualified personnel necessary for the development of our business, we may not be able to commence operations or grow at an acceptable pace.

We incur significant costs as a result of being a public company.

As a public company, we are incurring significant legal, accounting and other expenses and our corporate governance and financial reporting activities are more time-consuming. These costs and obligations divert resources from developing and furthering our business plan and operations. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, has required changes in corporate governance practices of public companies. For example, as a public company, we are required to adopt policies regarding internal controls and disclosure controls and procedures. In addition, we are incurring additional costs associated with our public company reporting requirements. These rules and regulations could make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

The Company has incurred significant indebtedness and has various obligations to satisfy or repay that indebtedness.

The Company has issued various forms of debt instruments to raise capital and certain of these obligations have matured and are due. The Company has obligations to repay or otherwise satisfy its debt obligations. This indebtedness could limit the Company’s ability to incur additional indebtedness for capital raising purposes, securing a line of credit, or otherwise. A significant portion of the Company’s resources may need to be dedicated to the repayment of such indebtedness which would reduce the amount of funds available for other corporate purposes. The Company’s ability to meet its expected debt obligations and reduce its indebtedness will be dependent upon the Company’s future performance, which will be subject to the success of its business strategy, general economic conditions, and other factors affecting the Company’s operations, many of which are beyond the Company’s control.

Our senior management’s limited experience managing a publicly traded company diverts management’s attention from operations and could harm our business.

Our management team has limited experience managing a publicly traded company and complying with federal securities laws, including compliance with disclosure requirements on a timely basis. Our management is required to design and implement appropriate programs and policies in response to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.

Our failure to adequately adhere to the established corporate governance practices or the failure or circumvention of our controls and procedures could seriously harm our business.

Compliance with the evolving corporate governance practices takes a significant amount of management time and attention, particularly with regard to disclosure controls and procedures and internal control over financial reporting. Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.

Risks Related to our Industry

As a small company with minimal financial resources, we are at a competitive disadvantage to our competitors, which include larger, established companies that have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than us.

The alternative energy and waste hauling/landfill industries in the United States are highly competitive and continually evolving as participants strive to distinguish themselves. Competition is likely to continue to increase with the emergence and commercialization of new alternative energy technologies. Even if we are successful in implementing our business plan, we may not be able to compete within these industries. Moreover, the success of alternative energy generation technologies may cause larger, conventional energy companies with substantial financial resources to enter the alternative energy industry. These companies, due to their greater capital resources and substantial technical expertise, may be better positioned to develop and exploit new technologies. Our inability to respond effectively to our competition could result in our inability to commence meaningful operations, achieve profitable operations or otherwise succeed in other aspects of our business plan.

Our success may be dependent on continued high energy prices.

Prices for energy can vary significantly over time and decreases in price levels could adversely affect our profitability and viability. Worldwide energy prices are subject to a myriad of factors almost all of which are completely beyond our ability to control. Frequently, unforeseen events can have a dramatic impact on the price paid for energy. If the prices for more traditional sources of energy remain relatively low, such a pricing environment could cause our business model to be unviable and our technology worthless.

Waste processing and energy production is subject to inherent operational accidents and disasters from which we may not be able to recover, especially if we have only one or a very small number of facilities.

Our anticipated operations would be subject to significant interruption if any of our potential facilities experience a major accident or are damaged by severe weather or other natural disasters. In particular, processing waste and producing energy products is subject to various inherent operational hazards, such as equipment failures, fires, explosions, abnormal pressures, blowouts, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Currently we do not have any insurance to cover those risks. We intend to seek insurance appropriate for our business before we commence significant operations. The insurance that we plan to obtain, if obtained, may not be adequate to cover fully the potential operational hazards described above.

Alternative technologies could make our business obsolete.

Even if our technology proves to be commercially feasible, there is extensive research and development being conducted in alternative energy sources. Technological developments in any of a large number of competing processes and technologies could make our technology obsolete and we have little ability to manage that risk.

Risks Related to Government Regulation

Enforcement of energy policy regulations could change.

Energy policy in the United States is subject to ongoing change. Over the last few decades, the United States Congress has passed separate major pieces of legislation addressing energy policy and related regulations. We anticipate that energy policy will continue to be a very important legislative priority on a national, state and local level. As energy policy continues to evolve, the existing rules and regulations that benefit our industry may change. It is difficult, if not impossible, to predict changes in energy policy that could occur on a federal, state or local level in the future. The elimination of or a change in any of the current rules and regulations could create a regulatory environment that prevents us from developing a commercially viable or profitable business.

Costs of compliance may increase with changing environmental and operational safety regulations.

As we implement our business plan, we will become subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our contemplated facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Furthermore, we may become liable for the investigation and cleanup of environmental contamination at any property that we would own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under CERCLA, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for investigation, cleanup, or other costs.

In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws, or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at any future production facility. Present and future environmental laws and regulations applicable to MSW processing and energy production, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on the results of our contemplated operations and financial position.

The hazards and risks associated with processing MSW and producing and/or transporting various energy or chemical products (such as fires, natural disasters, explosions, and abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. As protection against operating hazards, we intend to maintain insurance coverage against some, but not all, potential losses. We could, however, sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on the results of our contemplated operations and financial position.

Risks related to our Common Stock and Stock Price Fluctuation

Our stock is thinly traded, so you may be unable to sell at or near ask prices or at all. 

Our common stock trades on the OTCQB. Shares of our common stock are thinly-traded, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including:

Consequently, our stock price may not reflect an actual or perceived value. Also, there are periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broader or more active public trading market for our common shares may not develop or if developed, may not be sustained. Due to these conditions, you may not be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares.

Even if an active trading market develops, the market price for our common stock may be highly volatile and could be subject to wide fluctuations.

We believe that newer alternative energy companies and companies that effect reverse mergers, such as our company, are particularly susceptible to speculative trading that may not be based on the actual performance of the company, which increases the risk of price volatility in a common stock. In addition, the price of the shares of our common stock could decline significantly if our future operating results fail to meet or exceed the expectations of market analysts and investors. Some of the factors that could affect the volatility of our share price include:

Trading in our common stock is subject to special sales practices and may be difficult to sell.

Our common stock is subject to the Securities and Exchange Commission’s “penny stock” rule, which imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. Penny stocks are generally defined to be an equity security that has a market price of less than $5.00 per share. For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth or a joint net worth with the person’s spouse, in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of our shareholders in this offering to sell their securities in any market that might develop.

Stockholders should be aware that, according to Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our common stock.

Substantial future sales of our common stock shares in the public market could cause our stock price to fall.

If our stockholders sell substantial amounts of our common stock, or the public market perceives that stockholders might sell substantial amounts of our common stock, the market price of our common stock could decline significantly. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that our management deems appropriate. As of December 31, 2017, we had: (i) 97,633,409 shares of our common stock outstanding, and (ii) also have outstanding convertible notes (including accrued interest) with warrants convertible into approximately 58.0 million shares of our common stock, and warrants, immediately exercisable and representing the right to purchase approximately 14.7 million shares of our common stock. An additional 14,000,000 shares of our common stock have been reserved for issuance pursuant to our 2007 Stock Option Plan.

Potential issuance of additional common and preferred stock could dilute existing stockholders.

We are authorized to issue up to 240,000,000 shares of common stock. To the extent of such authorization, our board of directors has the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as the board of directors may consider sufficient. We are also authorized to issue up to ten million shares of preferred stock, the rights and preferences of which may be designated in series by the board of directors. Such designation of new series of preferred stock may be made without stockholder approval, and could create additional securities which would have dividend and liquidation preferences over the common stock offered hereby. Preferred stockholders could adversely affect the rights of holders of common stock by:

In all the situations described above, the issuance of additional common stock in the future will reduce the proportionate ownership and voting power of our current stockholders.

Not applicable.

We currently occupy 1,800 square feet of office space in St. Louis, Missouri. The initial term of the lease has expired, however, we are continuing to lease on a month-to-month basis (current term ended December 2016). The monthly lease payment is $1,800, plus utilities. We took possession of the leased space in January 2008.

On February 27, 2018, Gary Giordano, Thomas Giordano, and James Avenue, LLC, the minority members of Van Keuren (the "Plaintiffs"), filed a complaint (the "Complaint") against the Company and Mr. Hennessey in the Chancery Division of the Superior Court of Hudson County, New Jersey arising out of the Acquisition Agreement with Van Keuren (the "Van Keuren Agreement"). The Complaint asserts, among other things, breach of contract, breach of implied covenant of good faith and fair dealing, and fraud. The Complaint alleges that the Company failed to take reasonable actions to effectuate certain of its obligations under the Van Keuren Agreement within a reasonable time, such as (i) acquiring approval of the New Jersey Department of Environmental Protection to establish a transfer station and material recovery facility ("TS/MRF") on property owned by James Avenue, LLC, (ii) acquiring the other governmental approvals needed to operate the TS/MRF, and (iii) entering a lease with James Avenue, LLC to operate the TS/MRF, and furthermore that the Company misrepresented its ability to carry out these obligations. The Complaint also alleges that the Company never delivered 1,000,000 shares of restricted common stock due to the plaintiffs as consideration under the Van Keuren Agreement. The Complaint requests a return of the shares in Van Keuren to the Plaintiffs, as well as compensatory damages for the loss of rental income and preferential tipping fees. See Item 1—Business—Plan of Operation—Biomass Feedstock Production for additional information regarding the Van Keuren Agreement.

We are currently working with the Plaintiffs to reach a settlement. To that end, we have requested and received from the court an extension of time to file our response to the Complaint. Due to the uncertainty of the ultimate outcome of these matters, the impact on our future financial results cannot be reasonably estimated at this time.

Not applicable.

PART II

Our Common Stock (“Common Stock”) (symbol: CLTH) is currently posted on the OTCQB Market. The following table sets forth for the periods indicated the high and low bid prices per share of our Common Stock:

These bids and ask prices represent prices quoted by broker-dealers on the OTC Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

On March 30, 2018, the closing price of our Common Stock was $0.030 per share. As of March 30, 2017, we had approximately 129 stockholders of record.

Dividend Policy

We have no material operating history and therefore have had no earnings to distribute to stockholders. We do not anticipate paying any cash dividends in the foreseeable future. Rather, we currently intend to retain our earnings, if any, and reinvest them in the development of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the board of directors may deem relevant.

Recent Sales of Unregistered Securities 

In August 2013, the Company commenced an offering of units, under a Subscription Agreement, at a purchase price of $1,000 per unit (Equity Offering 8/13). Each unit consists of: (i) 10,000 shares of the Company’s authorized but unissued restricted Common Stock and (ii) warrants to purchase 30,000 additional shares of Common Stock for a three-year period from the date of issuance of the units at an initial exercise price of $0.15 per share. As of December 31, 2017, the Company raised a total of $763,500 of investment proceeds pursuant to the Equity Offering 8/13. The issuance of units and the issuance of Common Stock were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 506(b) of Regulation D (“Rule 506(b)”) promulgated under the Securities Act and/or Section 4(a)(2) of the Securities Act.

During September 2015, the Company commenced an offering of units comprised of a convertible promissory note and a warrant (2015 Offering). As of December 31, 2017, the Company raised a total of $85,000 of investment proceeds pursuant to the 2015 Offering. Each convertible promissory note carries an 18-month term and a 6% interest rate. In addition, each note can be converted into shares of the Company’s Common Stock at $0.10 per share at the noteholders option. Each note was issued with a warrant to purchase additional shares of Common Stock to provide three times coverage of the potential shares issued on the principal value of the note at a price of $0.15 per share. The issuance of units and the issuance of Common Stock upon conversion of notes were exempt from the registration requirements of the Securities Act, pursuant to Rule 506(b) and/or Section 4(a)(2) of the Securities Act.

In February 2017, the Company issued 500,000 shares of restricted Common Stock to a Board Member in exchange for $50,000. This offering of securities was exempt from registration under the Securities Act in accordance with Section 4(a)(2) thereof, a transaction by the issuer not involving a public offering.

In May 2017, the Company issued 100,000 shares of restricted Common Stock to a consultant as compensation for accounting services provided to the Company. This offering of securities was exempt from registration under the Securities Act in accordance with Section 4(a)(2) thereof, a transaction by the issuer not involving a public offering.

In June 2017, the Company issued 500,000 shares of restricted Common Stock to a Board Member in exchange for $50,000. This offering of securities was exempt from registration under the Securities Act in accordance with Section 4(a)(2) thereof, a transaction by the issuer not involving a public offering.

In July 2017, the Company issued 200,000 shares of restricted Common Stock to a consultant as compensation for accounting services provided to the Company. This offering of securities was exempt from registration under the Securities Act in accordance with Section 4(a)(2) thereof, a transaction by the issuer not involving a public offering.

In August 2017, the Company issued 2,000,000 shares of restricted Common Stock to consultants for business consulting services regarding the collection and disposal of MSW in the New York and New Jersey markets to be provided over a two-year term. These offerings of securities were exempt from registration under the Securities Act in accordance with Section 4(a)(2) thereof, as transactions by the issuer not involving a public offering.

Not applicable.

The following discussion of our plan of operation should be read in conjunction with the consolidated financial statements and related notes to the consolidated 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 Statements” and “Risk Factors” and those included elsewhere in this report.

As a result of the limited operating history of our company, prior years’ consolidated financial statements provide little information and virtually no guidance as to our future performance (except to the extent we continue to incur net losses). In order to finance our business beyond this stage, we will be required to raise additional capital or identify another source of outside funding. All of our potential developments/projects will require a significant amount of capital. While we continue to pursue outside sources of funding, we have not had success securing meaningful amounts of financing. As a result, we can provide no assurance that we will secure any funding in the immediate time frame required and the failure to do so will likely result in an inability to continue operations. Management hopes to secure additional funds through equity or debt financing, government grants, or project financings, until such time as the Company begins to generate revenue and the Company’s revenues and cash flow are sufficient to meet its cost structure and ultimately achieve profitable operations. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We may not be able to secure financing on favorable terms, or at all. If we are unable to obtain acceptable financing on a timely basis, our business will likely fail, and our common stock may become worthless.

Overview

Our focus is to secure sufficient capital to fund our current working capital requirements and the construction of a commercial plant as described previously in Item 1 of this report – Plan of Operations.

Results of Operations

The company’s activities and related primary expenses are in the following categories: General and administrative – payroll (including share-based compensation, stock grants, and payroll taxes), general office expenses, travel, and business insurance; Professional fees - consulting, accounting and legal fees; Interest – interest on convertible notes. The following tables set forth the amounts of expenses and changes in our consolidated statements of operations:

Year ended December 31, 2017 compared to the year ended December 31, 2016

Costs and expenses:

General and administrative – The decrease in 2017 was due primarily to decreases of: $49,000 related to stock grants, $17,000 in travel and entertainment, $90,000 in payroll, offset by an increase in insurance of $7,000.

Professional Fees – The increase in 2017 was due primarily to an increase of $25,000 in consulting fees.

Interest expense – The increase in 2017 was due to the compounding effect of interest on our notes payable, interest on two new notes payable in January and October of 2017 and a full years’ worth of interest for the June 2016 and October of 2016 notes.

Year ended December 31, 2016 compared to the year ended December 31, 2015

Costs and expenses:

General and administrative – The increase in 2016 was due primarily to an increase of: $48,000 related to stock grants, $12,000 in travel and entertainment, offset by a decrease of $30,000 in payroll and business insurance.

Professional Fees – The increase in 2016 was due primarily to an increase of $10,000 in accounting and consulting fees.

Interest expense – The increase in 2016 was due to the compounding effect of interest on our notes payable along with two new notes in June and October of 2016.

Liquidity and Capital Resources

As a development-stage company, we have no revenues and will be required to obtain an outside source of capital in order to execute our business plan and commercialize our products. Beginning in September 2008 and as of March 30, 2018, we raised an aggregate of: (i) approximately $3.50 million in separate offerings of units comprised of notes payable and warrants in separate offerings from 2008 through 2017 and (ii) $763,500 in an equity offering of restricted Common Stock through our Subscription Agreements (our Equity Offering 8/13). We are continuing to explore opportunities to raise cash through the issuance of these units and other financing opportunities, however to date we have not been successful in doing so. As of March 30, 2018, our current cash and other assets are not sufficient to fund our operations. As of December 31, 2017, we had a significant working capital deficit. Our liabilities are substantially greater than our current assets. Our only significant assets are our intellectual property rights, which are intangible and not readily convertible into liquid assets.

We are attempting to identify one or more potential sources of additional financing, such as through the sale of additional equity, various government funding opportunities and/or possibly through strategic alliances with larger energy or waste management companies. The Company will continue to explore, and if identified, evaluate financing alternatives and/or other transactions, including potentially retaining a financial advisor. However, we may not be successful in securing additional financing. If we are not able to obtain additional financing in the immediate future, we will be required to further 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 or to continue our operations.

Debt

Convertible Notes Payable - Since September 2008, the Company has conducted six offerings of units comprised of a convertible promissory note and a warrant, and one offering of a convertible note (with no warrant), having the terms set forth below:

Each note holder retains the option of cash repayment of the note plus interest, or can convert the note at any time during the term of the note or prior to the closing of any Qualifying Equity Financing (minimum capital received of $5 million) into shares of Common Stock at the conversion price noted above. All notes have been recorded as debt (notes payable) in the consolidated financial statements, net of discounts for the conversion and warrant features (except for the 11/10, 5/12, 2/14, and 2015 Offerings which carried no discounts). The discounts have been amortized on a straight-line basis over the term of each note and were fully amortized as of December 31, 2011.

2008 Offering - During September 2008, the Company commenced an offering of units and raised a total of $642,000 of investment proceeds through March 31, 2009. As of March 31, 2010, all of these notes had either been converted to shares of our common stock or exchanged into our 2009 Offering (resulting in new notes with a total face value of $539,829, which included the original principal and interest through the date of exchange).

2009 Offering - During April 2009, the Company commenced an offering of units and raised a total of $1,198,500 of investment proceeds through August 2010. Four notes have been converted to shares of Common Stock (one each in 2009, 2010, 2014 and 2017). Beginning in March 2011, certain notes were exchanged into our 11/10 Offering or our 7.1.15 Convertible Note Payable. As a result, as of December 31, 2017, we had $189,185 face value of notes outstanding due to this offering, which includes the exchanged notes from our 2008 Offering. All of these notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

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

11/10 Offering - During November 2010, the Company commenced an offering of units, and raised a total of $451,713 of investment proceeds. Three notes were converted to shares of common stock in 2011 and four notes were converted to common stock in 2012. As of December 31, 2017, we had $1,877,162 face value of notes outstanding, which includes the exchanged notes from our 2009 Offering. As of December 31, 2017, all of these notes have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

5/12 Offering - During May 2012, the Company commenced an offering of units and raised a total of $583,510 of investment proceeds. As of December 31, 2017, all of these notes are outstanding and have matured. We plan to work with each remaining note holder to exchange, convert or repay these notes.

2/14 Offering - During February 2014, the Company commenced an offering of units and raised a total of $100,000 of investment proceeds in one note. As of December 31, 2017, this note is outstanding and has matured. We plan to work with the note holder to exchange, convert or repay this note.

2015 Offering - During September 2015, the Company commenced an offering of units and, as of December 31, 2017, raised a total of $85,000 of investment proceeds. As of December 31, 2017, this note is outstanding and has matured. We plan to work with the note holder to exchange, convert or repay this note.

WL Meyer Legacy Trust (formerly CMS Acquisition, LLC) Note Payable - In September 2010, the Company issued a note in the amount of $100,000 (interest at 6.0% per annum through May 15, 2011 and 10.0% thereafter and secured by a security interest in the PSC Patent) and issued warrants to purchase 2,000,000 shares of Common Stock at a price of $0.05 per share. The note is due the earlier of: (i) April 26, 2018 pursuant to an amendment on April 26, 2017 or (ii) the date on which $500,000 or more in the aggregate is raised by the Company in future offerings. The warrants are exercisable at any time for five years from the date of issuance or reissuance. The value of these warrants has been recorded as a contra-balance amount discount with the note and was fully amortized (interest expense) as of February 28, 2011 (the original due date). As consideration in these amendments, the Company has: (i) paid $30,000 towards accrued interest to date and principal on the note, (ii) increased the interest rate to 10% as of May 15, 2011, (iii) re-dated the original warrants to April 26, 2017, (iv) issued new warrants for 300,000 shares of Common Stock with an exercise price of $0.05 and exercisable at any time until April 26, 2022, (v) issued new warrants for 150,000 shares of Common Stock with an exercise price of $0.10 and exercisable at any time until April 26, 2022, and (vi) the Company has approved the assignment of the note by CMS Acquisition LLC to the WL Meyer Legacy Trust per the March 17, 2015 amendment. As of December 31, 2017, $72,696 face value of this note is outstanding.

7.1.15 Convertible Note Payable - On July 1, 2015, one noteholder in our 2009 Offering exchanged two notes into this note. This new note carries a 6% annual interest, compounded annually, and is due in quarterly installment payments: the greater of $3,000 or 10% of all investment proceeds received during the calendar quarter preceding the quarterly installment payment. As of December 31, 2017, this note has been paid in full.

The following is a summary of warrants issued and outstanding as of the dates below, at the exercise price and the number of shares of Common Stock (these warrants have not been exercised or converted to common shares):

Summary of Cash Flow Activity

Net cash used by operating activities

During 2017, 2016 and 2015, cash used by operating activities was impacted primarily by the net loss reduced by increases in accrued interest and other accrued liabilities.

Net cash provided by financing activities

During 2017, cash provided by financing activities was primarily due from the continuance of our Equity Offering and the issuance of equity and note payables for a total of $140,000, offset by note payable payments of $5,000.

During 2016, cash provided by financing activities was primarily due from the continuance of our Equity Offering and the issuance of equity and a note payable for a total of $195,000, offset by note payable payments of $17,377.

During 2015, cash provided by financing activities was primarily due from the continuance of our Equity Offering and the issuance of a Convertible Note combining for a total of $185,000, offset by note payable payments of $14,500.

Contractual Obligations and Commitments

In the table below, we set forth our obligations as of December 31, 2017. 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements. We have not entered into any transaction, agreement or other contractual arrangement with an unconsolidated entity under which we have:

Critical Accounting Estimates

Long-Lived Assets – Our acquisition and merger activities have resulted in aggregate licensing and patent assets of approximately $2.2 million as of December 31, 2017. We are required to conduct impairment tests of long-lived assets on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. As we have not commenced commercial operations, these assets have not yet been placed in service.

Deferred Taxes – We recognize deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has incurred no income taxes to date. Any benefits are the result of temporary differences (start-up costs, stock compensation and other items) and operating loss carryforwards. The difference between the expected income tax benefit and non-recognition of an income tax benefit in each period is the result of a valuation allowance applied to deferred tax assets. A valuation allowance in the same amount of the benefit has been provided to reduce the deferred tax asset, as realization of the asset is not assured.

Stock-Based Compensation – We account for stock-based compensation in accordance with accounting guidance that requires measuring all stock-based compensation awards at fair value and recognizing an expense in the consolidated financial statements. We compensate certain employees, officers, directors and consultants with share-based payment awards and recognize compensation costs for these awards based on their fair values and expense is recognized over the requisite service period. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions including the expected term of an award and expected stock price volatility.

Convertible Notes Payable and Warrants – The Company has issued various Convertible Promissory Notes (“Notes”). These Notes may be converted at the option of the note holder into shares of the Company’s common stock. Additionally, these Notes carry warrants for shares of the Company’s common stock. These promissory notes have been recorded as debt (notes payable) in the consolidated financial statements, net of discounts, if any, for the conversion and warrant features. The discounts have been amortized on a straight-line basis over the term of each note.

Fair Value Measurement – We use fair value accounting and reporting to specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect our own assumptions of market participant valuation. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

As of and during the years ended December 31, 2017 and 2016, we utilized Level 1 inputs to determine the fair value of cash equivalents and we utilized Level 2 inputs to determine the fair value of certain long-lived assets.

Restricted Stock Compensation – From time to time, we issue restricted Common Stock to employees, directors, and consultants as compensation. The cost of these grants is recorded in general and administrative expense. The cost is determined using the number of shares granted at a discount to the market value on the date of the grant. The discount is applied for a Lack of Marketability due to: (i) shares issued are unregistered shares and subject to Rule 144 of the Securities Act, (ii) minimal trading activity in our shares, only about 1/3^rd of which are registered and free-trading shares, and (iii) the Company has yet to begin operations and has had no revenue.

Contingent Liabilities – We are, from time to time, subject to litigation to our business. Assessments regarding the ultimate cost of lawsuits require judgments concerning matters such as the anticipated outcome of negotiations, the number and cost of pending and future claims, and the impact of evidentiary requirements. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We regularly review the valuation of these liabilities and account for changes in circumstances for ongoing and emerging issues. The Company intends to defend itself vigorously in all litigation.

As of December 31, 2017, all of our debt instruments (Notes Payable) carry fixed interest rates. We do not have any arrangements for borrowings under a credit facility. We currently have no operations and are not subject to any currency fluctuations or credit risk.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

CleanTech Biofuels, In c.

St. Louis, Missouri

Opinion of the Financial Statements

We have audited the accompanying consolidated balance sheets of CleanTech Biofuels, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017 and the related notes [and schedules] (collectively referred to as the “financial statements”).  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CleanTech Biofuels, Inc. and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company and its subsidiaries will continue as a going concern.  As discussed in Note 15 to the financial statements, the Company’s significant operating losses and recent inability to secure additional capital to implement its business plan raise substantial doubt about its ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.  The Company and its subsidiaries are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.  As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement

presentation.  We believe that our audits provide a reasonable basis for our opinion.

MILHOUSE & NEAL, LLP

Certified Public Accountants

We have served as the Company’s auditor since 2010

Maryland Heights, Missouri

March 30, 2018

 CLEANTECH BIOFUELS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS