Carbon Sciences Inc

Analyst: Victor Sula, Ph.D. Report Update

October 8th, 2009

Company Introduction

Carbon Sciences Inc. 5511-C Ekwill Street Santa Barbara, CA 93111

Tel.: (805) 456-7000Fax: (805) 681-1300E-mail: [email protected] Website: www.carbonsciences.com

MARKET DATA

SymbolExchangesCurrent PriceRatingOutstanding SharesMarket Cap.

Source: Yahoo Finance

CABNOTC BB

$0.13Speculative Buy

154.02 Million$21.56 Million

Carbon Sciences Inc. (OTCBB: CABN) is developing a breakthrough technology for recycling harmful carbon dioxide (CO2) emissions into gasoline and fuels.

In September 2008, CABN announced its innovative new technology at the First International Summit on Policy, Technology and Investment, hosted by Cambridge University. CABN’s CEO described the Company’s program to use CO2 as a feedstock for producing portable fuels and simultaneously address the world’s energy and environmental challenges. CABN’s CO2-to-fuel technology takes CO2 from coal-fired power plants and other large CO2 emitters and transforms it into portable fuels for use in today’s vehicles and infrastructure.

Since the beginning of the industrial revolution, low cost fossil fuels such as oil and coal have powered the world’s economic growth. Today, industrialization has accelerated on a global scale and the world is consuming more fossil fuel than ever before. Demand for depleting fossil fuel resources has driven the price of energy to previously unimagined levels and in the process released billions of tons of CO2 into the atmosphere. The U.S. Energy Information Administration projects that global energy consumption will increase 50% by 2030 to over 112 million barrels of crude oil per day; nearing a critical point many energy analysts call Peak Oil. This dual crisis of energy depletion and climate change threatens living standards and the security of nations.

The world is highly dependent on the existing transportation and fuel delivery infrastructure. Automobiles, trucks, trains and planes powered by portable fuels are crucial to our way of life. Alternative

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fuel technologies being developed by others such as fuel cells and hydrogen will require substantial infrastructure changes to be deployed on a large scale. CABN’s technology, which transforms harmful byproducts of fossil fuel usage (CO2) into additional usable fuel, holds tremendous potential since it reduces harmful CO2 emissions while creating fuel that can be distributed through the existing infrastructure. CABN’s solution simultaneously addresses the problems of sustainable fuel supplies and climate stability. The Company estimates that with less than half of the CO2 emissions from coal-fired power plants alone, it can produce 30% of the world’s liquid fuel supply.

Breakthrough CO2 to Fuel Technology is Inspired By Nature

Since the beginning of time, certain microorganisms called chemoautotrophs, have been transforming CO2, into fuel molecules as part of their internal life support process. Unlike plants that derive energy from sunlight, these organisms get their energy from nutrients in their surroundings. Inside these microorganisms are complex biocatalytic processes that use enzymes to transform CO2 directly into fuel molecules. However, this natural process is inefficient as the enzymes die after a few cycles. Carbon Sciences’ CO2-to-Fuel technology is based on emulating and exploiting these enzyme-driven biocatalytic processes on an industrial scale.

Smart particle technology provides path to industrial scalability

In recent years, other scientists have successfully demonstrated the feasibility of transforming CO2 into fuel in laboratory experiments using enzymes. However, they fall short of a design pathway for industrial scale operations.

In October 2009, CABN announced the invention of a nano-scale reactor functioning like a highly efficient artificial microorganism that contains a proprietary enzyme process and serves a single purpose – to absorb CO2 molecules and excrete fuel molecules. This nano-scale reactor, called Smart Particle™, is the key to achieving a fast reaction time and industrial scale up of the Company’s CO2-to-Fuel process. The patent application for Smart Particle technology contains the detailed design of Smart Particles as well as a proprietary manufacturing process where these particles self-assemble in solution without any external nano-manufacturing.

CAPE tool accelerates progress toward commercial start-up

In May 2009, the Company announced it had developed a computer-aided process engineering (CAPE) tool that will enable CABN to model the performance of its biocatalytic CO2-to-Fuel process and rapidly advance from prototype to a full-scale pilot plant. Previously, the Company had planned on developing a mini-pilot plant as the next stage in developing its CO2-to-Fuel technology. Performance data from the mini-pilot project would be used to help design a full-scale commercial pilot plant. However, recent breakthroughs in nano-engineering of the biocatalyst, encouraging prototype performance results, and molecular-based computer modeling of the biocatalytic process

Carbon Sciences Inc. (OTCBB: CABN) 2

Technology Development Update


October 8th, 2009

give the development team the tools necessary to pursue a direct path to full-scale pilot design.

Enzyme encapsulation technology lowers fuel cost

The Company announced an important technical breakthrough that increases the functional life of key enzymes used in its biocatalytic CO2-to-Fuel process. The development of novel enzyme encapsulation technology will likely significantly improve the functional life of key enzymes and speed the commercialization of its Co2-to-Fuel process. Enzymes are very expensive, and the commercial viability of any biocatalytic process depends on the number of cycles the enzymes can perform before they must be replaced. This is known in the industry as the Total Turnover Number (TTN) of a biocatalytic process. A higher TTN means that more products can be produced with the same fixed cost of enzymes -- thereby lowering per unit costs. For Carbon Sciences, a higher TTN in its biocatalytic CO2-to-Fuel process directly translates into a lower cost per gallon for gasoline and other fuels.

Reduced reaction time increases scalability and economics of CO2-to-Fuel plant

The Company has also reported successfully reducing the reaction time of its CO2-to-Fuel process from hours to minutes. This achievement dramatically enhances the scalability and reduces the costs of building and operating an industrial scale CO2-to-Fuel plant. Reaction time is the time required to convert a unit amount of raw material to product in a fixed biochemical reactor. In the case of CO2 to fuel, a slow reaction time requires a very large reactor size for holding and processing a continuous stream of CO2 from a large emitter, such as a coal-fired power plant. For example, if a one cubic meter reactor can process one ton of CO2 per day, then 5,000 reactors are required to process 5,000 tons/day of CO2 emissions. However, if a one cubic meter reactor can process 10 tons of CO2 per day, then only 500 reactors are required.

CABN notes the following as key advantages of its CO2-to-Fuel technology versus biofuels and carbon sequestration.

CO2-to-Fuel vs. Biomass-to-Fuel

Most of the renewable alternatives to fossil fuel rely on the same fundamental concept of recycling CO2 into fuels. In most cases, this is accomplished through intermediaries such as terrestrial crops or microorganisms, where CO2 and water are transformed into complex energy molecules. These complex energy molecules, such as sugars, carbohydrates, lipids and cellulose are stored inside the intermediary’s biomass and they must be extracted, broken down, and further refined into hydrocarbon fuel equivalents.

CABN’s process bypasses the energy-intensive and time-consuming tasks of growing and processing biomass into fuel. The Company’s technology involves the direct molecular transformation of CO2 and water into fuel molecules through a novel and energy efficient biocatalytic process. The resulting fuels are molecularly identical to fuels that are used today such as gasoline, diesel and jet fuel. The difference between fuels produced by the Company’s technology and petroleum is that CABN’s fuels are renewable -- made from CO2 emissions and not dug up from the Earth. Unlike biofuels, they can be used as-is in today’s infrastructure, supply chain and vehicles.

The diagram below illustrates the difference between a Biomass to Fuel lifecycle and CO2-to-Fuel lifecycle.


Key Advantages of CO2-to-Fuel Technology


October 8th, 2009


CO2-to-fuel transformation plant

Source: http://www.carbonsciences.com/01/technology_keyadvantage.html


October 8th, 2009

Carbon Sciences Inc. (OTCBB: CABN)

CO2 Recycling vs. CO2 Sequestration

CO2 recycling takes CO2, combines it with other materials, and transforms them into higher value end products. In the case of CABN’s technology, the product is fuel. Fuel produced from CO2 transformation is identical to “normal” fuel such as gasoline, diesel fuel and jet fuel. There is no storage risk and the commercial value can offset the costs of traditional carbon capture and sequestration systems.

CO2 burying or sequestration involves mitigating CO2 by burying it. The main approaches used today by large CO2 emitters include geologic storage and ocean storage. These methods create issues concerning energy requirements and costs and the viability of long-term storage. More importantly, the cost of monitoring and preventing leaks of stored CO2 is ongoing, therefore reaches infinity - just like the monitoring of nuclear waste.

The scale of carbon capture and sequestration (CCS) needed to make a significant dent in worldwide carbon emis-sions is staggering. Burning coal provides 25% of the world’s energy but also produces 18 billion tons of CO2 an-nually, or 40% of the world’s total carbon emissions. According to a recent Science Magazine editorial from Steven Chu, Secretary of Energy of the United States, the annual 18 billion tons of CO2 from coal use will require an un-derground storage volume of more than 30,000 km3/year. That is equivalent to a 10 feet high storage container that covers the entire surface area of the United States for just one year of CO2 emissions.

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EnergyRequirements

Impact on theEnvironment

OngoingMonitoring andRiskManagement

After ProcessCommercialValue

Low-MediunCarbon Sciences has identifiedSeveral unique ways to reduce theEnergy required for CO2transformation

Positive-NeutralRenewable fuel from co2 reducesThe use of petroleum fuels and canimprobe the enviroment

LowNo associated risk with storage.Renewable fuel is used up in placeOf petroleum.

HighFuel is a very high value productwith global demand.

HighGeologic storage is projected toincrease energy costs associated with creating electricity 30%-40% over current costs

UnknownOil wells, saline aquifers, and mines are not proven storage vessels. Con-cern for impact to the environment from leakages.

HighConcern for leakage from storage facilities; must be closely and always monitored.

LowThis process may help older oil wells increase production of more fossil fuels

HighOcean storage is projected to increase energy costs associated with creating electricity 30%40% over current costs

UnknownConcern for impact on deep ocean life and corresponding effects to other biospheres

HighNeed to monitor the deep ocean biosphere for possible increased acidity and corresponding impact

CO2 Recycling Geologic Storage Ocean Storage

Advantages of CO2 recycling vs. CO2 sequestration

Source: http://www.carbonsciences.com/01/technology_transvsstorage.html


October 8th, 2009


CABN’s Biocatalytic Process vs. other CO2 Recycling Technologies

Established approaches for CO2-to-Fuel recycling include direct photolysis, which uses intense light energy to break off the oxygen atoms in CO2, and chemically reacting carbon dioxide gas with hydrogen gas to create methane or methanol. However, both of these conventional engineering approaches require immense energy due to high-pres-sure and high-temperature chemical processes and involve significant costs.

CABN plans to recycle large quantities of CO2 into gaseous and liquid fuels using a proprietary multi-step bio-catalytic process. Instead of using the expensive inorganic catalysts, such as zinc, gold or zeolite required for tradi-tional high-energy catalytic chemical processes, CABN’s process uses inexpensive, renewable enzymes to trigger the chemical reactions that are required to transform CO2 and water (H2O) into fuel molecules. The process develops at low temperature and pressure and requiring far less energy than conventional processes.

CABN’s biocatalytic process naturally occurs in certain micro-organisms in which carbon atoms extracted from CO2 and hydrogen atoms extracted from H2O combine to create hydrocarbon molecules. The Company’s process repli-cates this on a very large industrial scale.

Building Visibility

The Company’s CEO Byron Elton made several appearances on the popular online energy and environment net-work CleanSkies during the “The Energy Report” with Susan McGinnis to discuss CABN’s technology and its ap-plications in addressing global issues resulting from CO2 emissions.

Mr. Elton and Dr. Naveed Aslam, Ph.D. addressed energy industry leaders at the third annual ACI Carbon Capture and Sequestration Summit held in Washington, D.C. In addition, he has been invited to speak at the prestigious Embry-Riddle Aeronautical University’s 2009-2010 Honors Program “Distinguished Speakers Series” in Daytona Beach, Florida, on January 25, 2010.

Elton contributed an article to the August 2009’s edition of Corp! Magazine entitled “Carbon Dioxide Recycling: Technologies Make CO2 the Solution to the Energy and Environmental Crisis. The article discusses various options being considered by the Obama administration to mitigate CO2 emissions and stimulate the economy with a green technology revolution.

U.S. Congress Approves Climate Change Bill

In July 2009, the U.S. House of Representatives passed a sweeping climate change bill that will significantly alter the world’s energy landscape. The American Clean Energy and Security Act of 2009 (ACES) sets a cap on total emissions over the 2012–2050 period and requires regulated entities to hold rights, or allowances, to emit greenhouse gases. This vote was the first time Congress has approved a bill meant to curb heat-trapping gases that are causing climate change.

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Other Developments


October 8th, 2009


Financial ReviewIncome Statement

The Company is in an early development stage and has no revenues. Net losses for the six months ended June 30, 2009, were $615,822 compared to $470,638 for the prior period. The increased net loss was due to higher operating expenses.

Liquidity and Capital Resources

As of June 30, 2009, CABN had cash of $13,993 and a working capital deficit of $(142,530).

During the six months ended June 30, 2009, the Company used $518,930 in operating activities. Its principal source of funds was cash raised from financing activities totaling $493,275 during the six months ended June 30, 2009. To date, CABN has met its capital needs using the proceeds from equity sales.

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Revenue

Total operating expenses Selling and marketing expenses General and administrative expenses Research and development Depreciation expenseOperating incomeOther income (expenses)

Net LossDiluted EPS

-

484,965308,082

78,00890,451

8,424(484,965)

14,327

(470,638)(0.003)

-

611,478376,001126,587

97,53311,357

(611,478)(4,344)

(615,822)(0.004)

n/m

26.1%22.0%62.3%

7.8%34.8%

n/mn/m

n/mn/m

-

2,983,4291,905,083

567,545471,142

39,659(2,983,429)

33,566

(2,949,863)

H1 2008 H1 2009 % Chg Since inception

Operating results, $

Source: SEC Filings

Cash and equivalentsTotal current assetsNet Property and EquipmentPatentsTotal Assets

Liabilities, includingDebtEquity

45,29250,412

101,0078,773

160,192

128,358 -

31,834

13,99388,56589,65014,417

192,632

231,095 -

(38,463)

31-Dec-08 30-Jun-09

Balance sheet items, $

Source: SEC Filings


October 8th, 2009


Management anticipates additional funding will be required in 2009 and is exploring the Company’s financing al-ternatives, including equity and/or debt financing. However, there is no assurance that the Company will be able to obtain sufficient capital to fund ongoing operations.

CABN has reported several milestones in recent months that accelerate the development timeframe of its CO2-to-Fuel technology and enhance the processes’ scalability and economic benefits. These include the development of computer-aided process engineering tools that enable the Company to proceed directly from prototype to a full-scale pilot plant. In addition, CABN has developed a process for encapsulating biocatalytic enzymes that lowers the cost of produced fuels and reduces the reaction time of its proprietary CO2-to-Fuel process from hours to minutes.

In previous versions of the Company’s biocatalytic process, CO2 was transformed into fuel in approximately 10 hours. Breakthroughs made in enzyme encapsulation and a novel, new micro-sized biocatalytic structure reduced the time required for transforming CO2 into fuel to 10 to 30 minutes.

In addition, Congress has passed the American Clean Energy and Security Act which set a cap on total CO2 emis-sions between 2012 and 2050 and requires regulated entities to hold rights, or allowances, to emit greenhouse gases. This creates strong demand for novel technologies such as CO2-to-Fuel, which address CO2 emissions and the nation’s energy requirements. CABN has applied for a DOE grant and expects to find out soon if a grant will be awarded. Such an award would be considered very favorable news for CABN since it testifies to the technology’s potential and marketability. We continue to regard CABN as a long-term investment whose value lies in its innova-tive technology and huge potential market and we are reiterating our Speculative Buy rating for CABN shares.

Analyst Summary


October 8th, 2009


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The report is a service of BlueWave Advisors, LLC, a financial public relations firm that has been compensated by the companies profiled. All direct and third party compensation received has been disclosed within each individual profile in accordance with section 17(b) of the Securities Act of 1933. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BlueWave Advisors, LLC, and/or its affiliated will hold, buy, and sell securities in the companies profiled. When compensated in shares, all readers should be aware that is our policy to liquidate all shares immediately. We reserve the right to buy or sell the shares of any the com-panies mentioned in any materials we produce at any time. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BeaconEquity.com is a Web site wholly owned by BlueWave Advisors, LLC, which has purchased one million shares of restricted stock from CABN at ten cents per share; additionally, BlueWave Advisors LLC and its affiliates have previously compensated a total of sixty-thousand dollars directly from CABN as a marketing budget, which has expired, to manage a comprehensive investor awareness program including the creation and distribution of this report as well as other investor relations efforts. BlueWave Advisors also expects to receive an additional one million restricted shares directly from CABN for additional investor awareness services. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the informa-tion provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

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We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant posi-tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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