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Analyst: Victor Sula, Ph.D.

Report Update
March 2nd, 2009

2/27/09
CABN daily
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Carbon Sciences Inc. 0.17
5511-C Ekwill Street 0.16
Santa Barbara, CA 93111 0.15

volume © BigCharts.com
Tel.: (805) 456-7000 400

Fax: (805) 681-1300

Thousands
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E-mail: info@carbonsciences.com 200

Website: www.carbonsciences.com 100

09 Feb

MARKET DATA Company Introduction


Carbon Sciences Inc. (OTCBB: CABN) is developing a breakthrough
technology for transforming harmful carbon dioxide (CO2) emis-
Symbol CABN sions into the basic fuel building blocks required to produce gaso-
Exchanges OTC BB
line, diesel fuel, jet fuel and other portable fuels.
Current Price $0.25
Rating Speculative Buy
Outstanding shares 148.34 Million In September 2008, CABN announced this innovative new technol-
Market Cap. $37.09 Million ogy at the First International Summit on Policy, Technology and In-
vestment, hosted by Cambridge University. CABN’s CEO described
Source: Yahoo Finance, Analyst Estimates 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.

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 pre-
viously unimagined levels and in the process released billions of
tons of CO2 into the atmosphere. The U.S. Energy Information Ad-
ministration 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
Carbon Sciences Inc. (OTCBB: CABN) 1
Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

fuel technologies being developed by others such as fuel cells and hydrogen will require substantial infrastruc-
ture 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 emis-
sions while creating fuel that can be distributed through the existing infrastructure. CABN’s solution simultane-
ously addresses the problems of sustainable fuel supplies and climate stability.

Recent Developments
Working prototype

The Company just announced the completion of its highly anticipated prototype, engineered to demonstrate
CABN’s proprietary biocatalytic CO2-to-fuel process.

Applying CABN’s patent-pending technology in a laboratory scale prototype, the Company has successfully
transformed a stream of CO2 gas into methanol fuel. The demonstration prototype uses Carbon Sciences’ in-
novative biocatalytic process to break down CO2 and water, then combines the carbon and hydrogen to form
methanol, a low level liquid fuel. The resulting methanol is directly usable as a fuel, or it can be used to build
higher-level fuels such as gasoline, butanol and jet fuel. The Company is in the process of designing and devel-
oping expanded biocatalytic process technologies to create these higher-level fuels from CO2.

Patent Application

After successfully completing technology design and simulations, CABN submitted a patent application, “A
Biocatalytic Process and System to Transform Carbon Dioxide into Methanol” to the U.S. Patent and Trademark
Office on February 17, 2009.

National media coverage

The Company’s CO2-to-fuel technology has been recognized in the national media. In a recent article in USA
Today, author Paul Davidson recognized Carbon Sciences as “running ahead” of all other CO2-to-fuel technolo-
gies and included the following graphic illustrating the process:

Oxygen atoms
Turning carbon Carbon dioxide (CO2)
removed
Gasoline
How much to make gasoline?
About 65 cubic feet of carbon dioxide
dioxide into fuel molecules are taken from
carbon-dioxide source.
Hydrocarbons
and ten gallons of water are needed
to make one gallon of gasoline.
Carbon Sciences uses recyclable Carbon atom The molecules transformed Jet fuel
biocatalysts to break down CO2 and Fossil fuel into a variety
water, then combine the carbon power plant
are put through a
of fuels: 65 cubic feet
catalytic process of carbon dioxide
and hydrogen to form liquid fuel. in which oxygen
The Santa Barbara, Calif., start-up says Diesel fuel
Oxygen atoms (2) atoms are
the catalysts can perform the reaction removed from
with just a small amount of energy, CO2 and H20.
and should make CO2-to-fuels Water (H2O) molecules
Biocatalysts Methanol Ten
economically viable. A simplified are taken from water source. gallons
transform carbon
example of how the process is Water and hydrogen of water
Oxygen atom
designed to work: source atoms into basic Propane
hydrocarbons.

Carbon and One


Hydrogen atoms (2) hydrogen atoms Butane gallon
Sources: Carbon Sciences, USA TODAY research
combined. of gasoline
By Karl Gelles, USA TODAY

Carbon Sciences Inc. (OTCBB: CABN) 2


Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

CO2-to-Fuel Technology Described


CABN’s technology entails transforming CO2 emissions into the basic building blocks for producing gasoline and
other fuels. The Company is developing a scalable biocatalytic process that leverages its expertise in chemical
engineering and bio-engineering.

To produce fuel, hydrogen and carbon atoms must be bonded to create hydrocarbon molecules. In general, the
greater the number of carbon atoms in the hydrocarbon molecule, the greater the energy content of that fuel. Due
to high reactivity, carbon atoms do not usually exist in a pure form, but rather as components of other molecules.
CO2 is one of the most prevalent sources of carbon atoms; however, significant amounts of energy are required
to break CO2 apart and extract carbon atoms for new hydrocarbons. Because of the energy required, CO2-to-fuel
transformation technologies have not been economically viable in the past. However, CABN is developing a new
highly scalable process requiring significantly less energy that may make the process economical.

With more than 43 billion tons of annual CO2 emissions projected by the year 2030, up from 28 billion tons in 2005,
there is an abundant supply of raw materials available to produce sustainable fuels for global energy consump-
tion.
Biocatalytic process
Current approaches for CO2-to-fuel transformation include:

1. Direct photolysis, which uses intense light energy to break off oxygen atoms from CO2; and
2. Chemically reacting CO2 gas with hydrogen to create methane or methanol.

Both of these engineering approaches require immense energy to drive high pressure and high temperature chem-
ical processes.

CABN’s CO2-to-fuel approach relies on a proprietary multi-step biocatalytic process. Instead of using expensive
catalysts such as zinc, gold or zeolite with traditional catalytic chemical processes, the Company’s process uses
inexpensive, renewable bio-molecules to catalyze chemical reactions that transform CO2 into basic hydrocarbon
building blocks. The Company’s process occurs at low temperature and low pressure, thereby requiring far less
energy than other approaches.
CABN biocatalytic process

Source: http://www.carbonsciences.com/01/technology_co2fuel.html

Carbon Sciences Inc. (OTCBB: CABN) 3


Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

The biocatalyst employed in each stage of the process helps to create an intermediate, hydrogen-carbon com-
pound that can be acted upon in the next step with less energy. At the end of the process, the various hydrogen-
carbon compounds are assembled into basic hydrocarbons such as C1 (one carbon atom - e.g. methane), C2
(two carbon atoms - e.g. ethane) and C3 (three carbon atoms - e.g. propane). These fundamental hydrocarbons
can then be used to produce more complex fuels such as gasoline (C7-C10) and jet fuel (C10-C16), with already
available technology.

CO2-to-fuel transformation plant

CABN’s CO2-to-fuel technology will be deployed in a complete plant level process that takes CO2 from a large
emitter such as a power plant, and produces usable fuels as the output.
The complete process includes the following major components:

1. CO2 Flue Gas Processor, to purify the CO2 stream and remove heavy particulates. The Company’s process
does not require high purity CO2, hence low cost CO2 capture and processing;

2. Biocatalyst Unit, to regenerate the biocatalysts for the CO2 transformation process;

3. Biocatalytic Reactor Matrix, the primary and largest part of the plant where mass quantities of biocatalysts
work in a matrix of liquid reaction chambers, where the multi-stage breakdown of CO2 and its transforma-
tion into basic gas and liquid hydrocarbons happens. These reactors are inexpensive, low temperature and
low-pressure vessels. The number of reactors determines the size and output capacity of the plant;

4. Filtration, to filter liquid solutions through membrane units to extract liquid fuels. Gaseous fuels are ex-
tracted through condensers; and

5. Conversion and Polishing. The output from the filtration stage consists of simple hydrocarbons (C1-C3).
These hydrocarbons can be easily processed into more complex fuels such as gasoline and jet fuel through
commercially available catalytic converters.

CO2-to-fuel transformation plant

Source: http://www.carbonsciences.com/01/technology_co2fuel.html

Carbon Sciences Inc. (OTCBB: CABN) 4


Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

Financial Results
Income statement

CABN is still in an early development stage, has yet to report any revenues and is unlikely to report revenues for
at least three years. Management recently announced the completion of the Company’s technology demonstra-
tion prototype, which will be introduced in the first quarter of 2009, and anticipates building a small scale pilot
plant by year-end 2010.

During the first nine months of 2008, CABN recognized expenses of $776,284 relating mainly to selling, marketing,
general and administrative costs, and research and development.

Income statement, $

9 months 9 months
% Chg
2007 2008

Revenue - - -
Operating expenses 679,796 776,284 14%
Sales & marketing 483,228 441,694 -9%
General and administrative 151,253 127,012 -16%
Research and development 40,925 194,943 376%
Depreciation expense 4,390 12,635 188%

Other Income (Expense) 9,015 17,615 95%


Net Income -670,781 -758,669 n/m

Diluted EPS, $ ($0.005) ($0.005) n/m

Source: SEC Filings

Liquidity and capital resources

As of September 30, 2008, CABN had working capital of $140,424, down from $942,782 at year-end 2007. During
the first nine months of 2008, the Company financed its operations with cash raised through the sale of commons
stock.
Balance sheet items, $ thousands

30-Sep-07 31-Dec-07 31-Mar-08 30-Jun-08 30-Sep-08

Cash and equivalents 910.5 831.0 632.8 320.4 165.9


Net Working Capital 1,122.4 942.8 720.7 477.6 140.4
Total Assets 1,212.1 1,202.3 792.1 545.4 289.9

Liabilities, including 37.6 10.5 6.9 4.4 37.0


Debt - - - - -
Equity 1,174.4 1,011.6 785.2 545.4 252.9

Source: SEC Filings

Carbon Sciences Inc. (OTCBB: CABN) 5


Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

The Company expects to extend its research and development activities through 2010. Management antici-
pates CABN’s existing resources will be sufficient to support research and development efforts over the next 12
months. However, additional financing will likely be sought in the first half of 2009.

Analyst Summary
Since our last update, CABN’s stock price has increased from $0.15 at September 25, 2008 to $0.25 currently. The
major reason for the price increase is the anticipation of the Company’s CO2-to-fuel technology.

The Company is developing and commercializing a new technology for transforming CO2 emissions into the
basic building blocks required to produce gasoline, diesel fuel, jet fuel and other fuels. CABN’s CO2-to-fuel
process can be configured to produce a variety of hydrocarbon fuels by bonding together hydrogen and carbon
atoms, and requires significantly less energy than conventional approaches. The CO2-to-fuel process potentially
represents a multi-billion dollar market opportunity with worldwide energy consumption projected to increase
50% by 2030. The continuing depletion of fossil fuels resources and the expected increase of crude oil prices
make renewable fuel produced from CO2 feedstock an attractive alternative. We believe this is a very exciting
direction and development for CABN.

We regard CABN as a long-term investment play whose value lies in its innovative technology and huge po-
tential markets. Exciting new applications for the Company’s technology in multi-billion dollar energy markets
position CABN to capitalize on near-term opportunities associated with greenhouse gas emissions mitigation.

As a result, we are reiterating our Speculative Buy rating for CABN shares. We plan to re-evaluate our revenue
forecasts and price target as more information becomes available about planned technology deployments in the
energy markets.

Carbon Sciences Inc. (OTCBB: CABN) 6


Analyst: Victor Sula, Ph.D.
Report Update
March 2nd, 2009

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ing the profiled companies. Principals of BlueWave Advisors, LLC have purchased three hundred thousand shares of restricted stock from CABN at fifteen cents per share, and one
million shares of restricted stock from CABN at ten cents per share; additionally, BlueWave Advisors, LLC and its affiliates have been compensated a total of sixty-thousand dollars
directly from Carbon Sciences Inc. as a marketing budget to manage a comprehensive investor awareness program including the creation and distribution of this report as well as
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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.

Carbon Sciences Inc. (OTCBB: CABN) 7