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EX-10.8 - EXHIBIT 10.8 - Digital Locations, Inc.ex108.htm
EX-10.9 - EXHIBIT 10.9 - Digital Locations, Inc.ex109.htm
EX-10.7 - EXHIBIT 10.7 - Digital Locations, Inc.ex107.htm
EX-4.1 - EXHIBIT 4.1 - Digital Locations, Inc.ex41.htm
EX-23.1 - EXHIBIT 23.1 - Digital Locations, Inc.ex231.htm
EX-4.2 - EXHIBIT 4.2 - Digital Locations, Inc.ex42.htm
As filed with the Securities and Exchange Commission January  9, 2012
            Registration No. 333-177797
 


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 

 
FORM S-1
Amendment No. 1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

 
CARBON SCIENCES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
1481
 
20-5451302
(State or other jurisdiction
of incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)

5511C Ekwill Street,
Santa Barbara, CA 93111
(805) 456-7000
 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Byron Elton
Chief Executive Officer
Carbon Sciences, Inc.
5511C Ekwill Street,
Santa Barbara, CA 93111
(805) 456-7000
 (Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Gregory Sichenzia, Esq.
Marcelle S. Balcombe, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Floor
New York, New York 10006
(212) 930-9700

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ¨
Accelerated filer   ¨
Non-accelerated filer      ¨(Do not check if a smaller reporting company)
 
Smaller reporting company  x
 
 
 

 
                            
 

CALCULATION OF REGISTRATION FEE
 

Title of Each Class
of Securities to be Registered
 
Proposed Maximum Aggregate
Offering Price (1)
   
Amount of
Registration Fee (2)
 
 
Common Stock, $0.0001 par value per share (2)
 
  $       $    
 
Common Stock Purchase Warrant
 
 
___
      (3 )
 
Shares of Common Stock underlying Common Stock Purchase Warrant (2)
 
  $       $    
 
Placement Agent’s Common Stock Purchase Warrant
 
 
___
      (3 )
 
Shares of Common Stock underlying Placement Agent’s Common Stock Purchase Warrant (2)
 
  $       $    
 
Total Registration Fee
 
  $ 6,000,000     $ 687.60 (4)
(1)      Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(o) under the Securities Act.
(2)      Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions
(3)      No registration fee required pursuant to Rule 457(g) under the Securities Act.
(4)      This amount was paid by the registrant in connection with the filing of a registration statement on November 7, 2011.

                                               
 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.



 
 

 

The information in this preliminary prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.  This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED JANUARY __, 2012
 
$3,000,000 of Shares of Common Stock and
Warrants to purchase up to ________ shares of Common Stock
 
GRAPHIC
 

We are offering up to __ shares of our common stock, par value $0.0001 per share and warrants to purchase up to ______ shares of common stock at an exercise price of $____ per share.  Each purchaser will receive a warrant to purchase one share of common stock for each share of common stock purchased in this offering. We are not required to sell any specific number or dollar amount of shares of common stock or warrants, but will use our best efforts to sell all of the shares of common stock and warrants being offered.  This offering expires on the earlier of (i) the date upon which all of the shares of common stock and warrants being offered have been sold, or (ii) _________.  

Our common stock is quoted on the OTC Bulletin Board under the symbol “CABN.OB”. On January 6, 2012, the last reported sale price for our common stock on the OTC Bulletin Board was $1.90 per share.  

Investing in the offered securities involves a high degree of risk. See “Risk Factors” beginning on page 7 of this prospectus for a discussion of information that you should consider before investing in our securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

   
Per Share
   
Total
 
             
Public offering price
  $       $    
Placement Agent’s fees (1)
  $       $    
Proceeds, before expenses, to us
  $       $    
 
Aegis Capital Corp has agreed to act as our placement agent in connection with this offering. In addition, we may engage one or more sub placement agents or selected dealers. The placement agent is not purchasing the securities offered by us, and is not required to sell any specific number or dollar amount of securities offered by us, but will assist us in this offering on a reasonable “best efforts” basis. See “Plan of Distribution” for a description of compensation payable to the placement agent.

This offering will terminate on __________, unless the offering is fully subscribed before that date or we decide to terminate the offering prior to that date. In either event, the offering may be closed without further notice to you. All costs associated with the registration will be borne by us.
 
Brokers or dealers effecting transactions in these securities should confirm that the shares are registered under the applicable state law or that an exemption from registration is available.
Prospectus dated                    , 2012

 
 

 
 
CARBON SCIENCES, INC.
TABLE OF CONTENTS

   
Page
     
PROSPECTUS SUMMARY
  1
     
RISK FACTORS
  7
     
FORWARD-LOOKING STATEMENTS
  16
     
MARKET AND INDUSTRY DATA
  16
     
USE OF PROCEEDS
  17
     
 MARKET FOR COMMON STOCK AND DIVIDEND POLICY
  18
     
DILUTION
  19
     
CAPITALIZATION
  20
     
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  21
     
BUSINESS
  24
     
MANAGEMENT
  29
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  34
     
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  35
     
DESCRIPTION OF SECURITIES
  35
     
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
  37
     
PLAN OF DISTRIBUTION
  37
     
WHERE YOU CAN FIND MORE INFORMATION
  39
     
LEGAL MATTERS
  39
     
EXPERTS
  39
     
FINANCIAL STATEMENTS
  40

 
 

 
 
No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this prospectus in connection with the offer contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us.
 
Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in our affairs since the date hereof. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities other than those specifically offered hereby or of any securities offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies.
 
This prospectus has been prepared based on information provided by us and by other sources that we believe are reliable. This prospectus summarizes certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents, if any, for a more complete understanding of what we discuss in this prospectus. In making a decision to invest in the common stock, you must rely on your own examination of us and the terms of the offering and securities offered in this prospectus, including the merits and risks involved.
 
Notice to California investors:    Each purchaser of our shares and common stock hereunder in California must meet one of the following suitability standards:

 
·
any bank as defined in section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
 
 
·
any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
 
 
·
any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

 
·
any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer

 
·
any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 (exclusive of home, home furnishings and automobile);

 
·
any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

 
·
any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

 
·
any entity in which all of the equity owners are accredited investors.
 
 
 

 
 
 
 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.

Unless otherwise stated or the context requires otherwise, references in this prospectus to “Carbon Sciences”, the “Company”, “we”, “us”, or “our” refer to Carbon Sciences, Inc.
Our Company

We are a developmental stage company engaged in the development of patented catalyst technology for the commercial /industrial production of synthesis gas (syngas) from natural gas methane (CH4), and carbon dioxide (CO2). We believe the syngas produced by the technology we are developing will be able to be used as a feedstock in the commercial production of gasoline and other liquid transportation fuels.

Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in existing transportation infrastructure.

We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel and jet fuel. The key to our technology is a patented catalyst that reacts carbon dioxide (CO2) with natural gas methane (CH4), to produce a synthesis gas mixture of hydrogen and carbon monoxide (CO + H2), often referred to as syngas. This syngas can be fed into existing industrial scale gas-to-liquids (GTL) processes to produce liquid fuels.

A typical GTL plant consists of three core components:  (A) syngas generation, which converts natural gas into syngas, (B) Fischer-Tropsch processing which converts syngas into hydrocarbons, and  (C) liquid fuels upgrading, which converts hydrocarbons to liquid fuels such as gasoline, diesel, and jet fuel.  It is generally known in the industry that the syngas generation part of a large scale GTL plant is the most expensive part of the core components.  SRI International, a nonprofit R&D institute, estimates that the syngas section of a Royal Dutch Shell GTL plant accounts for 68% of the core costs.  Bechtel Corporation, an engineering, construction and project management company, estimates the syngas section to be 66% of the core costs.  Current syngas technology requires oxygen, which requires a separate oxygen generation plant.  Our syngas technology does not use oxygen.  We use carbon dioxide, a readily available and minimal value product, as a feedstock.  Therefore, we believe that our syngas technology will cost less than current syngas technology, which will result in a lower cost liquid fuel.

 We have an exclusive worldwide license from the University of Saskatchewan in Canada, or UOS, to a patented dry reforming catalyst for the production of syngas.  This catalyst is currently in a powdered form not yet suitable for industrial use. Our plan is to develop additional proprietary technology to enable the commercial use of this catalyst, such as developing a pelletized form of the catalyst that meets industrial performance requirements.  We are currently engaged in discussions with catalyst manufacturers regarding potential partnership arrangements for developing this commercial catalyst. However, to date, we have not entered in any arrangements or agreements for the development of a commercial catalyst.

To date, our efforts have been concentrated on the design, development and engineering of our initial technology. We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2010 financial statements, we received an opinion from our auditors that expressed substantial doubt about our ability to continue as a going concern without additional financing. Subsequent to December 31, 2010, we obtained $1,482,000 in private placements. We believe that the financings received by us after December 31, 2010 and the net proceeds of this offering will fully address such concern and enable us to complete development of our catalyst and commercially deploy our technology, and implement our business plan through 2015, when we anticipate  revenues will support our operations. If additional funds are required because our plans, expectations or assumptions change, we may also seek funding through additional equity or debt financing. There can be no assurance that such financing will be available or upon such terms that are acceptable to us, if at all.
 
 
 
 
1

 
 
 
 
 
Our Market Opportunities and Business Plan

In the International Energy Outlook 2010 report, the U.S. Energy Information Administration or EIA predicted that worldwide energy consumption will increase by 49% from 2007 to 2035. This increase translates to a requirement of over 110 million barrels of liquids and other petroleum per day in 2035, up from 86 million barrels per day in 2007. The EIA reports that the biggest use of liquid fuel, making up nearly 80% of the increase, is in the production of liquid fuels for the transportation sector.

The 2010 World Energy Outlook report published by the International Energy Agency’s or IEA, stated that 2006 was the year that the world’s conventional oil production reached its peak of 70 million barrels per day.

In another report, World Energy Outlook 2011, the IEA postulated that the world is entering a “Golden Age of Gas”.  Management believes that while the supply of world crude oil is declining, the global natural gas resource base is vast and widely dispersed geographically and nearly untapped. The IEA estimates that conventional recoverable gas resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today’s production for over 250 years.

We believe that we can apply our technology to natural gas resources to enable the production of non-petroleum liquid fuels to meet the world’s growing demand for use in cars, trucks, planes and ships.  Additionally, because our technology consumes CO2, we believe we can help reduce the amount of CO2 emissions being released into the atmosphere, which we believe is harmful to the environment and may be the cause of climate change.

Our business model is to develop and license technologies related to our catalyst such as, but not limited to, methods of manufacturing, integration into existing syngas processes and new process designs. We do not intend to manufacture or sell catalysts, syngas or any final products in the marketplace. We will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.

We expect that our marketing strategy will include media and analyst communications, blogs and selected trade show attendance. We intend to utilize appropriate opportunities to place our brand in general and industry specific publications, using press releases, white papers and authored articles and internet publications.

Our Syngas Technology

Our syngas technology is a dry reforming catalyst and process technology that can serve as the frontend of an end-to-end gas-to-liquids (GTL) system. To our knowledge, there is currently no commercially viable dry reforming syngas front-end process for GTL systems. We believe that with the help of a robust catalyst such as ours, a cost effective commercial grade dry reforming front-end can be implemented, and will result in lower capital and operating costs when compared to other reforming processes.

The key to our technology is a patented catalyst that reacts carbon dioxide (CO2) with natural gas methane to produce a synthesis gas mixture of hydrogen and carbon monoxide (CO + H2), often referred to as syngas.  This syngas can be fed into existing industrial scale gas-to-liquids (GTL) processes to produce liquid fuels.
 
 
 
 
2

 
 
 
Competitive Advantage

We believe our competitive advantage over other natural gas to syngas technologies such as steam reforming, partial oxidation and autothermal reforming, is that our CO2 + CH4 process, also known as dry reforming, requires a smaller processing plant and consumes CO2 in the process, which we believe will result in a system that has lower capital and operating costs compared to existing reforming processes. As part of our business plan, we intend to demonstrate and prove this by developing a detailed computer simulation model, using computer-aided process engineering tools. Based on laboratory testing results and validated in commercial testing facilities, we believe that we have a robust dry reforming catalyst to enable cost effective syngas production.
 
Risks Associated with Our Business

Our business is subject to numerous risks. Before you invest in our Common Stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading Risk factors beginning on page 7 of this prospectus. These risks include, among others, that:
 
·  
We are in the early stages of development and have limited operating history which you can base an investment decision.
   
·  
If we are unable to effectively manage the transition from a development stage company to an operating company, our financial results will be negatively affected.
   
·  
Sufficient customer acceptance for our technology may never develop or may take longer to develop than we anticipate, and as a result, our revenues and profits, if any, may be insufficient to fund our operations.
   
·  
The ability of our catalyst technology to be utilized on a commercially sustainable basis is unproven, and until we can develop and prove our technology, we likely will not be able to generate or sustain sufficient revenues to continue operating our business.
   
·  
We likely will not be able to generate significant revenues until we can successfully validate the performance of our technology with customers.
   
·  
The current credit and financial market conditions may exacerbate certain risks affecting our business.
   
·  
We may not be able to generate revenues from licensing our technology.
   
·  
We do not maintain theft or casualty insurance, and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.
   
·  
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
   
·  
The strategic relationships upon which we may rely are subject to change.
 
 
 
3

 
 
·  
Failure to obtain the patents for our applications could prevent us from securing royalty payments in the future, if appropriate.
   
·  
We may never fully realize the value of our technology license agreement, which presently is the principal asset reflected on our balance sheet.
   
·  
If we do not obtain protection for our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing technology.
   
·  
Intellectual property disputes could require us to spend time and money to address such disputes and could limit our intellectual property rights.
   
·  
If we infringe the rights of third parties we could be prevented from licensing our technologies and forced to pay damages, and defend against litigation.
   
·  
Our technology may become ineffective or obsolete.
   
·  
Competition resulting from advances in alternative fuels may reduce the demand for our technology.
   
·  
If we breach or default under our license agreement with the UOS, the licensor will have the right to terminate the license agreement, which termination may materially harm our business.
   
·  
Our current and potential competitors, some of whom have greater resources than we do, may develop products and technologies that may cause demand for, and the prices of, our products to decline.
   
Corporate Information

We were incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc. Our name was changed to Carbon Sciences, Inc. on April 9, 2007. Our principal executive offices are located at 5511C Ekwill Street, Santa Barbara, California 93111, and our telephone number is (805) 456-7000. Our website address is www.carbonsciences.com. The information on our website is not part of this prospectus.  We have included our website address as a factual reference and do not intend it to be an active link to our website.
 
 
4

 
 
The Offering
 
Securities offered by us
  
Up to   [●]  shares of common stock and warrants to purchase  up to [●]  shares of common stock. The warrants will be exercisable at a price of $___ per share and have a ___ year term.
     
Offering Price
 
$___ per share and warrant.
     
Common Stock to be outstanding  after this offering assuming the sale of all shares
covered by this prospectus and assuming no exercise of the warrants for the shares covered by this prospectus
 
  
[●] shares.
     
Common Stock to be outstanding  after this offering assuming the sale of all shares
covered by this prospectus and assuming the exercise of all warrants for the shares covered by this prospectus
  
[●] shares.
     
Use of Proceeds
 
We expect to use the net proceeds received from this offering for engineering and product development, sales and marketing and working capital and general corporate purposes.  For a more complete description of our anticipated use of proceeds from this offering, see “Use of Proceeds.” 
     
OTC BB Symbol
 
OTCBB
     
Risk Factors
 
See “Risk Factors” beginning on page 9 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to purchase our securities
 
 
5

 
 
 
General Information About This Prospectus
 
Unless otherwise noted, throughout this prospectus the number of shares of our common stock to be outstanding following this offering is based on 9,594,567 shares of our common stock outstanding as of January 6 ,  2012, reflects the 1-for-40 reverse stock split of our common stock effected on May 9, 2011 and assumes the sale of all shares of common stock offered hereby and excludes:
 
 
·  
725,000 shares of common stock issuable upon the exercise of stock options outstanding as of January 6 , 2012 at a weighted average exercise price of $3.38 per share;
 
     
·  
up to [●] shares of common stock issuable upon exercise of the warrants sold in this offering;
 
     
·  
up to [●] shares of common stock issuable upon exercise of the placement agent’s warrant; and
 
     
·  
2,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan.
 
               
Summary Historical Financial Information
 
The following table summarizes our financial data.  We have derived the following summary of our statements of operations data for the nine months ended September 30, 2011 and 2010 and balance sheet data as of September 30, 2011 from our unaudited financial statements appearing elsewhere in this prospectus. We have derived the following summary of our statements of operations data for the fiscal years ended December 31, 2010 and 2009 and balance sheet data as of December 31, 2010 and 2009 from our audited financial statements appearing elsewhere in this prospectus.  The following summary of our financial data set forth below should be read together with our financial statements and the related notes to those statements, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.
 
             
 
 
 
Nine Months
ended September 30,
   
Year ended
December 31,
 
   
2011
   
2010
   
2010
   
2009
 
Statement of Operations Data:
                       
Revenues………………………………………………………
  $ -     $ -     $ -     $ -  
                                 
Operating Expenses:
                               
General and administrative expenses…
    952,856       1,842,544       2,098,449       1,013,007  
Research and development expenses………….
    243,330       138,622       192,511       137,383  
Depreciation expense………………………….
    13,403       11,875       15,579       22,716  
                                 
Loss from Operations…………………………………………
    (1,209,589 )     (1,993,041 )     (2,306,539 )     (1,173,106 )
Other Income (Expense):
    (2,751 )     4,290       3,956       (7,452 )
                                 
Net Loss……………………………………………………….
  $ (1,212,340 )   $ (1,988,751 )   $ (2,302,583 )   $ (1,180,558 )
                                 
                                 
Basic and diluted loss per share ……………………
  $ (0.19 )   $ (0.43 )   $ (0.01 )   $ (0.01 )
                                 
Weighted average common shares outstanding- basic and diluted…………………….......................................................
    6,531,228       4,584,224       187,329,773       156,509,428  
                                 
                                 
                     
As of December 31
 
             
As of September
30, 2011
     
2010
     
2009
 
Balance Sheet Data:                                
Cash           $ 318,843     $ 38,422     $ 270,562  
    Total assets             537,796       158,818       387,293  
    Total current liabilities             69,950       56,350       38,242  
    Total stockholders’  equity             467,846       102,468        349,051  
 
6

 
 

RISK FACTORS
Risks Related to Our Business
 
We are in the early stages of development and have limited operating history which you can base an investment decision.

We were formed in August 2006 and are currently developing a new technology that is still being developed for commercial use. We have generated no revenues, have no real operating history upon which you can evaluate our business strategy or future prospects, and have negative working capital. As a result, our auditor issued an opinion in connection with our December 31, 2010 financial statements, which expressed substantial doubt about our ability to continue as a going concern unless we obtain additional financing. While this offering addresses such concern and is expected to see us through until we begin to generate revenues, our ability to generate such revenues will depend on whether we can successfully develop, commercialize and license our technology and make the transition from a development stage company to an operating company.  We expect to continue to incur losses until approximately 2015 when we estimate we may begin to generate revenues. In making your evaluation of our prospects, you should consider that we are a start-up business focused on a new technology, are designing solutions that have no proven market acceptance, and operate in a rapidly evolving industry. As a result, we may encounter many expenses, delays, problems and difficulties that we have not anticipated and for which we have not planned. There can be no assurance that at this time we will successfully commercialize our technology, operate profitably or that we will have adequate working capital to fund our operations or  meet our obligations as they become due.

Our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to successfully complete  the development of our technology or enter into licensing agreements with third parties on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.

If we are unable to effectively manage the transition from a development stage company to an operating company, our financial results will be negatively affected.

For the period from our inception, August 25, 2006, through September 30, 2011, we incurred an aggregate net loss, and had an accumulated deficit, of $7,029,522. For the years ended December 31, 2010 and 2009, we incurred net losses of  $2,302,583 and $1,180,558, respectively, and $517,706 and $1,212,340  in net losses for the three and nine months ended September 30, 2011, respectively. Our losses are expected to continue to increase for at least the next 48  months as we commence full scale development of our technology.  We believe we will require at least the net proceeds of this offering to make this transition and do not expect to transition from a development stage company to an operating company until 2015.  As we do make such transition, we expect our business to grow significantly in size and complexity. This growth is expected to place significant additional demands on our management, systems, internal controls and financial and operational resources. As a result, we will need to expend additional funds to hire additional qualified personnel, retain professionals to assist in developing appropriate control systems and expand our operating infrastructures. Our inability to secure additional resources, as and when needed, or manage our growth effectively, if and when it occurs, would significantly hinder our transition to an operating company, as well as diminish our prospects of generating revenues and, ultimately, achieving profitability.

Sufficient customer acceptance for our technology may never develop or may take longer to develop than we anticipate, and as a result, our revenues and profits, if any, may be insufficient to fund our operations.

Sufficient markets may never develop for our technology, may develop more slowly than we anticipate or may develop with economics that are not favorable for us. The development of sufficient markets for our technology at favorable pricing may be affected by cost competitiveness of our technology, customer reluctance to try new technology and emergence of more competitive technologies. Because out technology has not yet been used to manufacture syngas or liquid fuels, potential customers may be skeptical about product stability, supply availability, quality control and our financial viability, which may prevent them from purchasing our technology or entering into long-term licensing agreements with us. We cannot estimate or predict whether a market for our technology will develop, whether sufficient demand for our technology will materialize at favorable prices, or whether satisfactory profit margins will be achieved. If such pricing levels are not achieved or sustained, or if our technologies and business approach to our markets do not achieve or sustain broad acceptance, our business, operating results and financial condition will be materially and adversely impacted.
 
 
7

 

The ability of our catalyst technology to be utilized on a commercially sustainable basis is unproven, and until we can develop and prove our technology, we likely will not be able to generate or sustain sufficient revenues to continue operating our business.

While producing syngas is not a new technology, our dry reforming catalyst is not currently suitable for commercial use and has never been utilized on a commercially sustainable basis. The tests that we have conducted to date with respect to our technology have been performed in a limited scale environment, and the same or similar results may not be obtainable at competitive costs on a large-scale commercial basis. While industrial processes exist to convert syngas into liquid fuels, we have not conducted end-to-end tests on the ability of our technology to produce liquid gas.

We have never utilized our technology under the conditions or in the volumes that will be required for us to be profitable and cannot predict all of the difficulties that may arise. Our technology requires further research, development, regulatory approvals, environmental permits, design and testing prior to commercialization. Accordingly, our technology may not perform successfully on a commercial basis and may never generate any meaningful revenues or profits.

We likely will not be able to generate significant revenues until we can successfully validate the performance of our technology with customers.

To date, we have generated no revenues. Revenue generation could be impacted by any of the following:

 
 •
delays in demonstrating the technological advantages or commercial viability of our proposed technology;
 
 •
delays in developing our technology;  and
 
 •
inability to interest early adopter customers in our technology.
 
We may not be able to enter into agreements to license our technology at prices that will cover our costs. Potential customers may require lengthy or complex trials or long sampling periods before committing to license our  technology.

The current credit and financial market conditions may exacerbate certain risks affecting our business.

Due to the continued disruption in the financial markets arising from the global recession and the slow pace of economic recovery, many of our potential customers are unable to access capital necessary to accommodate the use of our technology.  Many are operating under austerity budgets that limit their ability to invest in infrastructure necessary to use alternative fuels and that make it significantly more difficult to take risks with new fuel sources. As a result, we may experience increased difficulties in convincing customers to adopt our technology as a viable alternative at this time.

We may not be able to generate revenues from licensing our technology.

Our business plan includes, as our main revenue stream, the collection of royalties through licensing our technology intellectual property portfolio that we currently have and will build in the course of our business.  Companies to which we grant licenses may not be able to produce, market and sell enough products to pay us royalty fees or they may default on the payment of royalties. We may not be able to achieve profitable operations from collecting royalties from the licensing of our proprietary technology.
 
 
8

 

We do not maintain theft or casualty insurance, and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.

We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse effect on our results of operations.
 
If we lose key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.

Our success is highly dependent on our ability to attract and retain qualified scientific, engineering and management personnel. Competition for these qualified personnel is intense. We are highly dependent on our management, including Mr. Byron Elton, who has been critical to the development of our business. The loss of the services of Mr. Elton could have a material adverse effect on our operations. We do not have an employment agreement with Mr. Elton. Accordingly, there can be no assurance that he will remain associated with us. His efforts will be critical to us as we continue to develop our technology and as we attempt to transition from a development stage company to a company with commercialized products and services. If we were to lose Mr. Elton or any other key employees or consultants, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies.

The strategic relationships upon which we may rely are subject to change.

Our ability to successfully test our technology and identify and enter into commercial arrangements with licensees will depend on developing and maintaining close working relationships with industry participants. These relationships will need to change and evolve over time, as we enter different phases of development. Our strategic relationships most often are not yet reflected in definitive agreements, or the agreements we have do not cover all aspects of the relationship. Our success in this area also will depend on our ability to select and evaluate new strategic relationships and to consummate transactions.  To test our technology, we will be dependent on strategic partners for the use or construction of demonstration systems. Our inability to identify suitable companies or enter into and maintain strategic relationships may affect our ability to commercialize our technology and impair our ability to grow. The terms of relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to maintain these relationships.

Failure to obtain the patents for our applications could prevent us from securing royalty payments in the future, if appropriate.

In addition to our license to the patented UOS catalyst, we intend to file new patent applications and build a global patent portfolio related to the methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations, in the normal course of our business. We cannot be certain that patents will be granted nor can we be certain that other companies will not file for patent protection for the similar technology before us. Even if we are granted patent protection for our technology, there is no assurance that we will be in a position to enforce our patent rights. Failure to be granted patent protection for our technology could result in greater competition or in limited royalty payments. This could result in inadequate revenue and cause us to cease operations.
 
We may never fully realize the value of our technology license agreement, which presently is the principal asset reflected on our balance sheet.

We may not be successful in realizing the expected benefits from our Exclusive License Agreement with the UOS.  We intend to incorporate the licensed technology in our development of a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. To date, we have incurred approximately $915,867 in research and development separate from our license payments, and we are continuing to incur additional research and development costs to commercialize the catalyst and optimize the process.
 
 
9

 
 
If we do not obtain protection for our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing technology.

Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

We have yet to complete an infringement analysis and, even if such an analysis were available at the current time, we could not be certain that no infringement exists, particularly as our products have not yet been fully developed. We may need to acquire additional licenses from third parties in order to avoid infringement claims, and any required licenses may not be available to us on acceptable terms, or at all. To the extent infringement claims are made, we could incur substantial costs in the resulting litigation, and the existence of this type of litigation could impede the development of our business.

We anticipate filing patent applications both in the U.S. and in other countries, as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our technology by obtaining and defending patents. These risks and uncertainties include but are not limited to the following:

·  
Patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage.
·  
Our competitors, many of which have substantially greater resources than us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets.
·  
Countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.

In addition to patents, we also intend to rely on trade secrets and proprietary know-how. Although we take measures to protect this information by entering into confidentiality and inventions agreements with our employees, scientific advisors, consultants, and collaborators, we cannot provide any assurances that these agreements will not be breached, that we will be able to protect ourselves from the harmful effects of disclosure if they are breached, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.

Patent protection and other intellectual property protection are important to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.

Intellectual property disputes could require us to spend time and money to address such disputes and could limit our intellectual property rights.

We may become subject to infringement claims or litigation arising out of patents and pending applications of competitors, or additional proceedings initiated by third parties or the United States Patent and Trademark Office, or PTO, to reexamine the patentability of our licensed patents. The defense and prosecution of intellectual property suits, PTO proceedings, and related legal and administrative proceedings are costly and time-consuming to pursue, and their outcome is uncertain. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and know-how, or to determine the enforceability, scope, and validity of the proprietary rights of others. An adverse determination in litigation or PTO proceedings to which we may become a party could subject us to significant liabilities, require us to obtain licenses from third parties, restrict or prevent us from selling our technology in certain markets, or invalidate or render unenforceable our licensed or owned patents. Although patent and intellectual property disputes might be settled through licensing or similar arrangements, the costs associated with such arrangements may be substantial and could include our paying large fixed payments and ongoing royalties. Furthermore, the necessary licenses may not be available on satisfactory terms or at all.
 
 
10

 

If we infringe the rights of third parties we could be prevented from licensing our technologies and forced to pay damages, and defend against litigation.

If our methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to do one or more of the following:

·  
obtain licenses, which may not be available on commercially reasonable terms, if at all;
·  
redesign our processes to avoid infringement;
·  
stop using the subject matter claimed in the patents held by others;
·  
pay damages; or
·  
defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.

Any of these events could substantially harm our financial condition and operations.

Our technology may become ineffective or obsolete.
 
To be competitive in the industry, we may be required to continually enhance and update our technology. The costs of doing so may be substantial, and if we are unable to maintain the efficacy of our technology, our ability to compete may be impaired. In addition, interest in our technology may wane as alternative fuels and other energy sources gain market acceptance. If competitors develop, obtain or license technology that is superior to ours, we may lose our competitive edge which may have a material adverse effect on our business, financial condition, results of operations and prospects.

Competition resulting from advances in alternative fuels may reduce the demand for our technology.

Alternative fuels and other energy sources are continually under development.  A wide array of entities, including automotive, industrial and power generation manufacturers, the federal government, academic institutions and small private concerns are seeking to develop alternative clean-power systems.  These technologies include using fuel cells or clean-burning gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns.  Additionally, there is significant research and development being undertaken regarding the production of ethanol from cellulosic biomass, the production of methane from anaerobic digestors, and the production of electricity from wind and tidal energy systems, among other potential sources of renewable energy.  If these alternative fuels continue to expand and gain broad acceptance, there may not be sufficient interest in our technology.

  If we breach or default under our license agreement with the UOS, the licensor will have the right to terminate the license agreement, which termination may materially harm our business.

The success of our business will depend in part on the maintenance of our license agreement with UOS. Pursuant to the terms of the license agreement, we are required to pay UOS an additional $20,000 in cash per year until the expiration date of the last of the licensed patents. In addition, we are required to pay an aggregate of $100,000 if we hit certain commercialization milestones. The license agreement also provides that UOS may terminate the agreement if we file an assignment in bankruptcy or apply for reorganization or other similar proceedings. To the extent we default on any of the required payments or breach any other material provisions of the  license agreement, UOS could terminate the agreement and pursue any remedy available to it in law or in equity, in which event we would lose our rights to commercialize our technology covered by the license, which loss may materially harm our business.
 
 
11

 
 
Our current and potential competitors, some of whom have greater resources than we do, may develop products and technologies that may cause demand for, and the prices of, our products to decline.
 
While we are not aware of any direct competitors offering commercial dry reforming technology to produce liquid fuels from natural gas, our potential customers may choose to buy or build their own systems instead of licensing our technology. Furthermore, our competitors may combine with each other, and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the abilities of their products to address the needs of our prospective customers.
 
Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop technology comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their technology than we do. Accordingly, we may not be able to compete effectively in our markets, competition may intensify and future competition may harm our business.

Risks Relating To This Offering
 
Our common stock is thinly traded and subject to volatility.

There can be no assurance that the market price for our common stock will remain at its current level. Thinly traded stocks, such as ours are more susceptible to significant and sudden price changes and a decrease in the market price could result in substantial losses for investors. The market price of our common stock may be significantly affected by one or more of the following factors, among others:

 
·
announcements or press releases relating to the industry or to our own business or prospects;
 
·
regulatory, legislative, or other developments affecting us or the industry generally;
 
·
sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
 
·
market conditions specific to companies in our industry and the stock market generally.
 
We cannot assure you that you will be able to find a buyer for your shares or that you will be able to sell your shares at the same price at which you purchase our shares or at a higher price.

There is no public market for the warrants to purchase common stock in this offering.

There is no established public trading market for the warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to list the warrants on a national securities exchange or arrange to have the warrants quoted on the OTC Bulletin Board following this offering. Without an active market, the liquidity of the warrants will be limited.

If the registration statement covering the shares issuable upon exercise of the warrants is no longer effective, the warrants will be issued with restrictive legends unless such shares are eligible for sale under Rule 144.

If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
 
Unless our common stock is listed on a national securities exchange, including the Nasdaq Capital Market or we have stockholders’ equity of $5,000,000 or less and our common stock has a market price per share of less than $4.00, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
 
In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document that describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities. Our management is aware of the abuses that have occurred historically in the penny stock market.
 
As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
 
 
12

 

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our common stock.  We are required to establish and maintain appropriate internal controls over financial reporting.  Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm.  The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.  We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis.  It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis.  In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors.  Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
 
Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.

In the past, we have issued common stock and warrants in order to raise money. We have also issued options as compensation for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional shares of common stock, including the shares being offered hereby,  warrants, including the warrants being offered hereby, other convertible securities and options could affect the rights of our stockholders and could reduce the market price of our common stock.

We are authorized to issue "blank check" preferred stock without stockholder approval, which could adversely impact the rights of holders of our common stock.

Our Articles of Incorporation authorize our Company to issue up to 20,000,000 shares of blank check preferred stock.  Currently no preferred shares are issued; however, we can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders.  Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock.  In addition, such preferred stock may contain provisions allowing those shares to be converted into shares of common stock, which could dilute the value of common stock to current stockholders and could adversely affect the market price, if any, of our common stock.  In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.  Although we have no present intention to issue any shares of authorized preferred stock, there can be no assurance that we will not do so in the future.

Shares eligible for future sale may adversely affect the market.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the approximately 9,594,567 shares of our common stock outstanding as of January 6, 2012, approximately 2,152,983 shares are freely tradable without restriction, as of January 5, 2012. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
 
 
13

 

We do not expect to pay dividends in the future and any return on investment may be limited to the value of our common stock.

We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of the our Board of Directors. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.

Our management will have broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.

We currently intend to use the net proceeds from this offering for general corporate purposes and working capital. We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.

There is no minimum amount required to be raised in the offering, and if we cannot raise sufficient funds from this offering, we may need to curtail or cease operations.

There is not a minimum amount of securities that need to be sold in this offering for the Company to access the funds. Therefore, the proceeds of this offering will be immediately available for use by us and we do not have to wait until a minimum number of shares have been sold to keep the proceeds from any sales. We cannot assure you that subscriptions for the entire offering will be obtained. We have the right to terminate this offering at any time, regardless of the number of securities we have sold since there is no minimum subscription requirement. Our ability to meet our financial obligations, cash needs, and to achieve our objectives, could be adversely affected if the entire offering is not fully subscribed for and as a result we could be forced to curtail or cease our operations.

You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to [●]  shares and warrants offered in this offering at a public offering price of $[●] per share and warrant, and after deducting the placement agent’s fees and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $[●] per share, or  [●] %, at the  public offering price. In addition, in the past, we issued options and warrants to acquire shares of common stock and will issued warrants in this offering. To the extent these options or warrants are ultimately exercised, you will sustain future dilution. We may also acquire or license other technologies or finance strategic alliances by issuing equity, which may result in additional dilution to our stockholders.
 
We are controlled by our  current officers, directors and principal stockholders.

Following this offering, our directors, executive officers and principal stockholders and their affiliates beneficially will own approximately [●] % of outstanding shares of common stock. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have the ability to control matters requiring shareholder approval, including the election of our Board of Directors and approval of significant corporate transactions, such as merger or other sale of our company or assets. Thus, actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could cause our stock price to decline.
 
 
14

 

Because we are seeking a limited offering qualification in California, sales of our shares and warrants will be limited in California.

We are seeking a limited offering qualification of our units in California. If the offering is approved in California on the basis of such limited offering qualification, in the absence of any other exemptions, offers and sales of our units can only be made to proposed California purchasers based on their meeting certain suitability standards. California investors must meet at least one of the following criteria:

 
·
any bank as defined in section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors ;

 
·
any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

 
·
any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000 ;

 
·
any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer

 
·
any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 (exclusive of home, home furnishings and automobile);

 
·
any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

 
·
any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

 
·
any entity in which all of the equity owners are accredited investors.

If the offering is approved in California on the basis of a limited offering qualification, we will not have to demonstrate compliance with some of the merit regulations of the California Department of Corporations as found in Title 10, California Code of Regulations, Rule 260.140 et seq. In addition, the exemptions for secondary trading in California available under California Corporations Code Section 25104(h) will be withheld, although there may be other exemptions to cover private sales in California of a bona fide owner for his own account without advertising and without being effected by or through a broker dealer in a public offering.

 
15

 

FORWARD-LOOKING STATEMENTS

This prospectus, including the documents that we incorporate by reference, contains forward-looking statements.  Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
 
In some cases, you can identify forward-looking statements by terminology, such as  “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should”, “could” or the negative of such terms or other similar expressions.  Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them.  Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.
 
You should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect.  You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus or such prospectus supplement only.  Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.  New factors emerge from time to time, and it is not possible for us to predict which factors will arise.  In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  We qualify all of the information presented in this prospectus and any accompanying prospectus supplement, and particularly our forward-looking statements, by these cautionary statements.
 
MARKET AND INDUSTRY DATA

This prospectus includes data and forecasts that we have prepared based, in part, upon information obtained from industry publications. Third-party industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. We have used data and other information in this document that was published by the EIA and IEA. Forecasts in particular are subject to a high risk of inaccuracy, especially forecasts projected over long periods of time.

 
16

 
 
USE OF PROCEEDS 
 
We estimate that the aggregate net proceeds to us assuming  the sale of all the securities in this offering will be approximately $[●], after deducting placement agent fees and approximately $XX  of estimated offering expenses that will be payable by us from the proceeds of this offering. However, this is a best efforts offering, with no minimum, and there can be no assurance that the offering will result in significant proceeds, or enough proceeds to continue to operate our business operations.
 
We expect to use these net proceeds for the following purposes:
 
Engineering and product development
$[●]
   
Sales and marketing
$[●]
   
Working capital and general corporate purposes
$[●]
   
TOTAL
$[●]
 
We expect that the net proceeds from this offering will enable us, prior to the end of 2013, to:
 
·  
complete the development of the commercial form of our catalyst and related process technology;
·  
complete the techno-economic analysis of various applications of our catalyst to demonstrate economic benefits of our technology;
·  
file international patent applications for our technology; and
·  
engage a strategic partner to undertake a  demonstration system using our technology.
 
The above represents our best estimate of the allocation of the net proceeds of this offering. We may, as our development efforts proceed, find it necessary to reallocate a portion of the proceeds within the above-described categories or use portions of the proceeds for other purposes, including for acquisitions of complementary businesses, products or technologies; however, we have no current agreements or commitments to make any potential acquisition. In addition, our estimates may prove to be inaccurate, new technology and technology changes may be undertaken which require additional expenditures and/or unforeseen expenses may occur.
 
Engineering and product development expenses include salaries for additional technical staff and senior technical management, laboratory expenses, patent filing expenses, consulting expenses, and feasibility studies related specific natural gas sites.
 
Sales and marketing expenses include salaries for additional staff and senior management, tradeshows and general advertisements and promotions of our proprietary dry reforming syngas technology.
 
Based upon current assumptions relating to our business plan, we anticipate that the net proceeds of this offering will satisfy our capital requirements for at least 48 months following the consummation of this offering. These assumptions include the following:
 
·  
our commercial catalyst is completed;
·  
we enter into licensing arrangements with customers to use our technology;
·  
we will be able to enter into relationships with strategic partners for the use of or construction of demonstration systems for our technology with little or no cost to us; and
·  
revenue recognition commences in 2015.
 
 
17

 
 
If we determine to accelerate our business plan or if our plans otherwise change or our assumptions prove inaccurate, we may need to seek financing sooner than currently anticipated, incur additional financing or reduce or curtail our operations. We cannot assure you that financing will become available as and when needed.
 
We will invest proceeds not immediately required for the purposes described above principally in United States government securities, short-term certificates of deposit, money market funds or other short-term interest-bearing investments.
 
To the extent the warrants purchased in this offering are exercised “for cash”  instead of on a “cashless” basis, we will receive the proceeds from such exercise. We cannot predict when, or if, warrants will be exercised. It is possible that the warrants will expire unexercised.
 
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
 
Market Information
 
Our common stock has been quoted on the OTC Bulletin Board under the symbol “CABN” since September 28, 2007.  The following table provides, for the periods indicated, the range of high and low bid prices for our common stock.  These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Where applicable, the prices set forth below give retroactive effect to our one-for-forty reverse stock split which was effected on May 9, 2011.

Fiscal Year 2010
 
High
   
Low
 
First Quarter
 
$
6.16
   
$
3.28
 
Second Quarter
   
4.60
     
2.00
 
Third Quarter
   
4.40
     
2.84
 
Fourth Quarter 
   
3.80
     
1.84
 
 
Fiscal Year 2011
 
High
   
Low
First Quarter
 
$
3.60
   
$
2.40
Second Quarter 
   
6.50
     
2.40
Third Quarter
   
6.30
     
1.40
Fourth Quarter
   
5.00
     
1.40
               
Fiscal Year 2012
   
High
     
Low
First Quarter (through January 5, 2012)
 
$
2.00
   
$
1.58
 

On January  6, 2012, there were 123 holders of record of our common stock.  This number does not include stockholders for whom shares were held in “nominee” or “street” name.

There is no market for the warrants and we do not intend to list the warrants on a national securities exchange or arrange to have the warrants quoted on the OTC Bulletin Board following this offering.

Dividend Policy

We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business.

 
18

 
 
DILUTION

If you invest in our common stock, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share  and warrant and the pro forma net tangible book value per share of our common stock after giving effect to this offering.

Our net tangible book value as of September 30, 2011 was $398,398 or $0.04 per share of common stock, based upon 9,594,567 shares outstanding as of that date. Pro forma net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities by the number of outstanding shares of common stock. After giving effect to the sale of the shares in this offering at the public offering price of $      per share and warrant, at September  30, 2011, after deducting placement agent’s fees and other estimated offering expenses payable by us, our pro forma net tangible book value at September 30, 2011 would have been approximately          , or $          per share and warrant. This represents an immediate increase in pro forma net tangible book value of approximately $          per share to our existing stockholders, and an immediate dilution of $           per share to investors purchasing shares in the offering.
 
Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

The following table illustrates the per share dilution to investors purchasing shares in the offering:

Public offering price per share and warrant
  $    
    Pro forma net tangible book value per share as of September 30, 2011
  $    
    Increase  in net tangible book value per share attributable to this offering
  $    
Pro forma net tangible book value per share after this offering
  $    
Amount of Dilution in net tangible book value per share to new investors in this offering
  $    

The following table sets forth the total consideration, and the average price per share, paid to us for our common stock by our existing stockholders, on a pro forma basis as of December 31, 2010, and the total consideration, and price per share, to be paid to us by investors in this offering for the shares offered in this offering, before deducting the placement agent’s fees and other estimated offering expenses:

 
Shares purchased
Total consideration
Average
     
price per
 
Amount
Percent
Amount
Percent
share
           
 Existing stockholders
                   
 Investors in this offering
                   
           
 
T Total
                   

The foregoing illustration does not reflect potential dilution from the exercise of outstanding options or warrants to purchase shares of our common stock, including the shares underlying the warrants sold in this offering or the placement agent’s warrants. If the holders of these derivative securities exercise them at a price per share that is less than the $ [●] public offering price per share and warrant, our new investors will have further dilution.

 
19

 

CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization, each as of September 30, 2011:
 
 
·
on an actual basis; and
     
 
·
on a pro forma as adjusted basis to give effect to the issuance of all of the securities offered hereby.
 
You should consider this table in conjunction with our financial statements and the notes to those financial statements and the pro forma financial information included elsewhere in this prospectus.
 
   
As of September 30, 2011
 
   
Actual
   
Pro forma(1)
 
Stockholders’ equity:
           
Preferred stock, $0.001 par value, 20,000,000            shares authorized; 0 shares issued and outstanding, actual and pro forma
  $ -     $    
                 
Common stock, $0.001 par value, 100,000,000 shares authorized, 9,594,567 and 5,120,229 shares issued and outstanding, actual; ____ and ____shares issued and outstanding, pro forma.
    9,594          
Additional paid-in capital
    7,487,774          
Accumulated deficit during the development stage
    (7,029,522 )        
Total shareholders’ equity
  $ 467,846     $    
Total capitalization
  $ 467,846     $    
 
(1) Assumes that all of the shares of common stock and warrants to purchase [●] shares of common stock are sold in this offering at an offering price of $      per share  and warrant proceeds thereof are approximately $      million after deducting placement agent’s fees and our estimated offering expenses. 
 
This table excludes 725,000 shares of our common stock issuable upon the exercise of options outstanding as of  September 30, 2011 with a weighted coverage exercise price of $3.38 per share.

 
20

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
    
Our Company

We are a developmental stage company engaged in the development of a patented catalyst technology for the production of synthesis gas (syngas) from natural gas methane (CH4) and carbon dioxide (CO2). We believe the syngas the technology we are developing will be able to be used as a feedstock in the commercial production of gasoline and other liquid transportation fuels.

Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in the existing transportation infrastructure.

We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel and jet fuel. The key to our technology is a patented catalyst that reacts carbon dioxide (CO2) with natural gas methane (CH4) to produce a synthesis gas mixture of hydrogen and carbon monoxide (CO + H2), often referred to as syngas. This syngas can be fed into existing industrial scale gas-to-liquids (GTL) processes to produce liquid fuels.

We have not yet generated revenues. We currently have negative working capital and, in connection with our December 31, 2010 financial statements, we received an opinion from our auditors that expressed substantial doubt about our ability to continue as a going concern without additional financing. Subsequent to December 31, 2010, we obtained $1,482,000 in private placements. We believe that the financings received by us after December 31, 2010 and the net proceeds of this offering will fully address such concern and enable us to complete development of our catalyst and commercially deploy our technology, and implement our business plan through such time as revenues support our operations. If additional funds are required because our plans, expectations or assumptions change, we may also seek funding through additional equity or debt financing. There can be no assurance that such financing will be available or upon such terms that are acceptable to us, if at all.

Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
 
21

 
  
Use of Estimates

In accordance with GAAP, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value of Financial Instruments

The Company's cash, cash equivalents, investments, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the three months ended September 30, 2011, and no pronouncements were adopted during the period.

Results of Operations

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011

General and Administrative Expenses

General and administrative, or G&A, expenses increased by $248,198 to $466,847 for the three months ended September 30, 2011, compared to $218,649 for the prior period September 30, 2010. The increase in G&A for the three months ended September 30, 2011 was due to an increase in professional fees. G&A decreased by $889,688 to $952,856 for the nine months ended September 30, 2011, compared to $1,842,544 for the prior period September 30, 2010. The decrease in G&A expenses was due primarily to a decrease in non-cash stock compensation expense of $1,230,000, and an increase in salaries, and professional fees as compared to the prior period.

Research and Development

Research and Development  or R&D costs decreased by $17,147 to $43,871 for the three months ended September 30, 2011, compared to $61,018 for the prior period September 30, 2010.  The decrease in the R&D for the three months ended September 30, 2011 was due to a decrease in salaries offset by an increase in lab fees. The R&D for the nine months ended September 30, 2011, increased by $104,708 to $243,330, compared to $138,622 for the prior period ended September 30, 2010. The overall increase in R&D was the result of an increase in consulting and lab fees.

Net Loss

Net Loss for the nine months ended September 30, 2011was $1,212,340 compared to $1,988,751 for the prior period September 30, 2010. The overall net decrease of $776,411 in net loss was due to a decrease in non-cash stock compensation cost for the current period, offset by an increase in G&A and R&D expenses. Currently the Company is in its development stage and had no revenues.

 
22

 

Year ended December 31, 2010 compared to the year ended December 31, 2009

General and Administrative Expenses

                     G&A expenses increased by $1,085,442 to $2,098,449 for the year ended December 31, 2010, compared to $1,013,007 for the year ended December 31, 2009. This increase in G&A expenses was primarily due to the increase in non-cash stock compensation expense of $1,230,000, and partially offset by the decrease in other G&A expenses of $144,558.

Research and Development

                      R&D costs increased by $55,128 to $192,511 for the year ended December 31, 2010 compared to $137,383 for the year ended December 31, 2009. This increase in R&D costs was the result of an increase in outside consulting fees and supplies for testing and research of product development.

Net Loss

                    Net loss increased by $1,122,025 to $2,302,583 for the year ended December 31, 2010, compared to $1,180,558 for the year ended December 31, 2009.  This increase in net loss was the result of an increase in non-cash stock compensation expense of $1,230,000, and the overall decrease in operating expenses of $96,567. We had no revenues.

Liquidity and Capital Resources

As of September 30, 2011, we had a working capital of $291,364 compared to a working deficit of $10,365 for the year ended December 31, 2010. The increase of $301,729 in working capital was due primarily to equity financing.
 
During the nine months ended September 30, 2011, the Company used $1,099,527 of cash for operating activities, as compared to $747,332 for the prior period September 30, 2010. The increase of $352,195 in the use of cash for operating activities was primarily due to an increase in operating net loss, an increase in prepaid expenses, and an increase in accounts payable.
 
Cash used by investing activities was $77,052 for the nine months ended September 30, 2011, as compared to cash used of $13,837 for the prior period September 30, 2010. The net increase of $63,215 in cash used by investing activities in the current period was due to an increase in the purchase of tangible and intangible assets as compared to the prior period ended September 30, 2010, which used fewer funds to purchase tangible and intangible assets, and received proceeds from the sales of a vehicle.
 
Cash provided from financing activities during the nine months ended September 30, 2011 was $1,457,000 as compared to $651,000 for the prior period ended September 30, 2010. Our capital needs have primarily been met from the proceeds of equity financing, and investor loans, as we are currently in the development stage and had no revenues.
 
Our financial statements as of September 30, 2011 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued their report dated March 30, 2011 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern  as the Company does not generate significant revenue and have negative cash flows from operations. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
During the first quarter of 2011, we issued Units comprising of an aggregate of 400,000 shares of common stock and warrants to purchase 1,600,000 shares of our common stock at a price of $1.00 per Unit for aggregate gross cash proceeds of $400,000.  Each Unit consisted of 1 share and a warrant to purchase 4 shares of the Company’s common stock.  The warrants were exercisable at a price of $1.00 for a term of five years. The net proceeds of the sales were used for working capital purposes. The warrants were subsequently exercised on a cashless basis for 1,333,335 shares of common stock.
 
 
23

 
 
During the second quarter of 2011, we issued Units comprising an aggregate of 400,000 shares of common stock and warrants to purchase 1,600,000 shares of our common stock at a price of $1.00 per Unit for aggregate gross cash proceeds  of $400,000. Each Unit consisted of 1 share and a warrant to purchase 4 shares of the Company’s common stock.  The warrants were exercisable at a price of $1.00 for a term of five years. The net proceeds of the sales were used for working capital purposes. The warrants were subsequently exercised on a cashless basis for 1,333,335 shares of common stock.

During the third quarter of 2011, we issued 341,000 shares of our common stock at a price of $2.00 per share for aggregate gross cash proceeds of $682,000. The net proceeds of the sales were used for working capital purposes
 
BUSINESS
Introduction

We are currently developing a technology to make gasoline and other fuels from natural gas methane (CH4) and carbon dioxide (CO2).

We are a developmental stage company engaged in the development of  a patented catalyst technology for the commercial/industrial production of synthesis gas (syngas) from natural gas and carbon dioxide (CO2). We believe the technology we are developing will be able to be used as a feedstock in the commercial production of gasoline and other liquid transportation fuels.

Our goal is to help reduce the world’s dependence on petroleum by developing technology to enable the cost effective use of natural gas as a feedstock to produce clean and green liquid fuels for use in the existing transportation infrastructure.

We believe that natural gas is the world’s next primary source of fuel. While found in abundant supply at affordable prices in the U.S. and throughout the world, natural gas cannot be used directly in cars, trucks, trains and planes without a massive overhaul of the existing liquid fuels infrastructure. We intend to address this problem by developing an industrial clean-tech process to enable the transformation of natural gas into liquid transportation fuels such as gasoline, diesel and jet fuel. The key to our technology is a patented catalyst that reacts carbon dioxide (CO2) with natural gas methane (CH4) to produce a synthesis gas mixture of hydrogen and carbon monoxide (CO + H2), often referred to as syngas. This syngas can be fed into existing industrial scale gas-to-liquids (GTL) processes to produce liquid fuels.

We believe our competitive advantage over other natural gas reforming technologies such as steam reforming, partial oxidation and autothermal reforming, is that our CO2 + CH4 process, also known as dry reforming, can enable a smaller plant footprint and consumes CO2 in the process which should lower the overall system capital and operating economics. As part of our business plan, we intend to demonstrate and prove this point.  Based on original laboratory testing results and validated in commercial testing facilities, we believe that we have a very robust dry reforming catalyst to enable cost effective syngas production.

Our business model is to develop and license technologies related to our catalyst such as but not limited to methods of manufacturing, integration into existing syngas processes and new process designs. We do not intend to manufacture or sell catalyst, syngas or any final products in the market place. We will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.

Our business model is to develop and license technologies related to our catalyst such as but not limited to methods of manufacturing, integration into existing syngas processes and new process designs. We do not intend to manufacture or sell catalyst, syngas or any final products in the market place. We will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.
 
 
24

 

While natural gas is currently the largest source of methane for gas-to-liquids production, other renewable sources of methane such as landfill gas, algae biomass, flare gas, and livestock gas can be captured and used as the methane feedstock for our technology

Market Opportunity

In the International Energy Outlook 2010 report, the EIA predicts that worldwide energy consumption will increase by 49% from 2007 to 2035.  This increase translates to a requirement of over 114 million barrels of crude oil per day in 2035, up from 86 million barrels per day in 2007.  The EIA reports that the biggest use of crude oil, making up nearly 80% of the increase, is in the production of liquid fuels for the transportation sector.

The 2010 World Energy Outlook  report published by the IEA stated that 2006 was the year that the world’s conventional oil production reached its peak of 70 million barrels per day.

In the World Energy Outlook 2011 report, the IEA postulates that the world is entering a “Golden Age of Gas.”  Management believes that while the supply of world crude oil is declining, the global natural gas resource base is vast and widely dispersed geographically. The IEA estimates that conventional recoverable gas resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today’s production for over 250 years.

We believe that we can apply our technology to natural gas resources to enable the production of non-petroleum liquid fuels to meet the world’s growing demand for use in cars, trucks, planes and ships.  Additionally, because our technology consumes CO2, we believe we can help reduce the amount of CO2 emissions being released into the atmosphere, which we believe is harmful to the environment and may contributes to climate change.

Most of the world’s natural gas reserves contain some amount of CO2, which must be removed before the natural gas methane is marketable. If the CO2 content is high, then the removal process is prohibitively expensive, therefore leaving those natural gas reserves uneconomical to develop.  Since our technology uses CO2 and methane as feedstocks, it can utilize high CO2 natural gas reserves directly.  Natural gas containing as much as 50% CO2 by volume is suitable for our syngas technology.  We believe this is a specific GTL market opportunity that existing technologies cannot address.

Gas to Liquids Overview

Many natural gas proponents are proposing the use of compressed natural gas (CNG) or liquefied natural gas (LNG) for use in new trucks and other vehicles. We believe this is a step in the right direction, but new engines mean new and expensive infrastructure. We believe a better solution is the direct transformation of natural gas into gasoline, diesel and jet fuel for use in existing engines and fuel delivery infrastructure.

We believe there are four main reasons why natural gas should be the new feedstock for liquid fuels:

·  
Energy independence from petroleum;
·  
Resulting liquid fuels can be used directly in the existing infrastructure;
·  
Natural gas is abundant and affordable; and
·  
Reduction of greenhouse gas emissions.

Current industrial scale gas-to-liquids (GTL) technology, invented by German chemists Franz Fischer and Hans Tropsch in the 1920’s, can convert a gas mixture of hydrogen (H2) and carbon monoxide (CO) into liquid fuels without using petroleum. However, H2 and CO do not exist naturally and must be manufactured synthetically. There are a number of ways to make this synthesis gas, or syngas, but the most promising and scalable approach is the reforming of natural gas, which is primarily methane (CH4).
 
 
25

 

There are four (4) known processes to reform natural gas (methane) into syngas:

·  
Steam Reforming – Reacts steam with methane.
·  
Partial Oxidation – Reacts pure oxygen with methane.
·  
Autothermal Reforming – A combination of steam and partial oxidation reforming.
·  
Dry Reforming – Reacts carbon dioxide with methane, without steam or oxygen.

To our knowledge, there are no commercial dry reforming syngas technologies available for GTL applications.  In addition, none of the other natural gas reforming technologies can be utilized with natural gas fields that contain high CO2 contents.

Our Syngas Technology

Our technology is a dry reforming catalyst and process technology that can serve as the front end of an end-to-end gas-to-liquids (GTL) system. The following diagram illustrates how our process fits into a complete GTL system.
 
GRAPHIC.

We believe that with the help of a catalyst such as the one we are developing, a cost effective commercial grade dry reforming front end can be implemented, and will result in lower capital and operating costs when compared to other reforming processes for the following reasons: (i) does not use oxygen or steam, both of which require large co-production plants that consume large amounts of energy, (ii) is expected to require less capital because of reduced need for oxygen or steam plants, (iii) consumes CO2, an inexpensive product often already in natural gas reserves. We cannot predict whether the catalyst will be engineered as a drop-in catalyst for certain existing syngas plants or whether there may be a need to build new plants optimized to take advantage of our catalyst.

Current commercial dry reforming catalysts are made from rare noble metals, such as palladium and ruthenium, which are expensive and not suitable for mass-market applications, such as fuel production . To our knowledge, there are no commercial dry reforming technologies that are used in GTL applications. Based on our research, we believe that the reason for this is the lack of a low cost catalyst capable of running for a long period of time. We believe the catalyst we are developing will be an  innovative catalyst which will address these issues.

Our currently patented catalyst has the following characteristics that we believe are not available from other known dry reforming catalysts:

·  
Made from inexpensive, readily available metals, such as nickel and aluminum
·  
High conversion efficiency of CO2 and CH4 into syngas
·  
Minimum coking. Coking is the deposition of carbon on the catalyst surface that inhibits the catalyst activity and performance.
·  
Over 1,000 hours of runtime. Long runtime eliminates the need for frequent and costly system shutdowns to reload the catalysts.

Our patented catalyst is currently in a powdered form not yet suitable for industrial use. Our plan is to develop an industrial form of this catalyst, such as pellets, which may include adding new materials or designing new manufacturing methods. We are in the early research and development phase of this process. We intend to enter into discussions with catalyst manufacturers regarding possible co-development arrangements for developing the commercial catalyst. We expect to complete the commercial form of our catalyst by the end of 2012.  By the end of 2013, we expect to complete the design of an industrial syngas production process optimized for our catalyst.  After that we expect to build a demonstration system in 2014, either by ourselves or in conjunction with strategic partners.  Once our commercial catalyst is proven in a demonstration system, we intend to aggressively expand our business development efforts and seek customers and strategic partners to license our technology.
 
 
26

 
 
Business Model

We are a technology development and licensing company. We do not intend to manufacture and market syngas or fuel as a final product. Instead, we will seek to license our intellectual property portfolio to catalyst manufacturers, as well as to major energy, chemical and engineering firms throughout the world for the purposes of syngas and fuel production.

For example, we will seek to license our catalyst technology to existing catalyst manufacturing companies who will be responsible for the manufacturing and sale of the physical catalysts. We may charge the manufacturer a royalty fee based on its catalyst sales. Likewise, we will seek to license or jointly develop various industrial syngas generation process designs based on our catalyst with engineering and construction firms. We may charge these firms a royalty fee based on their revenues received in the engineering and construction of syngas plants using our technology.

Marketing Strategy

We expect that our marketing strategy will include media and analyst communication, blogs, and selected trade show attendance. We intend to utilize appropriate opportunities to place our brand in general and industry specific publications, using press releases, white papers and authored articles and Internet publications.

Research and Development

We have hired technical personnel and have retained a number of scientific advisors and part-time technical contractors, to help us develop and commercialize our technology. We have purchased and developed research apparatus that enables us to refine our methodology and demonstrate our technology. Using computer-aided process engineering tools, we plan to develop a detailed computer simulation model that will allow us to demonstrate the commercial viability of our system.

In addition, we have entered into a consulting agreement with Emerging Fuels Technology  or EFT based in Tulsa, OK to provide laboratory services to support the development of our process to convert CO2 and methane into syngas.  EFT’s core competency is in the areas of Fischer-Tropsch and related synthesis and hydroprocessing chemistry.  Pursuant to the agreement with EFT, we agreed to pay standard rates for time spent by EFT of $200 per hour for consulting services performed by their principals, and $50 per hour to $400 per day for laboratory services, and to reimburse EFT for the reasonable expenses incurred during the term of the agreement. The consulting agreement may be terminated at any time by either party by giving notice.
 
Effective January 1,  2011, we entered into a consulting agreement with Dr. Howard Fong pursuant to which he is serving as our chief scientific advisor. On December 8, 2011, we entered into a new consulting agreement with Dr. Fong for  a term of twelve months commencing in January 2012 through December 2012. However, we have an option to extend the term for an additional year through December 2013.  The agreement with Dr. Fong provides for a monthly fee of $18,000. See “Management –Key Consultants”.
 
 
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Government Regulation
 
We are a technology development and licensing company and do not intend to sell, manufacture or produce any products. We are currently not subject to any government regulations that have a material effect on our operations. Additionally, we are not aware of any pending legislation or regulations that would have a material effect on our operations.

Manufacturing and Distribution
 
As a technology licensing company, we do not intend on manufacturing and distributing any products as our primary business operation.  However, we may build demonstration systems, either by ourselves or in conjunction with strategic partners.

Intellectual Property

We have filed numerous patent applications with the United States Patent and Trademark Office in the course of our business history. We have abandoned those applications since they are not relevant to our dry reforming technology.
 
On December 23, 2010, we entered in to a License Agreement with the University of Saskatchewan  or UOS, pursuant to which we have an exclusive, worldwide, sub-licensable, royalty-bearing right and license to make, have made, use, offer for sale, sell, reproduce, distribute, incorporate into other technology, or otherwise exploit certain patent-pending technology and relevant improvements from UOS, for a high performance catalyst for the dry reforming of methane with carbon dioxide for the production of synthesis gas. This License Agreement commenced on December 23, 2010, and will continue until the expiration date of the last of the licensed patents. In consideration for the grant of the patents, we are required to pay license fee of $20,000 a year for the term of the license Agreement. In addition, we are obligated to pay UOS $50,000 upon the first application of a licensed product in a pilot-scale or commercial facility and $50,000 upon the first sale of a licensed product. We are also required to pay royalties ranging from 0.9% to 3.6% of the sales revenue from a customer that uses a tangible licensed product or system made by us. In the event that we sublicense the licensed patents, we shall pay UOS sublicense compensation ranging from 6.25% to 12.5% of the sublicense fees that we receive. Under the License Agreement, we are also required to maintain general liability insurance with policy limits of no less than $2,000,000 during the term of the License Agreement and products liability insurance coverage with policy limits of no less than $5,000,000 to protect against our activities in relation to the license agreement.

The License Agreement may be terminated upon the parties mutual consent or upon the expiration of six months after notice of termination to the UOS. In addition, the License Agreement may be terminated upon the occurrence of an event of default under the agreement.

The patent subject to the license agreement was issued by the PTO on July 26, 2011 as patent No.7,985,710.

We intend to continue our research and development efforts in dry reforming. Based on the UOS catalyst and new developments in the course of our business, we intend to file additional applications and build a global patent portfolio related to methods of catalyst preparation, commercial form of the catalyst, application of the catalyst, process design and optimizations. Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy.  Therefore, we require that our personnel, contractors and sublicensees not disclose the trade secrets and confidential information pertaining to the technology. In addition, trade secret protection does not provide any barrier to a third party “reverse engineering” fuel made with the technology, to the extent that the technology is readily ascertainable by proper means. Neither the patent, if it issues, nor trade secret protection will preclude third parties from asserting that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights. 
 
 
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Competition

The market for liquid fuel is large, as is the number of competitors providing technology to the fuel industry. For example, companies that offer fuel production technologies include UOP LLC (A Honeywell Company), Chevron Corp, Royal Dutch Shell plc, BP plc, and ExxonMobil Corp.  

We do not compete directly with other firms in the production of fuel from natural gas. Instead, we compete with technology firms that offer natural gas reforming technologies such as steam reforming, partial oxidation and autothermal. We are not aware of any commercially available dry reforming technology for GTL applications. There can be no assurance that companies are not currently developing or will develop technology similar to the one we are developing. There are, however, commercial dry reforming catalysts made from rare earth metals, but they are not used for GTL applications.

We believe our main competitive advantage over the current natural gas proponents is the cost of adapting equipment to use natural gas.  Since the vast majority of trucks and vehicles are designed for consumption of petroleum-based fuels, many natural gas proponents often experience a second cost disadvantage – the expense of adopting new engines for these vehicles. We believe the ability of our technology to transform natural gas directly to gasoline, diesel and jet fuel for use in existing engines and fuel delivery infrastructure improves our ability to compete with the current natural gas proponents.

Technology Development Partners

We have entered into an agreement with Emerging Fuels Technology based in Tulsa, OK to provide laboratory and consulting services to support the development of our dry reforming technology. We may enter into technology development partnerships with other companies.
 
Employees

As of January 5, 2012 we had 3 full-time employees.  We have not experienced any work stoppages and we consider relations with our employees to be good. We have used an outsourced work-for-hire development model to date.  We intend to increase our internal research and development staffing with the proceeds of this offering.

Litigation

We are not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding that is expected to have a material adverse effect on our business.

Properties

Our principal office is located at 5511C Ekwill Street, Santa Barbara, California 93111. We lease approximately 2,800 square feet.  Our lease provides for a monthly base rent of $2,800 per month through September 30, 2011. Commencing October 1, 2011, our monthly base rent increased to $2,884 and shall increase annually thereafter by 3%.   The current term of the lease expires September 30, 2012.
 
MANAGEMENT

The following table sets forth information about our executive officers and directors:

Name
 
Age*
 
Position
Byron Elton
 
57
 
Chairman, Chief Executive Officer, President and Acting Chief Financial Officer
Roland R. Bryan
 
76
 
Director
Daniel Nethercott
 
51
 
Director

*As of January 6, 2012
 
 
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The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors are as follows:
 
Byron Elton – Mr. Elton is our Chief Executive Officer, President, Acting Chief Financial Officer and Chairman of the Board. Mr. Elton has been President and Chief Operating Officer of the Company since January 5, 2009 and a director of the Company since March 16, 2009. He was appointed as Chief Executive Officer effective May 20, 2009. He previously served as Senior Vice President of Sales for Univision Online from January  2007 to June 2008. Mr. Elton also served for eight years as an executive at AOL Media Networks from January 2000 to May 2007, where his assignments included Regional Vice President of Sales for AOL and Senior Vice President of E-Commerce for AOL Canada. His broadcast media experience includes leading the ABC affiliate in Santa Barbara, California in 1995 to 2000 and the CBS affiliate in Monterrey, California, from 1998 to 1999, in addition to serving as President of the Alaskan Television Network from 1995 to 1999.  Our Board of Directors has determined that Mr. Elton’s extensive senior level management experience specifically in new business development provides our board with strong leadership as it seeks to implement its business plan.

Roland F. Bryan – Mr. Bryan has served as our director since March 5, 2009. Mr. Bryan has been the President and Chairman of Solar3D (OTCBB: SLTD), formerly MachineTalker, Inc.,  since its inception in January 2002, its Chief Financial Officer since November 2003 and its Secretary since May 2006. Mr. Bryan also served as the Chief Executive Officer of Solar3D from January 2003 to October 2010. Solar3D is a company developing a 3 dimensional approach to gathering sunlight to improve the efficiency of solar cells. For the six years prior to founding Solar3D, Mr. Bryan was self-employed as an independent advisor to several high-tech companies on corporate organization, management, marketing and product development. During the last 25 years he has founded and sold several high-tech companies in the fields of telecommunications networking, military computer systems and commercial equipment for network access.  In 1974, he founded Associated Computer Consultants, Inc. or ACC,, a company that implemented interconnections to the first packet network for many United States government agencies. In 1991 the company was split into two separate businesses, one to concentrate on military products, the other to concentrate on commercial products. LM Ericsson Telephone Company acquired ACC in 1998 for $265 million.  In September 1994, WIRED MAGAZINE honored Mr. Bryan and 18 others, as the "Creators of the Internet." Mr. Bryan’s experience in building and growing technology companies provides our board with insight in the development and growth of companies in emerging technology.

Daniel Nethercott – Since December 2009, Mr. Nethercott has served as our director.  Mr. Nethercott is currently the President of Redfern Development, a real estate development company that he formed in 2004.  Before forming Redfern Development, he was a Senior Vice President and Partner for the Grupe Company from 1995 to 2004, one of the largest commercial and residential developers in Northern California.  He was a founding partner of NEKO Industries and founding board member of InMotx Robotics, a world leader in automated handling of natural products.   Mr. Nethercott’s experience as board member and board consultant to technology companies combined with his executive management experience in strategic and financial planning provides our board with valuable insight in on corporate governance.

Officers are appointed to serve for one year until the meeting of the board of directors following the annual meeting of stockholders and until their successors have been elected and qualified. Directors serve until the next annual meeting and until their successors are elected and qualified.

There are no family relationships among our executive officers and directors.

Key Consultants

Dr. Howard Fong –Dr. Fong currently serves as our chief scientific advisor pursuant to a consulting agreement. Dr. Fong received his Bachelor of Science in Chemical Engineering from San Jose State University in 1971, and Ph.D. in Chemical Engineering from the University of California, Berkeley in 1975. Dr. Fong joined Shell Development Company (Shell Oil Company) at the Westhollow Technology Center in Houston, Texas in 1975, and rose to the rank of Managing Engineer, where he was responsible for the assessment and commercialization of new technologies. Dr. Fong retired from Shell in April 2010 and has served as a consultant to the Company since January 2011. Dr. Fong has experience working with start-up companies, providing critical techno-economic evaluations and charting the path for successful commercialization.
 
 
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Board Leadership Structure and Role in Risk Oversight

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles.   Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.

Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
   
Director Independence

The Board of Directors determined that Roland Bryan and Daniel Nethercott are independent as that term is defined under the Nasdaq Marketplace Rules.

Committees of the Board

Audit Committee. Our audit committee is comprised of Roland Bryan and Daniel Nethercott. Mr. Bryan qualifies as an audit committee financial expert. Each member of the audit committee qualifies as independent under Nasdaq Marketplace Rules. Our audit committee is authorized to:
                                   
appoint, compensate, and oversee the work of any registered public accounting firm employed by us;
                                   
resolve any disagreements between management and the auditor regarding financial reporting;
                                   
pre-approve all auditing and non-audit services;
                                   
retain independent counsel, accountants, or others to advise the audit committee or assist in the conduct of an investigation;
                                   
meet with our officers, external auditors, or outside counsel, as necessary; and
                                   
oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policy.
 
 
 
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Compensation Committee. Our compensation committee is comprised of Roland Bryan, as Chairman, and Daniel Nethercott, and is authorized to:
                                   
discharge the responsibilities of the board of directors relating to compensation of the our directors, executive officers and key employees;
                                   
assist the board of directors in establishing appropriate incentive compensation and equity-based plans and to administer such plans;
                                   
oversee the annual process of evaluation of the performance of our management; and
                                   
perform such other duties and responsibilities as enumerated in and consistent with compensation committee’s charter.
 
Nominating Committee., Our nominating committee is comprised of Daniel Nethercott, as Chairman, and Roland Bryan and is authorized to:
                                   
assist the board of directors by identifying qualified candidates for director nominees, and to recommend to the board of directors the director nominees for the next annual meeting of shareholders;
                                   
lead the board of directors in its annual review of its performance;
                                   
recommend to the board director nominees for each committee of the board of directors; and
 
develop and recommend to the board of directors corporate governance guidelines applicable to us.
     

Compensation of Executive Officers

The following table sets forth the annual compensation for years ended December 31, 2011 and 2010 to our Chief Executive Officer and our most highly compensated officers other than the Chief Executive Officer at December 31, 2010 whose total compensation exceeded $100,000, which we refer to as our named executive officers.

Name and
Principal Position
 
 
Year
 
 
Salary ($)
   
Bonus ($)
   
Stock Awards ($)
   
Option Awards ($)
   
Non-Equity Incentive Plan Compensation ($)
   
Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($)
   
 
 
 
 
All Other Compensation ($)
 
 
 
 
 
 
 
Total ($)
Byron Elton, CEO, President and Acting CFO*
2011
2010
 
   
300,000
250,000
 
     
30,000
0
 
     
0
0
 
     
575,250
900,000
 
     
0
0
 
     
0
0
 
     
0
0
 
 
905,250
1,150,000
 
Naveed Aslam, CTO **
2011
2010
 
   
0
120,000
 
     
0
0
 
     
0
0
 
     
0
0
 
     
0
0
 
     
0
0
 
     
0
0
 
 
0
120,000
 
Mr. Elton was appointed President and Chief Operating Officer on January 5, 2009 and as Chief Executive Officer and Chairman on May 20, 2009. The fair value of  the stock option award to Mr. Elton was estimated using the Black-Scholes option pricing model. The estimated fair value was determined based on the market price of the Company’s stock on the date of grant.
**
Dr. Aslam was appointed Chief Technology Officer on January 7, 2009. On December 24, 2010, the Company accepted the resignation of Dr. Aslam effective as of December 31, 2010.

 
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Outstanding Equity Awards at Fiscal Year-End Table.

The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers at December 31, 2010.

Option Awards
Name
 
Number of Securities Underlying Unexercised Options Exercisable
   
Number of Securities Underlying Unexercised Options Unexercisable
   
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
Option Exercise
Price
 
Option Expiration Date
Byron Elton CEO,
President and Acting CFO
   
162,500
375,000
   
0
0
     
0
0
 
$4.31
$2.92
 
7/11/2018
4/23/2017
 
Director Compensation

Non-employee directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. No compensation was paid to non-employee directors during the fiscal year ended December 31, 2010. Our employee directors currently do not receive cash compensation for their service on the Board of Directors.

Stock Option and Other Long-term Incentive Plan

On November 2, 2011, our Board of Directors adopted the 2011 Equity Incentive Plan,  or the 2011 Plan. Under the 2011 Plan, options may be granted which are intended to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986,as amended,  or the Code, or which are not intended to qualify as Incentive Stock Options thereunder. In addition, direct grants of stock or restricted stock may be awarded.  There are  2,000,000 shares of common stock reserved for issuance under the 2011 Plan. A summary of the terms and provisions of the 2011 Plan are described below.

           The primary purpose of the 2011 Plan is to attract and retain the best available personnel in order to promote the success of our business and to facilitate the ownership of our stock by employees and others who provide services to us. Under the 2011 Plan, options may be granted to employees, officers, directors or consultants of ours. The term of each option granted under the 2011 Plan will be contained in a stock option agreement between the optionee and us and such terms shall be determined by a committee of the board of directors consistent with the provisions of the 2011 Plan, including the following:

•           The purchase price of the common stock subject to each incentive stock option will not be less than the fair market value (as set forth in the 2011 Plan), or in the case of the grant of an incentive stock option to a principal stockholder, not less than 110% of fair market value of such common stock at the time such option is granted.

•           The dates on which each option (or portion thereof) will be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the committee delegated by the boardboard of directors, in its discretion, at the time such option is granted. Unless otherwise provided in the grant agreement, in the event of a change of control (as set forth in the Incentive Stock Plan ), the committee delegated by the board may accelerate the vesting and exercisability of outstanding options all unvested shares shall immediately become vested;

•           Any option granted to an employee of ours will become exercisable over a period of no longer than five years. No option will in any event be exercisable after ten years from, and no Incentive Stock Option granted to a ten percent stockholder will become exercisable after the expiration of five years from, the date of the option;

•           No option will be transferable, except by will or the laws of descent and distribution, and any option may be exercised during the lifetime of the optionee only by such optionee. No option granted under the 2011 Plan will be subject to execution, attachment or other process;

•           In the event of any change in our outstanding common stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the board of directors or the committee delegated by the board may adjust proportionally (a) the number of shares of common stock (i) reserved under the 2011 Plan, (ii) available for Incentive Stock Options and Non-statutory Options and (iii) covered by outstanding stock awards or restricted stock purchase offers; (b) the exercise prices related to outstanding grants so that each optionee’s proportionate interest is maintained as immediately before such event; and (c) the appropriate fair market value and other price determinations for such grants. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the board of directors or the committee delegated by the board of directors will be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code, applies, and other grants by means of substitution of new grant agreements for previously issued grants or an assumption of previously issued grants.
 
 
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The board of directors may, insofar as permitted by law, from time to time, suspend or terminate the 2011 Plan or revise or amend it in any respect whatsoever, except that without the approval of our stockholders, no such revision or amendment will (i) increase the number of shares subject to the 2011 Plan, (ii) reduce the exercise price of outstanding options or effect repricing through cancellations and re-grants of new options, (iii) materially increase the benefits to participants, (iv) materially change the class of persons eligible to receive grants under the 2011 Plan; (v) decrease the exercise price of any grant  to below 100% of the fair market value on the date of grant; or (vi) extend the term of any options beyond that provided in the 2011 Plan; provided, however, no such action will alter or impair the rights and obligations under any option, or stock award, or restricted stock purchase offer outstanding as of the date thereof without the written consent of the participant thereunder.

Employment Agreements
 
We currently have no employment agreements with our executive officers.
 
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 6, 2012, the number of and percent of our common stock beneficially owned by:
 
·
each of our directors,
 
·
each of our named executive officers,
 
·
our directors and executive officers as a group, and
 
·
persons or groups known by us to own beneficially 5% or more of our common stock:
 
Unless otherwise specified, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
 
A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days from January 6, 2012 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of January 6, 2012 have been exercised and converted.

The address for our executive officers and directors is the same as our address.
 
     
Percentage of Common Stock Beneficially Owned (1)
Name of Beneficial Owner
 
Number of Shares Beneficially Owned
   
Prior to the Offering
 
Following the Offering
Byron Elton (2)
    845,500       8.14 %  
Roland R. Bryan
    6,250       *    
Daniel Nethercott
    6,250       *    
Derek McLeish(3)
    1,131,250       11.79 %  
Bountiful Capital, LLC (4)
3905 State Street, Suite 7-187
Santa Barbara, CA 93105
 
    1,458,333       15.19 %  
New Quest Ventures, LLC (5)
195 Highway 50, #104
PO Box 7172-189
Stateline, NV 89449
 
    1,436,314       14.97 %  
Wings Fund, Inc. (6)
5662 Calle Real #115
Santa Barbara, CA 93117
 
    1,854,917       19.33 %  
All Executive Officers and Directors as a Group
    858,000       8.26 %  

 
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*Less than one percent.    

(1)
Based upon ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­9,594,567 shares issued and outstanding as of January 6, 2012.
(2)
Pursuant to the Stock Option Agreement with Derek McLeish, a former officer of the Company, Mr. Elton has the right to acquire 375,000 shares of common stock held by Mr. McLeish at a price of $4.00, all of which will become vested and exercisable in the next 60 days. Includes (a) an option to purchase 375,000 shares of the Company’s common stock at a price of $2.92 which is currently exercisable and which expires on April 23, 2017, and (b) 45,500 will become vested and exercisable in the next 60days  under an option to purchase shares of the Company’s common stock at a price of $4.30 per share which expires on July 11, 2018.
(3)
Mr. McLeish has granted an option to Mr. Elton to purchase 375,000 shares to at a price of $4.00 per share.
(4)
Gregory Boden has the voting and dispositive power over the shares held by Bountiful Capital, LLC.
(5)
Jonathan Lei has the voting and dispositive power over the shares held by NewQuest Ventures, LLC.
(6)
Karen M. Graham has the voting and dispositive power over the shares held by Wings Fund, Inc.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the past three fiscal years, there have been no transactions and there are no currently proposed transactions in which the Company is a participant in which any related person has or will have a direct or indirect material interest which exceeds the lesser of $120,000 or one percent of the Company’s total assets at year end for the last two completed fiscal years.


DESCRIPTION OF SECURITIES

Under our articles of incorporation, our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, and 20,000,000 shares of preferred stock, $0.001 par value per share.

Our articles  of incorporation, as amended, authorizes us to issue shares of our preferred stock from time to time in one or more series without stockholder approval.  No shares of preferred stock are outstanding,

All outstanding shares of our common stock are duly authorized, validly issued, fully-paid and non-assessable.
 
 
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Common Stock

Voting. Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. Our common stock does not have cumulative voting rights. Persons who hold a majority of the outstanding common stock entitled to vote on the election of directors can elect all of the directors who are eligible for election.

Dividends. Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors.

Liquidation and Dissolution. In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders.
 
Authorized but Unissued Stock . We have shares of common stock and preferred stock available for future issuance, in some cases, without stockholder approval. We may issue these additional shares for a variety of corporate purposes, including public offerings to raise additional capital, corporate acquisitions, stock dividends on our capital stock or equity compensation plans.  The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us, thereby protecting the continuity of our management. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation.

Amendments to by-laws . Our by-laws authorize the holders of a majority of the outstanding voting shares or the Board of Directors, when authorized in the Articles of Incorporation, to amend, repeal, alter or rescind the by-laws at any time without stockholder approval.  
  
Stockholder action; special meetings .  Our by-laws provide that special meetings of the stockholders may only be called by the President or Secretary of the Corporation at the request in writing of (a) a majority of the members of the Board of Directors or (b) holders of at least ten percent of the total voting power of all outstanding shares of stock of the Corporation then entitled to vote, and may not be called absent such a request. These provisions could have the effect of delaying until the next stockholders' meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because that person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder only at a duly called stockholders' meeting, and not by written consent.

Preferred Stock

Our board of directors is authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

Options

           We currently have options outstanding to purchase an aggregate of 725,000 shares of our common stock at a weighted exercise price of $3.38. The options have a term of seven years and vest immediately upon grant or in installments as provided in the option agreements. The options may be exercised on a for-cash or cashless basis. In the event of the termination of the employment of the optionee, the option is exercisable within three months of such termination. In the event of the death of the optionee, the option may be exercised within six months of the death.
 
Warrants

In connection with this offering, we will issue warrants to purchase up to _________ shares of common stock. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $             per share for a period of ____ years. After the expiration of the exercise period, warrant holders will have no further rights to exercise such warrants.

The warrants may be exercised only for full shares of common stock, and may be exercised on a “cashless” basis if the registration statement covering the shares issuable upon exercise of the warrants is no longer effective. We will not issue fractional shares of common stock or cash in lieu of fractional shares of common stock. Warrant holders do not have any voting or other rights as a stockholder of our company. The exercise price and the number of shares of common stock purchasable upon the exercise of each warrant are subject to adjustment upon the happening of certain events, such as stock dividends, distributions, and splits.
 
 
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DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our Articles of Incorporation contains provisions to indemnify our directors and officers to the maximum extent permitted by Nevada law. We believe that indemnification under our Articles of Incorporation covers at least negligence on the part of an indemnified person. Our Bylaws permits us to advance expenses incurred by an indemnified person in defending a civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise) upon an undertaking by the person to repay those advances if it is ultimately determined that the person is not entitled to indemnification.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

PLAN OF DISTRIBUTION
 
We are offering up to _______ shares of our common stock and warrants to purchase up to ___ shares of common stock at a public offering price of $___ per share and warrant. Each purchaser will receive one warrant to purchase one share of common stock for each share of common stock purchased.  Pursuant to an engagement letter agreement, we engaged Aegis Capital Corp as our placement agent for this offering.  Aegis Capital Corp  is not purchasing or selling any securities, nor are they required to arrange for the purchase and sale of any specific number or dollar amount of shares of common stock or warrants, but will use their reasonable “best efforts” to sell all of the shares of common stock and warrants being offered.  There is no minimum offering amount required as a condition to closing this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth herein. W

Upon the closing of the offering, we will pay the placement agent a cash fee equal to 7% of the gross proceeds to us from the sale of the gross proceeds of the securities in the offering.  Subject to compliance with FINRA Rule 5110(f)(2)(D), we have also agreed to pay the placement agent a non-accountable expense allowance equal to 1% of the gross proceeds raised in the offering, which includes a $25,000 advance of non-accountable expenses previously paid by the Company.  In the event the offering is terminated, the placement agent will be reimbursed only for its actual accountable out-of-pocket expenses. The maximum amount we will reimburse Aegis Capital for background checks, book building software and road show expenses is $50,000. In addition, we agreed to grant the placement agent a warrant to purchase a number of shares of our common stock equal to 5% of the aggregate number of shares of common stock and shares of common stock issuable upon exercise of the warrants sold in the offering.  The placement agent warrants will have substantially the same terms as the warrants issued to the public in the offering except that it will have an exercise price equal to 125% of the public offering price per share and warrant, anti-dilution provisions are not as expansive, an expiration date that is four years from the earlier of the effective date this registration statement and will be subject to FINRA Rule 5110(g)(1) in that for a period of six months after the issuance date of the placement agent warrants, neither the placement agent warrants nor any warrant shares issued upon exercise of the placement agent warrants shall be (A) sold, transferred, assigned, pledged, or hypothecated, or (B) the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the offering pursuant to which the compensation warrants are being issued, except the transfer of any security as permitted by FINRA rules. For a period of 12 months from the closing of this offering, Aegis Capital has the right of first refusal to act as, in our discretion, lead underwriter or minimally as a co-manager, with at least 50% of the economics, or in the case of a three underwriter or placement agent transaction, 33% of the economics, for each and every future public and private equity and public debt offering during such period.

The placement agent may be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act and any commissions received by it and any profit realized on the sale of the securities by them while acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act.  The placement agent would be required to comply with the requirements of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, Rule 10b-5 and Regulation M under the Exchange Act.  These rules and regulations may limit the timing of purchases and sales of shares of common stock and warrants to purchase shares of common stock by the placement agent.  Under these rules and regulations, the placement agent may not (i) engage in any stabilization activity in connection with our securities; and (ii) bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until they have completed their participation in the distribution.
 
 
37

 

The placement agent agreement provides that we will indemnify the placement agent against specified liabilities, including liabilities under the Securities Act. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.  The placement agent agreement also provides that the agreement may be terminated by either party upon thirty (30) days prior written notice.

Our obligations to issue and sell the securities offered hereby to the purchasers is subject to the conditions set forth in a securities purchase agreement, which may be waived by us at our discretion. A purchaser’s obligation to purchase the securities is subject to the conditions set forth in a securities purchase agreement as well, which may also be waived by the purchaser.

In order to comply with certain state securities laws, if applicable, the securities will be sold in such jurisdictions only through registered or licensed brokers or dealers. We are seeking a limited offering qualification of our shares and warrants in California. If the offering is approved in California on the basis of such limited offering qualification, in the absence of any other exemptions, offers and sales of our units can only be made to proposed California purchasers based on their meeting certain suitability standards. California investors must meet at least one of the following criteria:

 
·
any bank as defined in section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

 
·
any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

 
·
any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

 
·
any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer

 
·
any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 (exclusive of home, home furnishings and automobile);

 
·
any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

 
·
any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

 
·
any entity in which all of the equity owners are accredited investors.

Institutional investors may generally purchase shares and warrants in the offering pursuant to exemptions provided for sales to such entities under the laws of various states. The definition of an “institutional investor” varies from state to state, but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. Purchasers who are not institutional investors, may purchase shares in this offering only if they reside in the jurisdictions where there is an effective registration or exemption, and, if required, meet any requisite suitability standards.

 
38

 

WHERE YOU CAN FIND MORE INFORMATION

We are a reporting company and file annual, quarterly and special reports, and other information with the Securities and Exchange Commission. Copies of the reports and other information may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. You can request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.

This prospectus is part of a registration statement on Form S-1 that we filed with the SEC. Certain information in the registration statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration statement that are excluded from this prospectus. For further information you may:

 
·
read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s Public Reference Room; or
 
·
obtain a copy from the SEC upon payment of the fees prescribed by the SEC.
 
LEGAL MATTERS

The validity of the securities being offered by this prospectus has been passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York. Blank Rome LLP is acting as counsel for the placement agent in this offering.

EXPERTS

The audited financial statements included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of HJ Associates & Consultants, LLP, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
 
 
39

 
 
Index to Financial Statements
 
 
Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
F-1
   
Statements of Operations for the Three and Nine months ended September 30, 2011 and 2010 (unaudited)
F-2
   
Statements of Shareholders’ Equity (Deficit)  as of September 30, 2011 (unaudited)
F-3
   
Statements of Cash Flows for Nine months ended September 30, 2011 and 2010 (unaudited)
F-4
   
Notes to Financial Statements  September 30, 2011
F-5
   
Report of Independent Registered Public Accounting Firm
F-8
   
Balance Sheets as of December 31, 2010 and 2009
F-9
   
Statements of Operations for the Years ended December 31, 2010 and 2009
F-10
   
Statements of Shareholders’ Equity from Inception (August 25, 2006) through December 31, 2010
F-11
   
Statements of Cash Flows for the years ended December 31, 2010 and 2009
F-12
   
Notes to Financial Statements  December 31, 2010 and 2009
F-13
 
 
40

 
 
CARBON SCIENCES, INC.
(A Development Stage Company)
 
Balance Sheets

             
             
             
   
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
  Cash
  $ 318,843     $ 38,422  
  Prepaid expenses
    42,471       7,563  
                 
                        TOTAL CURRENT ASSETS
    361,314       45,985  
                 
PROPERTY & EQUIPMENT, at cost
               
   Machinery & equipment
    133,344       91,344  
   Computer equipment
    31,434       28,716  
   Furniture & fixtures
    1,459       1,459  
      166,237       121,519  
   Less accumulated depreciation
    (59,203 )     (45,800 )
                 
                        NET PROPERTY AND EQUIPMENT
    107,034       75,719  
                 
OTHER ASSETS
               
   Patents
    69,448       37,114  
                 
                       TOTAL ASSETS
  $ 537,796     $ 158,818  
                 
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
    Accounts payable
  $ 53,349     $ 12,635  
    Accrued expenses
    8,966       11,369  
    Accrued interest, notes payable
    7,635       7,346  
    Note payable, shareholder
    -       25,000  
                 
                       TOTAL CURRENT LIABILITIES
    69,950       56,350  
                 
SHAREHOLDERS' EQUITY
               
   Preferred Stock, $0.001 par value,
               
    20,000,000 authorized common shares
    -       -  
   Common Stock, $0.001 par value;
               
    100,000,000 authorized common shares
               
    9,594,567 and 5,120,229 shares issued and outstanding, respectively
    9,594       5,120  
   Additional paid in capital
    7,487,774       5,914,530  
   Accumulated deficit during the development stage
    (7,029,522 )     (5,817,182 )
                 
                      TOTAL SHAREHOLDERS' EQUITY
    467,846       102,468  
                 
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 537,796     $ 158,818  
                 

The accompanying notes are an integral part of these financial statements
 


 
F-1

 
CARBON SCIENCES, INC.
(A Development Stage Company)
 
Statements of Operations
(Unaudited)
 
                               
                           
From Inception on
 
                           
August 25,2006
 
   
Three Months Ended
         
Nine Months Ended
         
through
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
 
                               
                               
REVENUE
  $ -     $ -     $ -     $ -     $ -  
                                         
OPERATING EXPENSES
                                       
  General and administrative expenses
    466,847       218,649       952,856       1,842,544       6,034,352  
  Research and development
    43,871       61,018       243,330       138,622       946,833  
  Depreciation expense
    4,760       3,286       13,403       11,875       80,000  
                                         
TOTAL OPERATING EXPENSES
    515,478       282,953       1,209,589       1,993,041       7,061,185  
                                         
LOSS FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSES)
    (515,478 )     (282,953 )     (1,209,589 )     (1,993,041 )     (7,061,185 )
                                         
OTHER INCOME/(EXPENSE)
                                       
  Interest income
    -       -       -       -       39,521  
  Gain on sale of asset
    -       -       -       5,045       5,045  
  Foreign exchange gain/(loss)
    (2,108 )             (2,108 )     -       (2,108 )
  Penalties
    -       -       (29 )     -       (79 )
  Interest expense
    (120 )     (320 )     (614 )     (755 )     (10,716 )
                                         
TOTAL OTHER INCOME/(EXPENSES)
    (2,228 )     (320 )     (2,751 )     4,290       31,663  
                                         
NET LOSS
  $ (517,706 )   $ (283,273 )   $ (1,212,340 )   $ (1,988,751 )   $ (7,029,522 )
                                         
BASIC AND DILUTED LOSS PER SHARE
  $ (0.08 )   $ (0.06 )   $ (0.19 )   $ (0.43 )        
                                         
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
                                 
      BASIC AND DILUTED
    6,840,020       4,783,598       6,531,228       4,584,224          
                                         
 

The accompanying notes are an integral part of these financial statements


 
F-2

 
 
CARBON SCIENCES, INC.
(A Development Stage Company)
 
Statement of Shareholders' Equity/(Deficit)


                                 
Deficit
       
                                 
Accumulated
       
                           
Additional
   
during the
       
   
Preferred stock
   
Common stock
   
Paid-in
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Stage
   
Total
 
                                           
Balance at December 31, 2010
    -     $ -       5,120,229     $ 5,120     $ 5,914,530     $ (5,817,182 )   $ 102,468  
                                                         
                                                         
Issuance of common stock for cash (unaudited)
                                                       
(price per share between $1.00 - $2.00)
    -       -       1,141,000       1,141       1,480,859       -       1,482,000  
                                                         
Cashless issuance of common stock warrants (unaudited)
    -       -       3,333,338       3,333       (3,333 )     -       -  
                                                         
Stock compensation cost (unaudited)
    -       -       -       -       95,718       -       95,718  
                                                         
Net Loss for the nine months ended September 30, 2011 (unaudited)
    -       -       -       -       -       (1,212,340 )     (1,212,340 )
                                                         
Balance at September 30, 2011 (unaudited)
    -     $ -       9,594,567     $ 9,594     $ 7,487,774     $ (7,029,522 )   $ 467,846  
                                                         

The accompanying notes are an integral part of these financial statements


 
F-3

 
CARBON SCIENCES, INC.
(A Development Stage Company)
 
Statements of Cash Flows
(Unaudited)

               
From Inception on
 
               
August 25, 2006
 
   
Nine Months Ended
         
through
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
   Net loss
  $ (1,212,340 )   $ (1,988,751 )   $ (7,029,522 )
   Adjustment to reconcile net loss to net cash
                       
     used in operating activities
                       
   Depreciation expense
    13,403       11,875       80,000  
   Stock issuance for services
    -       -       251,038  
   Stock compensation cost
    95,718       1,230,000       1,325,718  
   Gain on sale of asset
    -       (5,045 )     (5,045 )
  Changes in Assets and Liabilities
                       
   (Increase) Decrease in:
                       
   Prepaid expenses
    (34,908 )     7,960       (42,471 )
   Increase (Decrease) in:
                       
   Accounts payable
    40,714       8,500       53,349  
   Accrued expenses
    (2,114 )     (11,871 )     16,601  
                         
NET CASH USED IN OPERATING ACTIVITIES
    (1,099,527 )     (747,332 )     (5,350,332 )
                         
CASH FLOWS USED IN INVESTING ACTIVITIES:
                       
   Proceeds from sale of vehicle
    -       24,500       24,500  
   Patent expenditures
    (32,334 )     (22,697 )     (69,448 )
   Purchase of equipment
    (44,718 )     (15,640 )     (206,489 )
                         
NET CASH USED IN INVESTING ACTIVITIES
    (77,052 )     (13,837 )     (251,437 )
                         
CASH FLOWS IN FINANCING ACTIVITIES:
                       
   Advances from officer
    -       -       113,000  
   Loans from investors
    -       25,000       525,000  
   Repayment of advances and loans
    (25,000 )     -       (373,000 )
   Proceeds from subscriptions payable
    -       -       362,775  
   Proceeds from issuance of common stock, net
    1,482,000       626,000       5,292,837  
                         
NET CASH PROVIDED BY FINANCING  ACTIVITIES
    1,457,000       651,000       5,920,612  
                         
NET INCREASE/(DECREASE) IN CASH
    280,421       (110,169 )     318,843  
                         
CASH, BEGINNING OF PERIOD
    38,422       270,562       -  
                         
CASH, END OF PERIOD
  $ 318,843     $ 160,393     $ 318,843  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                 
   Interest paid
  $ 120     $ 158     $ 3,213  
   Taxes paid
  $ 800     $ 800     $ 3,200  
                         
SUPPLEMENTAL DISCLOSURES OF NON CASH ACTIVITIES
                 
From inception on August 25, 2006 through September 30, 2011, the Company issued 69,737 shares of common stock for converted debt in the
 
   amount of $265,000, at fair value of $3.80 per share.
                       


The accompanying notes are an integral part of these financial statements



 
F-4

 

CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER 30, 2011

1.      Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the nine month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2010.

Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern.  The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern.  The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion.  The Company has obtained funds from its shareholders since its inception , and believes this funding will continue, and is also actively seeking new investors.  Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Carbon Sciences, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Development Stage Activities and Operations
The Company is in its initial stages of formation and has insignificant revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.

Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.

Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.


 
 
F-5

 

CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER 30, 2011


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss per Share Calculations
The Company adopted the accounting pronouncement for loss per share, which dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the period ended September 30, 2011 as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

Stock-Based Compensation

Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.

Recently Issued Accounting Pronouncements

 
Management reviewed accounting pronouncements issued during the three months ended September 30, 2011, and no pronouncements were adopted during the period.

3.
CAPITAL STOCK

As of April 29, 2011, the Company authorized a one-for-forty (1:40) reverse split. All share amounts have been retroactively restated reflecting this reverse split.

During the nine months ended September 30, 2011, the Company issued:
·  
800,000 shares of common stock at a price of $1.00 per share for gross cash proceeds of $800,000, with warrants attached to purchase 3,200,000 shares of common stock over a period of five years;
·  
341,000 shares of common stock at a price of $2.00 for gross cash proceeds of $682,000;
·  
3,333,338 shares of common stock upon cashless exercise of warrants to purchase 4,000,000 shares of common stock.

During the nine months ended September 30, 2010, the Company issued:
·  
335,714 shares of common stock at a price of $1.40 per share for gross cash proceeds of $470,000;
·  
150,000 shares of common stock at a price of $1.04 for gross cash proceeds of $156,000.

4.      STOCK OPTIONS

As of September 30, 2011, the Board of Directors of the Company granted non-qualified stock options to purchase 725,000 shares of common stock to its employees. Each option is exercisable to the nearest whole share, in installments or otherwise, as the respective option agreements may provide. Notwithstanding any other provisions of the Option agreement, each option expires on the date specified in the option agreement, which date shall not be later than the seventh (7th) anniversary from the grant date of the options. The stock options vested immediately, and are exercisable for a period of seven years from the date of grant at exercise prices between $2.80 and $4.31 per share, the market price of the Company’s common stock on the date of grant.


 
F-6

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS-UNAUDITED
SEPTEMBER 30, 2011


4.      STOCK OPTIONS AND WARRANTS (Continued)
 
   
9/30/2011
 
Risk free interest rate
    .67% - 3.3 %
Stock volatility factor
    92.21% - 98.23 %
Weighted average expected option life
 
2 - 7 years
 
Expected dividend yield
 
None
 
 
A summary of the Company’s stock option activity and related information follows:
 
   
9/30/2011
       
         
Weighted
 
   
Number
   
average
 
   
of
   
exercise
 
   
Options
   
price
 
Outstanding, beginning of period
    462,500     $ 2.90  
Granted
    262,500       3.45  
Exercised
    -       -  
Expired
    -       -  
Outstanding, end of period
    725,000     $ 3.38  
Exercisable at the end of period
    426,250     $ 2.45  
Weighted average fair value of
               
options granted during the period
    $ 3.47  
                 
 
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the financial statements of operations during the period ended September 30, 2011, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of September 30, 2011 based on the grant date fair value estimated, and compensation expense for the stock-based payment awards granted subsequent to September 30, 2011, based on the grant date fair value estimated. We account for forfeitures as they occur. The stock-based compensation expense recognized in the statement of income during the period ended September 30, 2011 and 2010 is $95,718 and $1,230,000, respectively.

Warrants
During the period ended September 30, 2011, the Company issued no warrants. On July 22, 2011, through a cashless exercise 4,000,000 warrants were exercise to purchase 3,333,338 shares of common stock. At September 30, 2011, the Company had no warrants outstanding.

5.
SUBSEQUENT EVENTS

 
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has no events to report.
 
 
F-7

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Carbon Sciences, Inc.
(A Development Stage Company)
Santa Barbara, California

We have audited the accompanying balance sheets of Carbon Sciences, Inc. as of December 31, 2010 and 2009, and the related statements of operations, stockholders' equity, and cash flows for the years then ended, and from inception on August 25, 2006 through December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carbon Sciences, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, and from inception on August 25, 2006 through December 31, 2010, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company does not generate significant revenue, and has negative cash flows from operations.  This raises substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

/s/ HJ Associates & Consultants, LLP

HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 30, 2011
 
 
 
 
F-8

 
CARBON SCIENCES, INC.
(A Development Stage Company)
BALANCE SHEETS
 
   
December 31, 2010
   
December 31, 2009
 
             
ASSETS
           
             
CURRENT ASSETS
           
  Cash
  $ 38,422     $ 270,562  
  Prepaid expenses
    7,563       24,023  
                 
                        TOTAL CURRENT ASSETS
    45,985       294,585  
                 
PROPERTY & EQUIPMENT, at cost
               
   Machinery & equipment
    91,344       71,498  
   Computer equipment
    28,716       17,559  
   Furniture & fixtures
    1,459       -  
   Mobile vehicle
    -       40,252  
      121,519       129,309  
   Less accumulated depreciation
    (45,800 )     (51,018 )
                 
                        NET PROPERTY AND EQUIPMENT
    75,719       78,291  
                 
OTHER ASSETS
               
   Patents
    37,114       14,417  
                 
                       TOTAL ASSETS
  $ 158,818     $ 387,293  
                 
                 
                 
LIABILITIES AND SHAREHOLDER'S EQUITY
               
                 
CURRENT LIABILITIES
               
    Accounts payable
  $ 12,635     $ 4,046  
    Accrued expenses
    11,369       27,762  
    Accrued interest, notes payable
    7,346       6,434  
    Note payable, shareholder
    25,000       -  
                 
                       TOTAL CURRENT LIABILITIES
    56,350       38,242  
                 
SHAREHOLDERS' EQUITY
               
   Common Stock, $0.001 par value;
               
500,000,000 authorized common shares
               
204,778,697 and 177,350,125 shares issued and outstanding
    204,778       177,350  
   Additional paid in capital
    5,714,872       3,686,300  
   Accumulated deficit during the development stage
    (5,817,182 )     (3,514,599 )
                 
                      TOTAL SHAREHOLDERS' EQUITY
    102,468       349,051  
                 
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 158,818     $ 387,293  
 
The accompanying notes are an integral part of these financial statements
 
 
F-9

 
 
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
 
               
From Inception on
 
               
August 25,2006
 
   
Year Ended
   
through
 
   
December 31, 2010
   
December 31, 2009
   
December 31, 2010
 
                   
                   
REVENUE
  $ -     $ -     $ -  
                         
OPERATING EXPENSES
                       
  General and administrative expenses
    2,098,449       1,013,007       5,081,496  
  Research and development
    192,511       137,383       703,503  
  Depreciation expense
    15,579       22,716       66,597  
                         
TOTAL OPERATING EXPENSES
    2,306,539       1,173,106       5,851,596  
                         
LOSS FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSES)
    (2,306,539 )     (1,173,106 )     (5,851,596 )
                         
OTHER INCOME/(EXPENSE)
                       
  Interest income
    -       -       39,521  
  Gain on sale of asset
    5,045       -       5,045  
  Penalties
    -       (50 )     (50 )
  Interest expense
    (1,089 )     (7,402 )     (10,102 )
                         
TOTAL OTHER INCOME/(EXPENSES)
    3,956       (7,452 )     34,414  
                         
NET LOSS
  $ (2,302,583 )   $ (1,180,558 )   $ (5,817,182 )
                         
BASIC AND DILUTED LOSS PER SHARE
  $ (0.01 )   $ (0.01 )        
                         
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
                 
      BASIC AND DILUTED
    187,329,773       156,509,428          
 
The accompanying notes are an integral part of these financial statements
 
 
F-10

 
 
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
 
                       
Deficit
       
                   
 
 
Accumulated
       
             
Additional
   
Stock
 
during the
       
   
Common stock
 
Paid-in
   
Subscriptions
 
Development
       
   
Shares
   
Amount
  Capital    
Payable
 
Stage
   
Total
 
Inception August 25, 2006
    -     $ -     $ -     $ -     $ -     $ -  
                                                 
Issuance of common stock for cash to founders in September 2006
 
(99,500,000 shares issued at $0.00025 for cash)
    99,500,000       99,500       (74,625 )     -       -       24,875  
                                                 
Issuance of common stock for cash in September 2006
                 
(7,000,000 shares issued at $0.015 for cash)
    7,000,000       7,000       98,000       -       -       105,000  
                                                 
Issuance of common stock for cash in October 2006
                 
(21,000,000 shares issued at $0.015 for cash)
    21,000,000       21,000       294,000       -       -       315,000  
                                                 
Issuance of common stock for cash in November 2006
                 
(390,000 shares issued at $0.10 for cash)
    390,000       390       38,610       -       -       39,000  
                                                 
Issuance of common stock for cash in December 2006
                 
(555,000 shares issued at $0.10 for cash)
    555,000       555       54,945       -       -       55,500  
                                                 
Net Loss from Inception through December 31, 2006
                                    (413,641 )     (413,641 )
Balance at December 31, 2006
    128,445,000       128,445       410,930       -       (413,641 )     125,734  
                                                 
Issuance of common stock for cash in January 2007
                 
(255,000 shares issued at $0.10 for cash)
    255,000       255       25,245       -       -       25,500  
                                                 
Issuance of common stock for cash in March 2007
                 
(2,900,000 shares issued at $0.10 for cash)
    2,900,000       2,900       287,100       -       -       290,000  
                                                 
Issuance of common stock for cash in May 2007
                         
(1,770,000 shares issued at $0.10 for cash)
    1,770,000       1,770       175,230       -       -       177,000  
                                                 
Issuance of common stock for cash in May 2007
                         
(1,450,000 shares issued at $0.10 for cash)
    1,450,000       1,450       143,550       -       -       145,000  
                                                 
Issuance of common stock for cash in July 2007
                         
(11,250,000 shares issued at $0.10 for cash)
    11,250,000       11,250       1,113,750       -       -       1,125,000  
                                                 
Issuance of common stock for services in July 2007
                 
(1,472,000 shares issued at $0.10 per share)
    1,472,000       1,472       145,728       -       -       147,200  
                                                 
Issuance of common stock for services in September 2007
         
(500,000 shares issued at $0.15 per share)
    500,000       500       74,500       -       -       75,000  
                                                 
Stock issuance cost
    -       -       (265,200 )     -       -       (265,200 )
                                                 
Issuance of common stock for cash in December 2007
                 
(300,000 shares issued at $0.15 per share)
    300,000       300       44,700       -       -       45,000  
                                                 
Net Loss for the year ended December 31, 2007
    -       -       -       -       (878,679 )     (878,679 )
Balance at December 31, 2007
    148,342,000       148,342       2,155,533       -       (1,292,320 )     1,011,555  
                                                 
Stock subscriptions payable
    -       -       -       62,000       -       62,000  
                                                 
Net Loss (unaudited)
    -       -       -       -       (1,041,721 )     (1,041,721 )
Balance at December 31, 2008
    148,342,000       148,342       2,155,533       62,000       (2,334,041 )     31,834  
                                                 
Stock subscriptions payable
    -       -       -       213,650       -       213,650  
                                                 
Issuance of common stock for services in April 2009
                 
(172,500 shares issued at fair value for $0.10 per share)
    172,500       172       17,078       -       -       17,250  
                                                 
Issuance of common stock for services in April 2009
                 
(250,000 shares issued at fair value at $0.10 per share)
    250,000       250       24,750       -       -       25,000  
                                                 
Issuance of common stock for cash in May 2009
                         
(2.756,500 shares issued at $0.10 per share)
    2,756,500       2,757       272,893       (275,650 )     -       -  
                                                 
Issuance of common stock for cash in May 2009
                         
(1,500,000 shares issued at $0.10 per share)
    1,500,000       1,500       148,500       -       -       150,000  
                                                 
Issuance of common stock for services in May 2009
                 
(1,000,000 shares issued at fair value at $0.10 per share)
    1,000,000       1,000       99,000       -       -       100,000  
                                                 
Issuance of common stock for services in September 2009
         
(337,875 shares issued at fair value at $0.10 per share)
    337,875       338       33,450       -       -       33,788  
                                                 
Issuance of common stock for conversion of debt in September 2009
 
(2,789,474 shares issued at fair value at $0.095 per share)
    2,789,474       2,789       262,211       -       -       265,000  
                                                 
Issuance of common stock for cash in September 2009
                 
(11,210,526 shares issued  $0.0263146 per share)
    11,210,526       11,211       283,789       -       -       295,000  
                                                 
Stock subscriptions payable
    -       -       -       149,125       -       149,125  
                                                 
Stock issuance cost
    -       -       (51,038 )     -       -       (51,038 )
                                                 
Issuance of common stock for subscription payable
                 
(1,491,250 shares issued  $0.10 per share)
    1,491,250       1,491       147,634       (149,125 )     -       -  
                                                 
Issuance of common stock for cash in December 2009
                 
(7,500,000 shares issued  $0.04 per share)
    7,500,000       7,500       292,500       -       -       300,000  
                                                 
Net Loss for the year ended December 31, 2009
    -       -       -       -       (1,180,558 )     (1,180,558 )
Balance at December 31, 2009
    177,350,125       177,350       3,686,300       -       (3,514,599 )     349,051  
                                                 
Issuance of common stock for cash in April 2010
                       
(2,857,143 shares issued  $0.035 per share)
    2,857,143       2,857       97,143       -       -       100,000  
                                                 
Issuance of common stock for cash in May 2010
                         
(2,000,000 shares issued  $0.026 per share)
    2,000,000       2,000       50,000       -       -       52,000  
                                                 
Issuance of common stock for cash in June 2010
                         
(4,000,000 shares issued  $0.026 per share)
    4,000,000       4,000       100,000       -       -       104,000  
                                                 
Stock compensation expense for stock options granted and fully vested
    -       -       1,230,000       -       -       1,230,000  
                                                 
Issuance of common stock for cash in July 2010
                         
(2,000,000 shares issued  $0.035 per share)
    2,000,000       2,000       68,000       -       -       70,000  
                                                 
Issuance of common stock for cash in August 2010
                 
(8,571,429 shares issued  $0.035 per share)
    8,571,429       8,571       291,429       -       -       300,000  
                                                 
Issuance of common stock for cash in November 2010
                 
(4,000,000 shares issued  $0.025 per share)
    4,000,000       4,000       96,000       -       -       100,000  
                                                 
Issuance of common stock for cash in December 2010
                 
(4,000,000 shares issued  $0.025 per share)
    4,000,000       4,000       96,000       -       -       100,000  
                                                 
Net Loss for the year ended December 31, 2010
    -       -       -       -       (2,302,583 )     (2,302,583 )
                                                 
Balance at December 31, 2010
    204,778,697     $ 204,778     $ 5,714,872     $ -     $ (5,817,182 )   $ 102,468  
 
The accompanying notes are an integral part of these financial statements
 
 
F-11

 
 
CARBON SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
 
               
From Inception on
 
               
August 25,2006
 
   
Year Ended
   
through
 
   
December 31, 2010
   
December 31, 2009
   
December 31, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
   Net loss
  $ (2,302,583 )   $ (1,180,558 )   $ (5,817,182 )
   Adjustment to reconcile net loss to net cash
                       
     used in operating activities
                       
   Depreciation expense
    15,579       22,716       66,597  
   Stock issuance for services
    -       176,038       251,038  
   Stock compensation cost
    1,230,000       -       1,230,000  
   Gain on sale of asset
    (5,045 )             (5,045 )
  Changes in Assets and Liabilities
                       
   (Increase) Decrease in:
                       
   Other receivable
    -       2,400       -  
   Prepaid expenses
    16,460       (21,303 )     (7,563 )
   Increase (Decrease) in:
                       
   Accounts payable
    8,589       (30,760 )     12,635  
   Accrued expenses
    (15,481 )     (9,356 )     18,715  
                         
NET CASH USED IN OPERATING ACTIVITIES
    (1,052,481 )     (1,040,823 )     (4,250,805 )
                         
CASH FLOWS USED IN INVESTING ACTIVITIES:
                       
   Proceeds from sale of vehicle
    24,500       -       24,500  
   Patent expenditures
    (22,697 )     (5,644 )     (37,114 )
   Purchase of equipment
    (32,462 )     -       (161,771 )
                         
NET CASH USED IN INVESTING ACTIVITIES
    (30,659 )     (5,644 )     (174,385 )
                         
CASH FLOWS IN FINANCING ACTIVITIES:
                       
   Advances from/(to) officer
    -       40,000       113,000  
   Loans from investors
    25,000       290,000       525,000  
   Repayment of advances and loans
    -       (115,000 )     (348,000 )
   Proceeds from subscriptions payable
    -       362,775       362,775  
   Proceeds from issuance of common stock,net
    826,000       693,962       3,810,837  
                         
NET CASH PROVIDED BY FINANCING  ACTIVITIES
    851,000       1,271,737       4,463,612  
                         
NET INCREASE/(DECREASE) IN CASH
    (232,140 )     225,270       38,422  
                         
CASH, BEGINNING OF YEAR
    270,562       45,292       -  
                         
CASH, END OF YEAR
  $ 38,422     $ 270,562     $ 38,422  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                       
   Interest paid
  $ 179     $ 968     $ 2,887  
   Taxes paid
  $ 800     $ 800     $ 2,400  
                         
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
                       
During the year ended December 31, 2009, the Company issued 2,789,474 shares of common stock for converted debt
         
   in the amount of $265,000, at fair value of $0.095 per share.
                       
 
The accompanying notes are an integral part of these financial statements
 
 
F-12

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009


1. 
ORGANIZATION AND LINE OF BUSINESS
 
Organizational History
The Company was incorporated in the State of Nevada on August 25, 2006, as Zingerang, Inc.  On April 2, 2007 the Company changed its name to Carbon Sciences, Inc.
 
Overview of Business
The Company was initially in the business of offering a real-time and interactive mobile communication services to businesses and consumers under the Zingerang trade name. The Company is now pursuing a new line of business.  The company is developing a technology to convert earth destroying carbon dioxide (CO2) into a useful form that will not contribute to green house gases.  This technology is based on a patent filed by the company and developed under the brand name, GreenCarbon™ Technology.  By eliminating harmful CO2 from human created sources, such as power plants and industrial factories, the technology will provide a partial solution to the problem of global warming.  GreenCarbon™ Technology is initially targeted at electrical power plants.  CO2 makes up nearly 80% of all greenhouse gases.  More than a quarter of that CO2 comes from electrical power plants.

Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business.  The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern.  The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern.  The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion.  As discussed in Note 3, the Company has obtained funds from its shareholders since it’s’ inception through December 31, 2010. Management believes this funding will continue, and is also actively seeking new investors.  Management believes the existing shareholders and the prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business.

2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Carbon Sciences, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Development Stage Activities and Operations
The Company has been in its initial stages of formation and for the year ended December 31, 2010, had no revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.

Revenue Recognition
The Company will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, the Company has had no revenues and is in the development stage.
 
 
F-13

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

 
2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements.  Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, and the fair value of stock options. Actual results could differ from those estimates.

Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight line method over its estimated useful lives:
 
   Computer equipment
 
3 Years
   Machinery & Equipment
 
7 Years
   Mobile vehicle
 
5 Years
 
Depreciation expense as of December 31, 2010 and 2009 was $15,579 and $22,716 respectively.

Fair Value of Financial Instruments
Fair Value of Financial Instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2010 and 2009, the amounts reported for cash, prepaid expenses, accounts payable, and accrued expenses, approximate the fair value because of their short maturities.
 
Loss per Share Calculations
Loss per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. No shares for employee options or warrants were used in the calculation of the loss per share as they were all anti-dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the years ended December 31, 2010 and 2009, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

Income Taxes
The Company uses the liability method of accounting for income taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
 
 
F-14

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

 
2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Research and Development
Research and development costs are expensed as incurred.  Total research and development costs were $192,511 and $137,383 for the years ended December 31, 2010 and 2009, respectively.

Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred.  Total advertising costs were $4,386 and $88,600 for the years ended December 31, 2010 and 2009, respectively.

Stock-Based Compensation
Share based payments applies to transactions in which an entity exchanges its equity instruments for goods or services, and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. We will be required to follow a fair value approach using an option-pricing model, such as the Black Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. The adoption of share based compensation has no material impact on our results of operations.

Recently Issued Accounting Pronouncements
 
Management reviewed accounting pronouncements issued during the three months ended December 31, 2010, and no pronouncements were adopted during the period.

3.
CAPITAL STOCK

During the year ended December 31, 2010, the Company issued 13,428,572 shares of common stock at a price of $0.035 per share for cash; 6,000,000 shares of common stock were issued at a price of $0.026 for cash; 8,000,000 shares of common stock issued at $0.25 per share for cash. During the year ended December 31, 2009, the Company issued 5,747,750 shares of common stock for cash at a price of $0.10 per share; 11,210,526 shares of common stock were issued for cash at a price of $0.026 per share; 1,760,375 shares of common stock were issued for services at a fair value of $176,038; 7,500,000 shares of common stock were issued for $300,000 in cash at a price of $0.04 per share; 2,789,474 shares of common stock were issued for conversion of debt at a fair value of $265,000.

4. 
STOCK OPTIONS AND WARRANTS

On April 23, 2010, the Board of Directors of the Company granted non qualified stock options for 20,500,000 shares of common stock to its employees, agreements may provide. Notwithstanding any other provisions of the Option agreement, each Option expires on the date specified in the Option agreement, which date shall not be later than the seventh (7th) anniversary from the grant date of the options. The stock options vested immediately, and are exercisable for a period of seven years from the date of grant at an exercise price of $0.073 per share, the market value of the Company’s common stock on the date of grant.
 
   
12/31/2010
 
Risk free interest rate
    3.30 %
Stock volatility factor
    1 %
Weighted average expected option life
 
7 years
 
Expected dividend yield
 
None
 
 
 
F-15

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009


4. 
STOCK OPTIONS AND WARRANTS (Continued)

A summary of the Company’s stock option activity and related information follows:
 
   
12/31/2010
 
         
Weighted
 
   
Number
   
average
 
   
of
   
exercise
 
   
Options
   
price
 
Outstanding, beginning of period
    -     $ -  
Granted
    20,500,000       0.073  
Exercised
    -       -  
Expired
    (5,000,000 )     -  
Outstanding, end of period
    15,500,000     $ 0.073  
Exercisable at the end of period
    15,500,000     $ 0.073  
Weighted average fair value of
               
options granted during the period
    $ 0.073  
 
The weighted average remaining contractual life of options outstanding as of December 31, 2010 was as follows:
 
                 
Average
 
     
Stock
   
Stock
   
Remaining
 
Exercisable
   
Options
   
Options
   
Contractual
 
Prices
   
Outstanding
   
Exercisable
   
Life (years)
 
$ 0.07       15,500,000       15,500,000       6.32  
 
The stock-based compensation expense recognized in the statement of operations during the year ended December 31, 2010, related to the granting of these options is $1,230,000. During the year ended December 31, 2009, no options were granted.

Warrants
During the years ended December 31, 2010 and 2009, the Company granted 0 and 12,000,000 warrants for services, respectively, determined using the Black Scholes pricing model.
 
   
2010
   
2009
 
Risk free interest rate
    2.28% - 2.51 %     2.28% - 2.51 %
Stock volatility factor
    1 %     1 %
Weighted average expected option life
 
5 years
   
5 years
 
Expected dividend yield
 
None
   
None
 
 
During the years ended December 31, 2010 and 2009, the Company issued warrants for services. A summary of the Company’s warrant activity and related information follows:
 
   
Year End
   
Year End
 
   
December 31, 2010
   
December 31, 2009
 
         
Weighted
         
Weighted
 
         
average
         
average
 
         
exercise
         
exercise
 
   
Options
   
price
   
Options
   
price
 
Outstanding -beginning of year
    12,000,000     $ 0.31       -     $ -  
Granted
    -       -       12,000,000       0.29  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
Outstanding - end of year
    12,000,000     $ 0.31       12,000,000     $ 0.29  
 
 
F-16

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

 
4. 
STOCK OPTIONS AND WARRANTS (Continued)

Warrants (Continued)
At December 31, 2010, the weighted average remaining contractual life of warrants outstanding:
 
                 
Weighted
 
                 
Average
 
                 
Remaining
 
Exercisable
   
Warrants
   
Warrants
   
Contractual
 
Prices
   
Outstanding
   
Exercisable
   
Life (years)
 
$ 0.18       10,100,000       10,100,000       4.50  
$ 0.19       1,050,000       1,050,000       4.63  
$ 0.16       650,000       650,000       4.81  
$ 0.16       200,000       200,000       4.87  
          12,000,000       12,000,000          
 
Warrants with a fair value of $2,153,500 determined using the Black Scholes pricing model, was recognized in the statement of income for the year ended December 31, 2009. No warrants were granted during the year ended December 31, 2010.

5.
RENTAL LEASE

 
The Company extended its facility lease for a period of two years expiring on September 30, 2012. The base rent is $2,800 per month. The rent paid for the years ended December 31, 2010 and 2009 were $45,101 and $43,481.

 
6.   INCOME TAXES

 
The Company files income tax returns in the U.S. Federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008.

 
Deferred income taxes have been provided by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain.Included in the balances at December 31, 2010 and 2009, are no tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.  Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 
The Company's policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods ended December 31, 2010 and 2009, the Company did not recognize interest and penalties.
 
 
F-17

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009


7.
DEFERRED TAX BENEFIT

 
At December 31, 2010, the Company had net operating loss carry-forwards of approximately $4,513,700, which expire at dates that have not been determined. No tax benefit has been reported in the December 31, 2010 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

 
A reconciliation of income tax expense that would result from applying the U.S. Federal and State rate of 40% to pretax income from continuing operations for the period ended December 31, 2010 and 2009, with federal income tax expense presented in the financial statements is as follows:
 
   
2010
   
2009
 
Income tax benefit computed at U.S. Federal
           
 statutory rate of 34%
  $ (921,033 )   $ (472,224 )
State Income taxes, net of benefit of federal taxes
    -       -  
Depreciation
    (9,805 )     982  
R&D
    7,700       5,397  
Accrued compensated absences
    (5,566 )     5,566  
Other
    1,562       586  
Related party payable
    (6,556 )     (825 )
Penalty
    -       20  
Loss on disposal of asset
    (1,341 )     -  
Non deductible stock compensation
    492,000       -  
                 
Valuation Allowance
    443,039       460,498  
                 
Income tax expense
  $ -     $ -  
 
 
 
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
 
F-18

 
CARBON SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009


7.
DEFERRED TAX BENEFIT (Continued)

The items as of December 31, 2010 and 2009, which comprise a significant portion of deferred tax assets and liabilities are approximately as follows:
   
2010
   
2009
 
Deferred tax assets:
           
  NOL carryover
  $ 1,761,769     $ 1,318,730  
  Contribution carryover
    200       200  
  R & D credit carryover
    60,859       41,608  
  Accrued compensated absences
    -       5,566  
  Related party payable
    4,618       825  
                 
Deferred tax liabilites:
               
  Depreciation
    (32,251 )     (13,447 )
                 
Less Valuation Allowance
    (1,795,195 )     (1,353,482 )
                 
Net deferred tax asset
  $ -     $ -  
 
 
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

 
8.   RELATED PARTY TRANSACTION

 
On April 9, 2010, the Company signed a promissory note for funds received from an investor in the amount of $25,000 for operating expenses. The note bears interest at 5% per annum, and is due April 9, 2011.

9.
SUBSEQUENT EVENTS

 
Management evaluated subsequent events as of the date of the financial statements pursuant to ASC TOPIC 855.

On January 26, 2011, the Company issued 2,000,000 shares of common stock at a price of $0.025 per share for cash of $50,000, with warrants attached to purchase four (4) shares of common stock upon exercise.

During February 2011, the Company issued 6,000,000 shares of common stock at a price of $0.025 per share for cash of $150,000, with warrants attached to purchase four (4) shares of common stock upon exercise. Also, the Company signed an agreement with a consulting firm to provide laboratory services to support their development of a catalytic process to convert CO2 and methane to syngas.

During March 2011, the Company issued 8,000,000 shares of common stock at a price of $0.025 per share for cash of $200,000, with warrants attached to purchase four (4) shares of common stock upon exercise.
 
F-19

 
 





 
 
$3,000,000 Shares Common Stock and
Warrants to purchase up to ___ shares of Common Stock



GRAPHIC
 
 



PROSPECTUS


 




 





 
 

 
 

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13. Other Expenses of Issuance and Distribution
 
The following table provides information regarding the various actual and anticipated expenses (other than placement agent fees) payable by us in connection with the issuance and distribution of the securities being registered hereby.  All amounts shown are estimates except the Securities and Exchange Commission registration fee.

Nature of Expense
 
Amount
 
SEC registration fee
  $
687.60
 
Accounting fees and expenses
    20,000  
Legal fees and expenses
    225,000  
Transfer agent’s fees and expenses
    5,000  
Printing and related fees
    15,000  
Miscellaneous
    15,000  
Total
  $
280,687.60
 
 
Item 14. Indemnification of Directors and Officers.
 
Nevada Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful.

Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards.

Our articles of incorporation include an indemnification provision under which we have the power to indemnify our directors, officers, employees and other agents of the Company to the fullest extent permitted by Nevada law.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

Item 15. Recent Sales of Unregistered Securities

The Company issued an aggregate of 131,413 shares of common stock at a purchase price of $4.00 per share for cash in the amount of $525,650, through a private placement offering which closed on April 8, 2009.

On September 28, 2009, we entered into a Stock Purchase Agreement with an accredited investor for the sale of 280,264 shares of common stock at a price of $1.05 per share for gross cash proceeds of $295,000.
 
 
II-1

 
 
On September 28, 2009, we entered into an Exchange of Notes for shares agreement, pursuant to which we agreed to issue 69,737 shares of common stock in exchange for the cancellation of promissory notes in the amount of $265,000.

Also, during the three months ended September 30, 2009, we sold 37,282 shares of common stock to accredited investors at a price of $4.00 per share for gross cash proceeds of $149,125.

On April 19, 2010, the Company issued 71,429 shares of common stock at a price of $1.4 for $100,000 cash.

In November 2010, we issued 100,000 units comprising of 100,000 shares and a warrant to purchase 400,000 shares of common stock of the Company for gross cash proceeds of $100,000.

In December 2010, we sold an aggregate of 100,000 units comprising of 100,000 shares and warrants to purchase 400,000 shares of common stock of the Company for net cash proceeds $100,000.

During the period ended March 31, 2011, we issued Units comprising of an aggregate of 400,000 shares of common stock and warrants to purchase 1,600,000 shares of our common stock at a price of $1.00 per Unit for aggregate gross cash proceeds of $400,000. The warrants were subsequently exercised on a cashless basis resulting in the issuance of 1,333,335 shares of common stock.

During the period ended June 30, 2011, we issued Units comprising an aggregate of 800,000 shares of common stock and warrants to purchase 3,200,000 shares of our common stock  at a price of $1.00 per Unit for aggregate gross cash proceeds  of $800,000. The warrants were subsequently exercised on a cashless basis resulting in the issuance of 1,333,335 shares of common stock.

During the period ended September 30, 2011, we  issued 341,000 shares of our common stock at a price of  $2.00 per share for aggregate gross cash proceeds of $682,000..

The Company relied on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Rule 506 of Regulation D and Section 4(2) of the Act in connection with the foregoing issuances.

All share amounts have been retroactively restated reflecting a one for forty (1:40) reverse split effected on May 9, 2011.
 
Item 16. Exhibits and Financial Statement Schedules
   
3.1
Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on August 25, 2007. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
3.2
Articles of Amendment of Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on April 9, 2007 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
3.3
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on May 9, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 16, 2011).
   
3.4
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on August 1, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 4, 2011).
   
3.5
Bylaws of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
4.1
Form of Common Stock Purchase Warrant to be issued to the Purchasers**
   
4.2
Form of Placement Agent’s Warrant.**
   
4.3
Form of Warrant issued in connection with Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
5.1
Opinion of Sichenzia Ross Friedman Ference LLP. *
   
10.1
Lease agreement with Ekwill Street, L.P. (as amended). (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.2
Exclusive License Agreement between Carbon Sciences, Inc. and the University of Saskatchewan dated December 23, 2010. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.3
Consulting Agreement dated as of March 30, 2011 between Carbon Sciences, Inc. and Emerging Fuels, Technology, Inc. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.4
Form of Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
 
 
II-2

 
 
10.5
Stock Option Agreement between Carbon Sciences, Inc. and Byron Elton. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.6
Carbon Sciences, Inc. 2011 Equity Incentive Plan. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.7
Consulting Agreement between Carbon Sciences, Inc. and Howard Fong, dated December 8, 2011. **
   
10.8
Form of Securities Purchase Agreement**
   
 10.9
Placement Agent Agreement between Carbon Sciences, Inc. and Aegis Capital Corp.**
   
14.1
Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 26, 2008).
   
23.1
Consent of Independent Registered Public Accounting Firm.**
   
23.2
Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1).*
   
* To be filed by Amendment
**Filed herewith

Item 17. Undertakings.
 
(a) The undersigned registrant hereby undertakes to:
 
(1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to:
 
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
 
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement.
 
(iii) Include any additional or changed material information on the plan of distribution.
 
(2) That, for the purpose of determining any liability under the Securities Act of 1933 to any purchaser, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
  
 
II-3

 
 
 
SIGNATURES
 

 
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Barbara, California, on January 9, 2012.
 
 
CARBON SCIENCES, INC.
 
       
 
By:
/s/ Byron Elton  
   
Byron Elton
 
   
Chief Executive Officer, President, Acting Chief Financial Officer and Chairman of the Board
 
       
SIGNATURES AND POWER OF ATTORNEY


Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature
 
Title
 
Date
/s/ Byron Elton  
 
Chief Executive Officer, President, Acting Chief Financial Officer and Chairman of the Board
 
 
January 9, 2012
Byron Elton
 
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer )
   
         
/s/ Roland R. Bryan  
 
Director
 
January 9, 2012
Roland R. Bryan
       
         
/s/ Daniel Nethercott
 
Director
 
January 9, 2012
Daniel Nethercott
       
         
 
 
S-1

 
 
EXHIBIT INDEX

3.1
Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on August 25, 2007. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
3.2
Articles of Amendment of Articles of Incorporation of Carbon Sciences, Inc. filed with the Nevada Secretary of State on April 9, 2007 (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
3.3
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on May 9, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 16, 2011).
   
3.4
Certificate of Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on August 1, 2011 (Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 4, 2011).
   
3.5
Bylaws of Carbon Sciences, Inc. (Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on July 27, 2007).
   
4.1
Form of Common Stock Purchase Warrant to be issued to the Purchasers**
   
4.2
Form of Placement Agent’s Warrant.**
   
4.3
Form of Warrant issued in connection with Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
5.1
Opinion of Sichenzia Ross Friedman Ference LLP. *
   
10.1
Lease agreement with Ekwill Street, L.P. (as amended). (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.2
Exclusive License Agreement between Carbon Sciences, Inc. and the University of Saskatchewan dated December 23, 2010. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.3
Consulting Agreement dated as of March 30, 2011 between Carbon Sciences, Inc. and Emerging Fuels, Technology, Inc. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.4
Form of Stock Purchase Agreement entered into between the Company and the Purchasers, signatory thereto. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.5
Stock Option Agreement between Carbon Sciences, Inc. and Byron Elton. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.6
Carbon Sciences, Inc. 2011 Equity Incentive Plan. (Incorporated by reference to the Company’s Registration Statement on S-1 filed on November 7, 2011)
   
10.7
Consulting Agreement between Carbon Sciences, Inc. and Howard Fong, dated December  8, 2011.**
   
10.8
Form of Securities Purchase Agreement**
   
10.9
Placement Agent Agreement between Carbon Sciences, Inc. and Aegis Capital Corp.**
   
14.1
Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 26, 2008).
   
23.1
Consent of Independent Registered Public Accounting Firm.**
   
23.2
Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1).*