Exhibit 10.5

 

BLAST ENERGY SERVICES, INC.

$200,000 SECURED SUBORDINATED PROMISSORY NOTE

 

$200,000

  Houston, Texas   July 15, 2005

 

BLAST ENERGY SERVICES, INC., a California corporation (hereinafter called the
“Company,” which term includes any successor entities), for value received,
hereby promises to pay to Berg McAfee Companies, LLC a California corporation
(hereinafter called “Holder”), or his heirs, devisees, or assigns, the principal
sum of Two Hundred Thousand and No/100 dollars ($200,000), together with
interest on the amount of such principal sum from time to time outstanding,
payable in accordance with the terms set forth below. It is acknowledged by the
Parties that the principal sum of this Note has already been advanced. Interest
under this Note shall accrue based upon amounts actually advanced.

 

The obligations of the Company contained in this Note are secured by a
Subordinated Security Agreement between the Company and the Holder dated as of
the date hereof, as may be amended or modified (the “Security Agreement”).

 

ARTICLE I

 

DEFINITIONS

 

1.1 Definitions. For all purposes of this Note, except as otherwise expressly
provided or unless the context otherwise requires: (a) the terms defined in this
Article have the meanings assigned to them in this Article and include the
plural as well as the singular; (b) all accounting terms not otherwise defined
herein have the meanings assigned to them in accordance with generally accepted
accounting principles as promulgated from time to time by the Association of
Independent Certified Public Accountants; and (c) the words “herein,” “hereof”
and “hereunder” and other words of similar import refer to this Note as a whole
and not to any particular Article, Section or other subdivision.

 

“Advance” means a disbursement of proceeds of this Note as made by the Holder
pursuant to Section 2.1 hereof.

 

“Base Amount” shall mean a principal amount outstanding under the Note of
$200,000.

 

“Board of Directors” means the board of directors of the Company as elected from
time to time or any duly authorized committee of the Board of Directors.

 

“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday which
is not a day on which U.S. banking institutions are authorized or obligated by
law or executive order to be closed.

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“Default” means any event which is, or after notice or passage of time would be,
an Event of Default.

 

“Event of Default” has the meaning specified in Section 3.1.

 

“Maturity Date”, when used with respect to this Note, means September 30, 2006
(or such earlier date upon which this Note becomes due and payable under Section
3.2).

 

“Note” means this $200,000 Subordinated Promissory Note, as hereafter amended,
modified, substituted or replaced.

 

“Subordination” means that this Note shall be junior to the $800,000 Senior Note
to Berg McAfee Companies, LLC or its designee(s) for this same financing of
Blast Rig No.1.

 

“Person” means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
other entity, unincorporated organization or government or any agency or
political subdivision thereof.

 

ARTICLE II

 

ADVANCES; PAYMENTS

 

2.1 Advances. The Advance of principal under this Note for $200,000 has already
been made to the Company during 2005. Repayment of this Note shall occur after
the Senior Note to Berg McAfee Companies, LLC has been fully satisfied.

 

2.2 Interest. From the date of this Note through the Maturity Date, interest on
the principal amounts outstanding under the Note shall accrue at the rate equal
to five percent (5%) per annum calculated on the basis of a 360-day year from
the date of this Note through the Maturity Date. All past due amounts of
principal and interest shall bear interest at eight percent (8%) per annum
calculated on the basis of a 360-day year until paid.

 

2.3 Payment of Principal and Interest; Extension. The principal and all accrued
interest under this Note shall be due and payable in full on the Maturity Date.

 

2.4 Prepayments. The Company may prepay this Note, in whole or in part, without
penalty or discount, upon five days’ prior written notice given to Holder
pursuant to Section 5.5. All payments made under this Note shall be applied
first to accrued interest, and the balance, if any, to principal.

 

2.5 Manner of Payment. Cash payments of principal and interest on this Note will
be made by delivery of checks to Holder or wire transfers pursuant to
instructions from Holder. If the date upon which the payment of principal and
interest is required to be made pursuant to this Note occurs other than on a
Business Day, then such payment of principal and interest shall be made on the
next occurring Business Day following said payment date and shall include
interest through said next occurring Business Day.

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2.6 Security. This Note is secured by the collateral defined in the Security
Agreement.

 

ARTICLE III

 

REMEDIES

 

3.1 Events of Default. An “Event of Default” occurs if:

 

(a) the Company defaults in the payment or mandatory prepayment of the principal
or interest on this Note when such principal or interest becomes due and payable
and such default remains uncured for a period of ten (10) Business Days; or

 

(b) the Company defaults in the performance of any covenant made by the Company,
and such default remains uncured for a period of thirty (30) Business Days in
this Note (other than a default in the performance of a covenant specifically
addressed elsewhere in this Section 3.1) or the Security Agreement; or

 

(c) any representation or warranty made by the Company in the Security
Agreement, or this Note or in any certificate furnished by the Company in
connection with the consummation of the transaction contemplated thereby or
hereby, is untrue in any material respect as of the date of making thereof and
such default remains uncured for a period of ten (10) Business Days; or

 

(d) a court of competent jurisdiction enters (i) a decree or order for relief in
respect of the Company in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar law or
(ii) a decree or order adjudging the Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under any applicable
federal or state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any
substantial part of the property of the Company or ordering the winding up or
liquidation of the affairs of the Company and any such decree or order of relief
or any such other decree or order remains unstayed for a period of 30 days from
its date of entry; or

 

(e) the Company commences a voluntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar law or
any other case or proceeding to be adjudicated a bankrupt or insolvent, or the
Company files a petition, answer or consent seeking reorganization or relief
under any applicable federal or state law, or the Company makes an assignment
for the benefit of creditors, or admits in writing its inability to pay its
debts generally as they become due; or

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(f) the Company (1) merges or consolidates with or into any other Person (unless
the Company is the surviving or acquiring party or if the merger or
consolidation is to effect a re-domicile of the Company); (2) dissolves or
liquidates; or (3) sells all or substantially all of its assets except where
such action by the Company would not have a material adverse effect on the
financial condition or business of the Company.

 

3.2 Acceleration of Maturity. This Note and all accrued interest shall
automatically become immediately due and payable if an Event of Default
described in Sections 3.1(d), 3.1(e) or 3.1(f) occurs and, this Note shall, at
the option of the Holder in its sole discretion, become immediately due and
payable if any other Event of Default occurs, and in every such case the Holder
of the Note may declare the principal and interest on the Note to be due and
payable immediately.

 

ARTICLE IV

 

COVENANTS

 

The Company covenants and agrees that, so long as this Note is outstanding:

 

4.1 Payment of Principal and Accrued Interest. The Company will duly and
punctually pay or cause to be paid the principal sum of this Note, together with
interest accrued thereon from the date hereof to the date of payment, in
accordance with the terms hereof.

 

4.2 Existence. The Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate or Company existence,
rights (charter and statutory) and franchises.

 

4.3 Taxes; Claims; etc. The Company will promptly pay and discharge all lawful
taxes, assessments, and governmental charges or levies imposed upon it or upon
its income or profits, or upon any of its properties, real, personal, or mixed,
before the same shall become in default, as well as all lawful claims for labor,
materials, and supplies or otherwise which, if unpaid, might become a lien or
charge upon such properties or any part thereof, and which lien or charge will
have a material adverse effect on the business of the Company; provided,
however, that the Company shall not be required to pay or cause to be paid any
such tax, assessment, charge, levy, or claim prior to institution of foreclosure
proceedings if the validity thereof shall concurrently be contested in good
faith by appropriate proceedings and if the Company shall have established
reserves deemed by the Company adequate with respect to such tax, assessment,
charge, levy, or claim.

 

4.4 Maintenance of Existence and Properties. The Company will keep its material
properties in good repair, working order, and condition, ordinary wear and tear
excepted, so that the business carried on may be properly conducted at all times
in accordance with prudent business management.

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4.5 Information and Records. The Company shall maintain its books and records in
accordance with U.S. generally accepted accounting principles, applied on a
consistent basis.

 

4.6 Notice of Defaults. The Company will promptly notify the Holder in writing
of the occurrence of any Event of Default under this Note.

 

4.7 Compliance with Laws. The Company will promptly comply in all material
respects with all laws, ordinances and governmental rules and regulations to
which it is subject, the violation of which would materially and adversely
affect the Company.

 

4.8 Parties Participation Agreement. Within ten (10) business days after the
date hereof, the parties shall enter into a participation agreement, the effect
of which will be to provide Holder five percent (5%) of the gross revenues
generated from the Rig, paid on a quarterly basis. The term of such agreement
shall be for ten (10) years commencing October 1, 2006 and continuing until
September 30, 2016.

 

ARTICLE V

 

MISCELLANEOUS

 

5.1 Consent to Amendments. This Note may be amended, and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, if and only if the Company shall obtain the written consent to
such amendment, action or omission to act from the holders of a majority of the
aggregate principal amount of this Note.

 

5.2 Benefits of Note; No Impairment of Rights of Holder of Senior Indebtedness.
Nothing in this Note, express or implied, shall give to any Person, other than
the Company, Holder, and their successors any benefit or any legal or equitable
right, remedy or claim under or in respect of this Note.

 

5.3 Successors and Assigns. All covenants and agreements in this Note contained
by or on behalf of the Company and the Holder shall bind and inure to the
benefit of the respective successors and assigns of the Company and the Holder.

 

 

5.4 Restrictions on Transfer. Holder shall not transfer this Note except with
the prior written consent of the Company, such consent not to be unreasonably
withheld. Any lender to which Holder grants a security interest in this Note
shall be entitled to exercise all remedies to which it is entitled by contract
or by law, including (without limitation) transferring this Note into its own
name or into the name of any purchaser at any sale undertaken in connection with
enforcement by such lender of its remedies.

 

5.5 Notice; Address of Parties. Except as otherwise provided, all communications
to the Company or Holder provided for herein or with reference to this Note
shall be deemed to have been sufficiently given or served for all purposes (i)
upon receipt if sent by hand delivery or overnight

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courier, (ii) upon receipt if sent by facsimile, or (iii) on the third business
day after being sent as certified or registered mail, postage and charges
prepaid, to the following addresses: if to the Company at 14550 Torrey Chase
Boulevard, Suite 330, Houston, Texas 77014-1022, Attn: John O’Keefe, or at any
other address designated by the Company in writing to Holder; if to Holder at
10600 N. De Anza Blvd, Suite 250, Cupertino, CA 95014, or at any other address
designated by Holder to the Company in writing.

 

5.6 Separability Clause. In case any provision in this Note shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions in such jurisdiction shall not in any
way be affected or impaired thereby; provided, however, such construction does
not destroy the essence of the bargain provided for hereunder.

 

5.7 Governing Law; Arbitration. This Note shall be governed by, and construed in
accordance with, the internal laws of the State of California (without regard to
principles of choice of law). All claims arising from or related in any way to
this Agreement shall be submitted to and resolved by binding arbitration with
the American Arbitration Association (“AAA”) through its office in Santa Clara
County, California. Except as to injunctions and other provisional relief, this
section on mandatory arbitration applies to any dispute, claim or controversy
arising out of or related in any way to this Agreement, including but not
limited to its enforceability, validity, or interpretation. The arbitration
shall be conducted under rules of the AAA which are incorporated herein unless
expressly contradicted by the language of this paragraph. One neutral arbitrator
shall be used. The arbitrator shall provide a written decision setting forth his
or her essential findings and conclusions on which the award is based and
judicial review of the arbitration award shall be allowed to the extent required
by any applicable federal, state or local law. Judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction. This
paragraph shall be governed by the Federal Arbitration Act. Consistent with the
expedited nature of arbitration, each party to any arbitration filed under this
paragraph will, upon the written request of the other party, promptly provide
the other with copies of documents relevant to the issues raised by any claim or
counterclaim. Additionally, each party shall allow any other party to depose
witnesses under that party’s control and shall cooperate with the other party in
scheduling depositions. Any dispute regarding discovery, or the relevance or
scope thereof, shall be determined by the arbitrator. All discovery shall be
completed within 90 days following the appointment of the arbitrator, unless the
arbitrator finds that there is good cause for extending the discovery period.
Without waiving any remedy under this Agreement, either party may seek from any
court having jurisdiction injunctive relief or any interim or provisional relief
that is necessary to protect the rights or property of that party, pending the
arbitrator’s final determination on the merits. Any provision of this section on
mandatory arbitration that is found to be unconscionable shall be severed and
this section on mandatory arbitration shall be enforced without the severed
provision.

 

5.8 Usury. It is the intention of the parties hereto to conform strictly to the
applicable laws of the State of California and the United States of America, and
judicial or administrative interpretations or determinations thereof regarding
the contracting for, charging and receiving of interest for the use,
forbearance, and detention of money (hereinafter referred to in this Section 5.8
as “Applicable Law”). The Holder shall have no right to claim, to charge or to
receive any interest in

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excess of the maximum rate of interest, if any, permitted to be charged on that
portion of the amount representing principal which is outstanding and unpaid
from time to time by Applicable Law. Determination of the rate of interest for
the purpose of determining whether this Note is usurious under Applicable Law
shall be made by amortizing, prorating, allocating and spreading in equal parts
during the period of the actual time of this Note, all interest or other sums
deemed to be interest (hereinafter referred to in this Section 5.8 as
“Interest”) at any time contracted for, charged or received from the Company in
connection with this Note. Any Interest contracted for, charged or received in
excess of the maximum rate allowed by Applicable Law shall be deemed a result of
a mathematical error and a mistake. If this Note is paid in part prior to the
end of the full stated term of this Note and the Interest received for the
actual period of existence of this Note exceeds the maximum rate allowed by
Applicable Law, Holder shall credit the amount of the excess against any amount
owing under this Note or, if this Note has been paid in full, or in the event
that it has been accelerated prior to maturity, Holder shall refund to the
Company the amount of such excess, and shall not be subject to any of the
penalties provided by Applicable Law for contracting for, charging or receiving
Interest in excess of the maximum rate allowed by Applicable Law. Any such
excess which is unpaid shall be canceled.

 

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
on the date first above written.

 

BLAST ENERGY SERVICES, INC. By:  

/s/ John O’Keefe 7-19-05

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    John O’Keefe    

Executive V.P., Chief Financial Officer

and Co-Chief Executive Officer