UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2010





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from  to





000-53725


(Commission file number)











Blast Energy Services, Inc.


(Exact name of registrant as specified in its charter)











Texas
22-3755993(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)





14550 Torrey Chase Blvd, Suite 330


Houston, Texas 77014


(Address of principal executive offices)





(281) 453-2888


(Issuer’s telephone number)








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).   Yes   ̈    No   ̈





Indicate by check mark whether the registrant is a large accelerated filer, and 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   ̈                                                                                           Smaller
reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.


Yes    ̈No   x





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.





Yes   xNo    ̈





As of August 16, 2010, 61,909,238 shares of the registrant’s common stock, $.001 par value per share, were outstanding, including 1,150,000 approved but unissued shares arising from the class action settlement from 2005.





Blast Energy Services, Inc.





For the Three and Six Months Ended June 30, 2010





INDEX











PART I – FINANCIAL INFORMATION
PageItem 1.
Financial StatementsUnaudited Consolidated Balance Sheets as of June 30, 2010and December 31, 2009
1Unaudited Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2010 and 2009
2Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009
3Notes to Unaudited Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14Item 4T.
Controls and Procedures
15PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
16Item 1A.
Risk Factors
17Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17Item 3.
Defaults Upon Senior Securities
17Item 4.
(Removed and Reserved)
17Item 5.
Other Information
17Item 6.
Exhibits
18Signatures

18








PART I – FINANCIAL INFORMATION





Item 1. Financial Statements


BLAST ENERGY SERVICES, INC.


CONSOLIDATED BALANCE SHEETS


(unaudited)








June 30,
2010


December 31,
2009AssetsCurrent Assets:Cash

$
22,638


$
261,164Accounts receivable, net


61,421



58,281Other assets


84,411



37,485Current portion of long-term receivable


1,440,000



1,440,000Total Current Assets


1,608,470



1,796,930Equipment, net of accumulated depreciation of $262,063 and $190,327


1,030,223



1,101,959Long-term accounts receivable


1,440,000



1,440,000Total Assets

$
4,078,693


$
4,338,889Liabilities and Stockholders’ Equity (Deficit)Current Liabilities:Accounts payable

$
123,842


$
73,846Accrued expenses


357,014



295,772Accrued expenses – related party


210,821



165,797Deferred revenue


6,014



1,890Notes payable – other


55,268



3,794Notes payable – related party


1,120,000



-Total Current Liabilities


1,872,959



541,099Long Term Liabilities:Notes payable – related party


-



1,120,000Notes payable – long-term portion


13,571



15,588Total Liabilities


1,886,530



1,676,687Stockholders’ Equity (Deficit):Preferred stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and 6,000,000 shares issued and outstanding


6,000



6,000Common stock, $.001 par value, 180,000,000 shares authorized; 61,909,238 and 61,819,904 shares issued and outstanding


61,909



61,820Additional paid-in capital


75,157,080



75,136,853Accumulated deficit


(73,032,826
)


(72,542,471
)Total Stockholders’ Equity


2,192,163



2,662,202Total Liabilities and Stockholders’ Equity

$
4,078,693


$
4,338,889




















See accompanying notes to unaudited consolidated financial statements


1


BLAST ENERGY SERVICES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three and Six Months Ended June 30, 2010 and 2009


(unaudited)








For the Three Months Ended
June 30,


For the Six Months Ended
June 30,2010


2009


2010


2009Revenue:

$
69,623


$
84,319


$
154,025


$
202,332Operating expenses:Cost of sales


84,250



269,079



189,994



457,790Selling, general and administrative expense


130,430



339,155



338,183



698,365Depreciation and amortization


35,868



35,675



71,736



67,690Bad debt expense


-



10,778



-



10,778Loss on disposal of equipment


-



-



-



3,885Total operating expenses


250,548



654,687



599,913



1,238,508Operating loss


(180,925
)


(570,368
)


(445,888
)


(1,036,176
)Other income (expense):Other income


2,073



-



2,073



-Interest income


-



30



17



131Interest expense


(23,332
)


(23,344
)


(46,557
)


(46,378
)Net loss

$
(202,184
)

$
(593,682
)

$
(490,355
)

$
(1,082,423
)Preferred dividends


59,178



59,836



119,014



119,014Net loss attributable to common shareholders

$
(261,362
)

$
(653,518
)

$
(609,369
)

$
(1,201,437
)Basic and diluted loss per share

$
(0.00
)

$
(0.01
)

$
(0.01
)

$
(0.02
)Weighted average common shares outstanding – basic and diluted


61,909,238



61,782,404



61,881,105



61,245,387





















































See accompanying notes to unaudited consolidated financial statements.


2


BLAST ENERGY SERVICES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Six Months Ended June 30, 2010 and 2009


(unaudited)





Six Months Ended
June 30,2010


2009Cash Flows From Operating Activities:Net loss

$
(490,355
)

$
(1,082,423
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


71,736



67,690Bad debt expense


-



10,778Option and warrant expense


5,516



9,300Loss on disposition of equipment


-



3,885Changes in:Accounts receivable


(3,140
)


30,130Other current assets


22,809



16,949Accounts payable


49,996



160,607Accrued expenses


76,042



175,770Accrued expenses – related party


45,024



-Deferred revenue


4,124



(1,064
)Net Cash Used In Operating Activities


(218,248
)


(608,378
)Cash Flows From Investing Activities:Proceeds from sale of fixed assets


-



5,000Cash paid for purchase of fixed assets


-



(77,520
)Cash paid for construction of equipment


-



(10,511
)Net Cash Used In Investing Activities


-



(83,031
)Cash Flows From Financing Activities:Payments on short term debt


(20,278
)


(13,147
)Net Cash Used In Financing Activities


(20,278
)


(13,147
)Net change in cash


(238,526
)


(704,556
)Cash at beginning of period


261,164



731,631Cash at end of period

$
22,638


$
27,075Cash paid for:Interest

$
1,533


$
970Income taxes


-



-Non-Cash Transactions:Cashless exercise of warrants


-



1,350Prepaid insurance financed with note payable


69,735



111,059Property financed with note payable


-



21,455Common stock issued for accrued liabilities


14,800



-








See accompanying notes to unaudited consolidated financial statements.


3


BLAST ENERGY SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE 1 – BASIS OF PRESENTATION





The accompanying unaudited interim financial statements of Blast Energy Services, Inc. (“Blast” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the
Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Blast’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the full year.  Notes to the financial statements that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K, have been omitted.





Blast’s consolidated financial statements include the accounts of Blast and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.





Reclassifications. Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to the current presentation for comparative purposes.





Use of Estimates in Financial Statement Preparation.The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial
statement disclosures.  While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.





Fair Value of Financial Instruments.  The carrying amount of Blast’s cash, accounts receivables, accounts payables, and accrued expenses approximates their estimated fair values due to the short-term nature of those financial instruments. The fair value of related party
transactions is not determinable due to their related party nature.





Cash Equivalents.  Blast considers all highly liquid investments with original maturities of three months or less to be cash equivalents.





Revenue Recognition.  All revenue is recognized when persuasive evidence of an arrangement exists, the service or sale is complete, the price is fixed or determinable and collectability is reasonably assured.  Revenue is derived from sales of satellite hardware,
satellite bandwidth, satellite service and lateral drilling services.  Revenue from satellite hardware is recognized when the hardware is installed.  Revenue from satellite bandwidth is recognized evenly over the term of the contract.  Revenue from satellite service is recognized when the services are performed.  Blast provides no warranty but sells commercially obtained three to twelve month warranties for satellite hardware.  Blast has a 30-day return policy.  Revenue
for applied fluid jetting services is recognized when the services are performed and collectability is reasonably assured and when collection is uncertain, revenue is recognized when cash is collected.





Allowance for Doubtful Accounts.  Blast does not require collateral from its customers with respect to accounts receivable but performs periodic credit evaluations of such customer’s financial condition. Blast determines any required allowance by considering a number
of factors including length of time accounts receivable are past due and Blast’s previous loss history. Blast provides reserves for accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of June 30, 2010 and December 31, 2009, Blast has determined that no allowance for doubtful accounts is required.





Earnings or Loss Per Share.  Basic earnings per share equal net earnings or loss divided by weighted average shares outstanding during the period.  Diluted earnings per share include the impact on dilution from all contingently issuable shares, including options,
warrants and convertible securities.  The common stock equivalents from contingent shares are determined by the treasury stock method.  Blast incurred a net loss for the three and six month periods ended June 30, 2010 and 2009 and therefore, basic and diluted earnings per share for those periods are the same as all potential common equivalent shares would be anti-dilutive.





4


New Accounting Pronouncements. We have adopted recently issued accounting pronouncements and have determined that they have no material effect on our financial position, results of operations, or cash flow.  We do not expect any recently issued but not yet adopted accounting
pronouncements to have a material effect on our financial position, results of operations or cash flow.





NOTE 2 – GOING CONCERN





Blast incurred a net loss of approximately $490,000 for the six months ended June 30, 2010 and has an accumulated deficit of approximately $73 million.  The cash balance of approximately $23,000 as of June 30, 2010 is not sufficient to fund the Company’s operations for the next twelve months. These conditions raise
substantial doubt as to Blast’s ability to continue as a going concern. Management is trying to grow the existing businesses but may need to raise additional capital through sales of common stock or convertible instruments, as well as obtain financing from third parties. The consolidated financial statements do not include any adjustments that might be necessary if Blast is unable to continue as a going concern.





NOTE 3 - EQUIPMENT





Equipment consists of the following:





Description

Life

June 30,
2010

December 31,
2009Computer equipment

3 years

$ 22,313

$ 22,313Tractor/Trucks

4 years

98,974

98,974Service Trailer

5 years

4,784

4,784AFJ Rig

10 years

1,166,215

1,166,2151,292,286

1,292,286Less:  accumulated depreciation



(262,063)

(190,327)$ 1,030,223

$ 1,101,959








NOTE 4 – COMMITMENTS AND CONTINGENCIES





Management Furlough





On June 12, 2009, the Company’s board of directors implemented cost cutting measures to reduce overhead costs and conserve cash, including partial and full furloughs of management and staff with reduced or no pay, respectively.   As such, John O’Keefe, our then President and CEO, was furloughed without pay, effective
June 15, 2009.  John MacDonald, CFO and Corporate Secretary, and Andrew Wilson, V.P. of Business Development (a non-executive position) were reduced to half pay until such time as funds are available to return to full pay. The Blast board of directors has appointed Michael L. Peterson, a current member of the board, to serve as interim President and CEO in the absence of Mr. O’Keefe. If Mr. O’Keefe is not retained after the furlough period, the Company will recognize a $100,000 employment severance
liability under the terms of Mr. O’Keefe’s employment contract.





Letter of Intent to Acquire Oil and Gas Properties





On April 26, 2010, Blast Energy Services, Inc. (“Blast”) entered into a letter of intent with Sun Resources Texas, Inc., a privately-held company based in Longview, Texas (“Sun”), to acquire Sun’s oil and gas interests in the Sugar Valley Field located in Matagorda County, Texas (the “Field”).





Under the terms proposed in the letter of intent, Blast will pay $1.2 million in cash and common stock (as described below) for Sun’s approximately 66% working interest in three wells on the Field currently producing a total of approximately 40 gross barrels of oil per day from the Gravier Sand formation, with an estimate of more
than 30,000 barrels of recoverable reserves net to the interest to be acquired by Blast, and approximately a 75% working interest in non-producing recoverable reserves estimated on the Field at over 78,000 barrels net to the interest to be acquired by Blast.





5




Following due diligence and the negotiation of a definitive agreement, the transaction is expected to close in September 2010, funding permitting, and subject to the approval of the Board of Directors of both companies and Sun’s shareholders.  There is no assurance that the transaction will be completed on these terms, if at
all.





Blast intends to pay Sun in connection with the transaction with funds received from the $1.44 million (net of associated legal fees) payable to Blast in September 2010 from Quicksilver in connection with the Compromise Settlement and Release Agreement entered into with Quicksilver in September 2008, as described in Note 9.





NOTE 5 – NOTES PAYABLE – RELATED PARTY





In February 2008, the Bankruptcy Court entered an order confirming our Second Amended Plan of Reorganization (the “Plan”).The maturity date of a pre-Plan, secured $1.12 million note with Berg McAfee Companies, a major shareholder of Blast, was extended for an additional
three years from the Plan effective date to February 27, 2011.  The note bears interest at 8% and contains a lender option for the principal and interest to be convertible into Company stock at the rate of one share for each $0.20 of the note outstanding.  Blast had accrued interest payable under this note (reflected as Accrued expenses – related party in the accompanying balance sheet) of $210,821 and $165,797 at June 30, 2010 and December 31, 2009, respectively.





NOTE 6 – PREFERRED STOCK – RELATED PARTIES





Series A Convertible Preferred Stock





In January 2008, Blast sold the rights to an aggregate of two million units, each consisting of four shares of Series A Convertible Preferred Stock, and one three year warrant to purchase one share of common stock with an exercise price of $0.10 per share (the “Units”), for an aggregate of $4 million or $2.00 per Unit, to Clyde
Berg and to McAfee Capital LLC, two parties related to Blast’s largest shareholder, Berg McAfee Companies.  The shares of common stock issuable in connection with the exercise of the warrants and in connection with the conversion of the Preferred Stock were granted registration rights in connection with the sale of the Units.  The proceeds from the sale of the Units were used to satisfy creditor claims of approximately $2.4 million under the terms of our Second Amended Plan of Reorganization,
allowing Blast to emerge from Chapter 11 bankruptcy, and provided working capital of $1.6 million.





The Series A Preferred Stock (the “Preferred Stock”) accrue dividends at the rate of 8% per annum, in arrears for each month that the Preferred Stock is outstanding.  Blast has the right to pay any or all of the accrued dividends at any time by providing the holders of the Preferred Stock at least five days written
notice of their intent to pay such dividends.  In the event Blast receives a “Cash Settlement,” defined as an aggregate total cash settlement received by Blast, net of legal fees and expenses, in connection with Blast’s litigation proceedings with Hallwood and Quicksilver (as defined below) in excess of $4 million, Blast is required to pay outstanding dividends within thirty (30) days in cash or stock at the holder’s option.  If the dividends are not paid within thirty
(30) days of the date the Cash Settlement is received, a “Dividend Default” occurs.





The Preferred Stock, and any accrued and unpaid dividends, have optional conversion rights into shares of Blast’s common stock at a conversion price of $0.50 per share. The Preferred Stock automatically converts if Blast’s common stock trades for a period of more than twenty (20) consecutive trading days at a price greater
than $3.00 per share and if the average trading volume of Blast’s common stock exceeds 50,000 shares per day.  Six million preferred shares remain outstanding at June 30, 2010.





As of June 30, 2010, the aggregate and per share arrearages on the outstanding Preferred Stock were $612,165 and $0.10, respectively.





6


NOTE 7 – COMMON STOCK





In February 2010, 89,334 shares of Blast’s common stock were issued to a consultant in consideration for their services and were valued at $14,800, based upon the price of Blast’s common stock at the time the services were rendered.





In March 2009, the Company issued 1,350,000 shares to Laurus Master Fund Ltd. (“Laurus”) pursuant to Laurus’s cashless exercise of 1,508,824 common stock purchase warrants.





NOTE 8 – OPTIONS AND WARRANTS


Share-based Compensation:





The 2009 Stock Incentive Plan (the “Incentive Plan”) authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the Incentive Plan, to the Company’s employees, officers,
directors and consultants.  A total of 5,000,000 options are authorized to be issued under the Incentive Plan.  As of June 30, 2010, no shares have been granted under this plan.





During the six month period ended June 30, 2010, the Company recognized share-based compensation expense of $5,516. The remaining amount of unamortized options expense at June 30, 2010 is $8,430.  The intrinsic value of outstanding as well as exercisable options at June 30, 2010was
-0-.





Activity in options during the six month period ended June 30, 2010 and related balances outstanding as of that date are reflected below:





Number of Shares

Weighted Average Exercise Price

Weighted Average Remaining Contract Term (# years)Outstanding at January 1, 2010
2,970,292

$ 0.60Granted
-

-Exercised
-

-Forfeited and cancelled
355,500

0.61Outstanding at June 30, 2010
2,614,792

$ 0.61

4.7Exercisable at June 30, 2010
2,556,459

$ 0.62

4.7





Activity in warrants during the six months ended June 30, 2010 and related balances outstanding as of that date are reflected below. There were 12,245,089 warrants outstanding at June 30, 2010. The intrinsic value of the exercisable warrants at June 30, 2010 was $77,754.





Number of Shares

Weighted Average Exercise Price

Weighted Average Remaining Contract Term (# years)Outstanding at January 1, 2010
12,245,089

$ 0.84Granted
-

-Exercised
-

-Forfeited and cancelled
-

-Outstanding at June 30, 2010
12,245,089

$ 0.84

2.6Exercisable at June 30, 2010
12,245,089

$ 0.84

2.6





7


NOTE 9 – LITIGATION





Quicksilver Resources Lawsuit


In September 2008, Blast and Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), entered into a Compromise Settlement and Release Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to resolve the pending litigation and the parties agreed to release all claims against
one another and certain related parties. Quicksilver agreed to pay Eagle a total of $10 million of which $6 million has been received to date. The remaining amounts due from Quicksilver are (i) $2 million ($1.44 million net of associated legal fees) payable on or before September 2010, the second anniversary date of the execution of the settlement; and (ii) $2 million ($1.44 million net of associated legal fees) payable on or before September 2010, the third anniversary date of the execution of the settlement.   In
the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within ten days after written notice, then all of the remaining payments immediately become due and payable. The remaining amounts due from Quicksilver are shown as a current and long-term receivable in the balance sheet, net of contingent legal fees.





Alberta Energy Partners


During the course of Blast’s Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”) between Alberta and Blast. That motion
was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however, Alberta filed a motion for reconsideration
and rehearing of the District Court’s order.





On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”).  On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.





Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta instead entered into a Settlement Agreement with an effective date of February 1, 2010, to end the legal dispute. Under the terms of the Settlement Agreement, the 50% of the Abrasive Fluid Jetting Technology owned by
Blast that was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever.
All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement remained the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.




Upon the execution of the Settlement Agreement, Alberta filed with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta. This settlement has no bearing on the Applied
Fluid Jetting technology the Company is continuing to develop.




General


Other than the aforementioned matters, Blast is not aware of any other pending or threatened legal proceedings.  The foregoing is also true with respect to each officer, director and control shareholder, as well as any entity owned by any officer, director and control shareholder, over the last five years.





As part of its regular operations, Blast may become party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its’ commercial operations, products, employees and other matters.  Although Blast can give no assurance about the outcome of these or any
other pending legal and administrative proceedings and the effect such outcomes may have on Blast, except as described above, Blast believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on Blast’s financial condition or results of operations.





8


NOTE 10 – BUSINESS SEGMENTS





Blast has two reportable segments: (1) Satellite Communications Services and (2) Down-hole Solutions.  A reportable segment is a business unit that has a distinct type of business based upon the type and nature of services and products offered.





Blast evaluates performance and allocates resources based on profit or loss from operations before other income or expense and income taxes.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  The table below reports certain financial
information by reportable segment for the three and six months ended June 30, 2010 and 2009:





For the Three Months Ended
June 30,
For the Six Months Ended
June 30,2010
2009
2010
2009Revenues:Satellite Communications
$ 69,623
$ 84,319
$ 154,025
$ 182,332Down-hole Solutions
-
-
-
20,000Total Revenue
$ 69,623
$ 84,319
$ 154,025
$ 202,332Costs of Goods Sold:Satellite Communications
$ 62,487
$ 74,370
$140,106
$ 163,365Down-hole Solutions
21,763
194,709
49,888
294,425Corporate
166,298
385,608
409,919
780,718Total Costs of Goods Sold
$ 250,548
$ 654,687
$ 599,913
$ 1,238,508Operating profit (loss):Satellite Communications
$ 7,136
$ 9,949
$ 13,919
$ 18,967Down-hole Solutions
(21,763)
(194,709)
(49,888)
(274,425)Corporate
(166,298)
(385,608)
(409,919)
(780,718)Operating Loss
$ (180,925)
$ (570,368)
$ (445,888)
$ (1,036,176)





NOTE 11 – SUBSEQUENT EVENTS





In July 2010, Blast sold a surplus service vehicle for $45,000 in cash and also received approximately $23,000 in cash resulting from a refund related to the cancellation of workers compensation insurance policies from 2009.  This receivable amount is recorded as an other asset in the financial statements.








9


Item 2. Management’s Discussion and Analysis of Financial Condition and Results Operations





The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.





Forward-Looking Statements




Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project,"
"goal" and similar expressions identify such a statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do
not promise to or take any responsibility to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.





The following discussion and analysis of our financial condition is as of June 30, 2010.  Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our
Form 10-K for the year ended December 31, 2009.





Business Overview




Unless otherwise indicated, we use “Blast,” “the Company,” “we,” “our” and “us” in this quarterly report to refer to the businesses of Blast Energy Services, Inc. and its wholly-owned subsidiaries, Eagle Domestic Drilling Operations LLC and Blast AFJ, Inc.





Blast is an emerging technology company in the energy sector and strives to assist oil and gas companies in producing more economically. We seek to provide quality services to the energy industry through our two divisions (i) Satellite Communications services and (ii) Down-hole Solutions, such as our Applied Fluid Jetting (“AFJ”)
technology. Our mission is to substantially improve the economics of existing and evolving oil and gas operations through the application of Blast licensed and owned technologies. Our strategy is to grow our businesses by maximizing revenues from the communications and down-hole segments and controlling costs while analyzing potential acquisitions and new technology opportunities in the energy service sector.  Additionally, Blast is considering the potential impact from applying our down-hole solutions
business toward oil and gas assets that we own, thus exploiting the assets for our own benefit rather than for a third-party customer. To this end, we have begun exploring the opportunity to purchase oil and gas producing properties.




Other Opportunities




During the next twelve months, the Company plans to acquire oil and gas assets and may explore the sale of the satellite business. Blast may choose to raise funds through the sale of debt and/or equity in order to support its operations. The sale of additional equity securities, if undertaken by Blast, and if accomplished, may result in
dilution to our shareholders. Blast cannot assure you, however, that future financing will be available in amounts or on terms acceptable to Blast, or at all.




Management Changes




On June 12, 2009, the Company’s board of directors implemented cost cutting measures to reduce overhead costs and conserve cash, including partial and full furloughs of management and staff with reduced or no pay, respectively.   As such, John O’Keefe, our then President and CEO, was furloughed without pay, effective
June 15, 2009.  John MacDonald, CFO and Corporate Secretary, and Andrew Wilson, V.P. of Business Development (a non-executive position) were reduced to half pay until such time as funds are available to return to full pay. The Blast board of directors has appointed Michael L. Peterson, a current member of the board, to serve as interim President and CEO in the absence of Mr. O’Keefe.


10




Critical Accounting Policies




General




Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant
judgments and estimates used in preparation of our financial statements.





Stock-Based Compensation




Pursuant to the provisions of FASB ASC 718, Compensation – Stock Compensation, which establishes accounting for equity instruments exchanged for employee service, we utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option awards at
the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical
experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.




We estimate volatility by considering historical stock volatility. We have opted to use the simplified method for estimating expected term, which is equal to the midpoint between the vesting period and the contractual term.





Results of Operations and Financial Condition




All dollar amounts discussed in “Item 2” are rounded to the nearest $1,000, or for larger numbers, to the nearest tenth of a million dollars.  Please consult the financial statements in “Item 1” for exact dollar amounts.





Comparison of the Three Months Ended June 30, 2010 with the Three Months Ended June 30, 2009





Satellite Communications.Satellite Communications Services’ revenues decreased by $14,000 or 17% to $70,000 for the three months ended June 30, 2010 compared to $84,000 for the three months ended
June 30, 2009. The operating margin from Satellite Communications Services decreased by $3,000 to an operating profit of $7,000 for the three months ended June 30, 2010, compared to $10,000 for the three months ended June 30, 2009. Lower market prices for natural gas during 2010 have resulted in our customers reducing the number of active drilling rigs they employed during the three months ended June 30, 2010, as compared to the similar period in 2009, thereby reducing the demand for our satellite communications
services. As a result, revenues and margin are lower for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.




Down-hole Solutions.Down-hole Solutions’ revenues were $-0- for the three months ended June 30, 2010 and 2009. The loss from Down-hole Solutions decreased by $173,000 to $22,000 for the three months
endedJune 30, 2010 compared to a loss of $195,000 for the three months ended June 30, 2009. This decrease was due to the temporary suspension of field testing of this technology after unsuccessfully attempting to drill laterals on several wells.




Depreciation and Amortization.  Depreciation and amortization expense was $36,000 for the three months ended June 30, 2010 and 2009.




Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses decreased by $209,000 to $130,000 for the three months ended June 30, 2010 compared to $339,000 for the three months
ended June 30, 2009.


11





For the Three Months Ended June 30,
Increase
(Decrease)(in thousands)
2010
2009Payroll and related costs
$ 47
$ 111
$ (64)Option and warrant expense
3
1
2Legal fees & settlements
5
62
(57)External services
56
81
(25)Insurance
3
50
(47)Travel & entertainment
5
15
(10)Office rent, communications,  misc.
11
19
(8)$ 130
$ 339
$ (209)





Significantly lower administrative costs were a result of reduced payroll costs associated with the furlough and reduction of salary of executive management in 2009, along with a reduction legal fees and the use of outside consultants, a reduction in insurance expenses due to cancellation of certain policies, and an approximate $23,000
refund of 2009 workers compensation insurance expense accrued at June 30, 2010 and received by the Company in July 2010.




Interest Expense.  Interest expense was $23,000 for the three months ended June 30, 2010 and 2009. During the three months ended June 30, 2010 and 2009, interest expense included accrued interest on the $1.1 million related party note related to the fabrication of the AFJ
rig (described in greater detail below).




Net Loss.  Net loss decreased by $392,000 or 66% to a net loss of $202,000 for the three months ended June 30, 2010 compared to a net loss of $594,000 for the three months ended June 30, 2009.  This decrease is primarily due to lower administrative costs and the
reduction in Down-hole expenses as described above, offset by the decrease in revenues described above.





Comparison of the Six Months Ended June 30, 2010 with the Six Months Ended June 30, 2009





Satellite Communications.Satellite Communications Services’ revenues decreased by $28,000 or 15% to $154,000 for the six months ended June 30, 2010 compared to $182,000 for the six months ended June
30, 2009. The operating margin from Satellite Communications Services decreased by $5,000 to an operating profit of $14,000 for the six months ended June 30, 2010 compared to $19,000 for the six months ended June 30, 2009.   Lower market prices for natural gas during 2010 have resulted in our customers reducing the number of active drilling rigs they employed for the six months ended June 30, 2010, as compared to the similar period in 2009, thereby reducing the demand for our satellite communications
services. As a result, revenues and margin are lower for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009.




Down-hole Solutions.Down-hole Solutions’ revenues were $-0- for the six months ended June 30, 2010 compared to $20,000 for the six months ended June 30, 2009. The loss from Down-hole Solutions decreased
by $224,000 to $50,000 for the six months endedJune 30, 2010 compared to a loss of $274,000 for the six months ended June 30, 2009. This decrease was due to the temporary suspension of field testing of this technology after unsuccessfully attempting to drill laterals on several wells.




Depreciation and Amortization.Depreciation and amortization expense was $72,000 for the six months ended June 30, 2010 compared to $68,000 for the six months ended June 30, 2009, which increase was mainly due to
an increase in our depreciable asset base.





Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses decreased by $360,000 to $338,000 for the six months ended June 30, 2010 compared to $698,000 for the six months ended
June 30, 2009.


12


.


For the Six Months Ended June 30,
Increase
(Decrease)(in thousands)
2010
2009Payroll and related costs
$ 94
$ 226
$ (132)Option and warrant expense
6
9
(3)Legal fees & settlements
41
72
(31)External services
136
240
(104)Insurance
35
79
(44)Travel & entertainment
9
33
(24)Office rent, communications,  misc.
17
39
(22)$ 338
$ 698
$ (360)







Significantly lower administrative costs were a result of reduced payroll costs associated with the furlough and reduction of salary of executive management in 2009, along with a reduction in legal fees, a reduction in the use of outside consultants, a reduction in insurance expenses due to cancellation of certain policies, and an approximate
$23,000 refund of 2009 workers compensation insurance expense accrued at June 30, 2010 and received by the Company in July 2010.




Interest Expense. Interest expense was approximately $47,000 for the six months ended June 30, 2010 and $46,000 for the six months ended June 30, 2009. During the six months ended June 30, 2010 and 2009, interest expense included accrued interest on the $1.1 million related party
note related to the fabrication of the AFJ rig.




Net Loss.  Net loss decreased by $592,000 to a net loss of $490,000 for the six months ended June 30, 2010 compared to a net loss of $1,082,000 for the six months ended June 30, 2009.  This decrease is primarily due to lower administrative costs and the reduction
in Down-hole expenses as described above, offset by the decrease in revenues described above.





Liquidity and Capital Resources





We have no current commitment from our officers and Directors or any of our shareholders to supplement our operations or provide us with financing in the future. In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when
we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all. As of June 30, 2010, we had cash of approximately $23,000.  However, in July 2010, Blast sold a surplus service vehicle for $45,000 in cash and received approximately $23,000 in cash resulting from the refund of premiums related to
cancelled workers compensation policies from 2009.  Cash on hand at August 16, 2010 was $51,993. The Company anticipates receiving $1.44 million in September 2010 pursuant to its Settlement Agreement with Quicksilver Resources. A portion of the proceeds are expected to be used to close its acquisition of oil and gas properties from Sun Resources Texas, Inc. pursuant to the letter of intent dated April 26, 2010.





Under the terms proposed in the letter of intent, Blast will pay $1.2 million in cash and common stock (as described below) for Sun’s approximately 66% working interest in three wells on the Field currently producing a total of approximately 40 gross barrels of oil per day from the Gravier Sand formation, with an estimate of more
than 30,000 barrels of recoverable reserves net to the interest to be acquired by Blast, and approximately a 75% working interest in non-producing recoverable reserves estimated on the Field at over 78,000 barrels net to the interest to be acquired by Blast.





Blast had total current assets of $1.6 million as of June 30, 2010, including the cash balance of $23,000, compared to total current assets of $1.8 million as of December 31, 2009, including a cash balance of $261,000.





Blast had total assets as of June 30, 2010 of $4.1 million compared to total assets of $4.3 million as of December 31, 2009.





Blast had total liabilities of $1.89 million as of June 30, 2010, including current liabilities of $1.87 million compared to total liabilities of $1.7 million as of December 31, 2009, including current liabilities of $541,000.





13


Blast had negative net working capital of $265,000, total stockholders’ equity of $2.2 million and a total accumulated deficit of $73.0 million as of June 30, 2010 compared to net working capital of $1.3 million, total stockholders’ equity of $2.7 million and a total accumulated deficit of $72.5 million as of December 31, 2009.
The reduction in equity is attributable to the net loss of $490,000 for the six months ended June 30, 2010.





A secured $1.12 million note with Berg McAfee Companies, LLC remains outstanding as of June 30, 2010.  The note, which was extended for an additional three years from the effective date of the Plan (February 27, 2008) to February 27, 2011, bears interest at eight-percent (8%) per annum, and contains an option to convert into
shares of the Company’s common stock at the rate of one share of common stock for each $0.20 of the note outstanding.




In December 2009, Blast, through its wholly-owned Delaware subsidiary, Blast AFJ, Inc., began a private placement offering of the Series A Preferred Stock of its subsidiary corporation to “accredited” investors and “non-U.S. persons” as such terms are defined under the Securities Act of 1933, as amended.  The
proposed terms of the offering have since changed however, and Blast AFJ, Inc. currently plans to offer, pursuant to the offering, up to 50 Convertible Subordinated Promissory Notes, each, with the principal value of $500,000 (for $25,000,000 in total possible funding)(the “Convertible Notes”).  The Convertible Notes bear interest at the rate of 3% per annum, payable quarterly, with the principal amount of the Convertible Notes due five years from their issuance date.  The Notes
are convertible into shares of Blast’s common stock at the option of the holders thereof, at any time after the fourth anniversary of their issuance, at a conversion price of $2.50 per share.  The Convertible Notes are unsecured and no Series A Preferred Stock or Convertible Notes have been sold to date.  The offering is in connection with the United States Citizenship and Immigration Service (“USCIS”) EB-5 Program, pursuant to which Blast’s subsidiary was formed as
a development stage fossil fuel extraction company, to manage the manufacturing and operation of well drilling units or rigs within the geographic area of a regional center designated by the USCIS pursuant to the EB-5 Immigrant Investor Program.  To date no funds have been raised.  Blast intends to include additional disclosure regarding the offering and the business plan of its wholly-owned subsidiary at such time as any securities have been sold in the offering.





Cash Flows From Operating Activities.Blast had net cash used in operating activities of approximately $218,000 for the six months ended June 30, 2010 which was mainly due to $490,000 of loss from continuing operations, partially offset by an increase in accrued expenses of $76,000,
an increase in accounts payable of $50,000, an increase in accrued expenses-related party of $45,000 and $72,000 of depreciation and amortization expense.





Cash Flows from Financing Activities.Blast had net cash used in financing activities of $20,000 for the six months ended June 30, 2010, primarily related to payments on short-term debt.




Off-Balance Sheet Arrangements





None.





Recent Accounting Pronouncements





For the period ended June 30, 2010, there were no other changes to our critical accounting policies as identified in our annual report on Form 10-K for the year ended December 31, 2009.





Item 3. Quantitative and Qualitative Disclosures about Market Risk





Not Applicable.





14


Item 4T. Controls and Procedures





Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized,
and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our principal executive and principal financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2010,
pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our principal executive and principal financial officer concluded that, as of June 30, 2010, our disclosure controls and procedures were effective.





Changes in Internal Control Over Financial Reporting





There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  We will continue to evaluate the effectiveness of internal controls
and procedures on an on-going basis.









15


PART II




OTHER INFORMATION





Item 1. Legal Proceedings





Quicksilver Resources Lawsuit


In September 2008, Blast and Eagle entered into a Compromise Settlement and Release Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to resolve the pending litigation and the parties agreed to release all claims against one another and certain related parties. Quicksilver agreed to pay Eagle a total of
$10 million of which $6 million has been received to date. The remaining amounts due from Quicksilver are (i) $2 million payable on or before the second anniversary date of the execution of the settlement; and (ii) $2 million payable on or before the third anniversary date of the execution of the settlement.   In the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within ten days after written notice, then all of the remaining payments immediately
become due and payable. The remaining amounts due from Quicksilver are shown as a current and long-term receivable in the balance sheet, net of contingent legal fees.





Alberta Energy Partners


During the course of Blast’s Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”) between Alberta and Blast. That motion
was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however, Alberta filed a motion for reconsideration
and rehearing of the District Court’s order.





On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”).  On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.





Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta instead entered into a Settlement Agreement to end the legal dispute with an effective date of February 1, 2010. Under the terms of the Settlement Agreement, the 50% of the Abrasive Fluid Jetting Technology owned by
Blast that was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever.
All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement shall also remain the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.




Upon the execution of the Settlement Agreement, Alberta agreed to file with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta. This settlement has no bearing on
the Applied Fluid Jetting technology the Company is continuing to develop.




General


Other than the aforementioned matters, Blast is not aware of any other pending or threatened legal proceedings.  The foregoing is also true with respect to each officer, director and control shareholder as well as any entity owned by any officer, director and control shareholder, over the last five years.





As part of its regular operations, Blast may become party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its’ commercial operations, products, employees and other matters.  Although Blast can give no assurance about the outcome of these or any
other pending legal and administrative proceedings and the effect such outcomes may have on Blast, except as described above, Blast believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on Blast’s financial condition or results of operations.


16





Item 1A. Risk Factors





There have been no material changes from the risk factors previously disclosed in the registrant’s Form 10-K for the fiscal year ended December 31, 2009, filed with the Commission on March 31, 2010.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item 3.  Defaults Upon Senior Securities





None.





Item 4.  (Removed and Reserved)





Item 5.  Other Information.





None.





17


Item 6.  Exhibits





Exhibit No.

DescriptionExhibit 31.1*

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2*

Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1*

Certification of Principal Executive Officer pursuant to Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2*

Certification of Principal Accounting Officer pursuant to Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





*Filed herewith


.





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Blast Energy Services, Inc.Date:  August 16, 2010
By:
/s/ Michael L. PetersonMichael L. PetersonInterim President and CEO(Principal Executive Officer)Date:  August 16, 2010
By:
/s/ John MacDonaldJohn MacDonaldChief Financial Officer(Principal Accounting Officer)