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 March 31, 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 May 17, 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 Months Ended March 31, 2010





INDEX










PART I – FINANCIAL INFORMATION
PageItem 1.
Financial StatementsUnaudited Consolidated Balance Sheets as of March 31, 2010 and December, 31 2009
1Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 2010 and 2009
2Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2010 and 2009
3Notes to Unaudited Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14Item 4T.
Controls and Procedures
14PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
15Item 1A.
Risk Factors
16Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16Item 3.
Defaults Upon Senior Securities
16Item 4.
(Removed and Reserved)
16Item 5.
Other Information
16Item 6.
Exhibits
17Signatures

17








PART I – FINANCIAL INFORMATION





Item 1. Financial Statements


BLAST ENERGY SERVICES, INC.


CONSOLIDATED BALANCE SHEETS


(unaudited)





March 31,
2010


December 31,
2009AssetsCurrent Assets:Cash

$
108,200


$
261,164Accounts receivable, net


65,035



58,281Other assets


84,012



37,485Current portion of long-term receivable


1,440,000



1,440,000Total Current Assets


1,697,247



1,796,930Equipment, net of accumulated depreciation of $226,195 and $190,327


1,066,091



1,101,959Long-term accounts receivable


1,440,000



1,440,000Total Assets

$
4,203,338


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

$
114,229


$
73,846Accrued expenses


319,727



295,772Accrued expense – related party


188,309



165,797Deferred revenue


1,900



1,890Notes payable – other


52,994



3,794Notes payable – related party


1,120,000



-Total Current Liabilities


1,797,159



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


-



1,120,000Notes payable – long term portion


14,590



15,588Total Liabilities


1,811,749



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


75,154,322



75,136,853Accumulated deficit


(72,830,642
)


(72,542,471
)Total Stockholders’ Equity


2,391,589



2,662,202Total Liabilities and Stockholders’ Equity

$
4,203,338


$
4,338,889
































See accompanying notes to unaudited consolidated financial statements


1


BLAST ENERGY SERVICES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended March 31, 2010 and 2009


(unaudited)








2010


2009Revenue:

$
84,402


$
118,013Operating Expenses:Cost of sales


105,744



188,711Selling, general and administrative


207,753



359,210Depreciation and amortization


35,868



32,015Loss on disposal of equipment


-



3,885Total operating expenses


349,365



583,821Operating Loss


(264,963
)


(465,808
)Other income (expense):Interest income


17



101Interest expense


(23,225
)


(23,034
)Net loss

$
(288,171
)

$
(488,741
)Preferred dividends


59,178



59,178Net loss attributable to common shareholders

$
(347,349
)

$
(547,919
)Basic and diluted loss per share

$
(0.01
)

$
(0.01
)Weighted average common shares outstanding – basic and diluted


61,827,959



60,528,306


















































See accompanying notes to unaudited consolidated financial statements.


2


BLAST ENERGY SERVICES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Three Months Ended March 31, 2010 and 2009


(unaudited)





2010


2009Cash Flows From Operating Activities:Net loss

$
(288,171
)

$
(488,741
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


35,868



32,015Option and warrant expense


2,758



8,254Loss on disposition of equipment


-



3,885Changes in:Accounts receivable


(6,754
)


27,977Other current assets


14,506



(16,940
)Accounts payable


40,383



71,230Accrued expenses


38,754



18,311Accrued expenses – related party


22,512



-Deferred revenue


10



(878
)Net Cash Used In Operating Activities


(140,134
)


(344,887
)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


(12,830
)


-Net Cash Used In Financing Activities


(12,830
)


-Net change in cash


(152,964
)


(427,918
)Cash at beginning of period


261,164



731,631Cash at end of period

$
108,200


$
303,713Cash paid for:Interest

$
342


$
521Income taxes


-



-Non-Cash Transactions:Cashless exercise of warrants


-



1,350Prepaid insurance financed with note payable


61,031



67,088Common 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 maturities 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 March 31, 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 equals net earnings or loss divided by weighted average shares outstanding during the year.  Diluted earnings per share includes 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 month periods ended March 31, 2010 and 2009, and therefore, basic and diluted earnings per share for those periods are the same as all potential common equivalent shares and would be anti-dilutive.





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.


4


NOTE 2 – GOING CONCERN





Blast incurred a net loss of approximately $288,000 for the three months ended March 31, 2010 and has an accumulated deficit of approximately $72.8 million.  The cash balance of approximately $108,000 as of March 31, 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

March 31,
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



(226,195)

(190,327)$ 1,066,091

$ 1,101,959





During the year ended December 31, 2009, the carrying value of equipment of $50,479 representing a new potential product in our Satellite Division, the Intelligent Petro-Service Module, was fully impaired.  Blast determined that future development of this product is uncertain due to a legal dispute between the software development
subcontractor and another party.  As a consequence of this uncertainty, recovery of this investment is not likely.





NOTE 4 – COMMITMENTS AND CONTINGENCIES





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, and therefore will not serve as President or CEO until such time as he may return to the Company.  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.





NOTE 5 – NOTES PAYABLE – RELATED PARTY





In February 2008, the Bankruptcy Court entered an order confirming our Second Amended Plan of Reorganization (the “Plan”).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 of February 27, 2008.  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 $188,309 and $165,797 at March 31, 2010 and December 31, 2009 respectively.





5


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 March 31, 2010.





As of March 31, 2010, the aggregate and per share arrearages on the outstanding Preferred Stock were $552,329 and $0.09, respectively.





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.





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 March 31, 2010, no shares have been granted under this plan.





The Company accounts for share-based compensation, including options and nonvested shares, according to the provisions of FASB ASC 718, "Share Based Payment". During the three month period ended March 31, 2010, the Company recognized share-based compensation expense of $2,758. The remaining amount of unamortized options expense at March
31, 2010 is $11,188.  The intrinsic value of outstanding as well as exercisable options at March 31, 2010was -0-.





6


Activity in options during the three month period ended March 31, 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 March 31, 2010
2,614,792

$ 0.61

5.2Exercisable at March 31, 2010
2,552,292

$ 0.62

5.2





Activity in warrants during the three months ended March 31, 2010 and related balances outstanding as of that date are reflected below. There were 12,245,089 warrants outstanding at March 31, 2010. The intrinsic value of the exercisable warrants at March 31, 2010 was $124,407.





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 March 31, 2010
12,245,089

$ 0.84

2.9Exercisable at March 31, 2010
12,245,089

$ 0.84

2.9





NOTE 9 – LITIGATION





Hallwood Energy/Hallwood Petroleum Lawsuit


In April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5 million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million in cash,
issue $2.75 million in equity and irrevocably forgave $1.65 million in deposits paid to Eagle.  The parties were fully and mutually released from any and all claims between them.  The terms of the settlement were approved by the board of each company and were confirmed by the Court. Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September 2008.  Payments received from Hallwood in October 2008 were distributed to the appropriate class of creditors as designated
in the Plan.





On February 11, 2009, Blast and Eagle entered into an amended settlement letter with Hallwood that modified and finalized the terms of the parties April 3, 2008 settlement letter.  The amended settlement provided that the equity component would be satisfied by the issuance to Blast of Class C Partnership Interests in Hallwood
Energy LP, equal to 7% of such Interests, having a face value of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement was approved by the board of each company and was confirmed by the Bankruptcy Court.





On March 2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for the Northern District of Texas under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that it could dispose of burdensome and uneconomical assets and reorganize its financial obligations and capital structure.





7


Subsequently, the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in this matter which transferred the control of Hallwood to the third party. We believe this action will result in the elimination of any existing equity position held in Hallwood, including Blast’s, so we have recognized a zero carrying value
in our financial statements for the Class C Interests.





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.





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 months ended March 31, 2010 and 2009:





For the Three Months Ended
March 31,2010

2009Revenues:Satellite Communications
$ 84,402

$ 98,013Down-hole Solutions
-

20,000Total Revenue
$ 84,402

$ 118,013Costs of Goods Sold:Satellite Communications
$ 77,619

$ 88,995Down-hole Solutions
28,125

99,716Corporate
243,621

395,110Total Costs of Goods Sold
$ 349,365

$ 583,821Operating profit (loss):Satellite Communications
$ 6,783

$ 9,018Down-hole Solutions
(28,125)

(79,716)Corporate
(243,621)

(395,110)Operating Loss
$ (264,963)

$ (465,808)








NOTE 11 – SUBSEQUENT EVENTS





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 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 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.





This transaction also contemplates the drilling of a development well to access the non-producing reserves commencing in November 2010.  The gross drilling and completion cost of this well is expected to be approximately $900,000.  In addition, Blast contemplates drilling a water disposal well on the Field with a gross
cost of $200,000 to reduce the operating costs of the producing wells.





Terms of the transaction as provided in the letter of intent include the issuance of a note payable to Sun in the amount of $400,000, which will be payable in cash on or before October 8, 2010 and the issuance of restricted common shares of Blast with an equivalent value of $800,000 at the closing of the transaction.





Additionally, since Sun is the operator of the wells, Blast expects to retain key employees of Sun through service agreements following the closing.





9


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.  Blast intends to pay Sun in connection with the transaction with funds received
from the $2 million 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 above in Note 9.

















10


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 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 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 March 31, 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 attempt to expand its Satellite Communications Services and Down-hole Solutions businesses and possibly acquire oil and gas assets. Blast may choose to raise funds through the sale of debt and/or equity in order to expand its current lateral jetting rig fleet and/or 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, and therefore will not serve as President or CEO until such time as he may return to the Company.  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.


11




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




On January 1, 2006, we adopted the provisions of FASB ASC 718 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 based compensation 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 estimated volatility by considering historical stock volatility. We have opted to use the simplified method for estimating expected term 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 March 31, 2010 with the Three Months Ended March 31, 2009





Satellite Communications.Satellite Communications Services’ revenues decreased by $14,000 or 14% to $84,000 for the three months ended March 31, 2010 compared to $98,000 for the three months ended
March 31, 2009. The operating margin from Satellite Communications Services decreased by $2,000 to an operating profit of $7,000 for the three months ended March 31, 2010 compared to $9,000 for the three months ended March 31, 2009. Lower market prices for natural gas has resulted in our customers reducing the number of active drilling rigs they employ as compared to the similar period in 2009, and thereby reducing the demand for our satellite communications services. As a result, revenues and margin are lower
for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.




Down-hole Solutions.Down-hole Solutions’ revenues were $-0- for the three months ended March 31, 2010 compared to $20,000 for the three months ended March 31, 2009. The loss from Down-Hole Solutions
decreased by $52,000 to $28,000 for the three months endedMarch 31, 2010 compared to a loss of $80,000 for the three months ended March 31, 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 increased by $4,000 or 12% to $36,000 for the three months ended March 31, 2010 compared to $32,000 for the three months ended March 31, 2009.  This
increase is primarily related to the depreciation of trucks put in service in the first and second quarters of 2009.




Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses decreased by $151,000 to $208,000 for the three months ended March 31, 2010 compared to $359,000 for the three months
ended March 31, 2009.


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For the Three Months Ended
March 31,
Increase
(Decrease)(in thousands)
2010
2009Payroll and related costs
$ 47
$ 115
$ (68)Option and warrant expense
3
8
(5)Legal fees
36
10
26External services
77
156
(79)Insurance
32
29
3Travel & entertainment
4
18
(14)Office rent, communications,  misc.
9
23
(14)$ 208
$ 359
$ (151)





Significantly lower administrative costs were primarily a result of reduced payroll costs associated with the furlough and reduction of salary of executive management in 2009 and a reduction in the use of outside consultants. These reductions were partially offset by an increase in legal fees related to the Applied Fluid Jetting (“AFJ”)
patent application that was filed during the three month period ending March 31, 2010.  In February 2009, we filed a provisional patent (application number 61/152,885) relating to the process and unique equipment related to our applied fluid jetting process.  In February 2010, the final patent application was submitted. This filing, if granted, preserves Blast’s and John Adam’s, the inventor’s, exclusive use of this proprietary process.




Interest Expense. Interest expense was $23,000 for the three months ended March 31, 2010 and 2009. During the three months ended March 31, 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 $201,000 or 41% to a net loss of $288,000 for the three months ended March 31, 2010 compared to a net loss of $489,000 for the three months ended March 31, 2009.  This decrease is primarily due to lower administrative costs as 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 March 31, 2010, we had cash of approximately $108,000.





Blast had total current assets of $1.7 million as of March 31, 2010, including the cash balance of $108,000, 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 March 31, 2010 of $4.2 million compared to total assets of $4.3 million as of  December 31, 2009.





Blast had total liabilities of $1.8 million as of March 31, 2010, including current liabilities of $1.8 million compared to total liabilities of $1.7 million as of December 31, 2009, including current liabilities of $541,000.





Blast had negative net working capital of $100,000 and total stockholders’ equity of $2.4 million as of March 31, 2010 compared to net working capital of $1.3 million and total stockholders’ equity of $2.7 million as of December 31, 2009. The reduction in equity is related to the net loss of $288,000 for the three months ended
March 31, 2010.





A secured $1.12 million note with Berg McAfee Companies, LLC remains outstanding as of March 31, 2010.  The note, which was extended for an additional three years from the effective date of the Plan (February 27, 2008), bears interest at eight-percent (8%) per annum, and contains an option to be convertible 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.


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In December 2009, Blast, through a wholly-owned Delaware subsidiary, 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.  Pursuant to the offering,
the subsidiary offered up to 10,000,000 shares of its Series A Preferred Stock at a purchase price of $2.50 per share ($25,000,000 in total).  Each share of the subsidiary’s Series A Preferred Stock is convertible into one share of Blast’s common stock at any time, and automatically converts into shares of Blast’s common stock on the tenth anniversary of the issuance of the Series A Preferred Stock.  The offering was in connection with the United States Citizenship and Immigration
Service (“USCIS”) EB-5 Program, pursuant to which Blast’s subsidiary will be 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 shares of Series A Preferred Stock of Blast’s subsidiary have been sold and 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 $140,000 for the three months ended March 31, 2010 which was mainly due to $288,000 of loss from continuing operations, partially offset by an increase in accrued expenses of $39,000,
an increase in accounts payable of $40,000, an increase in accrued expenses-related party of $23,000 and $36,000 of depreciation and amortization.





Cash Flows from Financing Activities.Blast had net cash used in financing activities of $13,000 for the three months ended March 31, 2010, primarily related to payments on short-term debt.




Off-Balance Sheet Arrangements





None.





Recent Accounting Pronouncements





For the period ended March 31, 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.





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 March 31, 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 March 31, 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.









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PART II




OTHER INFORMATION





Item 1. Legal Proceedings





Hallwood Energy/Hallwood Petroleum Lawsuit


In April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5 million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million in cash,
issue $2.75 million in equity and irrevocably forgave $1.65 million in deposits paid to Eagle.  The parties were fully and mutually released from any and all claims between them.  The terms of the settlement were approved by the board of each company and were confirmed by the Court. Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September 2008.  Payments received from Hallwood in October 2008 were distributed to the appropriate class of creditors as designated
in the Plan.





On February 11, 2009, Blast and Eagle entered into an amended settlement letter with Hallwood that modified and finalized the terms of the parties April 3, 2008 settlement letter.  The amended settlement provided that the equity component would be satisfied by the issuance to Blast of Class C Partnership Interests in Hallwood
Energy LP, equal to 7% of such Interests, having a face value of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement was approved by the board of each company and was confirmed by the Bankruptcy Court.





On March 2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for the Northern District of Texas under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that it could dispose of burdensome and uneconomical assets and reorganize its financial obligations and capital structure.





Subsequently, the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in this matter which transferred the control of Hallwood to the third party. We believe this action will result in the elimination of any existing equity position held in Hallwood, including Blast’s, so we have recognized a zero carrying value
in our financial statements for the Class C Interests.





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.





15


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.





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





In February 2010, Blast issued 89,334 shares of common stock in consideration for payment of invoices for nitrogen rejection technology due diligence consulting services provided from October 2008 through February 2009 by Hunter Project Management, Inc. The consulting contract called for
the consultant to receive half of its pay in cash and half in common shares. Cash payments were made at the time the invoices were received, but for security reasons, the stock issuance for the remainder amount owed of $14,800 was delayed until the consultant returned to the U.S. from an extended assignment in Moscow on behalf of another client.  We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a
public offering, the recipient took the shares for investment and not resale and we took appropriate measures to restrict transfer. No underwriters or agents were involved in the foregoing issuance and no underwriting discounts or commissions were paid by us.





Item 3.  Defaults Upon Senior Securities





None.





Item 4.  (Removed and Reserved)





Item 5.  Other Information.





None.





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Item 6.  Exhibits




Exhibit No.

DescriptionExhibit 10.1(1)

Letter of Intent with Sun Resources Texas, Inc.Exhibit 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


(1) Filed as an exhibit to our Report on Form 8-K, filed with the Commission on May 3, 2010, and incorporated herein by reference.





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:  May 17, 2010
By:
/s/ Michael L. PetersonMichael L. PetersonInterim President and CEO(Principal Executive Officer)Date:  May 17, 2010
By:
/s/ John MacDonaldJohn MacDonaldChief Financial Officer(Principal Accounting Officer)