PEDEVCO - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

 

 

 

 

 

000-53725

(Commission file number)

 

 

(Exact name of registrant as specified in its charter)

 

 

 

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.     Yes  x    No  ¨

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   x No   ¨

The number of shares of the issuer’s common stock outstanding of each of the issuer’s classes of equity as of November 12, 2009 is 61,854,904 including 1,150,000 approved but unissued shares arising from the class action settlement from 2005 and 35,000 shares that are still outstanding as of the filing of this report, but which shares the Issuer expects to cancel in the fourth quarter of 2009 and which are not shown as outstanding in the accompanying financial statements.

  

Blast Energy Services, Inc.

For the Three and Nine Months Ended September 30, 2009

INDEX

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BLAST ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

BLAST ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

BLAST ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying unaudited interim financial statements of Blast Energy Services, Inc. (“Blast”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission 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 have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, Blast’s consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should Blast be unable to continue as a going concern.

 

Business. 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. We are an emerging technology company in the energy sector and strive 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 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.

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.

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 September 30, 2009 and December 31, 2008, Blast has determined that no allowance for doubtful accounts is required.  During the nine months ended September 30, 2009, Blast recognized bad debt expense of $10,778 related to one customer’s receivable balance determined to be uncollectible.

Earnings Per Share.  Basic earnings per share equals net earnings divided by weighted average shares outstanding during the year.  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 nine month periods ended September 30, 2009 and 2008, and therefore, basic and diluted earnings per share for those periods are the same as all potential common equivalent shares 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.

NOTE 2 – GOING CONCERN

Blast has a cash balance of approximately $661,000, current assets of approximately $2.3 million and stockholders’ equity of approximately $3.0 million as of September 30, 2009. Blast had a loss from continuing operations of approximately $1.4 million for the nine months ended September 30, 2009 and an accumulated deficit at September 30, 2009 of approximately $72.3 million. The consolidated financial statements do not include any adjustments that might be necessary if Blast is unable to continue as a going concern. These conditions create uncertainty 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.

NOTE 3 – EQUIPMENT

Equipment consists of the following:

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 August 2009, Blast entered into a Demand Promissory Note (“Note”) with a related third-party individual (“Lender”), pursuant to which the Lender loaned Blast $60,000.  The Note was due and payable on the earlier to occur of (a) August 10, 2010, or (b) any time after October 10, 2009, if the Lender declared all or a portion of the loan due and payable on such date (the “Due Date”). The Note accrued interest at the rate of 8% per annum, with interest and principal payable on the Due Date.  Blast had the right to repay the Note at any time without penalty.  In connection with and as consideration for the Note, Blast granted the Lender warrants to purchase 250,000 shares of its common stock.  The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date (August 10, 2009). The value of the warrants, $12,498 based upon the Black-Scholes option pricing model, was expensed on the date of grant as additional interest expense due to the demand nature of the Note.  On October 31, 2009, Blast repaid this $60,000 Note in full including accrued interest of $1,027.

NOTE 6 - 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 about $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.

In October 2008, Blast agreed to redeem two million shares of Blast’s Series A Preferred Stock held by Clyde Berg and McAfee Capital, LLC at face value of $0.50 per share and paid $1 million to redeem the Preferred shares.  The Preferred shares have a dividend rate of 8% per annum until paid or converted.  In connection with the redemption, Blast cancelled one million Preferred shares each held by Clyde Berg and McAfee Capital, LLC, and consequently only six million Preferred shares remain outstanding as of September 30, 2009. As of September 30, 2009, the aggregate and per share dividend arrearages were $432,658 and $0.07, respectively.

NOTE 7 – COMMON STOCK

In May 2008, the Board of Directors approved the issuance of up to 300,000 shares of Blast’s common stock to a consultant in consideration for market surveillance and financial consulting services provided.  The shares were earned by the consultant as follows: 150,000 shares immediately and 37,500 shares at the end of each quarter for the one year period of the engagement. In September 2009, under the terms of this engagement, the remaining 37,500 shares were issued. The shares were valued at $7,500 based upon the closing price of Blast’s common stock at the date the shares were earned.

NOTE 8 - OPTIONS AND WARRANTS

In August 2009, in connection with and as consideration for the Demand Promissory Note mentioned above in Note 5, Blast granted the Lender warrants to purchase 250,000 shares of its common stock. The fair value of $12,498 was recorded as interest expense during the nine months ended September 30, 2009 and the warrants were valued using the Black-Scholes option-pricing model. Variables used in the Black-Scholes pricing model for the 250,000 warrants include: (1) discount rate of 1.79%, (2) expected term of 1.5 years, (3) expected volatility of 155.51% and (4) zero expected dividends. The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date.

In March 2009, under the terms of the $0.01 warrants granted to Laurus Master Fund, Ltd. (“Laurus”) in August 2006, Laurus elected to make a cashless warrant exercise equivalent to 1,508,824 shares of common stock using a fair market value of $0.095 per share.  This resulted in 1,350,000 shares being issued to Laurus and 158,824 shares being cancelled under the cashless exercise formula. Of the 6,090,000 $0.01 warrants originally granted to Laurus, 1,713,913 warrants remain unexercised as of September 30, 2009. These warrants expire in August 2013.

Share-based Compensation

The Company accounts for share-based compensation, including options, warrants and nonvested shares, according to the provisions of ASC 718, Compensation – Stock Compensation (formerly, SFAS No. 123R, "Share Based Payment"). During the nine months ended September 30, 2009, the Company recognized share-based compensation expense of $13,005. The remaining amount of unamortized options expense at September 30, 2009 is $22,434.

Activity in options during the nine months ended September 30, 2009 and related balances outstanding as of that date are reflected below. No options were issued during the nine months ended September 30, 2009. There were 2,999,459 options outstanding at September 30, 2009. The intrinsic value of outstanding as well as exercisable options at September 30, 2009 was -0-.

Activity in warrants during the nine months ended September 30, 2009 and related balances outstanding as of that date are reflected below. There were 12,245,089 warrants outstanding at September 30, 2009. The intrinsic value of the exercisable warrants at September 30, 2009 was $108,856.

NOTE 9 – LITIGATION

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 were distributed in October 2008.

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 will continue to recognize a zero carrying value in our financial statements for our Hallwood equity interests until the matter is fully resolved.

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.  Blast and Quicksilver also agreed to release all the claims against each other and certain related parties. Quicksilver agreed to pay Eagle a total of $10 million, as follows:

In the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within 10 days after written notice, then all of the remaining payments immediately become due and payable. Quicksilver made the first payment of $5 million in October 2008 and the second payment of $1 million ($720,000 net to Blast) in September 2009. 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 (“Alberta”) took a number of actions adverse to Blast during the course of the Chapter 11 case. Alberta filed a motion to deem rejected the Technology Purchase Agreement (the “Agreement”) between Alberta and Blast. That motion was denied, and Alberta appealed the bankruptcy court’s rulings. However, the District Court has ordered that the consolidated appeal is stayed and administratively closed until Alberta has exhausted its appeal of the confirmation order. Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. This appeal was dismissed by the district court as moot. 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 Fifth District Court of Appeals but no ruling has yet been issued. Blast believes that the rulings made by the district court were correct and expects the appeal process to concur with the district judge’s rulings.

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.

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 nine months ended September 30, 2009 and 2008:

NOTE 11 – DISCONTINUED OPERATIONS

There are no assets or liabilities associated with the discontinued operations at September 30, 2009 and December 31, 2008.  Net income from the discontinuance of drilling operations for the three and nine months ended September 30, 2009 and 2008 are as follows:

NOTE 12 – SUBSEQUENT EVENTS

Effective October 1, 2009, after serving for more than ten years, Dr. Joseph P. Penbera resigned from the board of directors for Blast Energy Services, Inc. on amicable terms in order to devote his attentions to other business opportunities.

 

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

 

Forward-Looking Statements

 

All statements that are included in this Quarterly Report, other than statements of historical fact, are forward-looking statements. You can identify forward-looking statements by words such as “anticipate,” “believe” and similar expressions and statements regarding our business strategy, plans and objectives for future operations. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The forward-looking statements in this filing involve known risks and uncertainties, which may cause our actual results in future periods to be materially different from any future performance suggested in this report. Such factors may include, but are not limited to, such risk factors as: changes in technology, reservoir or sub-surface conditions, the introduction of new services, commercial acceptance and viability of new services, fluctuations in customer demand and commitments, pricing and competition, reliance upon subcontractors, the ability of our customers to pay for our services, together with such other risk factors as may be included in our Annual Report on Form 10-K filed with the Commission on March 31, 2009 and incorporated herein by reference. The use of the term “Blast” or the “Company” herein refers to Blast Energy Services, Inc. and its wholly-owned subsidiary, Eagle Domestic Drilling Operations LLC.

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.  Please consult the financial statements in “Item 1” for exact dollar amounts.

 

Plan of Operations

During the next twelve months, Blast plans to attempt to expand its Satellite Communications Services and Down-hole Solutions businesses. 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.

Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

 

Satellite Communications Services’ revenues decreased by $53,000 or 45% to $63,000 for the three months ended September 30, 2009 compared to $116,000 for the three months ended September 30, 2008. The decrease was the result of a reduction in new business and customer renewals from the prior period. The operating margin from Satellite Communications Services increased by $6,000 or 50% to an operating profit of $18,000 for the three months ended September 30, 2009 compared to $12,000 for the three months ended September 30, 2008.

Down-hole Solutions’ revenues were $-0- for the three months ended September 30, 2009 compared to $20,000 for the three months ended September 30, 2008. The Company has temporarily suspended field testing of this technology after unsuccessfully attempting to drill laterals on several wells during the second quarter of 2009. The loss generated increased $54,000 to $58,000 for the three months ended September 30, 2009 compared to a loss of $4,000 during the three months ended September 30, 2008. This increase is primarily due to rig crew, repairs, and maintenance costs associated with attempted rig deployment in 2009 compared with certain pre-deployment fabrication costs and rig repairs incurred in 2008.

Depreciation and amortization expense increased by $34,000 to $36,000 for the three months ended September 30, 2009 compared to $2,000 for the three months ended September 30, 2008.  This increase is primarily related to the depreciation of the AFJ rig which was brought into service in October 2008.

 

Selling, general and administrative (“SG&A”) expenses decreased by $174,000 or 48% to $191,000 for the three months ended September 30, 2009 compared to $365,000 for the three months ended September 30, 2008.

Significantly lower administrative costs were primarily a result of lower payroll costs related to the furlough of executive management and lower legal fees from a reduction in matters requiring legal advice and consultation during the three months ended September 30, 2009, compared to the three months ended September 30, 2008.

Interest expense was $37,000 for the three months ended September 30, 2009 as compared to $23,000 for the three months ended September 30, 2008. During the three months ended September 30, 2009 and 2008, interest expense included accrued interest on the $1.1 million related party note related to the fabrication of the AFJ rig.  Interest expense for the 2009 period also included $12,000 of expense related to the fair value of warrants granted as part of the $60,000 note payable entered into in August 2009, as described in Note 4 to the financial statements included herewith.

Loss from continuing operations improved by $79,000 or 21% to $304,000 for the three months ended September 30, 2009 compared to $383,000 for the three months ended September 30, 2008, primarily due to significantly lower administrative costs partially offset by higher costs of services from the Down-hole Solutions business.

Net loss decreased by $79,000 or 21% to a net loss of $304,000 for the three months ended September 30, 2009 compared to a net loss of $383,000 for the three months ended September 30, 2008, primarily due to significantly lower administrative costs partially offset by higher costs of services from Down-hole Solutions business.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Satellite Communications Services’ revenues decreased by $22,000 or 8% to $246,000 for the nine months ended September 30, 2009 compared to $268,000 for the nine months ended September 30, 2008. The decrease was the result of a reduction in new business and customer renewals. The operating margin from Satellite Communications Services increased by $67,000 or 223% to an operating profit of $37,000 for the nine months ended September 30, 2009 compared to an operating loss of $30,000 for the nine months ended September 30, 2008.

Down-hole Solutions’ revenues were $20,000 for the nine months ended September 30, 2009 and September 30, 2008. The Company resumed field testing of the Applied Fluid Jetting (“AFJ”) technology in fiscal 2009, and the lateral jetting rig successfully drilled laterals on one well in January 2009 but had not been successful on laterals attempted in the second quarter and subsequently suspended field operations in the third quarter of 2009. The loss generated by the Down-hole Solutions segment increased $204,000 or 158% to $333,000 for the nine months ended September 30, 2009 compared to $129,000 during the nine months ended September 30, 2008. This increase represents rig crew, repairs, and maintenance costs associated with the attempted rig deployment in 2009 compared with certain pre-deployment fabrication costs and rig repairs incurred in 2008.

Depreciation and amortization expense increased by $97,000 to $104,000 for the nine months ended September 30, 2009 compared to $7,000 for the nine months ended September 30, 2008.  This increase is primarily related to the depreciation of the AFJ rig which was brought into service in October 2008.

 

Selling, general and administrative (“SG&A”) expenses decreased by $937,000 or 51% to $890,000 for the nine months ended September 30, 2009 compared to $1,827,000 for the nine months ended September 30, 2008.

Significantly lower administrative costs were primarily a result of lower payroll costs related to the furlough of executive management in June 2009 and to previously deferred salaries being paid upon emergence from bankruptcy in 2008, lower legal fees following the emergence from bankruptcy in 2008 and lower non-cash charges associated with the reduction in issuance of grants of warrants and non-issuance of options during the nine months ended September 30, 2009.

Interest expense decreased by $6,000 to $83,000 for the nine months ended September 30, 2009 compared to $89,000 for the nine months ended September 30, 2008. During the nine months ended September 30, 2009 and 2008, interest expense included accrued interest on the $1.1 million related party note related to the fabrication of the AFJ rig. Interest expense for the 2009 period also included $12,000 of expense related to the fair value of warrants granted as part of the $60,000 note payable entered into in August 2009.  The higher interest expense in 2008 is related to the payment of interest on the Debtor-in-Possession loan that was paid off in April 2008.

Loss from continuing operations improved by $0.7 million or 33% to $1.4 million for the nine months ended September 30, 2009 compared to $2.1 million for the nine months ended September 30, 2008, primarily due to lower administrative costs partially offset by higher costs of services from the Down-hole Solutions business.

Income from discontinued operations was $-0- for the nine months ended September 30, 2009 compared to a gain of $1.7 million for the nine months ended September 30, 2008. These operations continue to have no activity, having been discontinued since mid 2007. The gain in 2008 was primarily due to the April 2008 settlement with Hallwood which irrevocably forgave an accumulated liability of $1,649,000 previously accrued to cover an advance made by Hallwood.

The net loss increased by $1.0 million to $1.4 million for the nine months ended September 30, 2009 compared to a loss of $0.4 million for the nine months ended September 30, 2008, primarily due to the gain for the nine months ended September 30, 2008, from the April 2008 settlement whereby Hallwood irrevocably forgave an accumulated liability of $1,649,000 previously accrued to cover an advance made by Hallwood. The loss in 2009 was primarily due to higher costs of services from the Down-hole Solutions business partially offset by lower administrative costs.

Liquidity and Capital Resources

 

Blast had total current assets of $2.3 million as of September 30, 2009, including a cash balance of $661,000, compared to total current assets of $1.6 million as of December 31, 2008, including a cash balance of $732,000.  The increase in current assets is primarily related to the increase in the current portion of long-term receivable related to the $1.4 million net payment due from Quicksilver (after subtracting attorney fees due in connection with such payment) in September 2010 under the terms of the lawsuit settlement agreement described above.

Blast had total assets as of September 30, 2009 of $4.9 million compared to total assets of $5.7 million as of December 31, 2008.  This decrease is primarily related to the reduction in the cash balance from costs expended in field testing the AFJ rig, partially offset by the payment received in September 2009 under the terms of the Quicksilver lawsuit settlement agreement.

Blast had total liabilities of $2.0 million as of September 30, 2009, including current liabilities of $0.8 million compared to total liabilities of $1.4 million as of December 31, 2008, including current liabilities of $0.3 million.  The increase in current liabilities is related to the financing of insurance policies covering the AFJ rig and its workers, an increase in accounts payable, and the deferral of officers’ salaries. Blast also had net working capital of $1.5 million and stockholders’ equity of $3.0 million as of September 30, 2009.

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.

In August 2009, Blast entered into a Demand Promissory Note (“Note”) with a related third-party individual (“Lender”), pursuant to which the Lender loaned Blast $60,000.  The Note was due and payable on the earlier to occur of (a) August 10, 2010, or (b) any time after October 10, 2009, if the Lender declared all or a portion of the loan due and payable on such date (the “Due Date”). The Note accrued interest at the rate of 8% per annum, with interest and principal payable on the Due Date.  Blast had the right to repay the Note at any time without penalty.  In connection with and as consideration for the Note, Blast granted the Lender warrants to purchase 250,000 shares of its common stock.  The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date (August 10, 2009). On October 31, 2009, Blast repaid this $60,000 Note in full including accrued interest of $1,027.

Blast had net cash used in operating activities of approximately $740,000 for the nine months ended September 30, 2009, which was mainly due to the loss from continuing operations of approximately $1,387,000.

Blast had net cash used in investing activities of $83,000 for the nine months ended September 30, 2009, which primarily consisted of capitalized improvements to the AFJ rig and the purchase of a crane truck to support field operations.

Blast had net cash provided by financing activities of approximately $33,000 for the nine months ended September 30, 2009, which primarily consisted of the loan proceeds from the $60,000 demand promissory note described above and was partially offset by payments on short-term debt.

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.

Blast had net cash provided by discontinued operations of $720,000 for the nine months ended September 30, 2009, which primarily consisted of the settlement proceeds from the Quicksilver lawsuit settlement agreement.

As of September 30, 2009, we had no off-balance sheet arrangements.

 

For the period ended September 30, 2009, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 4. Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment.

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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 were distributed in October 2008.

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 will continue to recognize a zero carrying value in our financial statements for our Hallwood equity interests until the matter is fully resolved.

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.  Blast and Quicksilver also agreed to release all the claims against each other and certain related parties. Quicksilver agreed to pay Eagle a total of $10 million, as follows:

In the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within 10 days after written notice, then all of the remaining payments immediately become due and payable. Quicksilver made the first payment of $5 million in October 2008 and the second payment of $1 million in September 2009 ($720,000 net to Blast). 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 (“Alberta”) took a number of actions adverse to Blast during the course of the Chapter 11 case. Alberta filed a motion to deem rejected the Technology Purchase Agreement (the “Agreement”) between Alberta and Blast. That motion was denied, and Alberta appealed the bankruptcy court’s rulings. However, the District Court has ordered that the consolidated appeal is stayed and administratively closed until Alberta has exhausted its appeal of the confirmation order. Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. This appeal was dismissed by the district court as moot. 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 Fifth District Court of Appeals but no ruling has yet been issued. Blast believes that the rulings made by the district court were correct and expects the appeal process to concur with the district judge’s rulings.

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 Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 31, 2009.

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

In May 2008, the Board of Directors approved the issuance of up to 300,000 shares of Blast’s common stock to a consultant in consideration for market surveillance and financial consulting services provided.  The shares were earned by the consultant as follows: 150,000 shares immediately and 37,500 shares at the end of each quarter for the one year period of the engagement. In September 2009, under the terms of this engagement, the remaining 37,500 shares were issued, The shares were valued at $7,500 based upon the closing price of Blast’s common stock at the date the shares were earned.

In August 2009, in connection with and as consideration for the Demand Promissory Note described above, Blast granted the Lender warrants to purchase 250,000 shares of its common stock.  The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date.

We claim an exemption from registration afforded by Section 4(2) of the Act since the foregoing issuances did not involve a public offering, the recipients took the shares for investment and not resale and we took appropriate measures to restrict transfer.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information.

None.

Item 6.   Exhibits

*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.