PEDEVCO CORP — Interim / Quarterly Report 2009

May 11, 2009

10-Q 1 form10-q.htm BLAST ENERGY SERVICES FORM 10-Q FOR PERIOD ENDED 3/31/09 form10-q.htm Licensed to: Blast Energy Services, Inc. Document Created using EDGARizer 4.0.7.0 Copyright 1995 - 2008 EDGARfilings, Ltd., an IEC company. All rights reserved

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, 2009

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

For the transition period from to

333-64122

(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. 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 May 11, 2009 is 61,817,404 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 second quarter of 2009.

Blast Energy Services, Inc.

For the Quarter Ended March 31, 2009

INDEX

| PART

I – FINANCIAL INFORMATION		Page
Item

1. | Financial Statements | 2 | | | Unaudited Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 | 2 | | | Unaudited Consolidated Statements of Operations For the Three Months Ended March 31, 2009 and 2008 | 3 | | | Unaudited Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2009 and 2008 | 4 | | | Notes to Unaudited Consolidated Financial Statements | 5 | | Item
2. | Management’s Discussion and Analysis of Condition and Results of Operations | 10 | | Item
3. | Quantitative and Qualitative Disclosures About Market Risk | 12 | | Item
4. | Controls and Procedures | 12 | | PART II – OTHER INFORMATION | | | | Item
5. | Legal Proceedings | 14 | | Item 1A. | Risk Factors | 14 | | Item
6. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 | | Item
7. | Other Information | 15 | | Item
8. | Exhibits | 15 | | Signatures | | 15 |

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BLAST ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

| | March 31, 2009 | | | | | --- | --- | --- | --- | --- | | Assets | | | | | | Current Assets | | | | | | Cash | $ 303,713 | $ | 731,631 | | | Accounts receivable, net | 79,088 | | 107,065 | | | Other assets | 137,280 | | 53,254 | | | Current portion of long-term receivable | 666,667 | | 666,667 | | | Total Current Assets | 1,186,748 | | 1,558,617 | | | Equipment, net of accumulated depreciation of $82,917 and $68,282 | 1,238,394 | | 1,191,263 | | | Long term accounts receivable | 2,933,333 | | 2,933,333 | | | Total Assets | $ 5,358,475 | $ | 5,683,213 | | | Liabilities and Stockholders’ Equity | | | | | | Current Liabilities | | | | | | Accounts payable | $ 95,315 | $ | 24,085 | | | Accrued expenses | 243,622 | | 225,312 | | | Deferred revenue | 8,581 | | 9,459 | | | Notes payable – other | 67,087 | | - | | | Total Current Liabilities | 414,605 | | 258,856 | | | Long Term Liabilities | | | | | | Notes Payable – Related Party | 1,120,000 | | 1,120,000 | | | Total Liabilities | 1,534,605 | | 1,378,856 | | | Commitments and Contingencies | - | | - | | | Stockholders’ Equity: | | | | | | Preferred stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and 6,000,000 shares issued and outstanding | 6,000 | | 6,000 | | | Common stock, $.001 par value, 180,000,000 shares authorized; 61,782,404 and 6,432,404 shares issued and outstanding | 61,782 | | 60,432 | | | Additional paid-in capital | 75,109,385 | | 75,102,481 | | | Accumulated deficit | (71,353,297 | ) | (70,864,556 | ) | | Total Stockholders’ Equity | 3,823,870 | | 4,304,357 | | | Total Liabilities and Stockholders’ Equity | $ 5,358,475 | $ | 5,683,213 | |

See accompanying notes to unaudited consolidated financial statements

2

BLAST ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2009 and 2008

(Unaudited)

Revenue:	2009 — $ 118,013		2008 — $ 71,652
Operating
expenses:
Cost
of sales	188,711		120,121
Selling,
general and administrative	359,210		585,947
Depreciation
and amortization	32,015		2,150
Loss
on disposal of equipment	3,885		-
Total
operating expenses	583,821		708,218
Operating
loss	(465,808	)	(636,566	)
Other
income (expense):
Other
income	-		8,000
Interest
income	101		11,103
Interest
expense	(23,034	)	(42,493	)
Total
other income (expense)	(22,933	)	(23,390	)
Loss
from continuing operations	(488,741	)	(659,956	)
Loss
from discontinued operations	-		(6,328	)
Net
loss	$ (488,741	)	$ (666,284	)
Preferred
dividends	59,178		-
Net
loss attributable to common shareholders	$ (547,919	)	$ (666,284	)
Basic
and diluted income (loss) per common share:
Continuing
operations	$ (0.01	)	$ (0.01	)
Discontinued
operations	-		-
Net
income (loss)	$ (0.01	)	$ (0.01	)
Weighted
average common shares outstanding
Basic
and diluted	60,528,306		53,448,942

See accompanying notes to unaudited consolidated financial statements.

3

BLAST ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2009 and 2008

(Unaudited)

	2009		2008
Cash
Flows From Operating Activities:
Net
loss	$ (488,741	)	$ (666,284	)
Loss
from discontinued operations	-		6,328
Loss
from continuing operations	(488,741	)	(659,956	)
Adjustments
to reconcile net loss to net cash used in operating
activities:
Depreciation
and amortization	32,015		2,150
Option
and warrant expense	8,254		51,723
Loss
on disposition of equipment	3,885		-
Changes
in:
Accounts
receivable	27,977		15,502
Other current
assets	(16,940	)	7,166
Accounts payable	71,230		(1,430,845	)
Accrued expenses	18,311		(11,160	)
Deferred revenue	(878	)	(1,867	)
Net
Cash Used In Operating Activities	(344,887	)	(2,027,287	)
Cash
Flows From Investing Activities:
Proceeds
from sale of fixed assets	5,000		-
Cash
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:
Borrowings
on debtor-in-possession financing	-		100,000
Payments
on short term debt	-		(552,570	)
Issuance
of convertible preferred stock	-		4,000,000
Common
stock repurchased and cancelled	-		(900	)
Net
Cash Provided By Financing Activities	-		3,546,530
Discontinued
operating activities	-		4,159
Net
Cash Provided By Discontinued Operations	-		4,159
Net
change in cash	(427,918	)	1,523,402
Cash
at beginning of period	731,631		48,833
Cash
at end of period	$ 303,713		$ 1,572,235
Cash
paid for:
Interest	$ 521		$ 30,615
Income
taxes	-		-
Non-Cash
Transactions:
Conversion
of deferred board compensation to common shares	-		161,000
Conversion
of related party advances to common shares	-		800,000
Issuance
of note payable for related party debt and accrued
interest	-		1,120,000
Prepaid
insurance financed with note payable	67,088		106,875
Cashless
exercise of warrants	1,350		-

See accompanying notes to unaudited consolidated financial statements.

4

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 the disclosure 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 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 March 31, 2009 and December 31, 2008, Blast has determined that no allowance for doubtful accounts is required.

5

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 month periods ended March 31, 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 results of operations, financial position, or cash flow.

NOTE 2 – GOING CONCERN

Blast has a cash balance of $304,000, current assets of $1.2 million and stockholders equity of $3.8 million as of March 31, 2009. However, Blast had a loss from continuing operations of approximately $489,000 for the three months ended March 31, 2009 and an accumulated deficit at March 31, 2009 of approximately $71,353,000. The 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:

| Description | Life | March 31, 2009 | December 31, 2008 | | --- | --- | --- | --- | | Computer equipment | 3 years | $ 22,313 | $ 22,313 | | Automobile/Trucks | 4 years | 77,520 | 26,265 | | Service Trailer | 5 years | 4,784 | 4,784 | | Remote Sensor Unit, in progress | 3 years | 50,479 | 50,479 | | AFJ Rig | 10 years | 1,166,215 | 1,155,704 | | | | 1,321,311 | 1,259,545 | | Less: accumulated depreciation | | (82,917) | (68,282) | | | | $ 1,238,394 | $ 1,191,263 |

NOTE 4 – PREFERRED STOCK

Related Party Transactions

In January 2008, Blast sold the rights to an aggregate of 2,000,000 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 $4,000,000 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 2,000,000 shares of Blast’s Series A Preferred Stock held by Clyde Berg and McAfee Capital, LLC at the face value of the Preferred shares, $0.50 per share, and paid $1,000,000 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 the 1,000,000 Preferred shares each held by Clyde Berg and McAfee Capital, LLC, and consequently only 6,000,000 Preferred Shares remain outstanding as of March 31, 2009. As of March 31, 2009, the aggregate and per share arrearages were $312,329 and $0.05, respectively.

6

NOTE 5 - OPTIONS AND WARRANTS

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 cash-less exercise of 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 cash-less exercise formula. Of the 6,090,000 penny warrants originally granted to Laurus, only 1,555,089 remain unexercised as of March 31, 2009.

Share-based Compensation

The Company accounts for share-based compensation, including options, warrants and nonvested shares, according to the provisions of SFAS No. 123R, "Share Based Payment". During the three month period ended March 31, 2009, the Company recognized share-based compensation expense of approximately $8,254. The remaining value of unamortized options remaining at March 31, 2009 is $37,167.

Activity in options during the three month period ended March 31, 2009 and related balances outstanding as of that date are reflected below. No options were issued during the three month period ended March 31, 2009. At March 31, 2009, 3,032,792 options were outstanding. The intrinsic value of the exercisable options at March 31, 2009 was $0.40.

| | Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) | | --- | --- | --- | --- | | Outstanding at January 1, 2009 | 3,032,792 | $ 0.59 | | | Granted | - | - | | | Exercised | - | - | | | Forfeited and canceled | - | - | | | Outstanding at March 31, 2009 | 3,032,792 | $ 0.59 | 6.3 | | Exercisable at March 31, 2009 | 2,845,292 | $ 0.62 | 6.1 |

Activity in warrants during the three month period ended March 31, 2009 and related balances outstanding as of that date are reflected below. No warrants were issued during the three month period ended March 31, 2009. At March 31, 2009, 12,153,913 warrants were outstanding. The intrinsic value of the exercisable warrants at March 31, 2009 was $0.29.

| | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (# years) | | --- | --- | --- | --- | | Outstanding at January 1, 2009 | 13,503,913 | $ 0.76 | | | Granted | - | - | | | Exercised | (1,350,000) | 0.01 | | | Forfeited and canceled | - | - | | | Outstanding at March 31, 2009 | 12,153,913 | $ 0.84 | 3.6 | | Exercisable at March 31, 2009 | 12,153,913 | $ 0.84 | 3.6 |

7

NOTE 6 – 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 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. This bankruptcy filing creates uncertainty as to the future value of this equity position in Hallwood, so we are recognizing a zero carrying value in our financial statements.

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. 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:

· $5 million payable upon the parties’ entry into the settlement;

· $1 million payable on or before the first anniversary date of the execution of the settlement;

· $2 million payable on or before the second anniversary date of the execution of the settlement; and

· $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 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. The remaining amounts due from Quicksilver are shown as a receivable in the balance sheet, net of contingent legal fees.

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 6 – 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, — 2009 | | 2008 | | | --- | --- | --- | --- | --- | | Revenues: | | | | | | Satellite Communications | $ 98,013 | | $ 71,652 | | | Down-hole Solutions | 20,000 | | - | | | Total Revenue | $ 118,013 | | $ 71,652 | | | Costs of Goods Sold: | | | | | | Satellite Communications | $ 88,995 | | $ 96,300 | | | Down-hole Solutions | 99,716 | | 23,821 | | | Corporate | 395,110 | | 588,097 | | | Total Costs of Good Sold | $ 583,821 | | $ 708,218 | | | Operating profit (loss): | | | | | | Satellite Communications | $ 9,018 | | $ (24,648 | ) | | Down-hole Solutions | (79,716 | ) | (23,821 | ) | | Corporate | (395,110 | ) | (588,097 | ) | | Operating Loss | $ (465,808 | ) | $ (636,566 | ) |

NOTE 7 – DISCONTINUED OPERATIONS

There are no assets or liabilities associated with the discontinued operations at March 31, 2009.

Net income (loss) from the discontinuance of drilling operations for the three months ended March 31, 2009 and 2008 are as follows:

| Revenues | March 31, 2009 — $ - | March 31, 2008 — $ - | | | --- | --- | --- | --- | | Operating Expenses: | | | | | Cost of sales | - | 3,667 | | | Selling, general and administrative | - | 644 | | | Interest expense | - | 1,047 | | | Total operating expenses | - | 5,358 | | | Loss from discontinued operations | - | (5,358 | ) | | Other income (expense) | | | | | Other expenses | - | (1,007 | ) | | Interest income | - | 37 | | | Total other income (expense) | - | (970 | ) | | Net loss from discontinued operations | $ - | $ (6,328 | ) |

9

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. Such funding may not be available and/or may be available on unfavorable terms.

Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008

Satellite Communications Services

Satellite Communications Services’ revenues increased by $26,000 to $98,000 for the three months ended March 31, 2009 compared to $72,000 for the three months ended March 31, 2008. The increase was the result of new business and customer renewals, including the new systems sold to a major pipeline company. The operating margin from Satellite Communications Services increased by $34,000 to a gross profit of $9,000 for the three months ended March 31, 2009 compared to a deficit of $25,000 for the three months ended March 31, 2008.

Down-hole Solutions

Down-hole Solutions’ revenues for the three months ended March 31, 2009 increased to $20,000 compared to zero revenue for the three months ended March 31, 2008. The Company has resumed field testing of this technology and the lateral jetting rig successfully drilled laterals on one well in January 2009. The loss generated increased $56,000 to $80,000 for the three months ended March 31, 2009 compared to $24,000 during the three months ended March 31, 2008. Cost of services provided for the three months ended March 31, 2009 increased by $76,000 to $100,000 compared to $24,000 for the three months ended March 31, 2008. This increase represents rig crew, repairs, and maintenance costs associated with rig deployment in 2009 compared with certain pre-deployment fabrication costs and rig repairs incurred in 2008.

Depreciation and Amortization

Depreciation and amortization expense increased by $30,000 to $32,000 for the three months ended March 31, 2009 compared to $2,000 for the three months ended March 31, 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

Selling, general and administrative (“SG&A”) expenses decreased by $227,000 to $359,000 for the three months ended March 31, 2009 compared to $586,000 for the three months ended March 31, 2008.

10

| (in thousands) | For the Three Months Ended March 31, — 2009 | 2008 | Increase (Decrease) | | --- | --- | --- | --- | | Payroll and related costs | $ 115 | $ 169 | $ (54) | | Option and warrant expense | 8 | 52 | (44) | | Legal fees | 10 | 227 | (217) | | External services | 156 | 71 | 85 | | Insurance | 29 | 31 | (2) | | Travel & entertainment | 18 | 13 | 5 | | Office rent, communications, misc. | 23 | 23 | - | | | $ 359 | $ 586 | $ (227) |

Lower administrative costs were primarily a result of lower payroll costs, significantly lower legal fees following the emergence from bankruptcy and lower non-cash charges associated with the lack of any grant of warrants or options during the three month ended March 31, 2009. These lower costs were partially offset by higher external services costs related to new business development activities.

Interest Expense

Interest expense decreased by $19,000 to $23,000 for the three months ended March 31, 2009 compared to $42,000 for the three months ended March 31, 2008. During the three months ended March 31, 2008, interest expense included accrued interest on the debtor-in-possession note that was converted to common stock after our emergence from bankruptcy in March 2008.

Loss from Continuing Operations

Loss from continuing operations improved by $171,000 to $489,000 for the three months ended March 31, 2009 compared to $660,000 for the three months ended March 31, 2008, primarily relating to lower administrative costs partially offset by higher costs of services from Down-hole Solutions business.

Income (Loss) from Discontinued Operations

Income from discontinued operations was $-0- for the three months ended March 31, 2009 compared to a loss of $6,000 for the three months ended March 31, 2008. These operations continue to have no activity, having been discontinued since mid-2007.

Net Loss

The net loss improved by $177,000 to $489,000 for the three months ended March 31, 2009 compared to $666,000 for the three months ended March 31, 2008, primarily relating to lower administrative costs partially offset by higher costs of services from Down-hole Solutions business.

Liquidity and Capital Resources

Blast had total current assets of $1.2 million as of March 31, 2009, including a cash balance of $304,000, compared to total current assets of $1.6 million as of December 31, 2008, including a cash balance of $732,000. The decrease in current assets is primarily related to the cash costs expended to field test and deploy the AFJ rig.

Blast had total assets as of March 31, 2009 of $5.4 million compared to total assets of $5.7 million as of December 31, 2008. This decrease is primarily related to the costs of deploying the AFJ rig as described above.

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Blast had total liabilities of $1.5 million as of March 31, 2009, consisting of current liabilities of $0.4 million compared to total liabilities of $1.4 million as of December 31, 2008, consisting of current liabilities of $0.3 million. The slight increase in current liabilities is related to the financing of insurance policies covering the AFJ rig and its workers. Blast also had net working capital of $0.8 million and stockholders’ equity of $3.8 million as of March 31, 2009.

Cash Flows from Operating Activities

Blast had net cash used in operating activities of approximately $345,000 for the three months ended March 31, 2009, which was mainly due to the loss from continuing operations of $489,000 partially offset by a $99,000 favorable change in working capital.

Cash Flows used for Investing Activities

Blast had net cash used in investing activities of $83,000 for the three months ended March 31, 2009, which primarily consisted of capitalized improvements to the AFJ rig and the purchase of a crane truck to support field operations.

Cash Flows from Financing Activities

Blast had no cash provided by financing activities for the three months ended March 31, 2009.

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.

Off-Balance Sheet Arrangements

As of March 31, 2009, we had no off-balance sheet arrangements.

Recent Accounting Pronouncements

For the period ended March 31, 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

Evaluation of Disclosure 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.

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Changes in Internal Control Over Financial Reporting

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.

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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 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, 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. This bankruptcy filing creates uncertainty as to the future value of this equity position in Hallwood, so we are recognizing a zero carrying value in our financial statements.

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. 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:

· $5 million payable upon the parties’ entry into the settlement;

· $1million payable on or before the first anniversary date of the execution of the settlement;

· $2 million payable on or before the second anniversary date of the execution of the settlement; and

· $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 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. The remaining amounts due from Quicksilver are shown as a receivable in the balance sheet, net of contingent legal fees.

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 a 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, filed with the Commission on March 31, 2009.

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

None.

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Item 5. Other Information.

None.

Item 6. Exhibits

| Exhibit 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | --- | --- | | Exhibit 31.2* | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Exhibit 32.1* | Certification of Principal Executive Officer pursuant to Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Exhibit 32.2* | Certification of Principal Accounting Officer pursuant to Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

*Filed herewith

SIGNATURES

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

By:	/s/ John O’Keefe, CEO
	John
O’Keefe
	Chief
Executive Officer
	(Principal
Executive Officer)
Date: May
11, 2009
By:	/s/ John MacDonald, CFO
	John
MacDonald
	Chief
Financial Officer
	(Principal
Accounting Officer)
Date: May
11, 2009