UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2009
 
¨
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.     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 August 14, 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 third quarter of 2009 and which are not shown as outstanding in the accompanying financial statements.

 
 

 

   
Blast Energy Services, Inc.

For the Three and Six Months Ended June 30, 2009

INDEX
 


PART I – FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
Unaudited Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
2
     
 
Unaudited Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2009 and 2008
3
     
 
Unaudited Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 2009 and 2008
4
     
 
Notes to Unaudited Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
15
     
Item 4.
Controls and Procedures
15
     
     
PART II – OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
16
     
Item 1A.
Risk Factors
17
     
  Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
     
Item 5.
Other Information
18
     
Item 6.
Exhibits
18
     
Signatures
 
18

 
1

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
BLAST ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
June 30,
2009
   
December 31,
2008
 
Assets
           
Current Assets:
           
Cash
  $ 27,075     $ 731,631  
Accounts receivable
    66,157       107,065  
Other assets
    147,364       53,254  
Current portion of long-term receivable
    666,667       666,667  
Total Current Assets
    907,263       1,558,617  
                 
Equipment, net of accumulated depreciation of $118,591 and $68,282
    1,224,174       1,191,263  
Long term receivable
    2,933,333       2,933,333  
                 
Total Assets
  $ 5,064,770     $ 5,683,213  
                 
Liabilities and Stockholders’ Equity (Deficit)
               
Current Liabilities:
               
Accounts payable
  $ 184,691     $ 24,085  
Accrued expenses
    401,083       225,312  
Deferred revenue
    8,395       9,459  
Notes payable – other
    101,843       -  
Total Current Liabilities
    696,012       258,856  
                 
Long Term Liabilities:
               
Notes payable – related party
    1,120,000       1,120,000  
Loan payable – long term portion
    17,524       -  
Total Liabilities
    1,833,536       1,378,856  
                 
Stockholders’ Equity (Deficit):
               
Preferred stock, $.001 par value, 20,000,000 shares authorized; 6,000,000 and 6,000,000 shares issued and outstanding
    6,000       6,000  
Common stock, $.001 par value, 180,000,000 shares authorized; 61,782,404 and 60,432,404 shares issued and outstanding
    61,782       60,432  
Additional paid-in capital
    75,110,431       75,102,481  
Accumulated deficit
    (71,946,979 )     (70,864,556 )
                 
Total Stockholders’ Equity
    3,231,234       4,304,357  
                 
Total Liabilities and Stockholders’ Equity
  $ 5,064,770     $ 5,683,213  


See accompanying notes to unaudited consolidated financial statements
 
 
2

 
BLAST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2009 and 2008
(Unaudited)


   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenue:
  $ 84,319     $ 79,973     $ 202,332     $ 151,625  
                                 
Operating expenses:
                               
Cost of sales
    269,079       197,547       457,790       317,668  
Selling, general and administrative
    339,155       876,409       698,365       1,462,356  
Depreciation and amortization
    35,675       2,467       67,690       4,617  
Bad debt expense
    10,778       -       10,778       -  
Loss on disposal of equipment
    -       1,270       3,885       1,270  
Total operating expenses
    654,687       1,077,693       1,238,508       1,785,911  
                                 
Operating loss
    (570,368 )     (997,720 )     (1,036,176 )     (1,634,286 )
                                 
Other income (expense):
                               
Other income
    -       158       -       8,158  
Interest income
    30       2,025       131       13,128  
Interest expense
    (23,344 )     (23,485 )     (46,378 )     (65,978 )
Total other income (expense)
    (23,314 )     (21,302 )     (46,247 )     (44,692 )
                                 
Loss from continuing operations
    (593,682 )     (1,019,022 )     (1,082,423 )     (1,678,978 )
Income from discontinued operations
    -       1,695,670       -       1,689,342  
Net income (loss)
  $ (593,682 )   $ 676,648     $ (1,082,423 )   $ 10,364  
                                 
Preferred dividends
    59,836       78,904       119,014       108,712  
Net income (loss) attributable to common shareholders
  $ (653,518 )   $ 597,744     $ (1,201,437 )   $ (98,348
                                 
Basic income (loss) per common share:
                               
Continuing operations
  $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.03 )
Discontinued operations
    -       0.03       -       0.03  
Net income (loss)
  $ (0.01 )   $ 0.01     $ (0.02 )   $ 0.00  
                                 
Diluted income (loss) per common share:
                               
Continuing operations
  $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.03 )
Discontinued operations
    -       0.02       -       0.03  
Net income (loss)
  $ (0.01 )   $ 0.00     $ (0.02 )   $ 0.00  
                                 
Weighted average common stock shares outstanding
                               
Basic
    61,782,404       57,790,618       61,245,387       55,619,780  
Diluted
    61,782,404       70,796,686       61,245,387       65,707,716  

 

See accompanying notes to unaudited consolidated financial statements.

 
3

 

BLAST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Six Months Ended June 30, 2009 and 2008
 (Unaudited)

   
2009
   
2008
 
Cash Flows From Operating Activities:
           
Net loss
  $ (1,082,423 )   $ 10,364  
Income from discontinued operations
    -       (1,689,342 )
Loss from continuing operations
    (1,082,423 )     (1,678,978 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    67,690       4,617  
Bad debt expense
    10,778       -  
Option and warrant expense
    9,300       360,111  
Loss on disposition of equipment
    3,885       1,270  
Stock issued for services
    -       42,500  
Changes in:
               
Accounts receivable
    30,130       (12,767 )
Other current assets
    16,949       4,392  
Accounts payable
    160,607       (1,615,839 )
Accrued expenses
    175,770       9,149  
Deferred revenue
    (1,064 )     143,921  
Net Cash Used In Operating Activities
    (608,378 )     (2,741,624 )
                 
Cash Flows From Investing Activities:
               
Proceeds from sale of fixed assets
    5,000       -  
Cash paid for purchase of fixed assets
    (77,520 )     (6,528 )
Cash paid for construction of equipment
    (10,511 )     (75,778 )
Net Cash Used In Investing Activities
    (83,031 )     (82,306 )
                 
Cash Flows From Financing Activities:
               
Borrowings on debtor-in-possession financing
    -       100,000  
Payments on short term debt
    (13,147 )     (582,781 )
Issuance of convertible preferred stock
    -       4,000,000  
Common stock repurchased and cancelled
    -       (900 )
Net Cash Provided By Financing Activities
    (13,147 )     3,516,319  
                 
Discontinued operating activities
    -       -  
Net Cash Provided By Discontinued Operations
    -       -  
                 
Net change in cash
    (704,556 )     692,389  
Cash at beginning of period
    731,631       48,833  
Cash at end of period
  $ 27,075     $ 741,222  
                 
Cash paid for:
               
Interest
  $ 970     $ 31,589  
Income taxes
    -       -  
                 
Non-Cash Transactions:
               
Conversion of deferred board compensation to common stock
    -       161,000  
Conversion of related party interest to common stock
    -       31,794  
Conversion of related party advances to common shares
    -       800,000  
Issuance of note payable for related party debt and accrued interest
    -       1,120,000  
Cashless exercise of warrants
    1,350       2,900  
Prepaid insurance financed with note payable
    111,059       106,875  
Property financed with note payable
    21,455       -  
 
 
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 June 30, 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 and six month periods ended June 30, 2009 and therefore, basic and diluted earnings per share for those periods are the same as all potential common equivalent shares would be anti-dilutive.

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 $27,000, current assets of $0.9 million and stockholders’ equity of $3.2 million as of June 30, 2009. Blast had a loss from continuing operations of approximately $1.1 million for the six months ended June 30, 2009 and an accumulated deficit at June 30, 2009 of approximately $71.9 million. 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
 
98,975
 
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
       
1,342,765
 
1,259,545
             
Less:  accumulated depreciation
     
(118,591)
 
(68,282)
       
$ 1,224,174
 
$ 1,191,263


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 returns to the Company.  John MacDonald, CFO and Corporate Secretary, and Andrew Wilson, VP Business Development (a non-executive position) were reduced to half pay until October 2009 at which time payment is expected to be received from Quicksilver (as defined below). 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.



 
6

 

NOTE 5 – 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 June 30, 2009. As of June 30, 2009, the aggregate and per share dividend arrearages were $372,165 and $0.06, respectively.

NOTE 6 - 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 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 cash-less exercise formula. Of the 6,090,000 $0.01 warrants originally granted to Laurus, 1,713,913 warrants remain unexercised as of June 30, 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 six months ended June 30, 2009, the Company recognized share-based compensation expense of $9,300. The remaining amount of unamortized options expense at June 30, 2009 is $32,517.

Activity in options during the six months ended June 30, 2009 and related balances outstanding as of that date are reflected below. No options were issued during the six months ended June 30, 2009. There were 3,032,792 options outstanding at June 30, 2009. The intrinsic value of the exercisable options at June 30, 2009 was -0-.


 
Number of Shares
 
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 June 30, 2009
3,032,792
 
$ 0.59
 
6.0
           
Exercisable at June 30, 2009
2,866,125
 
$ 0.62
 
5.8



 
7

 

Activity in warrants during the six months ended June 30, 2009 and related balances outstanding as of that date are reflected below. No warrants were issued during the six months ended June 30, 2009. There were 11,995,089 warrants outstanding at June 30, 2009. The intrinsic value of the exercisable warrants at June 30, 2009 was $139,958.


 
Number of Shares
 
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
(158,824)
 
0.01
   
           
Outstanding at June 30, 2009
11,995,089
 
$ 0.84
 
3.4
           
Exercisable at June 30, 2009
11,995,089
 
$ 0.84
 
3.4



NOTE 7 – 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.

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.

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.


 
8

 

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 current and long term receivable in the balance sheet, net of contingent legal fees.

Alberta Energy Partners
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. That matter is presently pending and the Fifth District Court of Appeals has scheduled to hear oral arguments on this matter on September 1, 2009. 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.

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.

NOTE 8 – BUSINESS SEGMENTS

Blast has two reportable segments: (1) Satellite Communications Services and (2) Down-hole Solutions.  A reportable segment is a business unit that has a distinct type of business based upon the type and nature of services and products offered.  Blast evaluates performance and allocates resources based on profit or loss from operations before other income or expense and income taxes.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  The table below reports certain financial information by reportable segment for the three and six months ended June 30, 2009 and 2008:


   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Satellite Communications
  $ 84,319     $ 79,973     $ 182,332     $ 151,625  
Down-hole Solutions
    -       -       20,000       -  
Total Revenue
  $ 84,319     $ 79,973     $ 202,332     $ 151,625  
                                 
Costs of Goods Sold:
                               
Satellite Communications
  $ 74,370     $ 96,935     $ 163,365     $ 193,235  
Down-hole Solutions
    194,709       100,612       294,425       124,433  
Corporate
    385,608       880,146       780,718       1,468,243  
Total Costs of Goods Sold
  $ 654,687     $ 1,077,693     $ 1,238,508     $ 1,785,911  
                                 
Operating profit (loss):
                               
Satellite Communications
  $ 9,949     $ (16,962 )   $ 18,967     $ (41,610 )
Down-hole Solutions
    (194,709 )     (100,612 )     (274,425 )     (124,433 )
Corporate
    (385,608 )     (880,146 )     (780,718 )     (1,468,243 )
Operating Loss
  $ (570,368 )   $ (997,720 )   $ (1,036,176 )   $ (1,634,286 )


 
9

 

NOTE 9 – DISCONTINUED OPERATIONS

There are no assets or liabilities associated with the discontinued operations at June 30, 2009 and December 31, 2008.

Net income from the discontinuance of drilling operations for the three and six months ended June 30, 2009 and 2008 are as follows:


   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues
  $ -     $ -     $ -     $ -  
                                 
Operating Expenses:
                               
Cost of sales
    -       (47,070 )     -       (43,403 )
Selling, general and administrative
    -       -       -       644  
Interest expense
    -       -       -       1,047  
Total operating expenses
    -       (47,070 )             (41,712 )
                                 
Gain from discontinued operations
    -       47,070       -       41,712  
                                 
Other income (expense)
                               
Gain on forgiveness of debt
    -       1,648,600       -       1,648,600  
Other expenses
    -       -       -       (1,007 )
Interest income
    -       -       -       37  
Total other income (expense)
    -       1,648,600       -       1,647,630  
                                 
Net loss from discontinued operations
  $ -     $ 1,695,670     $ -     $ 1,689,342  


NOTE 10 – SUBSEQUENT EVENTS

In August 2009, Blast entered into a Demand Promissory Note (“Note”) with a third-party individual (“Lender”), pursuant to which the Lender loaned Blast $60,000.  The Note is due and payable on the earlier to occur of (a) August 10, 2010, or (b) any time after October 10, 2009, if the Lender declares all or a portion of the loan due and payable on such date (the “Due Date”). The Note bears interest at the rate of 8% per annum, with interest and principal payable on the Due Date.  Blast has 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).



 
10

 

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 June 30, 2009 Compared to the Three Months Ended June 30, 2008
 
Satellite Communications Services

Satellite Communications Services’ revenues increased by $4,000 to $84,000 for the three months ended June 30, 2009 compared to $80,000 for the three months ended June 30, 2008. The increase was the result of new business and customer renewals. The operating margin from Satellite Communications Services increased by $27,000 to an operating profit of $10,000 for the three months ended June 30, 2009 compared to an operating loss of $17,000 for the three months ended June 30, 2008.

Down-hole Solutions

Down-hole Solutions’ revenues were $-0- for the three months ended June 30, 2009 and 2008. The Company has resumed field testing of this technology and unsuccessfully attempted to drill laterals on several wells during the quarter. The loss generated increased $94,000 to $195,000 for the three months ended   June 30, 2009 compared to a loss of $101,000 during the three months ended June 30, 2008. This increase is primarily due to rig crew, repairs, and maintenance costs associated with rig deployment compared with certain pre-deployment fabrication costs and rig repairs incurred in 2008.

Depreciation and Amortization

Depreciation and amortization expense increased by $34,000 to $36,000 for the three months ended June 30, 2009 compared to $2,000 for the three months ended June 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
 
Selling, general and administrative (“SG&A”) expenses decreased by $537,000 to $339,000 for the three months ended June 30, 2009 compared to $876,000 for the three months ended June 30, 2008.
 
 
11

 

 
 
For the Three Months Ended June 30,
Increase
(Decrease)
(in thousands)
2009
2008
Payroll and related costs
$ 111
$ 122
$ (11)
Option and warrant expense
1
308
(307)
Legal fees & settlements
62
234
(172)
External services
81
150
(69)
Insurance
50
32
18
Travel & entertainment
15
17
(2)
Office rent, communications,  misc.
19
13
6
 
$ 339
$ 876
$ (537)


Significantly lower administrative costs were primarily a result of lower payroll costs related to an increase in the allocation to the Down-hole Services business, lower legal fees following the emergence from bankruptcy and lower non-cash charges associated with the lack of grants of warrants and options during the three month ended June 30, 2009, compared to the three months ended June 30, 2008.

Interest Expense

Interest expense was $23,000 for the three months ended June 30, 2009 and 2008. During the three months ended June 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.

Loss from Continuing Operations

Loss from continuing operations improved by $425,000 to $594,000 for the three months ended June 30, 2009 compared to $1,019,000 for the three months ended June 30, 2008, primarily due to significantly lower administrative costs partially offset by higher costs of services from the Down-hole Solutions business.

Income  from Discontinued Operations

Income from discontinued operations was $-0- for the three months ended June 30, 2009 compared to a gain of $1.7 million for the three months ended June 30, 2008. These operations relating to our prior rig acquisition and related oil drilling 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 Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) which irrevocably forgave an accumulated liability of $1,648,600 previously accrued to cover an advance made by Hallwood.

Net Income (Loss  )

Net loss increased by $1,271,000 to a loss of $594,000 for the three months ended June 30, 2009 compared to a net gain of $677,000 for the three months ended June 30, 2008, primarily due to the gain from the April 2008 settlement whereby Hallwood irrevocably forgave an accumulated liability of $1,648,600 previously accrued to cover an advance made by Hallwood. The loss in 2009 was primarily due to higher costs of services from Down-hole Solutions business partially offset by lower administrative costs.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

Satellite Communications Services

Satellite Communications Services’ revenues increased by $30,000 to $182,000 for the six months ended June 30, 2009 compared to $152,000 for the six months ended June 30, 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 $61,000 to a gross profit of $19,000 for the six months ended June 30, 2009 compared to a gross loss of $42,000 for the six months ended June 30, 2008.

 
12

 

Down-hole Solutions

Down-hole Solutions’ revenues for the six months ended June 30, 2009 increased to $20,000 compared to $-0- revenue for the six months ended June 30, 2008. The Company resumed field testing of this Applied Fluid Jetting (“AFJ”) technology in fiscal 2009, and the lateral jetting rig successfully drilled laterals on one well in January 2009 but has not been successful on laterals attempted in the second quarter of 2009. The loss generated increased $150,000 to $274,000 for the six months ended   June 30, 2009 compared to $124,000 during the six months ended June 30, 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 $63,000 to $68,000 for the six months ended June 30, 2009 compared to $5,000 for the six months ended June 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
 
Selling, general and administrative (“SG&A”) expenses decreased by $764,000 to $698,000 for the six months ended June 30, 2009 compared to $1,462,000 for the six months ended June 30, 2008.


 
For the Six Months Ended June 30,
Increase
(Decrease)
(in thousands)
2009
2008
Payroll and related costs
$ 226
$ 291
$ (65)
Option and warrant expense
9
360
(351)
Legal fees & settlements
72
461
(389)
External services
240
221
19
Insurance
79
63
16
Travel & entertainment
33
30
3
Office rent, communications,  misc.
39
36
3
 
$ 698
$ 1,462
$ (764)


Significantly lower administrative costs were primarily a result of lower payroll costs related to deferred salaries being paid upon emergence from bankruptcy in 2008 and increase in the allocation to the Down-hole Services business, 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 six months ended June 30, 2009.

Interest Expense

Interest expense decreased by $20,000 to $46,000 for the six months ended June 30, 2009 compared to $66,000 for the six months ended June 30, 2008. During the six months ended June 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. 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

Loss from continuing operations improved by $0.6 million to $1.1 million for the six months ended June 30, 2009 compared to $1.7 million for the six months ended June 30, 2008, primarily due to lower administrative costs partially offset by higher costs of services from Down-hole Solutions business.

Income from Discontinued Operations

Income from discontinued operations was $-0- for the six months ended June 30, 2009 compared to a gain of $1.7 million for the six months ended June 30, 2008. These operations continue to have no activity, having been discontinued since mid 2007. The gain from in 2008 was primarily due to the April 2008 settlement with Hallwood which irrevocably forgave an accumulated liability of $1,648,600 previously accrued to cover an advance made by Hallwood.

 
13

 

Net Loss  

The net loss increased by $1.0 million to $1,1 million for the six months ended June 30, 2009 compared to a gain of $10,000 for the six months ended June 30, 2008, primarily due to the gain from the April 2008 settlement whereby Hallwood irrevocably forgave an accumulated liability of $1,648,600 previously accrued to cover an advance made by Hallwood. The loss in 2009 was primarily due to higher costs of services from Down-hole Solutions business partially offset by lower administrative costs.

Liquidity and Capital Resources
 
Blast had total current assets of $0.9 million as of June 30, 2009, including a cash balance of $27,000, 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 June 30, 2009 of $5.1 million compared to total assets of $5.7 million as of December 31, 2008.  This decrease is primarily due to cash expenditures related to the costs of deploying the AFJ rig as described above.

Blast had total liabilities of $1.8 million as of June 30, 2009, including current liabilities of $0.7 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, increase in accounts payable, and the deferral of officers’ salaries. Blast also had net working capital of $0.2 million and stockholders’ equity of $3.2 million as of June 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 returns to the Company.  John MacDonald, CFO and Corporate Secretary, and Andrew Wilson, VP Business Development (a non-executive position) were reduced to half pay until October 2009 at which time payment is expected to be received from Quicksilver (as defined below). 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.

On or around August 10, 2009, Blast entered into a Demand Promissory Note with a third-party individual (“Lender”), pursuant to which Lender loaned Blast $60,000, which amount bears interest at the rate of 8% per annum, with interest and principal payable on the Due Date (as described below).  The loan is due and payable on the earlier to occur of (a) August 10, 2010, and (b) any time after October 10, 2009, if Lender declares all or a portion of the loan due and payable on such date (the “Due Date”).  Blast has the right to repay the loan at any time without penalty.  In connection with and consideration for the loan, Blast granted the Lender warrants to purchase 250,000 shares of Blast’s common stock, which 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).

Cash Flows from Operating Activities

Blast had net cash used in operating activities of approximately $608,000 for the six months ended June 30, 2009, which was mainly due to the loss from continuing operations of $1,082,000.

Cash Flows used in Investing Activities

Blast had net cash used in investing activities of $83,000 for the six months ended June 30, 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 net cash used in financing activities of $13,000 for the six months ended June 30, 2009.


 
14

 

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 June 30, 2009, we had no off-balance sheet arrangements.
 
Recent Accounting Pronouncements

For the period ended June 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

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.

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.


 
15

 

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 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, so we will continue to recognize a zero carrying value in our financial statements until the matter is fully resolved.

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 on the balance sheet, net of contingent legal fees.

Alberta Energy Partners
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. That matter is presently pending and the Fifth District Court of Appeals has scheduled to hear oral arguments on this matter on September 1, 2009. 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.

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.

 
16

 

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 provide 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

None.

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

Our Annual Meeting of stockholders was held on May 27, 2009, which meeting had a record date of April 9, 2009, and disclosed herein are the final voting results of such meeting:

 
NUMBER OF VOTES CAST:
 
YES(1)
WITHHELD AUTHORITY
Proposal One - Election of Directors (all of which were Directors prior to the meeting, and whose term continued after the meeting):
   
John R. Block,
54,762,962
2,850,820
Roger P. (Pat) Herbert,
56,657,987
955,795
Joseph J. Penbera, Ph.D.,
54,531,597
3,082,185
Jeffrey R. Pendergraft (2), and
56,669,987
943,795
Michael L. Peterson
57,401,034
1,888,415
       
 
YES(1)
NO
ABSTAIN
Proposal Two – Approval of Independent Public Accountant (GBH CPAs, PC):
 
57,401,034
 
146,041
 
66,708
Proposal Three – Approval of the Company’s 2009 Stock Incentive Plan and the cancellation of the Company’s previously adopted 2003 Employee Stock Option Plan:
 
 
32,539,618
 
 
850,113
 
 
257,150

(1) Includes the vote of all 6,000,000 shares of Blast’s Series A Preferred Stock, which are each able to vote the number of shares of common stock such shares are convertible into, and therefore each vote one voting share or 6,000,000 voting shares total.

(2) Resigned effective July 13, 2009.

As a result of the voting described above, all of our director nominees were re-elected as directors of Blast, GBH CPAs, PC, was approved as Blast’s independent auditors for the fiscal year ended December 31, 2009, and Blast’s 2009 Stock Incentive Plan, and the cancellation of the 2003 Employee Stock Option Plan (without affecting the validity of any securities granted pursuant to such plan) were approved at the meeting.

Blast’s 2009 Stock Incentive Plan:

The 2009 Stock Incentive Plan (the “Plan”) is intended to secure for the Company the benefits arising from ownership of the Company's common stock by the employees, officers, directors and consultants of the Company, all of whom are and will be responsible for the Company's future growth.  The Plan is designed to help attract and retain for the Company and its affiliates personnel of superior ability for positions of exceptional responsibility, to reward employees, officers, directors and consultants for their services and to motivate such individuals through added incentives to further contribute to the success of the Company and its affiliates.

 
17

 

Pursuant to the Plan, the Board of Directors (or a committee thereof) has the ability to award grants of incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the Plan to the Company’s employees, officers, directors and consultants.  The number of securities issuable pursuant to the Plan is initially 5,000,000, provided that the number of shares available for issuance under the Plan will be increased on the first day of each Fiscal Year (as defined below) beginning with the Company’s 2011 Fiscal Year, in an amount equal to the greater of (i) 2,000,000 shares; or (ii) three percent (3%) of the number of issued and outstanding shares of the Company on the first day of such Fiscal Year.  The Company’s “Fiscal Year” shall be defined as the twelve month accounting period which the Company has designated for its public accounting purposes, which shall initially be the period from January 1 to December 31, and shall thereafter be such Fiscal Year as the Company shall adopt from time to time.

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibit 4.1*
 
Blast Energy Services, Inc. 2009 Stock Incentive Plan
     
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.

 
Blast Energy Services, Inc.
     
 
By:
/s/ Michael Peterson
   
Michael Peterson
   
Interim President and CEO
   
(Principal Executive Officer)
     
Date:  August 14, 2009
   
     
 
By:
/s/ John MacDonald, CFO
   
John MacDonald
   
Chief Financial Officer
   
(Principal Accounting Officer)
     
Date:  August 14, 2009
   



Exhibit 4.1
 
BLAST ENERGY SERVICES, INC.
2009 STOCK INCENTIVE PLAN

ARTICLE I -- PREAMBLE

1.1  This 2009 Stock Incentive Plan of Blast Energy Services, Inc. (the "Company") is intended to secure for the Company and its Affiliates the benefits arising from ownership of the Company's Common Stock by the Employees, Officers, Directors and Consultants of the Company and its Affiliates, all of whom are and will be responsible for the Company's future growth.  The Plan is designed to help attract and retain for the Company and its Affiliates personnel of superior ability for positions of exceptional responsibility, to reward Employees, Officers, Directors and Consultants for their services and to motivate such individuals through added incentives to further contribute to the success of the Company and its Affiliates. With respect to persons subject to Section 16 of the Act, transactions under this Plan are intended to satisfy the requirements of Rule 16b-3 of the Act.

1.2  Awards under the Plan may be made to an Eligible Person in the form of (i) Incentive Stock Options (to Eligible Employees only); (ii) Nonqualified Stock Options; (iii) Restricted Stock; (iv) Stock Awards; (v) Performance Shares; or (vi) any combination of the foregoing.

1.3  The Company’s board of directors adopted the Plan on March 30, 2009.  The Plan shall be effective April 1, 2009, (the "Effective Date"), subject to approval by the shareholders of the Company to the extent necessary to satisfy the requirements of the Code, the Act, or other applicable federal or state law.  Unless sooner terminated as provided elsewhere in this Plan, this Plan shall terminate upon the close of business on the day next preceding the tenth (10th) anniversary of the Effective Date.  Award Agreements outstanding on such date shall continue to have force and effect in accordance with the provisions thereof.

1.4  The Plan shall be governed by, and construed in accordance with, the laws of the State of Texas (except its choice-of-law provisions).

1.5 Capitalized terms shall have the meaning provided in Article II unless otherwise provided in this Plan or any related Award Agreement.

ARTICLE II -- DEFINITIONS

DEFINITIONS.  Except where the context otherwise indicates, the following definitions apply:

2.1  "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.

2.2  "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereinafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.

2.3  "Award" means an award granted to a Participant in accordance with the provisions of the Plan, including, but not limited to, Stock Options, Restricted Stock, Stock Awards, Performance Shares, or any combination of the foregoing.

2.4  "Award Agreement" means the separate written agreement evidencing each Award granted to a Participant under the Plan.

2.5  "Board of Directors" or "Board" means the Board of Directors of the Company, as constituted from time to time.

 
 

 

2.7  "Change of Control" means (i) the adoption of a plan of merger or consolidation of the Company with any other corporation or association as a result of which the holders of the voting capital stock of the Company as a group would receive less than 50% of the voting capital stock of the surviving or resulting corporation; (ii) the approval by the Board of Directors of an agreement providing for the sale or transfer (other than as security for obligations of the Company) of substantially all of the assets of the Company; or (iii) in the absence of a prior expression of approval by the Board of Directors, the acquisition of more than 20% of the Company's voting capital stock by any person within the meaning of Rule 13d-3 under the Act (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company).

2.8  "Code" means the Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder.

2.9  "Committee" means a committee of two or more members of the Board appointed by the Board in accordance with Section 3.2 of the Plan.

2.10  "Common Stock" means the Company’s common stock.

2.11  "Company" means Blast Energy Services, Inc., a Texas corporation.

2.12.  "Consultant" means any person, including an advisor engaged by the Company or an Affiliate to render bona fide consulting or advisory services to the Company or an Affiliate, other than as an Employee, Director or Non-Employee Director.

2.13  "Director" means a member of the Board of Directors of the Company.

2.14  "Disability" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code.

2.15  "Effective Date" shall be the date set forth in Section 1.3 of the Plan.

2.16  "Eligible Employee" means an Eligible Person who is an Employee of the Company or any Affiliate.

2.17  "Eligible Person" means any Employee, Officer, Director, Non-Employee Director or Consultant of the Company or any Affiliate, except for instances where services are in connection with the offer or sale of securities in a capital-raising transaction, or they directly or indirectly promote or maintain a market for the Company’s securities, subject to any other limitations as may be provided by the Code, the Act, or the Board.  In making such determinations, the Board may take into account the nature of the services rendered by such person, his or her present and potential contribution to the Company’s success, and such other factors as the Board in its discretion shall deem relevant.

2.19  “Employee” means an individual who is a common-law employee of the Company or an Affiliate including employment as an Officer.  Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate.

2.20  "ERISA" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended.

2.21  "Fair Market Value" means:

(a) for purposes of an Incentive Stock Option, if there is a market for the Company’s stock, on a stock exchange or in an over-the-counter market, or otherwise, the Fair Market Value shall be the mean between the highest and lowest quoted selling prices on the valuation date of the Incentive Stock Option, or if there were no sales of the Company’s Common Stock on the valuation date, the Fair Market Value shall be the weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation date.  If a valuation pursuant to this paragraph is not available, the appropriate method described in Section 20.2031-2 of the Treasury Regulations adopted under the Code shall be used for the Fair Market Value, and

 
 

 


(b) for all other purposes, the mean between the highest and lowest quoted selling prices of the Common Stock (if actual sales price information on such trading day is not available, the mean between the bona fide bid and asked prices on such trading day shall be used) on the trading day immediately prior to the date on which a determination is being made pursuant to this Section 2.21 (the “Mean Selling Price”), as reported by the National Association of Securities Dealers Automated Quotation System (“NASDAQ”), or if the Common Stock is not traded on NASDAQ, the Mean Selling Price in the over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Fair Market Value shall be the Mean Selling Price on such exchange; and, provided further, that if the Common Stock is not quoted or listed by any organization, the fair value of the Common Stock, as determined by the Board, whose determination shall be conclusive, shall be used.  In no event shall the Fair Market Value of any share of Common Stock be less than its par value.

2.22  "Grant Date" means, as to any Award, the latest of:

(a) the date on which the Board authorizes the grant of the Award; or

(b) the date the Participant receiving the Award becomes an Employee or a Director of the Company or its Affiliate, to the extent employment status is a condition of the grant or a requirement of the Code or the Act; or

                      (c) such other date (later than the dates described in (a) and (b) above) as the Board may designate and as set forth in the Participant's Award Agreement.

2.23  "Immediate Family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.

2.24  "Incentive Stock Option" means a Stock Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and is granted under Article IV of the Plan and designated as an Incentive Stock Option in a Participant's Award Agreement.

2.25  "Non-Employee Director" shall have the meaning set forth in Rule 16b-3 under the Act.

2.26  "Nonqualified Stock Option" means a Stock Option not intended to qualify as an Incentive Stock Option and is not so designated in the Participant's Award Agreement.

2.27  “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Act.

2.28  "Option Period" means the period during which a Stock Option may be exercised from time to time, as established by the Board and set forth in the Award Agreement for each Participant who is granted a Stock Option.

2.29  "Option Price" means the purchase price for a share of Common Stock subject to purchase pursuant to a Stock Option, as established by the Board and set forth in the Award Agreement for each Participant who is granted a Stock Option.

2.30  “Outside Director” means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code.

 
 

 


2.31  "Participant" means an Eligible Person to whom an Award has been granted and who has entered into an Award Agreement evidencing the Award or, if applicable, such other person who holds an outstanding Award.

2.32  "Performance Objectives" shall have the meaning set forth in Article IX of the Plan.

2.33  "Performance Period" shall have the meaning set forth in Article IX of the Plan.

2.34  "Performance Share" means an Award under Article IX of the Plan of a unit valued by reference to the Common Stock, the payout of which is subject to achievement of such Performance Objectives, measured during one or more Performance Periods, as the Board, in its sole discretion, shall establish at the time of such Award and set forth in a Participant's Award Agreement.

2.35  "Plan" means this Blast Energy Services, Inc. 2009 Stock Incentive Plan, as it may be amended from time to time.

2.36  “Reporting Person” means a person required to file reports under Section 16(a) of the Act.

2.37  "Restricted Stock" means an Award under Article VII of the Plan of shares of Common Stock that are at the time of the Award subject to restrictions or limitations as to the Participant's ability to sell, transfer, pledge or assign such shares, which restrictions or limitations may lapse separately or in combination at such time or times, in installments or otherwise, as the Board, in its sole discretion, shall determine at the time of such Award and set forth in a Participant's Award Agreement.

2.38  "Restriction Period" means the period commencing on the Grant Date with respect to such shares of Restricted Stock and ending on such date as the Board, in its sole discretion, shall establish and set forth in a Participant's Award Agreement.

2.39  "Retirement" means retirement as determined under procedures established by the Board or in any Award, as set forth in a Participant's Award Agreement.

2.40  “Rule 16b-3” means Rule 16b-3 promulgated under the Act or any successor to Rule 16b-3, as in effect from time to time.  Those provisions of the Plan which make express reference to Rule 16b-3, or which are required in order for certain option transactions to qualify for exemption under Rule 16b-3, shall apply only to a Reporting Person.

2.41  "Stock Award" means an Award of shares of Common Stock under Article VIII of the Plan.

2.42  "Stock Option" means an Award under Article IV or Article V of the Plan of an option to purchase Common Stock. A Stock Option may be either an Incentive Stock Option or a Nonqualified Stock Option.

2.43  "Ten Percent Stockholder" means an individual who owns (or is deemed to own pursuant to Section 424(d) of the Code), at the time of grant, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any of its Affiliates.

2.44  "Termination of Service" means (i) in the case of an Eligible Employee, the discontinuance of employment of such Participant with the Company or its Subsidiaries for any reason other than a transfer to another member of the group consisting of the Company and its Affiliates and (ii) in the case of a Director who is not an Employee of the Company or any Affiliate, the date such Participant ceases to serve as a Director. The determination of whether a Participant has discontinued service shall be made by the Board in its sole discretion. In determining whether a Termination of Service has occurred, the Board may provide that service as a Consultant or service with a business enterprise in which the Company has a significant ownership interest shall be treated as employment with the Company.

 
 

 

ARTICLE III – ADMINISTRATION

3.1  The Plan shall be administered by the Board of Directors of the Company.  The Board shall have the exclusive right to interpret and construe the Plan, to select the Eligible Persons who shall receive an Award, and to act in all matters pertaining to the grant of an Award and the determination and interpretation of the provisions of the related Award Agreement, including, without limitation, the determination of the number of shares subject to Stock Options and the Option Period(s) and Option Price(s) thereof, the number of shares of Restricted Stock or shares subject to Stock Awards or Performance Shares subject to an Award, the vesting periods (if any) and the form, terms, conditions and duration of each Award, and any amendment thereof consistent with the provisions of the Plan.  The Board may adopt, establish, amend and rescind such rules, regulations and procedures as it may deem appropriate for the proper administration of the Plan, make all other determinations which are, in the Board’s judgment, necessary or desirable for the proper administration of the Plan, amend the Plan or a Stock Award as provided in Article XI, and terminate or suspend the Plan as provided in Article XI.  All acts, determinations and decisions of the Board made or taken pursuant to the Plan or with respect to any questions arising in connection with the administration and interpretation of the Plan or any Award Agreement, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all persons.

3.2  The Board may, to the full extent permitted by and consistent with applicable law and the Company’s Bylaws, and subject to Subparagraph 3.2(b) hereinbelow, delegate any or all of its powers with respect to the administration of the Plan to a Committee consisting of not fewer than two members of the Board each of whom shall qualify (at the time of appointment to the Committee and during all periods of service on the Committee) in all respects as a Non-Employee Director and as an Outside Director.

(a)  If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in the Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not consistent with the provisions of the Plan, as may be adopted from time to time by the Board.


(b)  The Board may abolish the Committee at any time and reassume all powers and authority previously delegated to the Committee.

(c)  In addition to, and not in limitation of, the right of any Committee so designated by the Board to administer this Plan to grant Awards to Eligible Persons under this Plan, the full Board of Directors may from time to time grant Awards to Eligible Persons pursuant to the terms and conditions of this Plan, subject to the requirements of the Code, Rule 16b-3 under the Act or any other applicable law, rule or regulation. In connection with any such grants, the Board of Directors shall have all of the power and authority of the Committee to determine the Eligible Persons to whom such Awards shall be granted and the other terms and conditions of such Awards.

3.3  Without limiting the provisions of this Article III, and subject to the provisions of Article X, the Board is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants and to the Company, with respect to an outstanding Award in the event of a Change of Control as described in Article X or other similar event. Such action may include, but shall not be limited to, establishing, amending or waiving the form, terms, conditions and duration of an Award and the related Award Agreement, so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, an accelerated release of restrictions or other modifications. The Board may take such actions pursuant to this Section 3.3 by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in an Award and the related Award Agreement, or by taking action with respect to individual Participants from time to time.

3.4  Subject to the provisions of Section 3.9 and Section 3.4(a), the initial maximum aggregate number of shares of Common Stock which may be issued pursuant to Awards under the Plan shall be 5,000,000 shares. Such shares of Common Stock shall be made available from authorized and unissued shares of the Company.

 
 

 


(a)  The number of shares available for issuance under the Plan will be increased on the first day of each Fiscal Year beginning with the Company’s 2010 Fiscal Year, in an amount equal to the greater of (i) 2,000,000 shares; or (ii) three percent (3%) of the number of issued and outstanding shares of the Company’s Common Stock as reported on the Company’s shareholders list as prepared by the Company’s Transfer Agent on the first day of such Fiscal Year.  For the purposes of this Section, the Company’s “Fiscal Year” shall be defined as the twelve month accounting period which the Company has designated for its public accounting purposes, which shall initially be the period from January 1 to December 31, and shall thereafter be such Fiscal Year as the Company shall adopt from time to time.

(b) For all purposes under the Plan, each Performance Share awarded shall be counted as one share of Common Stock subject to an Award.

(c) If, for any reason, any shares of Common Stock (including shares of Common Stock subject to Performance Shares) that have been awarded or are subject to issuance or purchase pursuant to Awards outstanding under the Plan are not delivered or purchased, or are reacquired by the Company, for any reason, including but not limited to a forfeiture of Restricted Stock or failure to earn Performance Shares or the termination, expiration or cancellation of a Stock Option, or any other termination of an Award without payment being made in the form of shares of Common Stock (whether or not Restricted Stock), such shares of Common Stock shall not be charged against the aggregate number of shares of Common Stock available for Award under the Plan and shall again be available for Awards under the Plan. In no event, however, may Common Stock that is surrendered or withheld to pay the exercise price of a Stock Option or to satisfy tax withholding requirements be available for future grants under the Plan.

(d) The foregoing subsections (a) and (c) of this Section 3.4 shall be subject to any limitations provided by the Code or by Rule 16b-3 under the Act or by any other applicable law, rule or regulation.

3.5  Each Award granted under the Plan shall be evidenced by a written Award Agreement, which shall be subject to and shall incorporate (by reference or otherwise) the applicable terms and conditions of the Plan and shall include any other terms and conditions (not inconsistent with the Plan) required by the Board.

3.6  The Company shall not be required to issue or deliver any certificates for shares of Common Stock under the Plan prior to:

(a) any required approval of the Plan by the shareholders of the Company; and

(b) the completion of any registration or qualification of such shares of Common Stock under any federal or state law, or any ruling or regulation of any governmental body that the Company shall, in its sole discretion, determine to be necessary or advisable.

3.7  The Board may require any Participant acquiring shares of Common Stock pursuant to any Award under the Plan to represent to and agree with the Company in writing that such person is acquiring the shares of Common Stock for investment purposes and without a view to resale or distribution thereof.  Shares of Common Stock issued and delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Board may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed and any applicable federal or state laws, and the Board may cause a legend or legends to be placed on the certificate or certificates representing any such shares to make appropriate reference to any such restrictions. In making such determination, the Board may rely upon an opinion of counsel for the Company.

 
 

 


3.8  Except as otherwise expressly provided in the Plan or in an Award Agreement with respect to an Award, no Participant shall have any right as a shareholder of the Company with respect to any shares of Common Stock subject to such Participant's Award except to the extent that, and until, one or more certificates representing such shares of Common Stock shall have been delivered to the Participant. No shares shall be required to be issued, and no certificates shall be required to be delivered, under the Plan unless and until all of the terms and conditions applicable to such Award shall have, in the sole discretion of the Board, been satisfied in full and any restrictions shall have lapsed in full, and unless and until all of the requirements of law and of all regulatory bodies having jurisdiction over the offer and sale, or issuance and delivery, of the shares shall have been fully complied with.

3.9  The total amount of shares with respect to which Awards may be granted under the Plan and rights of outstanding Awards (both as to the number of shares subject to the outstanding Awards and the Option Price(s) or other purchase price(s) of such shares, as applicable) shall be appropriately adjusted for any increase or decrease in the number of outstanding shares of Common Stock of the Company resulting from payment of a stock dividend on the Common Stock, a stock split or subdivision or combination of shares of the Common Stock, or a reorganization or reclassification of the Common Stock, or any other change in the structure of shares of the Common Stock. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined by the Board in its sole discretion. Any such adjustment may provide for the elimination of any fractional shares which might otherwise become subject to an Award. All adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Incentive Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code.

3.10  No director or person acting pursuant to authority delegated by the Board shall be liable for any action or determination under the Plan made in good faith.  The members of the Board shall be entitled to indemnification by the Company in the manner and to the extent set forth in the Company's Articles of Incorporation, as amended, Bylaws or as otherwise provided from time to time regarding indemnification of Directors.

3.11  The Board shall be authorized to make adjustments in any performance based criteria or in the other terms and conditions of outstanding Awards in recognition of unusual or nonrecurring events affecting the Company (or any Affiliate, if applicable) or its financial statements or changes in applicable laws, regulations or accounting principles. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement in the manner and to the extent it shall deem necessary or desirable to reflect any such adjustment. In the event the Company (or any Affiliate, if applicable) shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Board may, in its sole discretion, make such adjustments in the terms of outstanding Awards under the Plan as it shall deem appropriate.

3.12  Subject to the express provisions of the Plan, the Board shall have full power and authority to determine whether, to what extent and under what circumstances any outstanding Award shall be terminated, canceled, forfeited or suspended. Notwithstanding the foregoing or any other provision of the Plan or an Award Agreement, all Awards to any Participant that are subject to any restriction or have not been earned or exercised in full by the Participant shall be terminated and canceled if the Participant is terminated for cause, as determined by the Board in its sole discretion.

ARTICLE IV -- INCENTIVE STOCK OPTIONS

4.1  The Board, in its sole discretion, may from time to time on or after the Effective Date grant Incentive Stock Options to Eligible Employees, subject to the provisions of this Article IV and Articles III and VI and subject to the following conditions:

(a) Incentive Stock Options shall be granted only to Eligible Employees, each of whom may be granted one or more of such Incentive Stock Options at such time or times determined by the Board.

 
 

 


(b) The Option Price per share of Common Stock for an Incentive Stock Option shall be set in the Award Agreement, but shall not be less than (i) one hundred percent (100%) of the Fair Market Value of the Common Stock at the Grant Date, or (ii) in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the Grant Date.

(c) An Incentive Stock Option may be exercised in full or in part from time to time within ten (10) years from the Grant Date, or such shorter period as may be specified by the Board as the Option Period and set forth in the Award Agreement; provided, however, that, in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, such period shall not exceed five (5) years from the Grant Date; and further, provided that, in any event, the Incentive Stock Option shall lapse and cease to be exercisable upon a Termination of Service or within such period following a Termination of Service as shall have been determined by the Board and set forth in the related Award Agreement; and provided, further, that such period shall not exceed the period of time ending on the date three (3) months following a Termination of Service, unless employment shall have terminated:

(i) as a result of Disability, in which event such period shall not exceed the period of time ending on the date twelve (12) months following a Termination of Service; or

(ii) as a result of death, or if death shall have occurred following a Termination of Service (other than as a result of Disability) and during the period that the Incentive Stock Option was still exercisable, in which event such period may not exceed the period of time ending on the earlier of the date twelve (12) months after the date of death;

and provided, further, that such period following a Termination of Service or death shall in no event extend beyond the original Option Period of the Incentive Stock Option.

(d) The aggregate Fair Market Value of the shares of Common Stock with respect to which any Incentive Stock Options (whether under this Plan or any other plan established by the Company) are first exercisable during any calendar year by any Eligible Employee shall not exceed one hundred thousand dollars ($100,000), determined based on the Fair Market Value(s) of such shares as of their respective Grant Dates; provided, however, that to the extent permitted under Section 422 of the Code, if the aggregate Fair Market Values of the shares of Common Stock with respect to which Stock Options intended to be Incentive Stock Options are first exercisable by any Eligible Employee during any calendar year (whether such Stock Options are granted under this Plan or any other plan established by the Company) exceed one hundred thousand dollars ($100,000), the Stock Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as  Nonqualified Stock Options.

(e) No Incentive Stock Options may be granted more than ten (10) years from the Effective Date.

(f) The Award Agreement for each Incentive Stock Option shall provide that the Participant shall notify the Company if such Participant sells or otherwise transfers any shares of Common Stock acquired upon exercise of the Incentive Stock Option within two (2) years of the Grant Date of such Incentive Stock Option or within one (1) year of the date such shares were acquired upon the exercise of such Incentive Stock Option.

4.2  Subject to the limitations of Section 3.4, the maximum aggregate number of shares of Common Stock subject to Incentive Stock Option Awards shall be the maximum aggregate number of shares available for Awards under the Plan.

4.3  The Board may provide for any other terms and conditions which it determines should be imposed for an Incentive Stock Option to qualify under Section 422 of the Code, as well as any other terms and conditions not inconsistent with this Article IV or Articles III or VI, as determined in its sole discretion and set forth in the Award Agreement for such Incentive Stock Option.

4.4  Each provision of this Article IV and of each Incentive Stock Option granted hereunder shall be construed in accordance with the provisions of Section 422 of the Code, and any provision hereof that cannot be so construed shall be disregarded.

 
 

 

ARTICLE V -- NONQUALIFIED STOCK OPTIONS

5.1  The Board, in its sole discretion, may from time to time on or after the Effective Date grant Nonqualified Stock Options to Eligible Persons, subject to the provisions of this Article V and Articles III and VI and subject to the following conditions:

(a) Nonqualified Stock Options may be granted to any Eligible Person, each of whom may be granted one or more of such Nonqualified Stock Options, at such time or times determined by the Board.

(b) The Option Price per share of Common Stock for a Nonqualified Stock Option shall be set in the Award Agreement and may be less than one hundred percent (100%) of the Fair Market Value of the Common Stock at the Grant Date; provided, however, that the exercise price of each Nonqualified Stock Option granted under the Plan shall in no event be less than the par value per share of the Company’s Common Stock.

(c) A Nonqualified Stock Option may be exercised in full or in part from time to time within the Option Period specified by the Board and set forth in the Award Agreement; provided, however, that, in any event, the Nonqualified Stock Option shall lapse and cease to be exercisable upon a Termination of Service or within such period following a Termination of Service as shall have been determined by the Board and set forth in the related Award Agreement.

5.2  The Board may provide for any other terms and conditions for a Nonqualified Stock Option not inconsistent with this Article V or Articles III or VI, as determined in its sole discretion and set forth in the Award Agreement for such Nonqualified Stock Option.

ARTICLE VI -- INCIDENTS OF STOCK OPTIONS

6.1  Each Stock Option shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Board and set forth in the related Award Agreement, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority.

6.2  Except as hereinafter described, a Stock Option shall not be transferable by the Participant other than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by the Participant or the Participant's guardian or legal representative.  In the event of the death of a Participant, any unexercised Stock Options may be exercised to the extent otherwise provided herein or in such Participant's Award Agreement by the executor or personal representative of such Participant's estate or by any person who acquired the right to exercise such Stock Options by bequest under the Participant's will or by inheritance. The Board, in its sole discretion, may at any time permit a Participant to transfer a Nonqualified Stock Option for no consideration to or for the benefit of one or more members of the Participant's Immediate Family (including, without limitation, to a trust for the benefit of the Participant and/or one or more members of such Participant's Immediate Family or a corporation, partnership or limited liability company established and controlled by the Participant and/or one or more members of such Participant's Immediate Family), subject to such limits as the Board may establish. The transferee of such Nonqualified Stock Option shall remain subject to all terms and conditions applicable to such Nonqualified Stock Option prior to such transfer. The foregoing right to transfer the Nonqualified Stock Option, if granted by the Board shall apply to the right to consent to amendments to the Award Agreement.

 
 

 


6.3  Shares of Common Stock purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Board, subject to limitations set forth in the Stock Option Award Agreement. The Board may, in its sole discretion, permit the exercise of a Stock Option by payment in cash or by tendering shares of Common Stock (either by actual delivery of such shares or by attestation), or any combination thereof, as determined by the Board. In the sole discretion of the Board, payment in shares of Common Stock also may be made with shares received upon the exercise or partial exercise of the Stock Option, whether or not involving a series of exercises or partial exercises and whether or not share certificates for such shares surrendered have been delivered to the Participant. The Board also may, in its sole discretion, permit the payment of the exercise price of a Stock Option by the voluntary surrender of all or a portion of the Stock Option. Shares of Common Stock previously held by the Participant and surrendered in payment of the Option Price of a Stock Option shall be valued for such purpose at the Fair Market Value thereof on the date the Stock Option is exercised.

6.4  The holder of a Stock Option shall have no rights as a shareholder with respect to any shares covered by the Stock Option (including, without limitation, any voting rights, the right to inspect or receive the Company’s balance sheets or financial statements or any rights to receive dividends or non-cash distributions with respect to such shares) until such time as the holder has exercised the Stock Option and then only with respect to the number of shares which are the subject of the exercise.  No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.

6.5  The Board may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Common Stock as the Stock Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at such Option Price, during such Option Period and on such other terms and conditions as are specified by the Board at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Common Stock previously subject to them shall be available for the grant of other Stock Options.

6.6  The Board may at any time offer to purchase a Participant's outstanding Stock Option for a payment equal to the value of such Stock Option payable in cash, shares of Common Stock or Restricted Stock or other property upon surrender of the Participant's Stock Option, based on such terms and conditions as the Board shall establish and communicate to the Participant at the time that such offer is made.

6.7  The Board shall have the discretion, exercisable either at the time the Award is granted or at the time the Participant discontinues employment, to establish as a provision applicable to the exercise of one or more Stock Options that, during a limited period of exercisability following a Termination of Service, the Stock Option may be exercised not only with respect to the number of shares of Common Stock for which it is exercisable at the time of the Termination of Service but also with respect to one or more subsequent installments for which the Stock Option would have become exercisable had the Termination of Service not occurred.

ARTICLE VII -- RESTRICTED STOCK

7.1  The Board, in its sole discretion, may from time to time on or after the Effective Date award shares of Restricted Stock to Eligible Persons as a reward for past service and an incentive for the performance of future services that will contribute materially to the successful operation of the Company an its Affiliates, subject to the terms and conditions set forth in this Article VII.

7.2  The Board shall determine the terms and conditions of any Award of Restricted Stock, which shall be set forth in the related Award Agreement, including without limitation:

(a) the purchase price, if any, to be paid for such Restricted Stock, which may be zero, subject to such minimum consideration as may be required by applicable law;

 
 

 


(b) the duration of the Restriction Period or Restriction Periods with respect to such Restricted Stock and whether any events may accelerate or delay the end of such Restriction Period(s);

(c) the circumstances upon which the restrictions or limitations shall lapse, and whether such restrictions or limitations shall lapse as to all shares of Restricted Stock at the end of the Restriction Period or as to a portion of the shares of Restricted Stock in installments during the Restriction Period by means of one or more vesting schedules;

(d) whether such Restricted Stock is subject to repurchase by the Company or to a right of first refusal at a predetermined price or if the Restricted Stock may be forfeited entirely under certain conditions;

(e) whether any performance goals may apply to a Restriction Period to shorten or lengthen such period; and

(f) whether dividends and other distributions with respect to such Restricted Stock are to be paid currently to the Participant or withheld by the Company for the account of the Participant.

7.3  Awards of Restricted Stock must be accepted within a period of thirty (30) days after the Grant Date (or such shorter or longer period as the Board may specify at such time) by executing an Award Agreement with respect to such Restricted Stock and tendering the purchase price, if any. A prospective recipient of an Award of Restricted Stock shall not have any rights with respect to such Award, unless such recipient has executed an Award Agreement with respect to such Restricted Stock, has delivered a fully executed copy thereof to the Board and has otherwise complied with the applicable terms and conditions of such Award.

7.4  In the sole discretion of the Board and as set forth in the Award Agreement for an Award of Restricted Stock, all shares of Restricted Stock held by a Participant and still subject to restrictions shall be forfeited by the Participant upon the Participant's Termination of Service and shall be reacquired, canceled and retired by the Company. Notwithstanding the foregoing, unless otherwise provided in an Award Agreement with respect to an Award of Restricted Stock, in the event of the death, Disability or Retirement of a Participant during the Restriction Period, or in other cases of special circumstances (including hardship or other special circumstances of a Participant whose employment is involuntarily terminated), the Board may elect to waive in whole or in part any remaining restrictions with respect to all or any part of such Participant's Restricted Stock, if it finds that a waiver would be appropriate.

7.5  Except as otherwise provided in this Article VII, no shares of Restricted Stock received by a Participant shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period.

7.6  Upon an Award of Restricted Stock to a Participant, a certificate or certificates representing the shares of such Restricted Stock will be issued to and registered in the name of the Participant. Unless otherwise determined by the Board, such certificate or certificates will be held in custody by the Company until (i) the Restriction Period expires and the restrictions or limitations lapse, in which case one or more certificates representing such shares of Restricted Stock that do not bear a restrictive legend (other than any legend as required under applicable federal or state securities laws) shall be delivered to the Participant, or (ii) a prior forfeiture by the Participant of the shares of Restricted Stock subject to such Restriction Period, in which case the Company shall cause such certificate or certificates to be canceled and the shares represented thereby to be retired, all as set forth in the Participant's Award Agreement.  It shall be a condition of an Award of Restricted Stock that the Participant deliver to the Company a stock power endorsed in blank relating to the shares of Restricted Stock to be held in custody by the Company.

 
 

 


7.7  Except as provided in this Article VII or in the related Award Agreement, a Participant receiving an Award of shares of Restricted Stock Award shall have, with respect to such shares, all rights of a shareholder of the Company, including the right to vote the shares and the right to receive any distributions, unless and until such shares are otherwise forfeited by such Participant; provided, however, the Board may require that any cash dividends with respect to such shares of Restricted Stock be automatically reinvested in additional shares of Restricted Stock subject to the same restrictions as the underlying Award, or may require that cash dividends and other distributions on Restricted Stock be withheld by the Company or its Affiliates for the account of the Participant. The Board shall determine whether interest shall be paid on amounts withheld, the rate of any such interest, and the other terms applicable to such withheld amounts.

ARTICLE VIII -- STOCK AWARDS

8.1  The Board, in its sole discretion, may from time to time on or after the Effective Date grant Stock Awards to Eligible Persons in payment of compensation that has been earned or as compensation to be earned, including without limitation compensation awarded or earned concurrently with or prior to the grant of the Stock Award, subject to the terms and conditions set forth in this Article VIII.

8.2  For the purposes of this Plan, in determining the value of a Stock Award, all shares of Common Stock subject to such Stock Award shall be set in the Award Agreement and may be less than one hundred percent (100%) of the Fair Market Value of the Common Stock at the Grant Date.

8.3  Unless otherwise determined by the Board and set forth in the related Award Agreement, shares of Common Stock subject to a Stock Award will be issued, and one or more certificates representing such shares will be delivered, to the Participant as soon as practicable following the Grant Date of such Stock Award. Upon the issuance of such shares and the delivery of one or more certificates representing such shares to the Participant, such Participant shall be and become a shareholder of the Company fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder of the Company. Notwithstanding any other provision of this Plan, unless the Board expressly provides otherwise with respect to a Stock Award, as set forth in the related Award Agreement, no Stock Award shall be deemed to be an outstanding Award for purposes of the Plan.

ARTICLE IX -- PERFORMANCE SHARES

9.1  The Board, in its sole discretion, may from time to time on or after the Effective Date award Performance Shares to Eligible Persons as an incentive for the performance of future services that will contribute materially to the successful operation of the Company and its Affiliates, subject to the terms and conditions set forth in this Article IX.

9.2  The Board shall determine the terms and conditions of any Award of Performance Shares, which shall be set forth in the related Award Agreement, including without limitation:

(a) the purchase price, if any, to be paid for such Performance Shares, which may be zero, subject to such minimum consideration as may be required by applicable law;

(b) the performance period (the "Performance Period") and/or performance objectives (the "Performance Objectives") applicable to such Awards;

(c) the number of Performance Shares that shall be paid to the Participant if the applicable Performance Objectives are exceeded or met in whole or in part; and

(d) the form of settlement of a Performance Share.

9.3  At any date, each Performance Share shall have a value equal to the Fair Market Value of a share of Common Stock.

 
 

 


9.4  Performance Periods may overlap, and Participants may participate simultaneously with respect to Performance Shares for which different Performance Periods are prescribed.

9.5  Performance Objectives may vary from Participant to Participant and between Awards and shall be based upon such performance criteria or combination of factors as the Board may deem appropriate, including, but not limited to, minimum earnings per share or return on equity. If during the course of a Performance Period there shall occur significant events which the Board expects to have a substantial effect on the applicable Performance Objectives during such period, the Board may revise such Performance Objectives.

9.6  In the sole discretion of the Board and as set forth in the Award Agreement for an Award of Performance Shares, all Performance Shares held by a Participant and not earned shall be forfeited by the Participant upon the Participant's Termination of Service. Notwithstanding the foregoing, unless otherwise provided in an Award Agreement with respect to an Award of Performance Shares, in the event of the death, Disability or Retirement of a Participant during the applicable Performance Period, or in other cases of special circumstances (including hardship or other special circumstances of a Participant whose employment is involuntarily terminated), the Board may determine to make a payment in settlement of such Performance Shares at the end of the Performance Period, based upon the extent to which the Performance Objectives were satisfied at the end of such period and pro rated for the portion of the Performance Period during which the Participant was employed by the Company or an Affiliate; provided, however, that the Board may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Board deems appropriate or desirable.

9.7  The settlement of a Performance Share shall be made in cash, whole shares of Common Stock or a combination thereof and shall be made as soon as practicable after the end of the applicable Performance Period.  Notwithstanding the foregoing, the Board in its sole discretion may allow a Participant to defer payment in settlement of Performance Shares on terms and conditions approved by the Board and set forth in the related Award Agreement entered into in advance of the time of receipt or constructive receipt of payment by the Participant.

9.8  Performance Shares shall not be transferable by the Participant. The Board shall have the authority to place additional restrictions on the Performance Shares including, but not limited to, restrictions on transfer of any shares of Common Stock that are delivered to a Participant in settlement of any Performance Shares.

ARTICLE X -- CHANGES OF CONTROL OR OTHER FUNDAMENTAL CHANGES

10.1  Upon the occurrence of a Change of Control and unless otherwise provided in the Award Agreement with respect to a particular Award:

(a) all outstanding Stock Options shall become immediately exercisable in full, subject to any appropriate adjustments in the number of shares subject to the Stock Option and the Option Price, and shall remain exercisable for the remaining Option Period, regardless of any provision in the related Award Agreement limiting the exercisability of such Stock Option or any portion thereof for any length of time;

(b) all outstanding Performance Shares with respect to which the applicable Performance Period has not been completed shall be paid out as soon as practicable as follows:

(i) all Performance Objectives applicable to the Award of Performance Shares shall be deemed to have been satisfied to the extent necessary to earn one hundred percent (100%) of the Performance Shares covered by the Award;

(ii) the applicable Performance Period shall be deemed to have been completed upon occurrence of the Change of Control;

 
 

 


(iii) the payment to the Participant in settlement of the Performance Shares shall be the amount determined by the Board, in its sole discretion, or in the manner stated in the Award Agreement, as multiplied by a fraction, the numerator of which is the number of full calendar months of the applicable Performance Period that have elapsed prior to occurrence of the Change of Control, and the denominator of which is the total number of months in the original Performance Period; and

(iv) upon the making of any such payment, the Award Agreement as to which it relates shall be deemed terminated and of no further force and effect.

(c) all outstanding shares of Restricted Stock with respect to which the restrictions have not lapsed shall be deemed vested, and all such restrictions shall be deemed lapsed and the Restriction Period ended.

10.2  Anything contained herein to the contrary notwithstanding, upon the dissolution or liquidation of the Company, each Award granted under the Plan and then outstanding shall terminate; provided, however, that following the adoption of a plan of dissolution or liquidation, and in any event prior to the effective date of such dissolution or liquidation, each such outstanding Award granted hereunder shall be exercisable in full and all restrictions shall lapse, to the extent set forth in Section 10.1(a), (b) and (c) above.

10.3  After the merger of one or more corporations into the Company or any Affiliate, any merger of the Company into another corporation, any consolidation of the Company or any Affiliate of the Company and one or more corporations, or any other corporate reorganization of any form involving the Company as a party thereto and involving any exchange, conversion, adjustment or other modification of the outstanding shares of the Common Stock, each Participant shall, at no additional cost, be entitled, upon any exercise of such Participant's Stock Option, to receive, in lieu of the number of shares as to which such Stock Option shall then be so exercised, the number and class of shares of stock or other securities or such other property to which such Participant would have been entitled to pursuant to the terms of the agreement of merger or consolidation or reorganization, if at the time of such merger or consolidation or reorganization, such Participant had been a holder of record of a number of shares of Common Stock equal to the number of shares as to which such Stock Option shall then be so exercised. Comparable rights shall accrue to each Participant in the event of successive mergers, consolidations or reorganizations of the character described above. The Board may, in its sole discretion, provide for similar adjustments upon the occurrence of such events with regard to other outstanding Awards under this Plan. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined by the Board in its sole discretion. Any such adjustment may provide for the elimination of any fractional shares which might otherwise become subject to an Award. All adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Incentive Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code.

ARTICLE XI -- AMENDMENT AND TERMINATION

11.1  Subject to the provisions of Section 11.2, the Board of Directors at any time and from time to time may amend or terminate the Plan as may be necessary or desirable to implement or discontinue the Plan or any provision hereof.  To the extent required by the Act or the Code, however, no amendment, without approval by the Company's shareholders, shall:

(a) materially alter the group of persons eligible to participate in the Plan;

(b) except as provided in Section 3.4, change the maximum aggregate number of shares of Common Stock that are available for Awards under the Plan;

(c) alter the class of individuals eligible to receive an Incentive Stock Option or increase the limit on Incentive Stock Options set forth in Section 4.1(d) or the value of shares of Common Stock for which an Eligible Employee may be granted an Incentive Stock Option.

 
 

 


11.2  No amendment to or discontinuance of the Plan or any provision hereof by the Board of Directors or the shareholders of the Company shall, without the written consent of the Participant, adversely affect (in the sole discretion of the Board) any Award theretofore granted to such Participant under this Plan; provided, however, that the Board retains the right and power to:

(a) annul any Award if the Participant is terminated for cause as determined by the Board; and

(b) convert any outstanding Incentive Stock Option to a Nonqualified Stock Option.

11.3  If a Change of Control has occurred, no amendment or termination shall impair the rights of any person with respect to an outstanding Award as provided in Article X.

ARTICLE XII -- MISCELLANEOUS PROVISIONS

12.1  Nothing in the Plan or any Award granted hereunder shall confer upon any Participant any right to continue in the employ of the Company or its Affiliates or to serve as a Director or shall interfere in any way with the right of the Company or its Affiliates or the shareholders of the Company, as applicable, to terminate the employment of a Participant or to release or remove a Director at any time.  Unless specifically provided otherwise, no Award granted under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Company or its Affiliates for the benefit of their respective employees unless the Company shall determine otherwise.  No Participant shall have any claim to an Award until it is actually granted under the Plan and an Award Agreement has been executed and delivered to the Company.  To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall, except as otherwise provided by the Board, be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as provided in Article VII with respect to Restricted Stock and except as otherwise provided by the Board.

12.2  The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. Any provision herein relating to compliance with Rule 16b-3 under the Act shall not be applicable with respect to participation in the Plan by Participants who are not subject to Section 16 of the Act.

12.3  The terms of the Plan shall be binding upon the Company, its successors and assigns.

12.4  Neither a Stock Option nor any other type of equity-based compensation provided for hereunder shall be transferable except as provided for in Section 6.2. In addition to the transfer restrictions otherwise contained herein, additional transfer restrictions shall apply to the extent required by federal or state securities laws.  If any Participant makes such a transfer in violation hereof, any obligation hereunder of the Company to such Participant shall terminate immediately.

12.5  This Plan and all actions taken hereunder shall be governed by the laws of the State of Texas.

12.6  Each Participant exercising an Award hereunder agrees to give the Board prompt written notice of any election made by such Participant under Section 83(b) of the Code, or any similar provision thereof.

12.7  If any provision of this Plan or an Award Agreement is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award Agreement under any law deemed applicable by the Board, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Board, materially altering the intent of the Plan or the Award Agreement, it shall be stricken, and the remainder of the Plan or the Award Agreement shall remain in full force and effect.

 
 

 


12.8  The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company or any of its Affiliates to make adjustments, reclassification, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate or sell, or to transfer all or part of its business or assets.

12.9  The Plan is not subject to the provisions of ERISA or qualified under Section 401(a) of the Code.

12.10  If a Participant is required to pay to the Company an amount with respect to income and employment tax withholding obligations in connection with (i) the exercise of a Nonqualified Stock Option, (ii) certain dispositions of Common Stock acquired upon the exercise of an Incentive Stock Option, or (iii) the receipt of Common Stock pursuant to any other Award, then the issuance of Common Stock to such Participant shall not be made (or the transfer of shares by such Participant shall not be required to be effected, as applicable) unless such withholding tax or other withholding liabilities shall have been satisfied in a manner acceptable to the Company.  To the extent provided by the terms of an Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under an Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Award, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock.



Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, Michael Peterson, certify that:
 
 
1)
I have reviewed this quarterly report on Form 10-Q of Blast Energy Services, Inc.;
 
 
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.   
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b.   
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
 
5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting
 
Date: August 14, 2009

By:
/s/ Michael Peterson
 
Michael Peterson
 
Interim President and CEO
 
(Principal Executive Officer)



Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
 
I, John MacDonald, certify that:
 
 
1)
I have reviewed this quarterly report on Form 10-Q of Blast Energy Services, Inc.;
 
 
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.   
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b.   
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.   
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.   
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
 
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

 
Date: August 14, 2009
 
By:
/s/ John MacDonald
 
John MacDonald
 
Chief Financial Officer
 
(Principal Accounting Officer)



Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Blast Energy Services, Inc. (the “Company”) for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Peterson, Interim President and CEO and Principal Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: August 14, 2009
 
 
By:
/s/ Michael Peterson
   
Michael Peterson
   
Interim President and CEO
   
(Principal Executive Officer)



Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Blast Energy Services, Inc. (the “Company”) for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John MacDonald, Chief Financial Officer and Principal Accounting Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: August 14, 2009

 
By:
/s/ John MacDonald
   
John MacDonald
   
Chief Financial Officer
   
(Principal Accounting Officer)