PEDEVCO CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the transition period from
to
Commission file number: 000-53725
Blast Energy Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Texas
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22-3755993
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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14550 Torrey Chase Blvd, Suite 330
Houston, Texas 77014
(Address of Principal Executive Offices)
(281) 453-2888
(Registrant’s Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $0.001 par value per share
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
x
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
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
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
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Accelerated
filer
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Non-accelerated filer
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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
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No
x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009 based upon the closing price reported on such date was $4,354,147.
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
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As of March 31, 2010, 61,909,238 shares of the registrant’s common stock, $.001 par value per share, were outstanding, including 1,150,000 approved but unissued shares arising from the class action settlement from 2005.
1
Table of Contents
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Page
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PART I
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Item 1. Business
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3
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Item 1A. Risk Factors
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14
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Item 1B. Unresolved Staff Comments
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22
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Item 2. Properties
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23
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Item 3. Legal Proceedings
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23
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Item 4. RESERVED
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24
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PART II
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Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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25
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Item 6 Selected Financial Data
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27
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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27
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk
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32
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Item 8. Financial Statements and Supplementary Data
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32
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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32
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Item 9A(T). Controls and Procedures
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33
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Item 9B. Other Information
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34
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PART III
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Item 10. Directors, Executive Officers and Corporate Governance
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35
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Item 11. Executive Compensation
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38
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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42
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Item 13. Certain Relationships and Related Transactions, and Director Independence
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44
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Item 14. Principal Accounting Fees and Services
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45
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PART IV
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Item 15. Exhibits and Financial Statement Schedules
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46
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2
Forward Looking Statements
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS", "ESTIMATES",
"PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING
OUR FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY
OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2009. AS USED HEREIN, THE “COMPANY,” “BLAST,” “WE,” “US,” “OUR” AND WORDS OF SIMILAR MEANING REFER TO BLAST ENERGY
SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES, EAGLE DOMESTIC DRILLING OPERATIONS LLC AND BLAST AFJ, INC., UNLESS OTHERWISE STATED.
Organizational History
Blast was originally incorporated in September 2000 as Rocker & Spike Entertainment, Inc, a California corporation. On January 1, 2001, we purchased the assets of Accident Reconstruction Communications Network and changed our name to Reconstruction Data Group, Inc. In April 2003, we entered into a merger agreement with Verdisys,
Inc., which was initially incorporated as TheAgZone Inc. in 1999 as a California corporation. Its purpose was to provide e-Commerce satellite services to agribusiness. The merger agreement called for us to be the surviving company. Our name was changed to Verdisys, Inc., our articles of incorporation and bylaws remained in effect, each share of Verdisys’ common stock was converted into one share of our common stock, our accident reconstruction assets were sold, and our business focus was changed to the
oil and gas industry. In June 2005, we changed our name to Blast Energy Services, Inc. (“Blast”) to reflect our focus on the energy services business.
In August 2006, we acquired Eagle Domestic Drilling Operations LLC (“Eagle”), a drilling contractor which owned three completed land rigs and three more under construction. The Eagle acquisition included five two-year term International Association of Drilling Contractors (“IADC”) contracts with day rates of $18,500
per day and favorable cost sharing provisions. The assumptions used in the Eagle acquisition included a steady and high revenue stream and full utilization rate expectations based upon these five contracts. The subsequent cancellation of these contracts by Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) and Quicksilver Resources, Inc. (“Quicksilver”) in the fall of 2006 severely impacted our ability to service the note incurred with the acquisition
of the drilling rig business. We filed suit for breach of those contracts.
In January 2007, Blast and Eagle filed voluntary petitions with the U.S. Bankruptcy Court for the Southern District of Texas – Houston Division (the “Court”) under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that we could dispose of burdensome and uneconomical assets and reorganize our financial obligations
and capital structure. We operated our businesses as “debtors-in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court.
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In May 2007 we executed an agreement with our lender on the terms of an asset purchase agreement intended to offset the full amount of our then outstanding $40.6 million senior Note, including accrued interest and default penalties. Under the terms of this agreement, only the five land drilling rigs and associated spare parts were
sold to repay the Note. As a result, our satellite communication business and our applied fluid jetting technology remained with us subsequent to the sale of the rigs.
In February 2008, the Bankruptcy Court entered an order confirming our Second Amended Plan of Reorganization (the “Plan”). The overall impact of the confirmed Plan was for Blast to emerge with unsecured creditors fully paid, have no debt service scheduled for at least two years, and keep equity shareholders’
interests intact.
Under the terms of the Plan, Blast raised $4 million in cash proceeds from the sale of convertible preferred securities to Clyde Berg and McAfee Capital (as described in greater detail below under “Preferred Stock”), two parties related to Blast’s largest shareholder, Berg McAfee Companies. The proceeds from
the sale of the securities were used to pay 100% of the unsecured creditor claims, all administrative claims, and all statutory priority claims, for a total amount of approximately $2.4 million. The remaining $1.6 million was used to execute an operational plan, including but not limited to, reinvesting in the Satellite Services and Down-hole Solutions businesses and pursue an emerging Digital Oilfield Services business.
Under the terms of the Plan, Blast carried three secured obligations:
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A $2.1 million interest-free senior obligation with Laurus Master Fund, Ltd., (“Laurus”) secured by the assets of Blast and payable only by way of a 65% portion of the proceeds received in the Hallwood and Quicksilver litigation, or from any asset sales that may occur in the future;
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A $125,000 note to McClain County, Oklahoma for property taxes, to be paid from the receipt of litigation proceeds from Quicksilver; and
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A pre-existing secured $1.12 million note with Berg McAfee Companies, which was extended for an additional three years from the effective date of the Plan (February 27, 2008) at an 8% interest rate, and which contains an option to be convertible into Company stock at the rate of one share of common stock for each $0.20 of the note outstanding.
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In October 2008 the notes owed to Laurus and McClain County were paid in full from the Hallwood and Quicksilver lawsuit settlement proceeds.
Debtor-in-Possession (DIP) Loan
The Bankruptcy court approved Blast’s ability to draw $0.8 million from McAfee Capital and Clyde Berg to finance Blast on a temporary basis. The Plan allowed them to convert the outstanding balance of the DIP loan and including accrued interest into Company common stock at the rate of one share for each $0.20 of the outstanding
balance. The full conversion of the DIP Loan took place in April 2008.
Preferred Stock
In January 2008, Blast sold the rights to an aggregate of 2,000,000 units, each unit consisting of four shares of Series A Convertible Preferred Stock (the “Preferred Stock”), and one three year warrant 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. The shares of common stock issuable in connection with the exercise of the warrants and the conversion of the Preferred Stock were granted piggy-back registration rights. The proceeds from the sale of the Units were used to satisfy creditor claims of $2.4 million under the terms of the Plan and provide working capital of $1.6 million.
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Series A Convertible Preferred Stock
The 8,000,000 shares of Series A Preferred Stock accrue dividends at the rate of 8% per annum, in arrears for each month that the Preferred Stock is outstanding. Blast has the right to repay any or all of the accrued dividends at any time by providing the holders of the Preferred Stock at least five days written notice of their
intent to repay such dividends. In the event Blast receives a “Cash Settlement,” defined as an aggregate total cash settlement received by Blast, net of legal fees and expenses, in connection with Blast’s litigation proceedings with Hallwood and Quicksilver in excess of $4 million, Blast is required to pay outstanding dividends within thirty days in cash or stock at the holder’s option. If the dividends are not paid within thirty days of the date the Cash Settlement
is received, a “Dividend Default” occurs. As of December 31, 2009, the aggregate and per share arrearages on the outstanding Preferred Stock were $493,151 and $0.08, respectively. Also included in the arrearages per share calculation were additional dividends in arrearage of $50,630 related to the 2,000,000 preferred shares that were redeemed in October 2008 (as described below).
The Preferred Stock and any accrued and unpaid dividends, have optional conversion rights into shares of Blast’s common stock at a conversion price of $0.50 per share. The Preferred Stock automatically converts if Blast’s common stock trades for a period of more than twenty consecutive trading days at a price greater than $3.00
per share and if the average trading volume of Blast’s common stock exceeds 50,000 shares per day.
In October 2008, Blast paid $1 million to redeem 2,000,000 shares of Preferred Stock, 1,000,000 shares each held by Clyde Berg and McAfee Capital, LLC, at $0.50 per share face value, and 6,000,000 shares of Preferred Stock are remain outstanding as of the date of this filing.
Warrants
Blast also granted warrants to the Preferred Stockholders to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share. These warrants have a three-year term. The relative fair value of the warrants determined utilizing the Black-Scholes option-pricing model was approximately $446,000 on the date
of sale. The significant assumptions used in the valuation were: the exercise price of $0.10; the market value of Blast’s common stock on the date of issuance of $0.29; expected volatility of 131%; risk free interest rate of 2.25%; and an expected term of three years. Management has evaluated the terms of the Convertible Preferred Stock and the grant of warrants and concluded that there was not a beneficial conversion feature at the date of grant.
Re-domicile to Texas
Pursuant to the Plan, Blast was re-domiciled in Texas. Blast filed a certificate of formation for Blast Energy Services, Inc, a Texas corporation and wholly-owned subsidiary of Blast, in March 2008. Immediately upon the formation of this subsidiary, Blast filed Articles of Merger in Texas and California, whereby Blast merged
with and into the Texas Corporation, which became the surviving entity. Blast adopted and replaced its articles of incorporation and bylaws with those of the Texas Corporation to effect the merger.
Litigation Settlements
Hallwood Energy/Hallwood Petroleum Lawsuit
In April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5 million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million in cash,
issue $2.75 million in equity and irrevocably forgave $1.65 million in deposits paid to Eagle. The parties were fully and mutually released from any and all claims between them. The terms of the settlement were approved by the board of each company and were confirmed by the Court. Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September 2008. Payments received from Hallwood in October 2008 were distributed to the appropriate class of creditors as designated
in the Plan.
On February 11, 2009, Blast and Eagle entered into an amended settlement letter with Hallwood that modified and finalized the terms of the parties April 3, 2008 settlement letter. The amended settlement provided that the equity component would be satisfied by the issuance to Blast of Class C Partnership Interests in Hallwood
Energy LP, equal to 7% of such Interests, having a face value of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement was approved by the board of each company and was confirmed by the Bankruptcy Court.
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On March 2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for the Northern District of Texas under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that it could dispose of burdensome and uneconomical assets and reorganize its financial obligations and capital structure.
Subsequently, the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in this matter which transferred the control of Hallwood to the third party. We believe this action will result in the elimination of any existing equity position held in Hallwood, including Blast’s, so we have recognized a zero carrying value
in our financial statements for the Class C Interests.
Quicksilver Resources Lawsuit
In September 2008, Blast and Eagle entered into a Compromise Settlement and Release Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to resolve the pending litigation and the parties agreed to release all claims against one another and certain related parties. Quicksilver agreed to pay Eagle a total of
$10 million, as follows:
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$5 million payable upon the parties’ entry into the settlement;
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$1 million payable on or before the first anniversary date of the execution of the settlement;
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$2 million payable on or before the second anniversary date of the execution of the settlement; and
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$2 million payable on or before the third anniversary date of the execution of the settlement.
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In the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within 10 days after written notice, then all of the remaining payments immediately become due and payable. Quicksilver made the first payment of $5 million in October 2008 and the second payment of $1 million in September 2009 ($720,000
to Blast, net of legal fees). The remaining amounts due from Quicksilver are shown as a current and long-term receivable in the balance sheet, net of contingent legal fees.
Alberta Energy Partners
During the course of Blast’s Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”) between Alberta and Blast. That motion
was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however, Alberta filed a motion for reconsideration
and rehearing of the District Court’s order.
On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”). On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.
Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta instead entered into a Settlement Agreement to end the legal dispute with an effective date of February 1, 2010. Under the terms of the Settlement Agreement, the 50% of the Abrasive Fluid Jetting Technology owned by Blast
that was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever.
All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement shall also remain the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.
Upon the execution of the Settlement Agreement, Alberta agreed to file with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta. This settlement has no bearing on the
Applied Fluid Jetting technology the Company is continuing to develop as described below.
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Business Operations
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:
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Satellite Communication services to remote oilfield locations, and
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Down-hole Solutions, such as our applied fluid jetting technology.
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Our strategy is to grow our businesses by maximizing revenues from the communications and down-hole segments and controlling costs while analyzing potential acquisition and new technology opportunities in the energy service sector. In the near term, we will also seek to maximize value from certain non-recurring litigation proceeds receivable
in 2010 and 2011.
Our primary business segment is providing satellite communication services to energy companies. This service allows such energy companies to remotely monitor and control well head, pipeline, drilling, and other oil and gas operations through low cost broadband data and voice services, transmitted from remote operations where terrestrial
or cellular communication networks do not exist or are too costly to install.
Our secondary business is the provision of Applied Fluid Jetting (“AFJ”) services to stimulate production and increase reservoir recoveries on behalf of oil and gas operators primarily in North America. For the relatively low cost of our service, operators can potentially multiply the revenues and profits from their old fields.
Conventional drilling locations typically use a massive area of land for the rig, equipment and support vehicles and badly scar the terrain. Blast’s AFJ service has a much smaller environmental footprint, using about 5% of the area with no scarring or damage of any kind to the land.
There are relatively small volumes of cutting fluids generated with the AFJ process, especially compared to conventional well drilling and the AFJ fluid is primarily composed of simple water. Blast ensures that even small quantities of AFJ cutting fluids are hauled away and processed for safe and legal disposal in approved disposal sites.
Industry Description
In recent years, relatively higher oil and natural gas prices have resulted in increased drilling activity for oil and natural gas. However, U.S. production volumes from traditional sources continue to decline. We believe our AFJ stimulation process can help offset this decline by increasing both initial flow volumes and ultimate
recoveries from new and existing wells.
We operate in the energy services sector, which services the broader upstream energy industry where companies explore, develop, produce, transport, and market oil and gas. This industry is comprised of a diverse number of operators, ranging from very small independent contractors to the extremely large corporations. While the majority of
oil and gas is produced by very large international oil companies, there are a much larger number of smaller independent companies who own and operate the vast majority of new and existing wells.
As a smaller firm with a specialized service, we provide satellite communication services and down-hole solutions to both small and large operators in the energy industry. As we grow, we intend to cater to all segments of the industry in situations where we believe the application of our services will add value to our customers.
Demand for our services depends on our ability to demonstrate improved economics to the sector we serve. We believe that oil and gas developers will use our AFJ service where the use of such services costs those developers less than other available alternative services and/or when they perceive such use will be able to cost effectively
increase their production and reserves. We also believe the use of our technology will be influenced by macro-economic factors driving oil and gas fundamentals.
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We believe that producing companies will react to the combination of the increased demand and the limited supply of oil and gas in a manner that requires them to utilize all segments of our business. We believe that oil and gas producers have and will continue to have great economic incentives to recover additional production and reserves
from known reservoirs rather than pursuing a more risky exploration or infill approach. Our AFJ technology may permit producers to add value by potentially recovering a significant additional percentage of the oil and gas from a reservoir. We believe that a very large potential market exists in North America for our production stimulation methods.
Activity in the energy services industry tends to be cyclical with oil and gas prices. In addition to the currently positive industry fundamentals, we believe the following sector-specific trends enhance the growth potential of our business sectors:
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While oil prices are difficult to predict, we believe they will remain relatively high by historic terms for the next several years. Following the current recession, we expect a resumption of high consumption and strong growth in Asian demand, along with limitations in delivery infrastructure and political unrest in major supplying countries to be primary
contributing factors.
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We believe gas prices, while volatile, will recover over the next several years due to the combination of strong market demand for clean fuels and major supply constraints in conventional areas. However, the impact of new supplies from unconventional gas sources, together with the recent economic downturn, has had and may continue to have, a
dampening effect on price.
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We do not believe there is any major substitution threat to oil and gas in the foreseeable future. In particular, any significant substitution of fossil fuels by hydrogen or other potential energy sources is believed by management to be at least a decade away.
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Satellite Communications
Our satellite business segment provides communication services to the energy sector. Historically, it has been common practice for oil and gas companies to manually gather much of their data for energy management, and communicate using satellite phones or cellular service where available. This is not only expensive but also causes a significant
time lag in the availability of critical management information. The Blast Satellite Private Network (“BSPN”) services utilize two-way satellite broadband to provide oil and gas companies with a wide variety of remote energy management communications and applications. Satellite’s capability to provide secure broadband to any remote location in the world gives it unique capabilities over terrestrial and cellular networks. Technology advancements now facilitate not only data, email and internet
traffic but also Voice over Internet (“VoIP”) and video streaming. Bandwidth traffic capabilities of base station have also increased significantly allowing larger and faster file and data transfer capabilities to compete with terrestrial systems. The capability of satellites to operate off stationary and mobile remote dishes with no supporting infrastructure has proven invaluable in both disaster recovery and remote or continuously moving commercial operations.
Our satellite services can be optimized to provide cost effective applications such as VoIP, Virtual Private Networking “VPN” and Real-time Supervisory Control and Data Acquisition Systems, commonly referred to as “SCADA”. SCADA permits oil and gas companies to dispense with a manual structure and move to a real-time,
automated, energy management program. Utilizing SCADA, a service we currently offer, production levels can be optimized to meet the producer’s current market demands and commitments.
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At present, we acquire modem hardware from ViaSat Inc., and Spacenet Inc. and install this equipment on our customers’ onshore platforms. Space segment services are acquired from SES and Loral and hub services from Viasat and Spacenet, Inc. (“Spacenet”).
We use satellite communications that are low cost and that ensure worldwide availability, even in geographic areas with a poor communications infrastructure. Our satellite services are based on industry standards to lower implementation costs and to simplify the integration into existing systems. Reliability and availability are critical
considerations for SCADA. Satellite services are provided 24 hours a day, 7 days a week with 99.9% availability virtually anywhere in the world, based on our own estimates. We believe our satellite services offer fewer points of failure than comparable terrestrial services, provide uniform service levels, and are faster and more cost effective to deploy. Our satellite services are also very flexible and easily accommodate site additions, relocations, bandwidth expansion, and network reconfiguration.
Additionally, security, integrity, and reliability have been designed into our satellite services to ensure that information is neither corrupted nor compromised. We believe that satellite communications are more secure than many normal telephone lines.
Major Customers
Our major satellite services customers in 2009 included BP America, Dow Chemical and Apache Corporation, representing 43%, 24% and 12%, respectively, of our satellite revenues for the year ended December 31, 2009. Contracts are usually for hardware, backhaul, and bandwidth. Virtually any oil and gas producer, of which there are many thousands,
is a potential customer for our satellite services.
Market
According to the U.S. Department of Energy more than 2.5 million oil and gas wells have been drilled since 1949 in the U.S. alone, many of which are located in remote or rural areas where communications and monitoring well status can be difficult and expensive. These well locations could benefit from the economics
of our real-time, high speed satellite connectivity services as compared to more conventional monitoring alternatives, such as the time consuming and costly transportation of personnel to remote well locations, or the equipment and maintenance costs of laying land lines for real-time monitoring of remote well operations. Our focus is serving the needs of oil and gas producers worldwide to control their production effectively and to enhance customer satisfaction by providing worldwide real-time access to information.
This market for satellite services is very competitive with increasing pressure on margins. Further, our larger competitors offer services at substantially discounted prices. We attempt to compete against such competitors by attempting to target niche markets and offering alternative solutions that solve customers’ complex communication problems at more cost effective rates. We utilize satellite, Wi-Fi and other wireless technology for the last mile of wellhead connectivity for these customers and focus
almost exclusively on the oil and gas market.
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Competition
The satellite communication industry is intensely competitive due to overcapacity, but we believe that competition is less severe in the oil and gas producing sector. Other satellite services providers in the oil and gas industry include, Stratus Global, Tachyon, Schlumberger and Caprock. Schlumberger, Caprock and Stratus Global are focused
on the top 20% of the market, particularly international and offshore platforms. Stratus Global is also focused on the offshore market using a traditional wireless network. We believe our satellite services offer advantages over these services by:
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Customizing the service to better meet the customer’s needs;
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Offering superior speed;
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Providing single vendor convenience; and
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Offering lower up-front infrastructure and operating costs.
Applied Fluid Jetting Services
Over the past several years, Blast has developed a down-hole stimulation service that management believes has the potential to dramatically increase production volumes and reserves from existing or newly drilled wells at an attractive price to the customer. Blast has filed for a patent to protect this proprietary AFJ process (as described
in greater detail below).
The theory behind AFJ is both simple and extremely bold to maximize the reservoir area contacted by the well bore, both vertically and horizontally--in order to increase production rates and improve reservoir recovery rates. Recent experience has moved the theory closer to commercial realization. Blast provides a production stimulation
service by entering existing or new well bores to access the productive formations containing oil and natural gas. By jetting laterally into the formations, more of the reservoir is exposed to the wellbore and additional hydrocarbons are flowed to the surface.
It is believed that this AFJ process can be successful in many types of sandstone and limestone/carbonate formations. In addition, management believes that the AFJ service may be successfully applied down to 9,000 feet of vertical well depth by simply adding a longer coiled tubing string. Since the process is at an early stage, management
believes that laterals longer than 90 feet may be jetted with the existing equipment.
Blast owns the patent pending covering the AFJ process and intends to defend it vigorously from would-be infringers of the technology. One of the major features that make the AFJ process attractive is the low barriers of entry required in securing the production stimulation business. Independent operators face a natural decline from their
oil and gas wells and are willing to pay a modest amount to stimulate that production and increase their revenues. Their investment is demonstrated almost right away and can be returned very quickly while Blast’s investment of approximately $1 million per rig can also be paid back in short order. The major service companies have focused their marketing away from Blast’s niche.
In 2008, Blast successfully jetted up to 90 feet horizontally into targeted oil zones from the 2,750 feet deep vertical well bore and we jetted 20 laterals into multiple zones. At a well depth of approximately 300 feet, the Blast rig completed two separate 50 foot laterals in each of two gas wells located near Abilene, Texas. Each lateral
extension was positioned at 180 degrees from each other into the targeted producing sand. As a result, the initial production of the first well increased five-fold and increased twelve-fold on the second well.
During 2009, Blast further tested the AFJ process on wells in the Austin Chalk play in Central Texas operated by Reliance Oil & Gas, Inc. (“Reliance”) with some initial production success. Later Blast attempted to apply the process to third-party wells in West Texas and in Kentucky. Unfortunately due to mechanical failures
of the surface equipment we were not able to achieve any lateral jetting in the down-hole environment. Currently the AFJ rig and other support vehicles have been moved back to a storage yard in Luling, Texas that is operated by Reliance. Once sufficient funds are available we intend to resolve the mechanical issues and we will once again take steps to try to commercialize this technology.
Major Customers
Management will continue to work with its partner, Reliance to find opportunities to further test and attempt to commercialize the AFJ technology. We currently have no active customers but are in discussions with one potential customer.
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Market
We believe it has become clear in recent years that while the demand for oil and gas in the U.S. continues to grow, the planet’s ability to meet this demand from existing and new sources worldwide is rapidly declining. This accelerated decline will require producers to seek new extraction methods or technologies to develop oil and
gas production from existing fields and we anticipate that our AFJ process will help satisfy the need for these new technologies. According to the US Energy Information Administration, approximately, 2.5 million wells have been drilled in the U.S. since 1949. “Historically, only some 30% of the total oil in a reservoir – the “original oil-in-place” – was recoverable. As pressure declines in the reservoir, the oil becomes costlier and costlier to produce until further production
becomes uneconomic…recent advances now allow greater recovery from old reservoirs.”
A key issue facing most independent oil and gas producers is how to economically increase their production volumes. Conventional approaches can involve some fairly expensive undertakings such as in-fill drilling programs, horizontal drilling, well stimulation and massive “frac” jobs. While these programs may apply
to large fields with thick contiguous pay sands, there are many fields with geological conditions or production characteristics where the potential improvement may not support such high dollar solutions.
The use of the AFJ process in the existing energy business is very small but has the potential for explosive growth. The vast majority of the approximate 2.5 million wells drilled in the U.S. since 1949 are either shut-in or are producing far below their productive capacity. Traditional energy stimulation techniques are not cost effective
for these wells due to high costs. Producers universally agree that more revenue from each well makes good economic sense for them at almost any price level of crude oil and natural gas in excess of marginal operating cost.
Blast has created a market opportunity by offering a unique service that can be priced as low as $20,000 per day, which we believe will stimulate production in new or existing wells by multiples of their current rates. The payback calculation for the operator is exemplified in prior AFJ work performed by Blast for Reliance, whereby for
a cost of $80,000 they more than doubled the volume of oil capable of being produced in two wells in South Texas and were able to pay back their investment in approximately 48 days at crude oil prices of $35 per barrel.
One approach to pricing our service has been to offer the service for free but share in the net revenues generated from the increase in production by applying the service to certain wells. In one example, we agreed to 50% revenue sharing and in another we agreed to 40% of revenue sharing. Offering the service on cash for fees basis is expected
to generate gross revenues of approximately $20.000 to $30,000 per day.
Conventional and directional drilling is slower and significantly more expensive than our service and only applies to high productivity wells as do the massive sand fracturing jobs common in the market today. Blast is not competing in this segment of the market place. The large energy service companies such as BJ Services, Halliburton or
Schlumberger cater to the high price end of the market for the minority of wells that actually have high production potential. We believe that this leaves over a million wells, which are not being serviced by the larger companies in the industry. There are a few other small operators that offer a service they claim to be similar to Blast, but they are universally limited in both gaining access to the formation and having sufficient pressure and volume flow to laterally jet effectively.
Competition
Blast is in the energy services sector which has many other firms offering a wide range of services to oil and gas producers. We are not aware of any major competitors to our specialized AFJ service. The top energy services firms are actively marketing high dollar solutions as described above.
Other Business Factors
Insurance
Our oil and gas operations are subject to hazards inherent in the oil and gas industry, such as accidents, blowouts, explosions, implosions, fires and oil spills. These conditions can cause:
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personal injury or loss of life;
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damage to or destruction of property, equipment and the environment; and
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suspension of operations.
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In addition, claims for loss of oil and gas production and damage to formations can occur in the well service industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in the Company being named as a defendant in lawsuits asserting large claims.
We maintain insurance coverage that we believe to be customary in the industry against these types of hazards. However, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. In addition, our insurance is subject to coverage limits and some policies exclude coverage for damages resulting from environmental
contamination. The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a materially adverse effect on our financial condition and results of operations.
Patents and Licenses
In February 2009, we filed a provisional patent (application number 61/152,885) relating to the process and unique equipment related to our applied fluid jetting process. In February 2010, the final patent application was submitted. This filing, if granted, preserves Blast’s and John Adam’s, the inventor’s,
exclusive use of this proprietary process.
We believe the applied fluid technology and related trade secrets may be instrumental to our competitive edge in the oil and gas service industry. We are highly committed to protecting the technology. We cannot assure our investors that the scope of any protection we are able to secure for our technology will be adequate to protect such
technology, or that we will have the financial resources to engage in litigation against parties who may infringe upon us or seek to rescind their agreements with us. We also cannot provide our investors with any degree of assurance regarding the possible independent development by others of technology similar to that which we have acquired, thereby possibly diminishing our competitive edge.
Governmental Regulations
Our satellite services utilize products that are incorporated into wireless communications systems that must comply with various government regulations, including those of the Federal Communications Commission (FCC). In addition, we provide services to customers through the use of several satellite earth hub stations, which are licensed
by the FCC through third parties. Regulatory changes, including changes in the allocation of available frequency spectrum and in the military standards and specifications that define the current satellite networking environment, could materially harm our business by (1) restricting development efforts by us and our customers, (2) making our current products less attractive or obsolete, or (3) increasing the opportunity for additional competition. Our, or the third parties who we license services
from, failure to comply with applicable regulations could materially harm our business and impair the value of our common stock. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products and services, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this government approval process have caused and may continue to cause our customers to cancel, postpone
or reschedule their installation of communications systems. This, in turn, may have a material adverse effect on our sales of products to our customers.
Assuming we continue our commercial drilling operations in connection with our AFJ technology, of which there can be no assurance, we may be subject to various local, state and federal laws and regulations intended to protect the environment. Such laws may include among others:
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Comprehensive Environmental Response, Compensation and Liability Act;
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Oil Pollution Act of 1990;
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Oil Spill Prevention and Response Act;
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The Clean Air Act;
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The Federal Water Pollution Control Act; Louisiana Regulations; and/or
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Texas Railroad Commission and other state regulations.
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These operations may involve the handling of non-hazardous oil-field wastes such as sediment, sand and water. Consequently, the environmental regulations applicable to our operations pertain to the storage, handling and disposal of oil-field wastes. State and federal laws make us responsible for the proper use and
disposal of waste materials while we are conducting operations. As our operations are presently conducted, we do not believe we are currently required under applicable environmental laws to obtain permits to conduct our business. We believe we conduct our operations in compliance with all applicable environmental laws, however, there has been a trend toward more stringent regulation of oil and gas exploration and production in recent years and future modifications of the environmental laws
could require us to obtain permits or could negatively impact our operations.
We depend on the demand for our products and services from oil and natural gas companies. This demand is affected by changing taxes, price controls and other laws relating to the oil and gas industry generally, including those specifically directed to oilfield operations. The adoption of laws curtailing exploration and development drilling
for oil and natural gas in our areas of operation could also adversely affect our operations by limiting demand for our products and services. We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing legislation regulations or enforcement.
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Research and Development Activities
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During 2009, Blast considered the AFJ rig in service, so operations and repair costs were not considered research and development costs. During 2008, approximately $88,000 was spent on modifying the AFJ rig so that it should be capable of returning to service and approximately $50,000 was spent on the development of
the IPSM demonstration unit that was used to introduce the new product offering in our satellite services business.
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Employees
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As of March 31, 2010, we had two full time employees and two part time employees. We also utilize independent contractors and consultants to assist us with the operation, repair and maintenance of the AFJ rig, installing the satellite equipment, and maintaining and supervising such services in order to complement our existing work force,
as needed. Our agreements with these independent contractors and consultants are usually short-term. We believe that our relations with our employees, independent contractors and consultants are good. None of our employees are represented by a union or covered by a collective bargaining agreement.
Available Information
We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, under which we file periodic reports, proxy and information statements and other information with the United States Securities and Exchange Commission, or SEC. Copies of the reports, proxy statements and other information
may be examined without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, or on the Internet at
http://www.sec.gov
. Copies of all or a portion of such materials can be obtained from the Public Reference Room of the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.
Financial and other information about Blast is available on our website (
www.blastenergyservices.com
). Information on our website is not incorporated by reference into this report. We make available on our website, free of charge, copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
Investing in our common stock involves a high degree of risk. You should consider the following risk factors, as well as other information contained or incorporated by reference in this report, before deciding to invest in our common stock. The following factors affect our business and the industry in which we operate.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we currently consider immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected, the market price of our common stock could decline and you could lose all or part of your investment.
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GENERAL RISKS RELATING TO OUR COMPANY
It is uncertain when we will have significant operating income or cash flow from operations sufficient to sustain our operations.
As of March 31, 2010, our cash balance was approximately $122,907. However, our base business still consumes cash and we have to generate more revenues and/or funding to avoid running out of cash. If financing is available, it may involve issuing securities senior to our common stock or equity financings, which are dilutive to
holders of our common stock. In addition, in the event we do not raise additional capital from conventional sources, such as our existing investors or commercial banks, there is a likelihood that our growth will be restricted and we may be forced to scale back or curtail our business plan. If we are unable to raise the additional funding, the value of our securities could become worthless and we may be forced to abandon our business plan.
We will need additional capital to conduct our operations and fund our business and our ability to obtain the necessary funding is uncertain.
We may need to raise additional funds through public or private debt or equity financing or other various means to fund our business. In such a case, adequate funds may not be available when needed or may not be available on favorable terms. If we need to raise additional funds in the future, by issuing equity securities, dilution to existing
stockholders will result, and such securities may have rights, preferences and privileges senior to those of our common stock. We may be unable to raise additional funds by issuing debt securities due to our high leverage and due to restrictive covenants contained in our senior debt, which may restrict our ability to expend or raise capital in the future. If funding is insufficient at any time in the future and we are unable to generate sufficient revenue from new business arrangements, we will be unable to continue
in our current form and will be forced to restructure or seek creditor protection. If this were to happen, our results of operations and the value of our securities could be adversely affected.
We have a limited operating history and our business and marketing strategies planned are not yet proven, which makes it difficult to evaluate our business performance.
We have not yet been able to commercialize the capabilities of our applied jetting technology and are not conducting operations with the abrasive technology. We have no established basis to assure investors that our business or marketing strategies will be successful. Because we have a limited operating history, there
is little historical financial data upon which an investor may evaluate our business performance. An investor must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies with limited capital in a rapidly evolving market. These risks and difficulties include our ability to meet our debt service and capital obligations, develop a commercial milling or jetting process with our AFJ technology, attract
and maintain a base of customers, provide customer support, personnel, and facilities to support our business, and respond effectively to competitive and technological developments. Our business strategy may not be successful or may not successfully address any of these risks or difficulties and we may not be able to generate future revenues.
Significant amounts of our outstanding shares of common stock are restricted from immediate resale but will be available for resale into the market in the near future, which could potentially cause the market price of our common stock to drop significantly, even if our business is doing well.
As of March 31, 2010, 61,909,238 shares of common stock were issued and outstanding and held by approximately 333 shareholders of record, including 1,150,000 approved but unissued shares arising from the 2005 class action settlement. Blast is waiting on plaintiff’s counsel to provide its transfer agent with the
approved distribution list of the members of the class. Many of our outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. A
sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of our common stock in any market that may develop. An excessive sale of our shares may result in a substantial decline in the price of our common stock, and limit our ability to raise capital, even if our business is doing well. Furthermore, the sale of a significant amount of securities into the market
could cause the value of our securities to decline in value.
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One principal stockholder can influence the corporate and management policies of our company.
Berg McAfee Companies with its affiliates (“BMC”), effectively control approximately 23% of our outstanding shares of common stock on March 31, 2010, or 32% including common and preferred shares and warrants issued under the terms of the Reorganization in April 2008. Therefore, BMC may have the ability to substantially influence
all decisions made by us. Additionally, BMC’s control could have a negative impact on any future takeover attempts or other acquisition transactions. Furthermore, certain types of equity offerings require stockholder approval depending on the exchange on which shares of a company’s common stock are traded. Because our officers and directors do not exercise majority voting control over us, our shareholders who are not officers and directors of us may be able to obtain a sufficient number of votes to
choose who serves as our Directors. Because of this, the current composition of our board may change in the future, which could in turn have an effect on those individuals who currently serve in management positions with us. If that were to happen, our new management could affect a change in our business focus and/or curtail or abandon our business operations, which in turn could cause the value of our securities, if any, to decline.
In October 2008, Blast’s current director, John R. Block, was appointed to the board of directors of AE Biofuels, Inc., a California-based vertically integrated biofuels company. The Chairman and CEO of AE Biofuels, Inc. is Eric McAfee. Mr. McAfee is also the managing partner for McAfee Capital, LLC and president of Berg
McAfee Companies, LLC, both of which are significant shareholders of Blast. Additionally, Michael L. Peterson, Blast’s Interim President and CEO and current board member is also a director of AE Biofuels, Inc. The fact that certain of our directors are also directors of entities affiliated with BMC could cause actual or perceived conflicts of interest between us and BMC and could cause the value for our securities to become devalued or worthless.
If we are late in filing our Quarterly or Annual reports with the Securities and Exchange Commission, we may be de-listed from the Over-The-Counter Bulletin Board.
Pursuant to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of periodic reports with the Securities and Exchange Commission (“SEC”), any OTCBB issuer which fails to file a periodic report (Form 10-Q or 10-K) by the due date of such report (not withstanding any extension granted to the issuer by
the filing of a Form 12b-25), three times during any 24 month period is automatically de-listed from the OTCBB. Such removed issuer would not be re-eligible to be listed on the OTCBB for a period of one year, during which time any subsequent late filing would reset the one-year period of de-listing. If we are late in our filings three times in any 24 month period and are de-listed from the OTCBB, our securities may become worthless and we may be forced to curtail or abandon our business plan.
Because our common stock is considered a “penny stock,” certain rules may impede the development of increased trading activity and could affect the liquidity for stockholders.
Our common stock is subject to the SEC “penny stock rules.” The rules impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of penny stock securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the “penny stock rules” require the delivery, prior to the transaction, of a disclosure schedule relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations
for the securities, and, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These rules may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the secondary market. In addition, the penny-stock rules could have an adverse effect on our ability to raise capital in the future from offerings of our common stock.
On July 7, 2005, the SEC approved amendments to the penny stock rules. The amendments provide that broker-dealers are required to enhance their disclosure schedule to investors who purchase penny stocks, and that those investors have an explicit “cooling-off period” to rescind the transaction. These amendments could place
further constraints on broker-dealers’ ability to sell our securities.
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Our markets may be adversely affected by oil and gas industry conditions that are beyond our control.
Industry conditions are influenced by numerous factors over which we have no control, such as the supply of and demand for oil and gas, domestic and worldwide economic conditions, political instability in oil producing countries and merger and divestiture activity among oil and gas producers. Those conditions frequently change the level
of drilling and work-over activity by producers. A reduction in activity could increase competition among energy services businesses such as ours, making it more difficult for us to attract and maintain customers, or could adversely affect the price we could charge for our services and the utilization rate we may achieve.
Our operations are subject to hazards inherent in the energy service business, which are beyond our control. If those risks are not adequately insured or indemnified against, our results of operations could be adversely affected. Our operations are also subject to many hazards inherent in the land drilling business, including, but not limited
to blow outs, damaged well bores, fires, explosions, equipment failures, poisonous gas emissions, loss of well control, loss of hole, damage or lost drill strings and damage or loss from inclement weather or other natural disasters. These hazards are to some extent beyond our control and could cause, among other things, personal injury and death, serious damage or destruction of property and equipment, suspension of drilling operations, and substantial damage to the producing formations and surrounding environment.
Our insurance policies for public liability and property damage to others and injury or death to persons are in some cases subject to large deductibles and may not be sufficient to protect us against liability for all consequences of well disasters, personal injury, extensive fire damage or damage to the environment. We may not be able
to maintain adequate insurance in the future at rates we consider reasonable, or particular types of coverage may not be available. The occurrence of events, including any of the above-mentioned risks and hazards, that are not fully insured against or the failure of a customer that has agreed to indemnify us against certain liabilities to meet its indemnification obligations could subject us to significant liability and could have a material adverse effect on our financial condition and results of operations.
Our operations are subject to environmental, health and safety laws and regulations that may expose us to liabilities for noncompliance, which could adversely affect us.
The U.S. oil and natural gas industry is affected from time to time in varying degrees by political developments and federal, state and local environmental, health and safety laws and regulations applicable to our business. Our operations are vulnerable to certain risks arising from the numerous environmental health and safety laws and
regulations. These laws and regulations may restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling activities, require reporting of the storage, use or release of certain chemicals and hazardous substances, require removal or cleanup of contamination under certain circumstances, and impose substantial civil liabilities or criminal penalties for violations. Environmental laws and regulations may impose strict liability, rendering
a company liable for environmental damage without regard to negligence or fault, and could expose us to liability for the conduct of, or conditions caused by, others, or for our acts that were in compliance with all applicable laws at the time such acts were performed. Moreover, there has been a trend in recent years toward stricter standards in environmental, health and safety legislation and regulation, which may continue.
We may incur material liability related to our operations under governmental regulations, including environmental, health and safety requirements. We cannot predict how existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes
may have on our business, financial condition or results of operations. Because the requirements imposed by such laws and regulations are subject to change, we are unable to forecast the ultimate cost of compliance with such requirements. The modification of existing laws and regulations or the adoption of new laws or regulations curtailing exploratory or development drilling for oil and natural gas for economic, political, environmental or other reasons could have a material adverse effect on us by limiting
drilling opportunities.
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Because of the inherent dangers involved in oil and gas exploration, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards
and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. As a result, substantial liabilities to third parties or governmental entities may be incurred and/or we could be forced to expend substantial monies in connection with litigation
or settlements. In accordance with customary industry practices, we maintain insurance against some, but not all, of such risks and losses. As such, there can be no assurance that any insurance obtained by us will be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against, could materially and adversely affect our financial
condition and operations, which could lead to any investment in us becoming worthless.
We have incurred, and expect to continue to incur, increased costs and risks as a result of being a public company.
As a public company, we are required to comply with the Sarbanes-Oxley Act of 2002, or SOX, as well as rules and regulations implemented by the SEC. Changes in the laws and regulations affecting public companies, including the provisions of SOX and rules adopted by the SEC, have resulted in, and will continue to result in, increased costs
to us as we respond to their requirements. Given the risks inherent in the design and operation of internal controls over financial reporting, the effectiveness of our internal controls over financial reporting is uncertain. If our internal controls are not designed or operating effectively, we may not be able to issue an evaluation of our internal control over financial reporting as required or we or our independent registered public accounting firm may determine that our internal control over financial reporting
was not effective. In addition, our registered public accounting firm may either disclaim an opinion as it relates to management’s assessment of the effectiveness of our internal controls or may issue an adverse opinion on the effectiveness of our internal controls over financial reporting. Investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and which could affect our ability to run our business as we otherwise would
like to. New rules could also make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the coverage that is the same or similar to our current coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees,
and as executive officers. We cannot predict or estimate the total amount of the costs we may incur or the timing of such costs to comply with these rules and regulations.
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Compliance with Section 404 of the Sarbanes-Oxley Act will strain our limited financial and management resources.
We anticipate incurring significant legal, accounting and other expenses in connection with our status as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in
corporate governance practices. As such, our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, for
this Annual Report on Form 10-K, we were required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. For fiscal year 2010, Section 404 will require us to obtain a report from our independent registered public accounting firm attesting to the assessment made by management. Our testing,
or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting
knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
We do not intend to pay cash dividends on our common stock in the foreseeable future, and therefore only appreciation of the price of our common stock will provide a return to our stockholders.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed
relevant by our board of directors. In addition, the terms of our senior note prohibit us from paying dividends and making other distributions. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
The market price of our common stock historically has been volatile.
The market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate new revenues, conditions and trends
in the industries in which our customers are engaged.
Our common stock is traded on the OTCBB under the symbol “BESV.” In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based
upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
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We currently have a sporadic, illiquid, volatile market for our common stock, and the market for our common stock may remain sporadic, illiquid, and volatile in the future.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future and will likely be subject to wide fluctuations in response to several factors, including, but not limited to:
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actual or anticipated variations in our results of operations;
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our ability or inability to generate revenues;
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the number of shares in our public float;
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increased competition; and
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conditions and trends in the market for oil and gas and down-hole services.
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Furthermore, because our common stock is traded on the OTCBB, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may
adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, asked and closing prices) may not be related to the actual value of the Company, and not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but
should instead determine value of our common stock based on the information contained in the Company's public reports, industry information, and those business valuation methods commonly used to value private companies.
RISKS RELATED TO OUR DOWN-HOLE SOLUTIONS BUSINESS
We currently have no active customers. If we are unable to attract more permanent customers, we will not be able to generate revenue.
Assuming we are able to re-deploy our AFJ rig, such re-deployment may not result in a significant number of customer orders or realized cash revenue. If we are unable to attract customers and generate sufficient revenue or arrange new financing, we will be unable to continue in our current form and will be forced to restructure or seek
creditor protection.
Our business plan relies on the successful deployment of a new generation coiled tubing unit utilizing applied fluid jetting, which has not been well established in the energy service industry.
Our AFJ service intends to provide well stimulation and lateral drilling services to oil and gas producers. Since we are among the first to commercially apply the proven applied jetting techniques to the energy producing business, we cannot guarantee that our custom drilling rig design based on the AFJ concept will be adequate or that the
applied jetting technology will stimulate additional oil and gas production. We may not achieve the designed results from application of the technology. Customers may not accept the services we offer. Any of these results could have a negative impact on the development of our business, including the possible impairment and write down of our AFJ assets.
Our customers may not realize the expected benefits of enhanced production or lower costs from our applied jetting technology, which may impair market acceptance of our drilling services.
Our AFJ business will be heavily dependent upon our customers achieving enhanced production, or lower costs, from certain types of existing oil and gas wells. Many of the wells for which the technology will be used on have been abandoned for some time due to low production volumes or other reasons. In some cases, we could experience difficulty
in having the enhanced production reach the market due to the gathering field pipeline system’s disrepair resulting from the age of the fields, significant amounts of deterioration of the reservoirs in the abandoned wells or the reliability of the milling process. Our AFJ technology may not achieve enhanced production from every well drilled, or, if enhanced production is achieved initially, it may not continue for the duration necessary to achieve payout or reach the market on a timely basis. The failure
to screen adequately and achieve projected enhancements could result in making the application of the technology uneconomic for our customers. Failure to achieve an economic benefit for our customers in the provision of this service would significantly impair the development of our AFJ business and limit our ability to achieve revenue from these operations.
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Geological uncertainties may negatively impact the effectiveness of our applied jetting services.
Oil and gas fields may be depleted and zones may not be capable of stimulation by our applied jetting technology due to geological uncertainties such as lack of reservoir drive or adequate well pressure. Such shortcomings may not be identifiable. The failure to avoid such shortcomings could have a material adverse effect on our results
of operations and financial condition.
Competition within the well service industry may adversely affect our ability to market our services.
The well service industry is highly competitive and includes several large companies as well as other independent drilling companies that possess substantially greater financial and other resources than we do. These greater resources could allow those competitors to compete more effectively than we can. While the large energy service companies
are not currently competing for production stimulation business in the low productivity wells that we target, this may change. Failure to successfully compete within our industry would significantly adversely effect the development of our AFJ business and limit our ability to generate sufficient revenue from these operations.
We have no issued patents for our technology and although we have recently filed a pending patent application, such patent application has not been approved to date. As a result, companies with products similar to ours may sue us in the future claiming our activities infringe on their patent
rights.
While we have recently filed a patent for our AFJ technology, such patent has not been approved or granted to date. In the event the patent application for our AFJ technology is not granted, we will not be able to stop other companies from lawfully practicing technology identical or similar to ours in the future.
If we are sued by another company claiming our activities infringe on their patent, and we are not able to prove the prior use of such technology, we could be forced to abandon our technology and/or expend substantial expenses in defending against another company's claims. This could have a severely adverse affect on our revenues and could cause any investment in the Company to decline in value and/or become worthless.
RISKS RELATED TO OUR SATELLITE COMMUNICATIONS BUSINESS
Our satellite business is highly dependent upon a few key suppliers of satellite networking components, hardware, and technological services.
Our satellite business is heavily dependent on agreements with Spacenet, ViaSat and other equipment and service providers. These strategic relationships provide key network technology, satellite data transport, hardware and software. Failure of Spacenet, ViaSat or other key relationships to meet our expectations or termination of a relationship
with one of our key providers could adversely affect our ability to provide customers with our satellite services and could lead to a loss in revenues, which would adversely affect our results of operations and financial condition.
We are dependent on only a few key customers for the majority of our revenues from our satellite business, and if we were to lose such customers, our results of operations would be severely impacted.
For the year ended December 31, 2009, we generated approximately $311,000 in revenues through our satellite business, of which approximately 79% of those revenues came from only three customers. Specifically, our major satellite services customers in 2009 included BP America, Dow Chemical and Apache, representing 43%, 24% and 12%, respectively,
of our satellite revenues for the year ended December 31, 2009. If we were to lose any of those customers and were unable to find similarly sized customers to take their place, our results of operations and revenues could be severely impacted, and we could be forced to curtail or abandon our current business plan and/or business operations.
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We depend upon our vendors and their affiliates to provide services that we require to operate the network we use to provide services to our customers.
We are not and do not plan to become a licensee of the FCC and do not hold any authorization to operate satellite communications facilities. We depend upon licenses held by Spacenet and ViaSat and their subsidiaries for our satellite communications. If the licenses held by Spacenet and ViaSat are limited or revoked, if the FCC limits the
number of its customer premises earth stations or if Spacenet or ViaSat fails to operate the earth stations providing service to us and our subscribers in a satisfactory manner, we may not be able to provide our customers with proper service, which could lead to a loss in revenues and could adversely affect our results of operations and financial condition.
We rely on third-party independent contractors to install our customer premises equipment at new subscribers’ businesses and remote locations.
We do not control the hiring, training, certification and monitoring of the employees of our third-party independent contractors. If growth of our new subscriber base outpaces growth of our installer base or if the installers fail to provide the quality of service that our customers expect, the introduction of our service could be delayed,
which could lead to a postponement or loss in satellite revenues.
The service we provide is entirely dependent on the functionality of satellites on which we lease transponders and on our computer and communications hardware and software.
Our ability to provide service is entirely dependent on the functionality of satellites on which we lease transponders. These satellites may experience failure, loss, damage or destruction from a variety of causes, including war, anti-satellite devices and collision with space debris. The ability to provide timely information
and services depends also on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems and operations are vulnerable to damage or interruption from human error, natural disasters, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Despite precautions, there is always the danger that human error or sabotage could substantially disrupt the system.
If any of these events occurs, we are likely to suffer a permanent loss of service, temporary gaps in service availability, or decreased quality of service. Any such failure in the service we provide could lead to a loss in revenues and could adversely affect our results of operations and financial condition.
If we are unable to attract or retain subscribers, our Satellite Communications business would be materially harmed.
Our success depends upon our ability to rapidly grow our subscriber base and retain our existing customers. Several factors may negatively impact this ability, including:
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loss of our existing sales employees, resulting in our lack of access to potential subscribers;
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failure to establish and maintain the Blast Energy Services brand through advertising and marketing, or erosion of our brand due to misjudgments in service offerings;
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failure to develop or acquire technology for additional value added services that appeals to the evolving preferences of our subscribers;
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failure to meet our expected minimum sales commitments to Spacenet and ViaSat; and
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failure to provide the minimum transmission speeds and quality of service our customers expect.
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In addition, our service may require customers to purchase our satellite system equipment and to pay our monthly subscriber fees. The price of the equipment and the subscription fees may be higher than the price of many dial-up, DSL and cable modem internet access services, where available. In some instances, we expect to subsidize our
subscribers’ customer premises equipment to encourage the purchase of our service and to offset our higher relative costs but such subsidy may not be possible. Failure to attract or retain subscribers would affect our ability to generate satellite revenues.
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We may fail to manage any potential growth or expansion, negatively impacting our quality of service or overcapacity impacting profitability.
If we fail to manage our potential rapid growth and expansion effectively or expand and allocate our resources efficiently, we may not be able to retain or grow our subscriber base. While we believe that the trend toward satellite broadband information services in the energy market will continue to develop, our future success is highly
dependent on increased use of these services within the sector. The number of satellite broadband users willing to pay for online services and information may not continue to increase. If our assumptions regarding the usage patterns of our subscribers are wrong, our subscribers’ usage patterns change or the market for satellite broadband services fails to develop as expected, we will have either too little or too much satellite capacity, both of which could harm our business.
If we achieve the substantial subscriber growth that we anticipate, we will need to procure additional satellite capacity. If we are unable to procure this capacity, we may be unable to provide service to our subscribers or the quality of service we provide may not meet their expectations. Failure to manage any potential growth may have
a material adverse effect on our business and our ability to generate satellite revenues.
Our current services may become obsolete due to the highly competitive and continued advancement of the satellite industry. Larger service providers may provide services at lower costs.
Intense competition in the internet services market and inherent limitations in existing satellite technology may negatively affect the number of our subscribers. Competition in the market for consumer internet access services is intense, and we expect the level of competition to intensify in the future. We compete with providers of various
high-speed communications technologies for local access connections such as cable modem and DSL. We also may face competition from traditional telephone companies, competitive local exchange carriers and wireless communication companies. As our competitors expand their operations to offer high speed internet services, we may no longer be the only high-speed service available in certain markets. We also expect additional competitors with satellite-based networks to begin operations soon. In particular, some satellite
companies have announced that in the future they may offer high-speed internet service at the same price or at a lower price than we currently intend to offer and are offering our services. The market for internet services and satellite technology is characterized by rapid change, evolving industry standards and frequent introductions of new technological developments. These new standards and developments could make our existing or future services obsolete. Many of our current and potential competitors have longer
operating histories, greater brand name recognition, larger subscriber bases and substantially greater financial, technical, marketing and other resources than we have. Therefore, they may be able to respond more quickly than we can respond to new or changing opportunities, technologies, standards or subscriber requirements. Our effort to keep pace with the introduction of new standards and technological developments and effectively compete with larger service providers could result in additional costs or the
effort could prove difficult or impossible. The failure to keep pace with these changes and to continue to enhance and improve the responsiveness, functionality and features of our services could harm our ability to attract and retain users, which could lead to a loss of satellite revenues.
We may be subject to significant liability for our products.
If our products contain defects, we may be subject to significant liability claims from subscribers and other users of our products and incur significant unexpected expenses or lost revenues. Our satellite communications products are complex and may contain undetected errors or failures. We also have exposure to significant liability claims
from our customers because our products are designed to provide critical communications services. Our product liability insurance and contractual limitations in our customer agreements may not cover all potential claims resulting from a defect in one or more of our products. Failure of our products to perform satisfactorily could cause us to lose revenue, as well as to experience delay in or loss of market acceptance and sales, product returns, diversion of research and development resources, injury to our reputation
or increased service and warranty costs.
None.
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Office Facilities.
We lease approximately 2,000 square feet of office space at a cost of $2,000 per month renewable on a month-to-month basis.
Equipment Storage.
As of December 31, 2009, our primary equipment consisted of the AFJ rig and support vehicles, which are currently located at the Reliance facility in Luling, Texas. We also maintain certain satellite communication equipment, computer equipment, and furniture
at our principal executive office. With the exception of some mechanical repairs needed to the AFJ rig, we believe that our facilities and equipment are in good operating condition and that they are adequate for their present use.
Hallwood Energy/Hallwood Petroleum Lawsuit
In April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5 million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million in cash,
issue $2.75 million in equity and irrevocably forgave $1.65 million in deposits paid to Eagle. The parties were fully and mutually released from any and all claims between them. The terms of the settlement were approved by the board of each company and were confirmed by the Court. Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September 2008. Payments received from Hallwood in October 2008 were distributed to the appropriate class of creditors as designated
in the Plan.
On February 11, 2009, Blast and Eagle entered into an amended settlement letter with Hallwood that modified and finalized the terms of the parties April 3, 2008 settlement letter. The amended settlement provided that the equity component would be satisfied by the issuance to Blast of Class C Partnership Interests in Hallwood
Energy LP, equal to 7% of such Interests, having a face value of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement was approved by the board of each company and was confirmed by the Bankruptcy Court.
On March 2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for the Northern District of Texas under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that it could dispose of burdensome and uneconomical assets and reorganize its financial obligations and capital structure.
Subsequently, the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in this matter which transferred the control of Hallwood to the third party. We believe this action will result in the elimination of any existing equity position held in Hallwood, including Blast’s, so we have recognized a zero carrying value
in our financial statements for the Class C Interests.
Quicksilver Resources Lawsuit
In September 2008, Blast and Eagle entered into a Compromise Settlement and Release Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to resolve the pending litigation and the parties agreed to release all claims against one another and certain related parties. Quicksilver agreed to pay Eagle a total of
$10 million, as follows:
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$5 million payable upon the parties’ entry into the settlement;
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$1 million payable on or before the first anniversary date of the execution of the settlement;
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$2 million payable on or before the second anniversary date of the execution of the settlement; and
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$2 million payable on or before the third anniversary date of the execution of the settlement.
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In the event any fees are not paid on their due date and Quicksilver’s failure to pay is not cured within 10 days after written notice, then all of the remaining payments immediately become due and payable. Quicksilver made the first payment of $5 million in October 2008 and the second payment of $1 million in September 2009 ($720,000
to Blast, net of legal fees). The remaining amounts due from Quicksilver are shown as a current and long-term receivable in the balance sheet, net of contingent legal fees.
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Alberta Energy Partners
During the course of Blast’s Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”) between Alberta and Blast. That motion
was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however, Alberta filed a motion for reconsideration
and rehearing of the District Court’s order.
On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”). On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.
Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta instead entered into a Settlement Agreement to end the legal dispute with an effective date of February 1, 2010. Under the terms of the Settlement Agreement, the 50% of the Abrasive Fluid Jetting Technology owned by Blast
that was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever.
All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement shall also remain the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.
Upon the execution of the Settlement Agreement, Alberta agreed to file with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta. This settlement has no bearing on the
Applied Fluid Jetting technology the Company is continuing to develop as described above in “Business Operations”.
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.
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Market Information and Holders
Our common stock is traded on the OTCBB under the symbol “BESV”. As of March 31, 2010 there were approximately 333 holders of record of the common stock. This number does not include stockholders for whom shares were held in “nominee” or “street name”. Our common stock
trades on a limited, sporadic and volatile basis.
The table below shows the high and low per-share bid information for our common stock for the periods as indicated as reported by the OTCBB.
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PRICE RANGES
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QUARTER ENDED
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HIGH
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LOW
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December 31, 2009
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$ 0.19
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$ 0.04
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September 30, 2009
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$ 0.12
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$ 0.05
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June 30, 2009
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$ 0.33
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$ 0.09
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March 31, 2009
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$ 0.20
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$ 0.07
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December 31, 2008
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$ 0.30
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$ 0.05
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September 30, 2008
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$ 0.41
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$ 0.19
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June 30, 2008
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$ 0.38
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$ 0.19
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March 31, 2008
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$ 0.30
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$ 0.14
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Dividends
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any dividends in the foreseeable future. We intend to devote any earnings to fund the operations and the development of our business.
Common Stock
Holders of shares of common stock are entitled to one vote per share on each matter submitted to a vote of shareholders. In the event of liquidation, holders of common stock are entitled to share pro rata in the distribution of assets remaining after payment of liabilities, if any. Holders of common stock have no cumulative voting rights,
and, accordingly, the holders of a majority of the outstanding shares have the ability to elect all of the directors of the Company. Holders of common stock have no preemptive or other rights to subscribe for shares. Holders of common stock are entitled to such dividends as may be declared by the Board out of funds legally available therefore. The outstanding shares of common stock are validly issued, fully paid and non-assessable.
Series A Convertible Preferred Stock
In connection with the approval of the Plan, the Bankruptcy Court and the Board of Directors approved a change in domicile from California to Texas and the authorization of 20,000,000 shares of Preferred Stock 8,000,000 shares of which were designated Series A Convertible Preferred Stock, of which 6,000,000 shares are currently
outstanding.
The 6,000,000 shares of Series A Preferred Stock accrue interest at the rate of 8% per annum, in arrears for each month that the Preferred Stock is outstanding. Blast has the right to repay any or all of the accrued dividends at any time by providing the holders of the Preferred Stock at least five days written notice of its
intention to repay such dividends.
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Additionally, the Preferred Stock (and any accrued and unpaid dividends) has optional conversion rights, which provide the holders of the Preferred Stock the right, at any time, to convert the Preferred Stock into shares of Blast’s common stock at a conversion price of $0.50 per share. In addition, the Preferred Stock automatically
converts at the same rate if Blast’s common stock trades for a period of more than twenty (20) consecutive trading days at a price greater than $3.00 per share and the average trading volume of Blast’s common stock exceeds 50,000 shares per day. The Preferred Stock shareholders have the right to vote the number of shares of voting common stock that the Preferred Stock is then convertible into.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information, as of December 31, 2009, with respect to our compensation plans under which common stock is authorized for issuance. We grant options to officers, directors, employees and consultants under our 2009 Stock Incentive Plan. We believe that the exercise price for all of the options set forth
below reflects at least 100% of fair market value on the dates of grant for the options at issue.
EQUITY COMPENSATION PLAN INFORMATION
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Plan Category
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Number of securities to be issued upon exercise of outstanding options, warrants and rights
(A)
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Weighted-average exercise price of outstanding options, warrants and rights
(B)
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A)
(C)
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Equity compensation plans approved by stockholders
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850,000
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0.20
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3,150,000
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Equity compensation plans not approved by stockholders
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2,970,292
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$0.60
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1,029,708
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Total
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3,820,292
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$0.51
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4,179,708
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2003 Stock Option Plan
The 2003 Stock Option Plan is intended to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and consultants and to promote the success of the Company's business. Pursuant to the plan, the Board of Directors (or a committee thereof) has the ability to award grants of incentive or non-qualified options as described in greater detail in the plan to
the Company’s employees, officers, directors and consultants. The number of securities originally grantable pursuant to the plan were 8,000,000. As of December 31, 2009, any future grants of shares will be made from the 2009 Stock Incentive Plan described below.
2009 Stock Incentive Plan
The 2009 Stock Incentive Plan (the “Incentive 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 Incentive 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.
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Pursuant to the Incentive 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 Incentive Plan to the Company’s employees, officers, directors and consultants. The
number of securities issuable pursuant to the Incentive Plan is initially 5,000,000, provided that the number of shares available for issuance under the Incentive 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. As of December 31, 2009, no shares have yet been granted from this plan.
Recent Sales of Unregistered Securities
There were no shares of common stock issued in 2009 from fund raising or private placement offerings of securities.
In December 2009, Blast cancelled 35,000 shares of common stock previously issued in August 2006 to an employee of Blast in connection with such employee’s exercise of warrants, the exercise price of such warrants was never paid by such employee and the shares were previously held in custody by Blast pending payment of the exercise price.
In December 2009, Blast, through a yet to be formed wholly-owned Delaware subsidiary, began a private placement offering of the Series A Preferred Stock of its subsidiary corporation to “accredited” investors and “non-U.S. persons” as such terms are defined under the Securities Act of 1933, as amended. Pursuant
to the offering, the subsidiary offered up to 10,000,000 shares of its Series A Preferred Stock at a purchase price of $2.50 per share ($25,000,000 in total). Each share of the subsidiary’s Series A Preferred Stock is convertible into one share of Blast’s common stock at any time, and automatically converts into shares of Blast’s common stock on the tenth anniversary of the issuance of the Series A Preferred Stock. The offering was in connection with the United States Citizenship
and Immigration Service (“USCIS”) EB-5 Program, pursuant to which Blast’s subsidiary will be formed as a development stage fossil fuel extraction company, to manage the manufacturing and operation of well drilling units or rigs within the geographic area of a regional center designated by the USCIS pursuant to the EB-5 Immigrant Investor Program. To date, no shares of Series A Preferred Stock of Blast’s subsidiary have been sold and no funds have been raised. Blast
intends to include additional disclosure regarding the offering and the business plan of its wholly-owned subsidiary at such time as any securities have been sold in the offering.
In February 2010 Blast issued 89,334 shares of common stock in consideration for payment of invoices for nitrogen rejection technology due diligence consulting services provided from October 2008 through February 2009 by Hunter Project Management, Inc. The consulting contract called for the consultant to receive half its pay in cash and
half in common shares. Cash payments were made at the time the invoices were received, but for security reasons, the stock issuance for the remainder amount owed of $14,800 was delayed until the consultant returned to the U.S. from an extended assignment in Moscow on behalf of another client. We claim an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient took the shares for investment
and not resale and we took appropriate measures to restrict transfer. No underwriters or agents were involved in the foregoing issuance and no underwriting discounts or commissions were paid by us.
Not applicable.
The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and the related footnotes thereto.
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Organizational Overview
On February 26, 2008, the U.S. Bankruptcy Court confirmed our Second Amended Plan of Reorganization (the “Plan”). This ruling allowed Blast to emerge from Chapter 11 bankruptcy. The overall impact of the confirmed Plan was for Blast to emerge with unsecured creditors fully paid, have no debt service scheduled for
at least two years, and to keep equity shareholders’ interests intact. Under the terms of the Plan, Blast raised $4 million in cash proceeds from the sale of convertible preferred securities to Clyde Berg and McAfee Capital, two parties related to Blast’s largest shareholder, Berg McAfee Companies. The proceeds from the sale of the securities were used to pay 100% of the unsecured creditor claims, all administrative claims, and all statutory priority claims, for a total amount of approximately
$2.4 million. The remaining $1.6 million was used to execute an operational plan, including but not limited to, reinvesting in the Satellite Services and Down-hole Solutions businesses.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant
judgments and estimates used in preparation of our financial statements.
Accounts Receivable.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts represents our estimate of the amount of probable credit losses existing in our accounts receivable. We
determine the allowance based on management’s estimate of likely losses based on a review of current open receivables and our historical write-off experience. We review the adequacy of our allowance for doubtful accounts at least quarterly. Significant individual accounts receivable balances and balances which have been outstanding greater than ninety (90) days are reviewed individually. Account balances, when determined to be uncollectible, are charged against the allowance.
Equipment.
Equipment, including improvements which extend the useful life of the asset, is stated at cost. Maintenance and repairs are charged to expense when incurred. We provide for the depreciation of our equipment using the straight-line method over the estimated
useful lives. Our method of depreciation does not change when equipment becomes idle; we continue to depreciate idle equipment on a straight-line basis. No provision for salvage value is considered in determining depreciation of our equipment. We review our assets for impairment when events or changes in circumstances indicate that the carrying values of certain assets either exceed their respective fair values or may not be recovered over their estimated remaining useful lives. Provisions
for asset impairment are charged to income when estimated future cash flows, on an undiscounted basis, are less than the asset’s net book value, and any impairment loss recorded will be equal to the difference between the asset’s carrying value and its estimated fair value.
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 AFJ 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. We provide no warranty but sell commercially-obtained three to twelve month warranties for satellite hardware. We have a 30-day return policy. Revenue
from AFJ services is recognized when the services are performed and collectability is reasonably assured. If collection is uncertain, revenue is recognized when cash is collected. We recognize reimbursements received from third parties for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets during the reporting period. Actual results could differ from such estimates.
28
Estimates are used by management in the following financial reporting areas:
|
|
·
|
Allowance for doubtful accounts,
|
|
|
·
|
Depreciation and amortization,
|
|
|
·
|
Asset impairment,
|
|
|
·
|
Income taxes, and
|
|
|
·
|
Stock option values.
|
Stock-Based Compensation.
We account for the grant of options pursuant to the provisions of FASB ASC 718,
Compensation – Stock Compensation,
which
establishes accounting for equity instruments exchanged for employee service. We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant
analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.
All dollar amounts discussed in “Item 7” are rounded. For exact dollar amounts and additional information on our accounting policies, see the financial statements and notes to the financial statements included in Part IV, Item 15 of this Report.
Results of Operations
Comparison of Year Ended December 31, 2009 with the Year Ended December 31, 2008
Satellite Communications.
Satellite Communications’ revenues decreased by $85,000 or 21% to $311,000 for the year ended December 31, 2009, compared to $396,000 for the year ended December 31, 2008. Cost of services provided for Satellite Communications decreased by
$124,000 or 30.7% to $280,000 for the year ended December 31, 2009, compared to $404,000 for the year ended December 31, 2008. The operating profit from Satellite Communications increased by $39,000 to a profit of $31,000 for the year ended December 31, 2009, compared to a loss of $8,000 for the year ended December 31, 2008. The margin increase was the result of new business with Dow Pipeline and BP America as well as a reduction in allocated overhead attributable to our ongoing cost reduction efforts.
As hardware is sold, we recognize the revenue in the period it is delivered to the customer. We bill some of our bandwidth contracts in advance, but recognize revenue over the period benefited. At December 31, 2009, $1,890 was reflected on the balance sheet as Satellite deferred revenue.
Down-hole Solutions.
Down-hole Solutions revenues decreased to $20,000 for the year ended December 31, 2009, compared to $36,000 for the year ended December 31, 2008, a decrease of $16,000 or 44.4% from the prior period. Cost of services for Down-hole Solutions
revenues increased $106,000 or 38.0% to $385,000 for the year ended December 31, 2009, compared to $279,000 for the year ended December 31, 2008. The operating loss from Down-hole Solutions increased by $122,000, to a loss of $365,000 for the year ended December 31, 2009, compared to a loss of $243,000 for the year ended December 31, 2008. The increased operating loss in 2009 is primarily related to the costs of field testing the Company’s patent pending AFJ process.
29
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expense decreased by $888,000 to $1,036,000 for the year ended December 31, 2009, compared
to $1,924,000 for the year ended December 31, 2008. The following table details the major components of SG&A expense over the periods:
|
In thousands
|
|||||||||
|
2009
|
2008
|
Increase/
(Decrease)
|
|||||||
|
Payroll and related costs
|
$
|
319
|
|
$
|
541
|
$
|
(222)
|
||
|
Option and warrant expense
|
16
|
377
|
(361)
|
||||||
|
Legal fees and settlements
|
100
|
269
|
(169)
|
||||||
|
External services
|
366
|
440
|
(74)
|
||||||
|
Insurance
|
132
|
130
|
2
|
||||||
|
Travel & entertainment
|
41
|
56
|
(15)
|
||||||
|
Office rent, communications and miscellaneous
|
62
|
111
|
(49)
|
||||||
|
$1,036
|
$ 1,924
|
$ (888)
|
|||||||
Significantly lower administrative costs were primarily a result of lower non-cash charges associated with fewer grants of warrants and options for the year ended December 31, 2009, reduced payroll costs associated with the furlough of executive management in June 2009, a reduction in the use of outside consultants and a reduction in legal
fees following the emergence from bankruptcy in 2008.
Depreciation and Amortization.
Depreciation and amortization expense increased by $101,000 to $139,000 for the year ended December 31, 2009 compared to $38,000 for the year ended December 31, 2008.
This increase is primarily related to the depreciation of the AFJ rig which was brought into service in October 2008.
Asset Impairment Expense.
Impairment of the IPSM equipment in the amount of $50,479 was taken in 2009 as it was determined that development of this product is uncertain due to legal issues being experienced by the software development subcontractor. There were no asset impairments
in 2008.
Interest Expense.
Interest expense decreased by $6,000 to $107,000 for the year ended December 31, 2009 compared to $113,000 for the year ended December 31, 2008. This decrease is primarily related to the reduction in interest expense associated with notes that were paid off in late
2008.
Interest Income.
Interest income decreased to almost zero for the year ended December 31, 2009 compared to $22,000 for the year ended December 31, 2008. This decrease is primarily related to a decrease in cash balances that were available for investment compared to interest earned
from higher average cash balances provided from the net proceeds of the lawsuit settlements with Hallwood and Quicksilver in 2008.
Other Income. O
ther income was zero for the year ended December 31, 2009 compared to $20,000 for the year ended December 31, 2008. The decrease was due to write-offs of vendor balances in 2008 during the bankruptcy process.
Loss From Continuing Operations.
Loss from continuing operations decreased by $0.6 million to $1.7 million for the year ended December 31, 2009 compared to a loss of $2.3 million for the year ended December 31, 2008. This decrease is primarily due to lower administrative
costs related to a reduction in stock compensation expenses, payroll expenses, legal fees and overhead costs and was partially offset by higher costs of services from the Down-hole Solutions business and lower revenues for the year ended December 31, 2009, compared to the year ended December 31, 2008.
Income From Discontinued Operations.
Income from discontinued operations was zero for the year ended December 31, 2009 compared to income of $9.3 million for the year ended December 31, 2008. These operations continue to have no activity, having been discontinued since mid 2007. The
gain in 2008 was primarily due to the debt forgiveness from the Hallwood settlement and other income recognized from the lawsuit settlements with Hallwood and Quicksilver.
Net Loss.
Net loss was $1.7 million for the year ended December 31, 2009 compared to net income of $7.0 million for the year ended December 31, 2008. The net income in 2008 was primarily due to the income from discontinued operations recognized from the lawsuit settlements
with Hallwood and Quicksilver, which represented one-time income, compared to the loss for the year ended December 31, 2009, which mainly reflects our operating loss.
30
Liquidity and Capital Resources
We have no current commitment from our officers and directors or any of our shareholders to supplement our operations or provide us with financing in the future. In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when
we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.
Blast had total current assets of $1.8 million as of December 31, 2009, including a cash balance of $261,000, compared to total current assets of $1.6 million as of December 31, 2008, including a cash balance of $732,000. The increase in current assets is primarily related to the increase in the current portion of our receivable due from
Quicksilver of $1.4 million (after subtracting attorney fees due in connection with such payment) which is due in September 2010 under the terms of the lawsuit settlement agreement described above.
Blast had total assets as of December 31, 2009 of $4.3 million compared to total assets of $5.7 million as of December 31, 2008. This decrease is primarily related to the reduction in the cash balance from costs expended in field testing the AFJ rig and the impairment of the IPSM equipment, partially offset by the
payment received in September 2009 under the terms of the Quicksilver lawsuit settlement agreement.
Blast had total liabilities of $1.7 million as of December 31, 2009, including current liabilities of $541,000 compared to total liabilities of $1.4 million as of December 31, 2008, including current liabilities of $259,000. The increase in current liabilities is primarily related to the deferral of board of directors compensation
and accrued interest on notes payable.
Blast had positive net working capital of $1.3 million and total stockholders’ equity of $2.7 million as of December 31, 2009 compared to networking capital of $1.3 million and total stockholders’ equity of $4.3 million as of December 31, 2008. The reduction in equity is related to the net loss of $1.7 million in 2009.
A secured $1.12 million note with Berg McAfee Companies, LLC remains outstanding as of December 31, 2009. The note, which was extended for an additional three years from the effective date of the Plan (February 27, 2008), bears interest at eight-percent (8%) per annum, and contains an option to be convertible into shares of the
Company’s common stock at the rate of one share of common stock for each $0.20 of the note outstanding.
In August 2009, Blast entered into a Demand Promissory Note (“Note”) with a related third-party individual (“Lender”), pursuant to which the Lender loaned Blast $60,000. The Note was due and payable on the earlier to occur of (a) August 10, 2010, or (b) any time after October 10, 2009, if the Lender declared
all or a portion of the loan due and payable on such date (the “Due Date”). The Note accrued interest at the rate of 8% per annum, with interest and principal payable on the Due Date. Blast had the right to repay the Note at any time without penalty. In connection with and as consideration for the Note, Blast granted the Lender warrants to purchase 250,000 shares of its common stock. The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision,
and are exercisable for three years from the grant date (August 10, 2009). On October 31, 2009, Blast repaid this $60,000 Note in full including accrued interest of $1,027.
31
In December 2009, Blast, through a wholly-owned Delaware subsidiary, began a private placement offering of the Series A Preferred Stock of its subsidiary corporation to “accredited” investors and “non-U.S. persons” as such terms are defined under the Securities Act of 1933, as amended. Pursuant to the offering,
the subsidiary offered up to 10,000,000 shares of its Series A Preferred Stock at a purchase price of $2.50 per share ($25,000,000 in total). Each share of the subsidiary’s Series A Preferred Stock is convertible into one share of Blast’s common stock at any time, and automatically converts into shares of Blast’s common stock on the tenth anniversary of the issuance of the Series A Preferred Stock. The offering was in connection with the United States Citizenship and Immigration
Service (“USCIS”) EB-5 Program, pursuant to which Blast’s subsidiary will be formed as a development stage fossil fuel extraction company, to manage the manufacturing and operation of well drilling units or rigs within the geographic area of a regional center designated by the USCIS pursuant to the EB-5 Immigrant Investor Program. To date, no shares of Series A Preferred Stock of Blast’s subsidiary have been sold and no funds have been raised. Blast intends to include
additional disclosure regarding the offering and the business plan of its wholly-owned subsidiary at such time as any securities have been sold in the offering.
Cash Flows From Operating Activities.
Blast had net cash used in operating activities of approximately $1.0 million for the year ended December 31, 2009 which was mainly due to $1.7 million of loss from continuing operations, partially offset by an increase in accrued expenses of $236,000,
an increase in other current assets of $137,000 and depreciation and amortization of $139,000.
Cash Flows from Investing Activities.
Blast had net cash used in investing activities of $83,000 for the year ended December 31, 2009 primarily related to the purchase of equipment used for field testing the AFJ process in the amount of $78,000.
Cash Flows from Financing Activities.
Blast had net cash used in financing activities of $123.000 for the year ended December 31, 2009, primarily related to payments on short-term debt.
Cash Flows from Discontinued Operating Activities.
Blast had net cash provided by discontinued operations of $720,000 for the year ended December 31, 2009, which primarily consisted of the settlement proceeds from the Quicksilver lawsuit settlement agreement.
Off-Balance Sheet Arrangements
None.
Not applicable.
The Financial Statements and supplementary data required by this Item are presented beginning on page F-1 of this annual report on Form 10-K.
Effective February 27, 2008, the client auditor relationship between Blast and Malone & Bailey, PC ("Malone") was terminated as Malone was dismissed by the Company. Effective February 27, 2008, the Company engaged GBH CPAs, PC, Certified Public Accountants ("GBH") as its principal independent public accountant for the fiscal year ended
December 31, 2007. The decision to change accountants was recommended, approved and ratified by the Company's Board of Directors effective February 27, 2008.
Malone's report on the financial statements of the Company for the fiscal years ended December 31, 2005 and December 31, 2006, and any later interim period, including the interim period up to and including the date the relationship with Malone ceased, did not contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles except for concerns about the Company's ability to continue as a going concern.
32
In connection with the audit of the Company's fiscal years ended December 31, 2005 and December 31, 2006, and any later interim period, including the interim period up to and including the date the relationship with Malone ceased, there were no disagreements between Malone and the Company on a matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Malone would have caused Malone to make reference to the subject matter of the disagreement in connection with its report on the Company's financial statements.
There were no reportable events as provided in Item 304(a)(v) of Regulation S-K during the Company's fiscal years ended December 31, 2005 and December 31, 2006, and any later interim period, including the interim period up to and including the date the relationship with Malone ceased.
The Company authorized Malone to respond fully to any inquiries of any new auditors hired by the Company relating to their engagement as the Company's independent accountant. The Company requested that Malone review the disclosure and Malone has been given an opportunity to furnish the Company with a letter addressed to the Commission containing
any new information, clarification of the Company's expression of its views, or the respect in which it does not agree with the statements made by the Company. Such letter is incorporated by reference as an exhibit to this Report.
The Company did not previously consult with GBH regarding either (i) the application of accounting principles to a specific completed or contemplated transaction; (ii) the type of audit opinion that might be rendered on the Company's financial statements; or (iii) a reportable event (as provided in Item 304(a)(v)(B) of Regulation S-K) during
the Company's fiscal years ended December 31, 2005 and December 31, 2006, and any later interim period, including the interim period up to and including the date the relationship with Malone ceased.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Interim President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, our Interim President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009 in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Interim President and Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under the framework in
Internal Control — Integrated Framework
issued by COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2009, in providing reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide
only management’s report in this annual report.
33
Changes in Internal Control over Financial Reporting
There was no change in internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
34
Executive Officers
Our executive officers are elected by the board of directors and serve at the discretion of the board. Our executive officers are as follows:
|
Name
|
Age
|
Position
|
||
|
Michael L. Peterson
|
48
|
Interim President and CEO
|
||
|
John MacDonald
|
51
|
CFO & Secretary
|
Biographical information for our executive officers is set forth below:
Michael L. Peterson
has served as
Interim President and CEO since June 2009 and as Director since May 2008. He has enjoyed a successful career in the securities industry in various
capacities, including the last four years as a private investor and venture capitalist. He is currently the Chairman and CEO of Solargen Energy, Inc., a developer of utility-scale solar farms where he began serving in December 2008. Since February 2006, Mr. Peterson is also founder and managing partner of California-based, Pascal Management. Prior to that, during 2005, he co-founded and became a managing partner of American International Partners, a venture investment fund based in Salt Lake City. From
2000 to 2004 he served as a First Vice President at Merrill Lynch where he helped establish a new private client services division to work exclusively with high net worth investors. For a majority of his career prior to 2000, he was employed by Goldman Sachs & Co. as a Vice President with the responsibility for a team of professionals that advised and managed over $7 billion in assets. Mr. Peterson received his MBA at the Marriott School of Management and a BS from Brigham Young University. In 2008 he became
a director of AE Biofuels, a company controlled by Eric McAfee.
John MacDonald
has served as Chief Financial Officer since April 2007 and as Corporate Secretary since March 2004. From March 2004 until March 2007, Mr. MacDonald served as Vice President of Investor Relations and Corporate Secretary. From January 2004 until March
2004, Mr. MacDonald served as an Investor Relations consultant. From June 2001 until December 2003 Mr. MacDonald served as Vice President of Investor Relations for Ivanhoe Energy. Mr. MacDonald held investor relations and financial analysis positions with EEX Corporation and Oryx Energy from 1980 to 2001. Mr. MacDonald received an MBA from Southern Methodist University in 1994 and his B.A. from Oklahoma State University in 1980.
Directors
All of the current directors will serve until the next annual stockholders’ meeting or until their successors have been duly elected and qualified. Our board of directors is as follows:
|
Name
|
Age
|
Position
|
||
|
Roger P. (Pat) Herbert
|
63
|
Chairman of the Board
|
||
|
John R. Block
|
75
|
Director
|
||
|
Michael L. Peterson
|
48
|
Director
|
Biographical information for our directors is set forth below:
Roger P. (Pat) Herbert
has
served as a Director of the Company since June 2005. He has worked in the energy services business for nearly 34 years. Mr. Herbert has served
as CEO and as a director of JDR Cable Systems (Holdings) Ltd. since July 2002. From September 2000 to July 2002 he was Chairman and CEO of GeoNet Energy Services, a company he founded. Prior to that time, Mr. Herbert worked at International Energy Services, Baker Hughes and Smith International. Mr. Herbert currently serves on the board of Scorpion Offshore, a publicly traded Norwegian energy services company, and also serves as Chairman of the Audit Committee. Mr.
Herbert received his MBA from Pepperdine University, his B.S.E. from California State University-Northridge and is a registered professional engineer in the State of Texas.
35
John R. Block
has served as a director since May 2000. He currently serves as Senior Legislative Advisor to Olsson, Frank and Weeda, P.C., an organization that represents the food industry, a position he has held since January 2005. From January 2002 until January
2005, he served as Executive Vice President at the Food Marketing Institute. From February 1986 until January 2002, Mr. Block served as President of Food Distributors International. Prior to that time, Mr. Block served as Secretary of Agriculture for the US Department of Agriculture from 1981 to 1986. He currently serves as a director of and Hormel Foods Corp. and AE BioFuels, a company controlled by Eric McAfee. Mr. Block received his B.A. from the US Military Academy.
Michael L. Peterson
- refer to “Executive Officers” section above for Mr. Peterson’s biographical information.
Certain of our Directors are Directors of entities affiliated with BMC which could cause actual or perceived conflicts of interest between us and BMC and could cause the value for our securities to become devalued or worthless.
Committees of the Board of Directors
We currently have an audit committee, a compensation committee, and a nominating and corporate governance committee.
Audit Committee
The audit committee of the Board of Directors currently consists of Mr. Peterson, Mr. Herbert, and Mr. Block, each of whom are non-employee directors. The audit committee selects, on behalf of our Board, an independent public accounting firm to audit our financial statements, discuss with the independent auditors their independence,
review and discuss the audited financial statements with the independent auditors and management, and recommend to the Board whether the audited financials should be included in our Annual Reports to be filed with the SEC. The audit committee operates pursuant to a written charter, which was adopted in 2003. During the last fiscal year, the audit committee held three meetings.
While Mr. Peterson serves as interim CEO and President, he is not considered as an independent member of the Board. However, Mr. Block and Mr. Herbert: (1) met the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (2) did not participate
in the preparation of our financial statements or the financial statements of Blast; and (3) are able to read and understand fundamental financial statements, including a balance sheet, income statement, and cash flow statement. The Board has determined that Mr. Peterson qualifies as an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act. He receives compensation for Board service only.
Compensation Committee
The compensation committee of the board consists of Mr. Block, Mr. Herbert, and Mr. Peterson. The compensation Committee reviews and approves (1) the annual salaries and other compensation of our executive officers, and (2) individual stock and stock option grants. The compensation Committee also provides assistance
and recommendations with respect to our compensation policies and practices, and assists with the administration of our compensation plans. The compensation committee operates pursuant to a written charter, which was adopted in 2003.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee of the board currently consists of Mr. Herbert, Mr. Block, and Mr. Peterson. The nominating and corporate governance committee assists our board of directors in fulfilling its responsibilities by: identifying and approving individuals qualified to serve as members of our board
of directors, selecting director nominees for our annual meetings of shareholders, evaluating the performance of our board of directors, and developing and recommending to our board of directors corporate governance guidelines and oversight procedures with respect to corporate governance and ethical conduct. This committee operates pursuant to a written charter adopted in 2003.
36
Compensation Committee Interlocks and Insider Participation
Our compensation committee is comprised of Mr. Block, Mr. Herbert, and Mr. Peterson. None of the committee members has ever been an employee of Blast Energy Services, Inc. While Mr. Peterson serves as interim CEO and President, he is not considered as an independent member of the Board. None of our remaining executive officers
serve as a member of the board of directors or compensation committee of any entity that has any executive officer serving as a member of our Board of Directors or compensation committee.
Code of Ethics
In 2005, in accordance with SEC rules, the then audit committee and the Board adopted a Code of Ethics for the Company’s senior officers. The Board believes that these individuals must set an exemplary standard of conduct, particularly in the areas of accounting, internal accounting control, auditing and finance. This
code sets forth ethical standards to which the designated officers must adhere and other aspects of accounting, auditing and financial compliance. The Code of Ethics is available on our website at www.blastenergyservices.com. Please note that the information contained on our website is not incorporated by reference in, or considered to be a part of, this document.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officers and persons who own more than 10% of a class of our equity securities which are registered under the Exchange Act of 1934, as amended, to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes of ownership of such registered securities. Such executive officers, directors and greater than 10% beneficial owners are required by Commission regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.
To our knowledge, based solely on a review of the copies of such reports furnished to us Michael L. Peterson, John A. MacDonald, John Block, and Roger P. (Pat) Herbert, are currently subject to Section 16(a) filing requirements and have made their required filings with the Commission. We
also believe that Berg McAfee Companies is subject to the Section 16(a) filing requirements and may not have made their required filings with the Commission to date.
Audit Committee Report
The Audit Committee of the Board currently consists of Mr. Peterson, Mr. Herbert, and Mr. Block.
The Audit Committee operates under a written charter adopted by the Board, which is evaluated annually. The charter of the Audit Committee is available on the Company’s website at www.blastenergyservices.com under the same heading as the Code of Ethics. The Audit Committee selects, evaluates and, where deemed appropriate,
replaces the Company’s independent auditors. The Audit Committee also pre-approves all audit services, engagement fees and terms, and all permitted non-audit engagements.
Management is responsible for the Company’s internal controls and the financial reporting process. The Company’s independent auditors are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with auditing standards generally accepted in the United States
of America and issuing a report on the Company’s consolidated financial statements. The Audit Committee’s responsibility is to monitor and oversee these processes.
In this context, the Audit Committee has reviewed the Company’s audited financial statements for fiscal 2009 and has met and held discussions with management and GBH CPAs, PC, the Company’s independent auditors. Management represented to the Audit Committee that the Company’s consolidated financial statements
for fiscal 2009 were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee discussed the consolidated financial statements with the independent auditors. The Audit Committee also discussed with GBH CPAs, PC matters required to be discussed by Statement on Auditing Standards No. 61 (Communications with Audit Committees).
GBH CPAs, PC also provided to the Audit Committee the written disclosure required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with GBH CPAs, PC the accounting firm’s independence.
37
Based upon the Audit Committee’s discussion with management and GBH CPAs, PC, and the Audit Committee’s review of the representation of management and the report of GBH CPAs, PC to the Audit Committee, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC.
Submitted by the Audit Committee of the Board of Blast Energy Services, Inc.
Michael L. Peterson, Roger P. (Pat) Herbert and John R. Block
Compensation Discussion and Analysis
Objectives of Our Executive Compensation Program
The compensation committee of our Board (the “Compensation Committee”) administers our executive compensation program.
The general philosophy of our executive compensation program is to align executive compensation with the Company’s business objectives and the long-term interests of our stockholders. To that end, the Compensation Committee believes executive compensation packages provided by the Company to its executives, including the named executive
officers, should include both cash and stock-based compensation that reward performance as measured against established goals. In addition, the Company strives to provide compensation that is competitive with other energy services companies and that will allow us to attract, motivate, and retain qualified executives with superior talent and abilities.
Our executive compensation is designed to reward achievement of the Company’s corporate goals. In 2009, our corporate goals were primarily focused on growing the Company’s satellite businesses and testing the AFJ process.
The Role of the Compensation Committee
The Compensation Committee has the primary authority to determine the Company’s compensation philosophy and to establish compensation for the Company’s executive officers. The Compensation Committee oversees the Company’s compensation and benefit plans and policies; administers the Company’s stock option plans; reviews
the compensation components provided to Blast’s officers, employees, and consultants; grants options to purchase common stock to Blast’s officers, employees, and consultants; and reviews and makes recommendations to the Board regarding all forms of compensation to be provided to the members of the Board.
The Compensation Committee generally sets the initial compensation of each executive. The Compensation Committee annually reviews and in some cases adjusts compensation for executives. Although, the CEO provides recommendations to the Compensation Committee regarding the compensation of the other executive officers, the Compensation Committee
has full authority over all compensation matters relating to executive officers.
Elements of Executive Compensation
Although the Compensation Committee has not adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation, it strives to maintain a strong link between executive incentives and the creation of stockholder value. Therefore, the Company emphasizes incentive compensation in the form of stock
options or warrants rather than base salary.
38
Executive compensation consists of the following elements:
Base Salary.
Base salaries for our executives are generally established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions and recognizing the Company’s
ability to pay. Prior to making its recommendations and determinations, the Compensation Committee reviews each executive’s:
|
·
|
historical pay levels;
|
|
·
|
past performance; and
|
|
·
|
expected future contributions.
|
The Compensation Committee does not use any particular indices or formulae to arrive at each executive’s recommended pay level.
Incentive Bonus.
The Compensation Committee reserves the right to provide our executives incentive bonuses, which the Committee may grant in its sole discretion, if they believe are in Blast’s best interest, after analyzing our current business objectives
and growth, if any, and the amount of revenue generated as a direct result of the actions and abilities of those executives.
Equity Awards.
We also use long-term incentives in the form of stock options or warrants. Employees and executive officers generally receive stock option grants at the commencement of employment and periodically receive additional stock option grants,
typically on an annual basis. Additionally, in connection with the approval of the Plan, the Bankruptcy Court approved a pool of four million five-year warrants with a $0.20 exercise price for the Board to award. To date, 850,000 of such warrants have been awarded. We believe that equity awards are instrumental in aligning the long-term interests of the Company’s employees and executive officers with those of the stockholders because such individuals realize gains only if the stock price increases. Equity
awards also help to balance the overall executive compensation program, with base salary providing short-term compensation and equity participation rewarding executives for long-term increases in stockholder value.
Options are generally granted through our 2003 Employee Stock Option Plan and 2009 Stock Incentive Plan, which that authorizes us to grant options to purchase shares of common stock to our employees and directors. The Compensation Committee reviews and approves stock option awards to executive officers in amounts that are based upon a review
and assessment of:
|
·
|
competitive compensation data;
|
|
·
|
individual performance;
|
|
·
|
each executive’s existing long-term incentives; and
|
|
·
|
retention considerations.
|
Periodic stock option grants are made at the discretion of the Compensation Committee to eligible employees and, in appropriate circumstances, the Compensation Committee considers the recommendations of members of management, such as the CEO. Stock options are granted with an exercise price equal to the fair market value of our common stock on the day of grant and typically vest ratably over a three year period. In 2009, no stock
options were awarded to executive officers.
Compensation Committee Report
The members of the Compensation Committee are John Block, Roger P. (Pat) Herbert, and Michael L. Peterson.
The Compensation Committee administers Blast’s 2003 Employee Stock Option Plan; reviews compensation components to be provided to Blast’s officers, employees, and consultants; grants options to purchase common stock and restricted stock to Blast’s officers, employees, and consultants; and reviews
and makes recommendations to the Board regarding all forms of compensation to be provided to the members of the Board. The Compensation Committee believes it has fulfilled its responsibilities under its charter for the fiscal year ended December 31, 2009.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) for the fiscal year ended December 31, 2009 with management. Based upon this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in Blast’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
39
Submitted by the Compensation Committee of the Board of Blast Energy Services, Inc.
John Block, Roger P. (Pat) Herbert, and Michael L. Peterson
Summary Compensation Table
The following tables set forth certain information
earned by or paid to certain persons who we refer to as our “Named Executive Officers” for services provided for the fiscal year ended
December 31,
2009. Our Named Executive Officers include persons who (i) served as our principal executive officer or acted in a similar capacity during 2009; (ii) were serving at fiscal year-end as our two most highly compensated executive officers, other than the principal executive officer, whose total compensation exceeded $100,000, and (iii) up to two additional individuals for whom disclosure would have been provided as a most highly compensated executive officer, but for the fact that the individual was
not serving as an executive officer at fiscal year-end.
|
Name and Principal Position
|
Year
|
Salary ($)
|
Option & Warrant Awards ($)
1
|
All Other Compensation ($)
|
Total ($)
|
|||||
|
Michael L. Peterson
|
2009
|
-
|
-
|
33,000
6
|
33,000
|
|||||
|
Interim President and CEO
|
||||||||||
|
John O’Keefe
|
2009
|
91,667
2
|
-
|
-
|
91,667
|
|||||
|
Former President and CEO
|
2008
|
208,333
5
|
63,912
|
-
|
272,245
|
|||||
|
John MacDonald
|
2009
|
109,375
2
|
-
|
-
|
109,375
|
|||||
|
CFO and Secretary
|
2008
|
185,500
3
|
31,956
|
-
|
217,456
|
|||||
|
Andrew Wilson
|
2009
|
127,604
2
|
-
|
-
|
127,604
|
|||||
|
Non-executive V.P. Business Development
|
2008
|
182,292
4
|
31,956
|
-
|
214,248
|
|||||
|
|
______________________
|
|
|
(1) Amounts in this column represent the aggregate grant date fair value of awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See Note 11 to our financial statements included in this annual report on Form 10-K for assumptions underlying the valuation of equity awards.
|
|
|
(2) Reflects the furlough of Mr. O’Keefe and the reduction in half for the salaries of Mr. MacDonald and Mr. Wilson in June 2009.
|
|
|
(3) Includes $35,500 in deferred pay from 2007 paid to Mr. MacDonald upon the confirmation of the Plan of Reorganization on February 27, 2008.
|
|
|
(4) Includes $7,292 in deferred pay from 2006 paid to Mr. Wilson upon the confirmation of the Plan of Reorganization on February 27, 2008.
|
|
|
(5) Includes $8,333 of deferred pay from 2006 paid to Mr. O’Keefe upon the confirmation of the Plan of Reorganization on February 27, 2008.
|
|
|
(6) Accrued board fees for 2009, all deferred into 2010.
|
40
Executive Employment Agreements
John MacDonald is employed by us pursuant to an Employment Agreement entered into upon the confirmation of the Plan of Reorganization on February 27, 2008. Mr. MacDonald is employed as Executive Vice President and CFO of the Company at an annual salary of $150,000. The term of the agreement was for one year and
is automatically renewed unless cancelled by the Board. The contract may be cancelled by either party with a 60-day written notice. Should the contract be cancelled by the Company, he is entitled to severance pay equal to six months pay. Mr. MacDonald is also entitled to participate in our annual compensation program with a potential bonus up to 50% of his base. Mr. MacDonald had been the Company’s CFO since April 2007 and retained his duties as Vice President of Investor Relations and Corporate Secretary
since March 2004. On June 15, 2009, at the request of the Board, Mr. MacDonald’s salary was temporarily reduced to $75,000, until such time that sufficient funds are available to resume normal operations.
Andrew Wilson is employed by us pursuant to an Employment Agreement entered into upon the confirmation of the Plan of Reorganization on February 27, 2008. Mr. Wilson is employed as Vice President - Business Development of the Company at an annual salary of $175,000. The term of the agreement was for one year and
is automatically renewed unless cancelled by the Board. The contract may be cancelled by either party with a 60-day written notice. Should the contract be cancelled by the Company, Mr. Wilson is entitled to severance pay equal to six months pay. Mr. Wilson is also entitled to participate in our annual compensation program with a potential bonus up to 50% of his base. On June 15, 2009, at the request of the Board, Mr. Wilson’s salary was temporarily reduced to $87,500, until such time that sufficient funds
are available to resume normal operations.
On June 12, 2009, the Company’s board of directors implemented cost cutting measures to reduce overhead costs and conserve cash, including partial and full furloughs of management and staff with reduced or no pay, respectively. As such, John O’Keefe, our then President and CEO, was furloughed without pay, effective
June 15, 2009, and therefore will not serve as President or CEO until such time as he may return to the Company. The Blast board of directors has appointed Michael L. Peterson, a 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 $100,000 employment severance liability under the terms of Mr. O’Keefe’s employment contract.
2009 Grants of Plan Based Awards
There were no grants of options or warrants to the Named Executive Officers in 2009.
2009 Outstanding Equity Awards at Fiscal Year-End
The following table presents information regarding outstanding equity awards at December 31, 2009 for each of the Named Executive Officers.
|
Warrant and Option Awards
|
|||||||||
|
Name
|
Number of Securities Underlying Unexercised Equity Awards (#) Exercisable
|
Number of Securities Underlying Unexercised Equity Awards (#) Unexercisable
|
Option Exercise Price ($)
|
Option Expiration Date
|
|||||
|
Michael L. Peterson
|
133,3333
|
16,667
|
$ 0.20
|
05/28/13
|
|||||
|
John O’Keefe
|
400,000
(1)
|
-
|
$ 0.20
|
05/15/13
|
|||||
| (Former President and CEO) |
80,000
|
-
|
$ 4.28
|
01/21/14
|
|||||
|
420,000
|
-
|
$ 0.90
|
07/29/14
|
||||||
|
400,000
|
-
|
$ 0.80
|
12/31/15
|
||||||
|
John MacDonald
|
200,000
(1)1)
|
-
|
$ 0.20
|
05/15/13
|
|||||
|
100,000
|
-
|
$ 0.40
|
03/14/15
|
||||||
|
50,000
|
-
|
$ 0.80
|
12/31/15
|
||||||
|
______________________
|
|||||||||
(1) Represents award of warrants. All other equity awards represent options.
41
2009 Director Compensation
The following table presents summary information for the year ended December 31, 2009 regarding the compensation of the non-employee members of our Board of Directors. Mr. Peterson was appointed to the Board in May 2008.
|
Fees Earned or Paid in Cash ($)
(1)
|
Option Awards ($)
(2)
|
Total
($)
|
|||||
|
John R. Block
|
42,000
|
-
|
42,000
|
||||
|
Roger P. (Pat) Herbert
|
60,000
|
-
|
60,000
|
||||
|
Joseph J. Penbera, PhD
(3)
|
36,000
|
-
|
36,000
|
||||
|
Jeffrey R. Pendergraft
(4)
|
21,000
|
-
|
21,000
|
||||
|
Michael L. Peterson
|
33,000
|
-
|
33,000
|
_____________________
|
(1)
|
Amounts in this column represent 2009 board compensation fees that were deferred at year end.
|
|
(2)
|
There were no grants of options or warrants to Board members in 2009.
|
|
(3)
|
Former director – resigned in September 2009.
|
|
(4)
|
Former director – resigned in June 2009.
|
Standard Compensation Arrangements
We reimburse our directors for travel and lodging expenses in connection with their attendance at Board and committee meetings. In summary, non-employee Board members receive the following fees:
|
Monthly Retainer
|
Amount
|
|
|
Board Chair
|
$ 2,500
|
|
|
Board Member
|
$ 2,500
|
|
|
Audit Committee Chair
|
$ 1,500
|
|
|
Compensation Committee Chair
|
$ 1,000
|
|
|
Nominating and Governance Committee Chair
|
$ 1,000
|
The following table sets forth, as of March 31, 2010, the number and percentage of outstanding shares of our common stock owned by: (a) each person who is known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (b) each of our directors; (c) the named executive officers as defined
in Item 402 of Regulation S-K; and (d) all current directors and executive officers, as a group. As of March 31, 2010, there were 61,819,904 shares of common stock issued and outstanding including 1,150,000 approved but unissued shares arising from the class action settlement from 2005.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by
a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual
voting power at any particular date.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
42
|
Name and Address of Beneficial Owner
1
|
Number of Shares Owned
|
Percentage of Class
|
|||
|
Beneficial Owners of more than 5%
|
|||||
|
Laurus Master Fund Ltd.
|
8,995,089
|
(2)
|
12.95%
|
||
|
335 Madison Ave.
|
|||||
|
New York, New York 10017
|
|||||
|
Berg McAfee Companies LLC
(3)
|
8,733,436
|
(4)
|
14.13%
|
||
|
10600 N. De Anza Blvd., #250
|
|||||
|
Cupertino, California 95014
|
|||||
|
McAfee Capital LLC
(5)
|
6,080,000
|
(6)
|
9.24%
|
||
|
10600 N. De Anza Blvd., #250
|
|||||
|
Cupertino, California 95014
|
|||||
|
Eric A. McAfee
|
16,026.534
|
(7)
|
20.91%
|
||
|
10600 N. De Anza Blvd., #250
|
|||||
|
Cupertino, California 95014
|
|||||
|
Clyde Berg
|
15,188,436
|
(8)
|
20.37%
|
||
|
10600 N. De Anza Blvd., #250
|
|||||
|
Cupertino, California 95014
|
|||||
|
Officers and Directors:
|
|||||
|
John MacDonald
|
421,450
|
(9)
|
*
|
||
|
John O’Keefe (Former President and CEO)
|
1,845,000
|
(10)
|
2.92%
|
||
|
John R. Block
|
682,583
|
(11)
|
1.10%
|
||
|
Roger P. (Pat) Herbert
|
629,833
|
(12)
|
1.02%
|
||
|
Michael L. Peterson
|
933,333
|
(13)
|
1.51%
|
||
|
All directors and executive officers as a group (4 persons)
|
2,667,200
|
(14)
|
4.30%
|
|
|
______________________
|
* Less than 1%
|
(1)
|
Unless otherwise indicated, the mailing address of the beneficial owner is c/o Blast Energy Services, Inc., 14550 Torrey Chase Blvd., Suite 330, Texas 77014.
|
|
(2)
|
Consisting of (i) 1,350,000 shares of common stock and (ii) 7,645,089 shares of common stock underlying warrants.
Under the terms of the warrants, Laurus is prohibited from exercising the warrants in an amount which would cause it and its affiliates to beneficially own more than 4.99% of the common stock of Blast.
|
|
(3)
|
Berg McAfee Companies is controlled by Clyde Berg and Eric McAfee.
|
|
(4)
|
Consisting of 8,733,436 shares of common stock held by Berg McAfee Companies LLC.
|
|
(5)
|
McAfee Capital is controlled by Eric McAfee. Eric McAfee is the Company’s former Vice-Chairman.
|
|
(6)
|
Consisting of (i) 2,080,000 shares of common stock held, (ii) 3,000,000 shares of common stock issuable upon conversion of preferred stock at $.50 per share and (iii) 1,000,000 shares of common stock underlying warrants exercisable at $0.10 per share.
|
|
(7)
|
Consisting of: (i) 1,213,098 common shares held personally, including 90,000 shares held by members of Mr. McAfee’s household, which Mr. McAfee is deemed to beneficially own; (ii) 8,733,436 shares of common stock held by Berg McAfee Companies LLC, which Mr. McAfee is deemed to beneficially own; (iii) 2,080,000 common shares, 3,000,000 common shares issuable upon conversion of the Convertible Preferred Stock and
warrants to purchase 1,000,000 shares issued in connection with the Convertible Preferred Stock offering held by McAfee Capital LLC, which Mr. McAfee is deemed to beneficially own (as described herein).
|
|
(8)
|
Consisting of: (i) 2,455,000 common shares held personally, (ii) 8,733,436 shares of common stock held by Berg McAfee Companies LLC, which Clyde. Berg is deemed to beneficially own; (iii) 3,000,000 common shares issuable upon conversion of the Convertible Preferred Stock; and (iv) warrants to purchase 1,000,000 shares issued in connection with the Convertible Preferred Stock offering (as described herein).
|
43
|
(9)
|
Consisting of: (i) 71,450 shares of common stock and (ii). 150,000 shares of common stock underlying currently exercisable stock options, and (iii) 200,000 shares underlying currently exercisable warrants.
|
|
(10)
|
Consisting of: (i) 545,000 shares of common stock and (ii). 900,000 shares of common stock underlying currently exercisable stock options, and (iii) 400,000 shares underlying currently exercisable warrants.
|
|
(11)
|
Consisting of (i) 443,250 shares of common stock and (ii) 239,333 shares of common stock underlying currently exercisable stock options.
|
|
(12)
|
Consisting of (i) 472,500 shares of common stock and (ii) 157,333 shares of common stock underlying currently exercisable stock options..
|
|
(13)
|
Consisting of (i) 800,000 shares of common stock and (ii) 133,333 shares of common stock underlying currently exercisable stock options.
|
|
(14)
|
Consisting of the holdings provided above in notes 9 through 12.
|
Certain Relationships and Related Transactions
Berg McAfee Companies
In 2008, Berg McAfee Companies, LLC (“BMC”) extended the term for the $1 million Note secured on the Applied Fluid Jetting rig (described below) for three years. The revised Note was issued for $1.12 million, including accumulated interest, and carries an 8% interest rate and is convertible into common stock at $0.20 per share.
On July 15, 2005, Blast entered into an agreement to develop its initial applied jetting rig with BMC. The arrangement involves two loans for a total of $1 million to fund the completion of the initial rig and sharing in the expected rig revenues for a ten-year period. Under the terms of the loan agreement with BMC, cash
revenues will be shared on the basis of allocating 90 percent to Blast and 10 percent to BMC for a ten-year period following repayment. After ten years, Blast will receive all of the revenue from the rig. BMC also has the option to fund an additional three rigs under these commercial terms. This note originally due in March 2007 was extended for three years, as described above.
McAfee Capital
On the effective date, the Plan allowed McAfee Capital to convert the $416,000 outstanding balance of the DIP loan, including accrued interest, they provided during the bankruptcy into the Company’s common stock at the rate of one share of common stock for each $0.20 of the DIP loan outstanding. Accordingly, 2,080,000 shares were
issued to McAfee Capital in April 2008.
In January 2008, Blast sold the rights to an aggregate of 1,000,000 units each consisting of four shares of Series A Convertible Preferred Stock and one three year warrant with an exercise price of $0.10 per share (the “Units”), for an aggregate of $2 million or $2.00 per Unit, to McAfee Capital, LLC. The Units were
issued after Blast was re-domiciled and the Preferred Stock authorized. 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 piggy-back registration rights in connection with the sale of the Units. In October 2008, the Company redeemed 1,000,000 of the Preferred Stock shares for $500,000.
Clyde Berg
On the effective date, the Plan allowed Mr. Berg to convert the $416,000 outstanding balance of the DIP loan, including accrued interest, he provided during the bankruptcy into the Company’s common stock at the rate of one share of common stock for each $0.20 of the DIP loan outstanding. Accordingly, 2,080,000 shares were issued to
Mr. Berg in April 2008.
44
In January 2008, Blast sold the rights to an aggregate of 1,000,000 units each consisting of four shares of Series A Convertible Preferred Stock and one three year warrant with an exercise price of $0.10 per share (the “Units”), for an aggregate of $2,000,000 or $2.00 per Unit, to Clyde Berg, an individual. The Units
were issued after Blast was re-domiciled and the Preferred Stock authorized. 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 piggy-back registration rights in connection with the sale of the Units. In October 2008, the Company redeemed 1,000,000 of the Preferred Stock shares for $500,000. As a partner in BMC and in combination with holding these units, Mr. Berg is the beneficial
holder of more than 5% of the outstanding shares of common stock of Blast.
Eric McAfee
As a partner in BMC and McAfee Capital and in combination with his personal holdings, Mr. McAfee is the beneficial holder of more than 5% of the outstanding shares of common stock of Blast. Eric McAfee is the Company’s former Vice-Chairman.
Director Independence
|
Director
|
Independent
|
Audit Committee
|
Nominating & Corporate Governance Committee
|
|||
|
John R. Block
|
X
|
X
|
X
|
|||
|
Roger P. (Pat) Herbert
|
X
|
X
|
X
|
|||
|
Michael L. Peterson
|
X
|
X
|
||||
While Mr. Peterson serves as interim CEO and President, he is not considered as an independent member of the Board.
In October 2008, Mr. Block was appointed to the board of directors for AE Biofuels, a California-based vertically integrated biofuels company. The Chairman and CEO of AE Biofuels is Eric McAfee. Mr. McAfee is also the managing partner for McAfee Capital LLC and president of Berg McAfee Companies LLC, both of whom are significant
shareholders of Blast. Michael Peterson is also a director of AE Biofuels.
The following table presents fees for professional audit services performed by GBH CPAs, PC for the audit of our annual financial statements for the fiscal years ended December 31, 2009 and 2008.
|
2009
|
2008
|
|||
|
GBH CPAs, PC:
|
||||
|
Audit fees
(1)
|
$ 46,550
|
$ 55,000
|
||
|
Other non-audit fees
(2)
|
-
|
-
|
||
|
Tax related fees
(3)
|
-
|
-
|
||
|
Total
|
$ 46,550
|
$ 55,000
|
|
(1)
|
Audit fees include professional services rendered for (1) the audit of our annual financial statements for the fiscal years ended December 31, 2008 and 2009 and (ii) the reviews of the financial statements included in our quarterly reports on Form 10-Q for such years.
|
|
(2)
|
Other fees include professional services for review of various filings and issuance of consents.
|
|
(3)
|
Tax fees include professional services relating to preparation of the annual tax return.
|
45
Item15. Exhibits and Financial Statement Schedules.
(a) 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
|
Audited Financial Statements for years ended December 31, 2009 and 2008
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
F-2
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008
|
F-3
|
|
Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2009 and 2008
|
F-4
|
|
Consolidated Statements of Cash Flows for the Years ended December 31, 2009 and 2008
|
F-5
|
|
Notes to Consolidated Financial Statements
|
F-6
|
|
2.
|
Financial Statement Schedules
|
The required information is included in the Consolidated Financial Statements or Notes thereto.
|
3.
|
List of Exhibits
|
|
Exhibit 2.1
|
Agreement and Plan of Reorganization, dated April 24, 2003, as amended June 30, 2003;
Filed July 18, 2003 with the SEC, Report on Form 8-K
|
|
|
Exhibit 2.2
|
Articles of Merger (California and Texas)
Filed on April 7, 2008 with the SEC, Form 10-KSB
|
|
|
Exhibit 3.1
|
Certificate of Formation Texas
Filed March 6, 2008 with the SEC, Form 8-K
|
|
|
Exhibit 3.2
|
Certificate of Designation of Series A Preferred Stock
Filed March 6, 2008 with the SEC, Form 8-K
|
|
|
Exhibit 3.3
|
Bylaws of Blast Energy Services, Inc., Texas
Filed March 6, 2008 with the SEC, Form 8-K
|
|
|
Exhibit 4.1
|
$800,000 Secured Promissory Note dated July 15, 2005 by and among Blast Energy Services, Inc. and Berg McAfee Companies, LLC
Filed July 26, 2005 with the SEC, Form 8-K
|
|
|
Exhibit 4.2
|
$200,000 Secured Subordinated Promissory Note dated July 15, 2005 by and among Blast Energy Services, Inc. and Berg McAfee Companies, LLC
Filed July 26, 2005 with the SEC, Form 8-K
|
|
|
Exhibit 4.3
|
2003 Stock Option Plan
Filed November 20, 2003 with the SEC, Form 10-QSB
|
|
|
Exhibit 4.4
|
Blast Energy Services, Inc. 2009 Stock Incentive Plan
Filed August 14, 2009 with the SEC, Form 10Q
|
|
|
Exhibit 10.1
|
Second Amended Plan of Reorganization
Filed March 6, 2008 with the SEC, Form 8-K
|
|
|
Exhibit 10.2
|
First Amended Plan of Reorganization
Filed March 6, 2008 with the SEC, Form 8-K
|
|
46
|
Exhibit 10.3
|
Subscription Agreement and Related Exhibits with Clyde Berg
Filed March 6, 2008 with the SEC, Form 8-K
|
|||
|
Exhibit 10.4
|
Subscription Agreement and Related Exhibits with McAfee Capital, LLC
Filed March 6, 2008 with the SEC, Form 8-K
|
|||
|
Exhibit 10.5
|
Laurus Master Fund, Ltd. $2.1 million Security Agreement
Filed March 6, 2008 with the SEC, Form 8-K
|
|||
|
Exhibit 10.6
|
Berg McAfee Companies $1.12 million Note
Filed March 6, 2008 with the SEC, Form 8-K
|
|||
|
Exhibit 10.7
|
Settlement Agreement
Filed on May 14, 2007 with the SEC, Form 8-K
|
|||
|
Exhibit 10.8
|
Eagle Domestic Drilling Operations LLC and Hallwood Energy, LP and Hallwood Petroleum LLC Settlement Agreement
Filed on April 7, 2008 with the SEC, Form 10-KSB
|
|||
|
Exhibit 10.9
|
Employment Agreement with John O’Keefe
Filed on November 13, 2008 with the SEC, Form 10-Q
|
|||
|
Exhibit 10.10
|
Employment Agreement with John MacDonald
Filed on November 13, 2008 with the SEC, Form 10-Q
|
|||
|
Exhibit 10.11
|
Settlement Agreement
Filed on February 9, 2010 with the SEC, Form 8-K
|
|||
|
Exhibit 16.1
|
Letter from Malone & Bailey, PC
Filed on March 5, 2008 with the SEC, Form 8-K
|
|||
|
Exhibit 21.1*
|
Subsidiaries
|
|||
|
Exhibit 31.1*
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
Exhibit 31.2*
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
Exhibit 32.1*
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
|
Exhibit 32.2*
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
|
*
|
Filed herewith
|
|
|
47
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
|
BLAST ENERGY SERVICES, INC.
|
||||
|
By:
|
/s/ Michael L. Peterson
|
|||
|
Michael L. Peterson
Interim President and
Principal Executive Officer
|
||||
|
By:
|
/s/ John MacDonald
|
|||
|
John MacDonald
Chief Financial Officer and
Principal Accounting Officer
|
||||
|
Date:
|
April 1, 2010
|
|||
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ MICHAEL L. PETERSON
|
Interim President and
|
April 1, 2010
|
||
|
Michael L. Peterson
|
Principal Executive Officer
and Director
|
|||
|
/s/ JOHN MACDONALD
|
Chief Financial Officer and
|
April 1, 2010
|
||
|
John MacDonald
|
Principal Accounting Officer
|
|||
|
/s/ JOHN R. BLOCK
|
Director
|
April 1, 2010
|
||
|
John R. Block
|
||||
|
/s/ ROGER P. HERBERT
|
Director
|
April 1, 2010
|
||
|
Roger P. Herbert
|
||||
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Blast Energy Services, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Blast Energy Services, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of Blast Energy
Services, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Blast is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Blast’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blast Energy Services, Inc. as of December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the two years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that Blast Energy Services, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, Blast incurred a loss from continuing operations for the year ended December 31, 2009 and has an accumulated deficit at December 31, 2009 which
raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
March 30, 2010
F - 1
BLAST ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 261,164 | $ | 731,631 | ||||
|
Accounts receivable, net
|
58,281 | 107,065 | ||||||
|
Other assets
|
37,485 | 53,254 | ||||||
|
Current portion of long-term receivable
|
1,440,000 | 666,667 | ||||||
|
Total current assets
|
1,796,930 | 1,558,617 | ||||||
|
Equipment, net of accumulated depreciation of $190,327 and $68,282
|
1,101,959 | 1,191,263 | ||||||
|
Long-term accounts receivable
|
1,440,000 | 2,933,333 | ||||||
|
Total assets
|
$ | 4,338,889 | $ | 5,683,213 | ||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 73,846 | $ | 24,085 | ||||
|
Accrued expenses
|
295,772 | 149,564 | ||||||
|
Accrued expenses – related party
|
165,797 | 75,748 | ||||||
|
Deferred revenue
|
1,890 | 9,459 | ||||||
|
Notes payable – other
|
3,794 | - | ||||||
|
Total current liabilities
|
541,099 | 258,856 | ||||||
|
Long-term liabilities:
|
||||||||
|
Notes payable – related party
|
1,120,000 | 1,120,000 | ||||||
|
Loan payable – long term portion
|
15,588 | - | ||||||
|
Total liabilities
|
1,676,687 | 1,378,856 | ||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred Stock, $.001 par value, 20,000,000 shares authorized; Series A - 6,000,000 shares issued and outstanding
|
6,000 | 6,000 | ||||||
|
Common stock, $.001 par value, 180,000,000 shares authorized; 61,819,904 and 60,432,404 shares issued and outstanding
|
61,820 | 60,432 | ||||||
|
Additional paid-in capital
|
75,136,853 | 75,102,481 | ||||||
|
Accumulated deficit
|
(72,542,471 | ) | (70,864,556 | ) | ||||
|
Total stockholders’ equity
|
2,662,202 | 4,304,357 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 4,338,889 | $ | 5,683,213 | ||||
See notes to the consolidated financial statements
F - 2
BLAST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Revenue:
|
$ | 330,908 | $ | 432,012 | ||||
|
Operating expenses:
|
||||||||
|
Cost of sales
|
665,523 | 682,995 | ||||||
|
Selling, general and administrative
|
1,036,254 | 1,923,814 | ||||||
|
Depreciation and amortization
|
139,426 | 38,458 | ||||||
|
Bad debt expense
|
6,716 | - | ||||||
|
Asset impairment
|
50,479 | - | ||||||
|
Loss on disposal of equipment
|
3,885 | 1,270 | ||||||
|
Total operating expenses
|
1,902,283 | 2,646,537 | ||||||
|
Operating loss
|
(1,571,375 | ) | (2,214,525 | ) | ||||
|
Other income (expense):
|
||||||||
|
Other income
|
- | 19,947 | ||||||
|
Interest income
|
245 | 22,177 | ||||||
|
Interest expense
|
(106,785 | ) | (112,951 | ) | ||||
|
Total other income (expense)
|
(106,540 | ) | (70,827 | ) | ||||
|
Loss from continuing operations
|
(1,677,915 | ) | (2,285,352 | ) | ||||
|
Income from discontinued operations
|
- | 9,296,352 | ||||||
|
Net Income (loss)
|
$ | (1,677,915 | ) | $ | 7,011,000 | |||
|
Preferred dividends
|
240,000 | 253,151 | ||||||
|
Net income (loss) attributable to common shareholders
|
$ | (1,917,915 | ) | $ | 6,757,849 | |||
|
Net income (loss) per common share - Basic :
|
||||||||
|
Continuing operations
|
$ | (0.03 | ) | $ | (0.04 | ) | ||
|
Discontinued operations
|
- | 0.16 | ||||||
|
Net income (loss)
|
$ | ( 0.03 | ) | $ | 0.12 | |||
|
Net income (loss) per common share - Diluted:
|
||||||||
|
Continuing operations
|
$ | (0.03 | ) | $ | (0.03 | ) | ||
|
Discontinued operations
|
- | 0.13 | ||||||
|
Net income (loss)
|
$ | (0.03 | ) | $ | 0.10 | |||
|
Weighted average common shares outstanding:
|
||||||||
|
Basic
|
61,526,377 | 57,627,725 | ||||||
|
Diluted
|
61,526,377 | 67,098,771 | ||||||
See notes to the consolidated financial statements
F - 3
BLAST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2009 and 2008
|
Series A Convertible
Preferred Stock
|
Common Stock
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Total
|
||||||||||||||||||||||
|
Balances at December 31, 2007
|
- | $ | - | 52,027,404 | $ | 52,027 | $ | 70,471,873 | $ | (77,875,556 | ) | $ | (7,351,656 | ) | ||||||||||||||
|
Issuance of preferred shares
|
8,000,000 | 8,000 | - | - | 3,992,000 | - | 4,000,000 | |||||||||||||||||||||
|
Common stock issued for:
|
||||||||||||||||||||||||||||
|
Notes payable and accrued interest
|
- | - | 4,160,000 | 4,160 | 827,634 | - | 831,794 | |||||||||||||||||||||
|
Services
|
- | - | 2,145,000 | 2,145 | 424,855 | - | 427,000 | |||||||||||||||||||||
|
Cashless exercise of warrants and options
|
- | - | 2,900,000 | 2,900 | (2,900 | ) | - | - | ||||||||||||||||||||
|
Cash exercise of warrants and options
|
- | - | 100,000 | 100 | 9,900 | - | 10,000 | |||||||||||||||||||||
|
Cancellation of shares
|
(900,000 | ) | (900 | ) | - | - | (900 | ) | ||||||||||||||||||||
|
Redemption of preferred shares
|
(2,000,000 | ) | (2,000 | ) | - | - | (998,000 | ) | - | (1,000,000 | ) | |||||||||||||||||
|
Option expense
|
- | - | - | - | 233,317 | - | 233,317 | |||||||||||||||||||||
|
Warrant expense
|
- | - | - | - | 143,802 | - | 143,802 | |||||||||||||||||||||
|
Net income
|
- | - | - | - | - | 7,011,000 | 7,011,000 | |||||||||||||||||||||
|
Balances at December 31, 2008
|
6,000,000 | $ | 6,000 | 60,432,404 | $ | 60,432 | $ | 75,102,481 | $ | (70,864,556 | ) | $ | 4,304,357 | |||||||||||||||
|
Common stock issued for:
|
||||||||||||||||||||||||||||
|
Cashless exercise of warrants
|
- | - | 1,350,000 | 1,350 | (1,350 | ) | - | - | ||||||||||||||||||||
|
Services
|
- | - | 37,500 | 38 | 7,462 | 7,500 | ||||||||||||||||||||||
|
Option expense
|
- | - | - | - | 15,762 | - | 15,762 | |||||||||||||||||||||
|
Warrant expense
|
- | - | - | - | 12,498 | - | 12,498 | |||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | (1,677,915 | ) | (1,677,915 | ) | |||||||||||||||||||
|
Balances at December 31, 2009
|
6,000,000 | $ | 6,000 | 61,819,904 | $ | 61,820 | $ | 75,136, 853 | $ | (72,542,471 | ) | $ | 2,662,202 | |||||||||||||||
See notes to the consolidated financial statements
F - 4
BLAST ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash Flows From Operating Activities:
|
||||||||
|
Net income (loss)
|
$ | (1,677,915 | ) | $ | 7,011,000 | |||
|
Income from discontinued operations
|
- | (9,296,352 | ) | |||||
|
Loss from continuing operations
|
$ | (1,677,915 | ) | $ | (2,285,352 | ) | ||
|
Adjustments to reconcile net loss to net cash provided from operating:
|
||||||||
|
Depreciation and amortization
|
139,426 | 38,458 | ||||||
|
Asset impairment
|
50,479 | - | ||||||
|
Share-based compensation
|
15,762 | 377,119 | ||||||
|
Stock issued for services
|
7,500 | 75,000 | ||||||
|
Warrants issued with debt
|
12,498 | - | ||||||
|
Loss on disposal of equipment
|
3,885 | 1,270 | ||||||
|
Change in:
|
||||||||
|
Accounts receivable
|
48,784 | 1,298,166 | ||||||
|
Other current assets
|
136,794 | 111,030 | ||||||
|
Accounts payable
|
49,761 | (1,360,845 | ) | |||||
|
Accrued expenses
|
146,209 | 40,882 | ||||||
|
Accrued expenses – related party
|
90,049 | 75,748 | ||||||
|
Deferred revenue
|
(7,569 | ) | (1,058 | ) | ||||
|
Net Cash Used in Operating Activities
|
(984,337 | ) | (1,629,582 | ) | ||||
|
Cash Flows From Investing Activities:
|
||||||||
|
Proceeds from restricted cash
|
5,000 | - | ||||||
|
Cash paid for purchase of fixed assets
|
(77,520 | ) | (7,840 | ) | ||||
|
Cash paid for construction of equipment
|
(10,511 | ) | (139,505 | ) | ||||
|
Net Cash Used in Investing Activities
|
(83,031 | ) | (147,345 | ) | ||||
|
Cash Flows From Financing Activities:
|
||||||||
|
Borrowings on debtor-in-possession financing
|
- | 100,000 | ||||||
|
Borrowings on short-term debt
|
60,000 | - | ||||||
|
Payments on short-term debt
|
(183,099 | ) | (649,375 | ) | ||||
|
Issuance of convertible preferred stock
|
- | 4,000,000 | ||||||
|
Proceeds from exercise of options
|
- | 10,000 | ||||||
|
Common stock repurchased and cancelled
|
- | (900 | ) | |||||
|
Redemption of preferred stock
|
- | (1,000,000 | ) | |||||
|
Net Cash Provided By (Used In) Financing Activities
|
(123,099 | ) | 2,459,725 | |||||
|
Discontinued operating activities
|
720,000 | - | ||||||
|
Net cash provided by discontinued operations
|
720,000 | - | ||||||
|
Net change in cash
|
(470,467 | ) | 682,798 | |||||
|
Cash at beginning of period
|
731,631 | 48,833 | ||||||
|
Cash at end of period
|
$ | 261,164 | $ | 731,631 | ||||
|
Cash paid for:
|
||||||||
|
Interest
|
$ | 4,238 | $ | 33,537 | ||||
|
Income taxes
|
- | - | ||||||
|
Non-Cash Transactions:
|
||||||||
|
Conversion of deferred board compensation to common stock
|
$ | - | $ | 352,000 | ||||
|
Conversion of related party interest to common stock
|
- | 31,794 | ||||||
|
Conversion of related party advances to common stock
|
- | 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
|
121,026 | 106,875 | ||||||
|
Property financed with note payable
|
21,455 | - | ||||||
See notes to the consolidated financial statements
F - 5
BLAST ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business.
Blast Energy Services, Inc.’s (“our” and “Blast’s”) is an emerging technology company in the energy sector and strives to assist oil and gas companies in producing more economically. We seek to provide quality services to the energy
industry through our two divisions (i) Satellite Communications services and (ii) Down-hole Solutions, such as our AFJ technology. Our mission is to substantially improve the economics of existing and evolving oil and gas operations through the application of Blast licensed and owned technologies. Our strategy is to grow our businesses by maximizing revenues from the communications and down-hole segments and controlling costs while analyzing potential acquisitions and new technology opportunities in the energy
service sector.
On February 26, 2008, the Court confirmed our Second Amended Plan of Reorganization (the “Plan”) , allowing Blast to emerge from Chapter 11 bankruptcy.
Basis of Presentation.
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.
Blast’s consolidated financial statements include the accounts of Blast and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications.
Certain amounts in the consolidated financial statements of the prior year 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.
Amendments to Articles of Incorporation.
In connection with the approval of the Plan , the Court, and the Board of Blast approved a change in Blast’s domicile from California to Texas. Blast
effected the re-domicile by forming a wholly-owned subsidiary, Blast Energy Services, Inc., in the State of Texas. Blast then merged with and into this subsidiary thereby becoming a Texas Corporation (the “Merger”). Following the Merger, Blast has 200,000,000 authorized shares of stock, of which 180,000,000 shares are common stock, $0.001 par value per share, and 20,000,000 shares are preferred stock, $0.001 par value per share. The Certificate of Formation of the
resulting Texas Corporation also allows the Board to issue “blank check” preferred stock with rights and privileges as it may decide in its sole discretion, but which shares must have voting rights. Blast also authorized 8,000,000 shares of Series A Convertible Preferred Stock and adopted new bylaws in connection with the Merger.
Fair Value of Financial Instruments
.
The carrying amount of Blast’s cash, accounts receivables, accounts payables, and accrued expenses approximates their estimated fair values
due to the short-term maturities of those financial instruments. The fair value of related party transactions is not determinable due to their related party nature.
Cash Equivalents
. Blast considers all highly liquid investments with original maturities of three months or less cash equivalents.
F - 6
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 December 31, 2009 and 2008, Blast has determined that no allowance for doubtful accounts is required. During the year ended December 31, 2009, Blast recognized bad debt expense of $6,716
related to several dated receivable balances determined to be uncollectible.
Equipment
. Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment
are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are three to twenty years.
Impairment of Long-Lived Assets
. Blast reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. Blast
assesses recoverability of the carrying value of the asset by estimating the future net undiscounted cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and estimated fair value.
Stock-Based Compensation.
Blast accounts for the issuance of options pursuant to the provisions of FASB ASC 718,
Compensation – Stock Compensation,
which
establishes accounting for equity instruments exchanged for employee service. We utilize the Black-Scholes option pricing model to estimate the fair value of stock based compensation at the date of grant.
Income Taxes
. Blast utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
Earnings or Loss Per Common Share
. Basic earnings per common share equals net earnings or loss divided by the 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 year ended December 31, 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. Diluted earnings per share for the year ended December 31, 2008 includes the dilutive effect of the
assumed conversion of Blast’s outstanding Series A preferred stock into common stock and the exercise of 3,063,913 warrants into an equivalent amount of common shares.
F - 7
Recently Issued Accounting Pronouncements
. On July 1, 2009, the FASB officially launched the FASB Accounting Standards Codification, which has become the single official source of authoritative, nongovernmental U.S. Generally Accepted Accounting Principles,
in addition to guidance issued by the Securities and Exchange Commission. The codification supersedes all prior FASB, AICPA, EITF, and related literature. The codification, which is effective for interim and annual periods ending after September 15, 2009, is organized into approximately 90 accounting topics. The FASB no longer issues new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, amendments to the codification are made by issuing “Accounting
Standards Updates.” The Company has incorporated the current codification in its Form 10-K.
There were various other accounting standards and interpretations issued during 2009 and 2008, none of which are expected to have a material impact on Blast’s financial position, operations or cash flows.
Blast had a cash balance of approximately $261,000, current assets of approximately $1.8 million and stockholders’ equity of approximately $2.7 million as of December 31, 2009. Blast had a loss from continuing operations of approximately $1.7 million for the year ended December 31, 2009 and an accumulated deficit at December 31, 2009
of approximately $72.5 million. The consolidated financial statements do not include any adjustments that might be necessary if Blast is unable to continue as a going concern. These conditions create uncertainty as to Blast’s ability to continue as a going concern. Management is trying to grow the existing businesses but may need to raise additional capital through sales of common stock or convertible instruments as well as obtain financing from third parties.
On June 12, 2009, the Company’s board of directors implemented cost cutting measures to reduce overhead costs and conserve cash, including partial and full furloughs of management and staff with reduced or no pay, respectively. As such, John O’Keefe, our then President and CEO, was furloughed without pay, effective
June 15, 2009, and therefore will not serve as President or CEO until such time as he may return to the Company. John MacDonald, CFO and Corporate Secretary, and Andrew Wilson, V.P. of Business Development (a non-executive position) were reduced to half pay until such time as funds are available to return to full pay. The Blast board of directors has appointed Michael L. Peterson, a current member of the board, to serve as interim President and CEO in the absence of Mr. O’Keefe. If Mr. O’Keefe
is not retained after the furlough period, the Company will recognize a $100,000 employment severance liability under the terms of Mr. O’Keefe’s employment contract.
Equipment consists of the following:
|
Description
|
Life
|
December 31, 2009
|
December 31, 2008
|
|||
|
Computer equipment
|
3 years
|
$ 22,313
|
$ 22,313
|
|||
|
IPSM, in progress
|
3 years
|
-
|
50,479
|
|||
|
Tractor
|
4 years
|
98,974
|
26,265
|
|||
|
Service Trailer
|
5 years
|
4,784
|
4,784
|
|||
|
AFJ Rig
|
10 years
|
1,166,215
|
1,155,704
|
|||
|
Equipment
|
$ 1,292,286
|
$ 1,259,545
|
||||
|
Less: accumulated depreciation
|
(190,327)
|
(68,282)
|
||||
|
Equipment, net
|
$ 1,101,959
|
$ 1,191,263
|
During the year ended December 31, 2009, the carrying value of the IPSM equipment of $50,479 was fully impaired. Blast determined that future development of this product is uncertain due to a legal dispute between the software development subcontractor and another party and as a consequence of this uncertainty, recovery of this
investment is not likely.
F - 8
Accrued expenses at December 31, 2009 and 2008 consisted of the following:
|
Description
|
2009
|
2008
|
||
|
Director fees
|
$ 247,500
|
$ 55,500
|
||
|
Interest
|
54
|
-
|
||
|
Other
|
48,218
|
94,064
|
||
|
$ 295,772
|
$ 149,564
|
Blast bills some of its satellite bandwidth contracts in advance, over periods ranging from 3 to 36 months. Blast recognizes revenue evenly over the contract term. Deferred revenue related to satellite services totaled $1,890 and $9,459 at December 31, 2009 and 2008, respectively. All of the deferred revenue
at December 31, 2009 is expected to be recognized in the next twelve months.
Related Party Transactions
Demand Note.
In August 2009, Blast entered into a Demand Promissory Note (“Note”) with a related third-party individual (“Lender”), pursuant to which the Lender loaned Blast $60,000. The Note was due and payable on
the earlier to occur of (a) August 10, 2010, or (b) any time after October 10, 2009, if the Lender declared all or a portion of the loan due and payable on such date (the “Due Date”). The Note accrued interest at the rate of 8% per annum, with interest and principal payable on the Due Date. Blast had the right to repay the Note at any time without penalty. In connection with the Note, Blast granted the Lender warrants to purchase 250,000 shares of its common stock. The warrants
have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date (August 10, 2009). The value of the warrants, $12,498 based upon the Black-Scholes option pricing model, was expensed on the date of grant as additional interest expense due to the demand nature of the Note. On October 31, 2009, Blast repaid this $60,000 Note in full including accrued interest of $1,027.
Note Extension
.
A pre-Plan secured $1.12 million note with Berg McAfee Companies, a major shareholder of Blast, was extended for an additional three years from the Plan effective
date of February 27, 2008. The note bears interest at 8% and contains a lender option for the principal and interest to be convertible into Company stock at the rate of one share for each $0.20 of the note outstanding. Blast had accrued interest payable under this note (reflected as Accrued expenses – related party in the accompanying balance sheet) of $165,797 and $75,748 at December 31, 2009 and 2008, respectively
Debtor-in-Possession (“DIP”) Loan
.
The Bankruptcy court approved Blast’s ability to draw $800,000 from McAfee Capital and Clyde Berg to finance Blast’s working capital
needs on a temporary basis. The Plan allowed them to convert the outstanding balance of the DIP loan and related accrued interest into Company common stock at the rate of one share for each $0.20 of the DIP loan outstanding. After the Merger became effective, 4,160,000 shares of common stock were issued in full payment of the principal and accrued interest on this obligation in April 2008.
Director Fee Conversion
. In April and October 2008 Blast’s Directors converted unsecured claims for unpaid directors’ fees from 2006 totaling $164,000 and unpaid director fees from 2007 and 2008 totaling $191,000 into 820,000 shares
and 955,000 shares of Blast’s common stock, respectively. These conversions were at the rate of one share for each $0.20 of the deferred amount owed.
Other Transactions
In May 2009, Blast financed the $21,455 purchase of a pre-owned 2006 Ford F-250 truck to be used as a service vehicle for satellite and down-hole solutions employees. The note carries a 60-month term and an interest rate of 8.25%, which resulted in a monthly payment of approximately $438 commencing in June 2009.
F - 9
In October 2008, Blast paid off its $2.1 million Senior Lien with Laurus Master Fund, Ltd. and $125,000 note with McClain County, Oklahoma from a portion of the cash proceeds of its lawsuit settlements with Hallwood and Quicksilver (as defined below under footnote 13).
As of December 31, 2009, Blast had accumulated net operating losses, and therefore, had no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $25,208,273 at December 31, 2009, and will expire in the
years 2019 through 2028.
At December 31, 2009, the deferred tax assets consisted of the following:
|
Deferred tax assets
|
|
|
Net operating losses
|
$8,570,813
|
|
Less: valuation allowance
|
(8,570,813)
|
|
Net deferred tax asset
|
$ –
|
The change in the valuation allowance for the years ended December 31, 2009 and 2008 totaled approximately $558,333 and $ 2,547,520, respectively.
Series A Convertible Preferred Stock
In January 2008, Blast sold the rights to an aggregate of two million units each consisting of four shares of Series A Convertible Preferred Stock, and one three year warrant to purchase one share of common stock with an exercise price of $0.10 per share (the “Units”), for an aggregate of $4 million or $2.00 per Unit, to Clyde
Berg and to McAfee Capital LLC, two parties related to Blast’s largest shareholder, Berg McAfee Companies. The shares of common stock issuable in connection with the exercise of the warrants and in connection with the conversion of the Preferred Stock were granted registration rights in connection with the sale of the Units. The proceeds from the sale of the Units were used to satisfy creditor claims of 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.
The Series A Preferred Stock (the “Preferred Stock”) accrue dividends at the rate of 8% per annum, in arrears for each month that the Preferred Stock is outstanding. Blast has the right to pay any or all of the accrued dividends at any time by providing the holders of the Preferred Stock at least five days written
notice of their intent to pay such dividends. In the event Blast receives a “Cash Settlement,” defined as an aggregate total cash settlement received by Blast, net of legal fees and expenses, in connection with Blast’s litigation proceedings with Hallwood and Quicksilver in excess of $4 million, Blast is required to pay outstanding dividends within thirty (30) days in cash or stock at the holder’s option. If the dividends are not paid within thirty (30) days of the
date the Cash Settlement is received, a “Dividend Default” occurs.
The Preferred Stock and any accrued and unpaid dividends, have optional conversion rights into shares of Blast’s common stock at a conversion price of $0.50 per share. The Preferred Stock automatically converts if Blast’s common stock trades for a period of more than twenty (20) consecutive trading days at a price greater than
$3.00 per share and if the average trading volume of Blast’s common stock exceeds 50,000 shares per day.
In October 2008, Blast redeemed two million shares of Blast’s Series A Preferred Stock held by Clyde Berg and McAfee Capital, LLC at face value of $0.50 per share and paid $1 million to redeem the Preferred shares. In connection with the redemption, Blast cancelled one million Preferred shares each held by Clyde Berg and
McAfee Capital, LLC. Accordingly, six million preferred shares remain outstanding at December 31, 2009.
As of December 31, 2009, the aggregate and per share arrearages on the outstanding Preferred Stock were $493,151 and $0.08, respectively, which includes dividends in arrearage of $50,630 related to the 2,000,000 preferred shares that were redeemed in October 2008.
F - 10
Warrants
Blast also granted warrants to the Preferred Stockholders to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share. These warrants have a three-year term. The relative fair value of the warrants determined utilizing the Black-Scholes model was approximately $446,000 on the date of sale. The
significant assumptions used in the valuation were: the exercise price of $0.10; the market value of Blast’s common stock on the date of issuance of $0.29; expected volatility of 131%; risk free interest rate of 2.25%; and a term of three years. Management has evaluated the terms of the Convertible Preferred Stock and the grant of warrants in accordance with EITF 98-5 (ASC 470) and EITF 00-27 (ASC 470), and concluded that there was not a beneficial conversion feature at the date of grant.
During 2008 Blast issued 9,305,000 shares of common stock as follows:
|
·
|
2,900,000 shares issued in connection with the cashless exercise of warrants and options
|
|
·
|
4,160,000 shares issued in repayment of notes payable and accrued interest valued at $831,794
|
|
·
|
1,775,000 shares issued to directors in payment of board compensation fees for 2007 and partial year 2008 valued at $352,000
|
|
·
|
370,000 shares issued to consultants for their services valued at $75,000; and
|
|
·
|
100,000 shares issued as a result of cash exercise of warrants and options valued at $10,000.
|
During 2008 Blast cancelled 900,000 shares of common stock pursuant to the settlement agreement approved on May 14, 2007, whereby Blast repurchased shares of common stock previously issued to Second Bridge LLC for $900.
During 2009 Blast issued 1,387,500 shares of common stock as follows:
|
·
|
1,350,000 shares issued in connection with the cashless exercise of warrants by Laurus per footnote 8; and
|
|
·
|
37,500 shares issued to consultants valued at $7,500 based upon the closing price of Blast’s common stock at the date the shares were earned.
|
During 2009 Blast cancelled 35,000 shares of common stock previously issued, but not considered outstanding, pursuant an option exercise that was never completed due to the filing for Chapter 11 in January 2007.
2003 Stock Option Plan
The 2003 Stock Option Plan is intended to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and consultants and to promote the success of the Company's business. Pursuant to the plan, the Board of Directors (or a committee thereof) has the ability to award grants of incentive or non-qualified options as described in greater detail in the plan to
the Company’s employees, officers, directors and consultants. The number of securities originally grantable pursuant to the plan were 8,000,000. As of December 31, 2009, any future grants of shares will be made from the 2009 Stock Incentive Plan described below.
Blast’s 2009 Stock Incentive Plan:
The 2009 Stock Incentive Plan (the “Incentive 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 Incentive 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.
F - 11
Pursuant to the Incentive 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 Incentive Plan to the Company’s employees, officers, directors and consultants. The
number of securities issuable pursuant to the Incentive Plan is initially 5,000,000, provided that the number of shares available for issuance under the Incentive 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. As of December 31, 2009, no shares have yet been granted under this plan.
Options
During 2008, options to purchase 750,000 shares of common stock were granted by Blast to its directors at an exercise price of $0.20 per share. These options have a term of ten years of which 500,000 shares vested immediately on the date of grant and the remainder vest 1/12th per quarter thereafter. Fair value of $167,266 was
recorded using the Black-Scholes method of option-pricing model. Variables used in the Black-Scholes pricing model for warrants granted during the year ended December 31, 2008 include (1) discount rate range of 3.1% to 3.4%, (2) expected life of 6 years, (3) expected volatility of 150% and (4) zero expected dividends.
During 2009 no new options were granted or awarded.
Warrants
Blast grants warrants to non-employees from time to time. The board of directors has discretion as to the terms under which the warrants are granted. All warrants vest immediately unless specifically noted in warrant agreements.
During 2008, warrants to purchase 900,000 shares of common stock were granted by Blast to its employees at an exercise price of $0.20 per share. These warrants have a term of five years and vested on the date of the grant. Fair value of $143,802 was recorded using the Black-Scholes method of option-pricing model. Variables
used in the Black-Scholes pricing model for warrants granted during the year ended December 31, 2008 include (1) discount rate of 2.7%, (2) expected life of 3 years, (3) expected volatility of 131.8% and (4) zero expected dividends.
Blast also granted warrants to the Preferred Stockholders to purchase up to 2,000,000 shares of common stock at an exercise price of $0.10 per share. These warrants have a three-year term. The relative fair value of the warrants determined utilizing the Black-Scholes model was approximately $446,000 on the date of sale. The
significant assumptions used in the valuation were: the exercise price of $0.10; the market value of Blast’s common stock on the date of issuance of $0.29; expected volatility of 131%; risk free interest rate of 2.25%; and a term of three years.
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 exercise of 1,508,824 shares of common stock using a fair market value of $0.095 per share. This resulted in 1,350,000 shares being issued to Laurus and 158,824 shares
being cancelled under the cashless exercise formula. Of the 6,090,000 penny warrants originally granted to Laurus, 1,555,089 remain unexercised as of December 31, 2009.
In August 2009, in connection with and as consideration for the Demand Promissory Note mentioned above in Note 7, Blast granted the Lender warrants to purchase 250,000 shares of its common stock. The fair value of $12,498 was recorded as interest expense for the year ended December 31, 2009 and the warrants were valued using the Black-Scholes
option-pricing model. Variables used in the Black-Scholes pricing model for the 250,000 warrants include: (1) discount rate of 1.79%, (2) expected term of 1.5 years, (3) expected volatility of 155.51% and (4) zero expected dividends. The warrants have an exercise price of $0.10 per share, contain a cashless exercise provision, and are exercisable for three years from the grant date.
F - 12
Summary information regarding options and warrants is as follows:
|
Options
|
Weighted Average Share Price
|
Warrants
|
Weighted Average Share Price
|
||||
|
Outstanding at December 31, 2007
|
2,572,792
|
$ 0.77
|
14,472,835
|
$ 0.74
|
|||
|
Year ended December 31, 2008:
|
|||||||
|
Granted
|
750,000
|
0.20
|
2,900,000
|
0.13
|
|||
|
Exercised
|
(100,000)
|
0.10
|
(2,900,000)
|
0.01
|
|||
|
Forfeited
|
(190,000)
|
1.63
|
(968,922)
|
0.81
|
|||
|
Outstanding at December 31, 2008
|
3,032,792
|
$ 0.59
|
13,503,913
|
$ 0.76
|
|||
|
Year ended December 31, 2009:
|
|||||||
|
Granted
|
-
|
-
|
250,000
|
0.10
|
|||
|
Exercised
|
-
|
-
|
(1,350,000)
|
0.01
|
|||
|
Forfeited
|
(62,500)
|
0.20
|
(158,824)
|
0.01
|
|||
|
Outstanding at December 31, 2009
|
2,970,292
|
$ 0.60
|
12,245,089
|
$ 0.84
|
Summary of options outstanding and exercisable as of December 31, 2009 is as follows:
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
Options Outstanding
|
Options Exercisable
|
|||
|
$ 0.10
|
3.3
|
854,792
|
854,792
|
|||
|
0.20
|
8.4
|
687,500
|
600,000
|
|||
|
0.38
|
5.4
|
36,000
|
36,000
|
|||
|
0.40
|
5.3
|
120,000
|
120,000
|
|||
|
0.61
|
6.4
|
48,000
|
48,000
|
|||
|
0.80
|
6.0
|
660,000
|
660,000
|
|||
|
0.90
|
4.6
|
420,000
|
420,000
|
|||
|
2.20
|
4.4
|
24,000
|
24,000
|
|||
|
4.28
|
4.1
|
120,000
|
120,000
|
|||
|
$0.10 to $4.28
|
5.4
|
2,970,292
|
2,882,792
|
At December 31, 2009, options outstanding had zero intrinsic value. At December 31, 2009, unrecognized compensation expense related to outstanding options was $13,946, all of which is expected to be amortized to expense over the next eighteen months.
Summary of warrants outstanding and exercisable as of December 31, 2009 is as follows:
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
Warrants Outstanding
|
Warrants Exercisable
|
|||
|
$ 0.01
|
3.7
|
1,555,089
|
1,555,089
|
|||
|
0.10
|
1.2
|
2,250,000
|
2,250,000
|
|||
|
0.20
|
3.4
|
850,000
|
850,000
|
|||
|
0.45
|
3.1
|
750,000
|
750,000
|
|||
|
1.00
|
3.1
|
750,000
|
750,000
|
|||
|
1.44
|
3.7
|
6,090,000
|
6,090,000
|
|||
|
$0.01to $1.44
|
3.1
|
12,245,089
|
12,245,089
|
At December 31, 2009, warrants outstanding had an intrinsic value of $77,754.
F - 13
Three customers accounted for 43%, 24% and 12% of total revenues in 2009. Three customers accounted for 37%, 18% and 16% of total revenues in 2008. There were no related party revenues in 2009 and 2008, respectively.
Blast at times has cash in banks in excess of FDIC insurance limits. At December 31, 2009, Blast had no cash in banks in excess of FDIC insurance limits.
Blast performs ongoing credit evaluations of its customers’ financial condition and does not generally require collateral from them.
Hallwood Energy/Hallwood Petroleum Lawsuit
In April 2008, Eagle Domestic Drilling Operations LLC, our wholly-owned subsidiary (“Eagle”), and Hallwood Petroleum, LLC and Hallwood Energy, LP (collectively, “Hallwood”) agreed to settle their ongoing litigation for $6.5 million. Under the terms of the settlement, Hallwood agreed to pay $2.0 million in cash,
issue $2.75 million in equity and irrevocably forgave $1.65 million in deposits paid to Eagle. The parties were fully and mutually released from any and all claims between them. The terms of the settlement were approved by the board of each company and were confirmed by the Court. Hallwood paid Eagle $0.5 million in July 2008 and $1.5 million in September 2008. Payments received from Hallwood in October 2008 were distributed to the appropriate class of creditors as designated
in the Plan.
On February 11, 2009, Blast and Eagle entered into an amended settlement letter with Hallwood that modified and finalized the terms of the parties April 3, 2008 settlement letter. The amended settlement provided that the equity component would be satisfied by the issuance to Blast of Class C Partnership Interests in Hallwood
Energy LP, equal to 7% of such Interests, having a face value of $7,658,000 as of September 30, 2008 (the “Class C Interests”). The settlement was approved by the board of each company and was confirmed by the Bankruptcy Court.
On March 2, 2009, Hallwood Energy filed voluntary petitions with the Bankruptcy Court for the Northern District of Texas under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in order that it could dispose of burdensome and uneconomical assets and reorganize its financial obligations and capital structure.
Subsequently, the Bankruptcy Court ruled in favor of a motion filed by an adversarial party in this matter which transferred the control of Hallwood to the third party. We believe this action will result in the elimination of any existing equity position held in Hallwood, including Blast’s, so we have recognized a zero carrying value
in our financial statements for the Class C Interests.
Quicksilver Resources Lawsuit
In September 2008, Blast and Eagle entered into a Compromise Settlement and Release Agreement with Quicksilver Resources, Inc. (“Quicksilver”) in the Court to resolve the pending litigation and the parties agreed to release all claims against one another and certain related parties. Quicksilver agreed to pay Eagle a total of
$10 million, 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 and the second payment of $1 million in September 2009 ($720,000
to Blast, net of legal fees). The remaining amounts due from Quicksilver are shown as a current and long-term receivable in the balance sheet, net of contingent legal fees.
F - 14
Alberta Energy Partners
During the course of Blast’s Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”) between Alberta and Blast. That motion
was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however, Alberta filed a motion for reconsideration
and rehearing of the District Court’s order.
On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”). On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.
Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta have instead entered into a Settlement Agreement to end the legal dispute with an effective date of February 1, 2010. Under the terms of the Settlement Agreement, the 50% of the Abrasive Fluid Jetting Technology owned
by Blast that was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature
whatsoever. All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement shall also remain the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.
Upon the execution of the Settlement Agreement, Alberta agreed to file with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta. This settlement has no bearing on the
Applied Fluid Jetting technology the Company is continuing to develop as described above in “Business Operations”.
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.
Blast has two reportable segments: (1) Satellite Communications 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.
F - 15
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 Year Ended
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues:
|
||||||||
|
Satellite Communications
|
$ | 310,908 | $ | 396,012 | ||||
|
Down-hole Solutions
|
20,000 | 36,000 | ||||||
|
Total Revenue
|
$ | 330,908 | $ | 432,012 | ||||
|
Cost of Goods Sold:
|
||||||||
|
Satellite Communications
|
$ | 280,268 | $ | 404,151 | ||||
|
Down-hole Solutions
|
385,255 | 278,844 | ||||||
|
Corporate
|
1,186,281 | 1,962,272 | ||||||
|
Total Costs
|
$ | 1,851,804 | $ | 2,645,267 | ||||
|
Operating profit (loss):
|
||||||||
|
Satellite Communications
|
$ | 30,640 | $ | (8,139 | ) | |||
|
Down-hole Solutions
|
(365,255 | ) | (242,844 | ) | ||||
|
Corporate
|
(1,186,281 | ) | (1,962,272 | ) | ||||
|
Total Loss
|
$ | (1,520,896 | ) | $ | (2,213,255 | ) | ||
Blast’s fixed assets at December 31, 2009 were as follows:
|
2009
|
|
|
Satellite Communications
|
$ -
|
|
Down-hole Solutions
|
1,100,409
|
|
Corporate
|
1,550
|
|
$ 1,101,959
|
All of Blast‘s long-term assets are attributable to North America.
There are no assets or liabilities associated with discontinued operations for the years ended December 31, 2009 and 2008.
F - 16
Net income from the discontinuance of drilling operations for the years ended December 31, 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Revenues
|
$ | - | $ | - | ||||
|
Operating Expenses:
|
||||||||
|
Cost of sales
|
- | (43,403 | ) | |||||
|
Selling, general and administrative
|
- | 365,355 | ||||||
|
Depreciation and amortization
|
- | - | ||||||
|
Total operating expenses
|
- | (321,952 | ) | |||||
|
Loss from discontinued operations
|
- | (321,952 | ) | |||||
|
Other income (expense)
|
||||||||
|
Other income
|
- | 9,620,291 | ||||||
|
Other (expense)
|
- | (1,005 | ) | |||||
|
Interest income
|
- | 66 | ||||||
|
Interest expense
|
- | (1,048 | ) | |||||
|
Loss on sale of equipment
|
- | - | ||||||
|
Total other income
|
- | 9,618,304 | ||||||
|
Net income from discontinued operations
|
$ | - | $ | 9,296,352 | ||||
The net income from discontinued operations is primarily due to the lack of activity from discontinued operations, the debt forgiveness from the Hallwood settlement and other income recognized from the lawsuit settlements with Hallwood and Quicksilver during 2008.
Alberta Energy Partners
During the course of Blast Energy Services, Inc.’s (“Blast’s”) Chapter 11 bankruptcy proceedings in 2007 and 2008, Alberta Energy Partners (“Alberta”) took a number of legal actions adverse to Blast. Alberta filed a motion to deem rejected the 2005 Technology Purchase Agreement (the “Purchase Agreement”)
between Alberta and Blast. That motion was denied, and Alberta appealed the bankruptcy court’s ruling. Additionally, Alberta objected to the confirmation of Blast’s plan of reorganization. That objection was overruled by the bankruptcy court, and Alberta appealed. The appeal was dismissed by the United District Court for the Southern District of Texas (the “District Court”) as moot (together with the prior denial of Alberta’s motions, the “Dismissal Orders”); however,
Alberta filed a motion for reconsideration and rehearing of the District Court’s order.
On September 1, 2009, oral arguments on that matter were heard by the United States District Court of Appeals for the Fifth Circuit (the “Fifth Circuit”). On January 21, 2010, Blast was informed that the Fifth Circuit reversed the decision of the District Court, vacated the Dismissal Orders and remanded the matters
to the District Court for further consideration.
Rather than enter into costly and lengthy hearings on this matter, Blast, Alberta and certain related parties of Alberta have instead entered into a Settlement Agreement to end the legal dispute with an effective date of February 1, 2010. Under the terms of the Settlement Agreement, the 50% of the Jetting Technology owned by Blast that
was sold to Blast pursuant to the Purchase Agreement was transferred and assigned back to Alberta. In consideration of the assignment provided for above, Alberta and the related parties of Alberta agreed to release Blast, its present and former officers, directors, employees, attorneys and agents of and from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses, and compensation of every kind and nature whatsoever.
All personal property (whether machinery, equipment or of any other type) that Blast developed and paid for in connection with the Purchase Agreement shall also remain the property of Blast as a result of the Settlement Agreement, including, but not limited to, the coiled tubing rig and all parts, machinery and equipment associated with the operation and/or maintenance of such rig.
F - 17
Upon the execution of the Settlement Agreement, Alberta agreed to file with the District Court a motion to dismiss with prejudice its appeal of the prior District Court orders, which together with the Settlement Agreement, settles and ends the ongoing disputes and litigation between Blast and Alberta.
Patent for AFJ process
In February 2009, we filed a provisional patent (application number 61/152,885) relating to the process and unique equipment related to our applied fluid jetting process. In February 2010, the final patent application was submitted. This filing preserves Blast’s and John Adam’s exclusive use of this proprietary process.
Stock Issued In Payment of Consulting Services
In February 2010 Blast issued 89,334 shares of common stock toward payment of invoices for nitrogen rejection technology due diligence consulting services provided from October 2008 through February 2009 by Hunter Project Management, Inc. The consulting contract called for the consultant to receive half its pay in cash and half in common
shares. Cash payments were made at the time the invoices were received, but for security reasons, the stock issuance for the remainder amount owed of $14,800 was delayed until the consultant returned to the U.S. from an extended assignment in Moscow on behalf of another client.
In accordance with SFAS 165 (ASC 855-10) Company management reviewed all material events through March 30, 2010 and there are no other material subsequent events to report.
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVNote 1 - Business Overview and Summary Of Accounting PoliciesNote 2 Going ConcernNote 3 Commitments and ContingenciesNote 4 EquipmentNote 5 Accrued ExpensesNote 6 Deferred RevenueNote 7 Notes Payable Related Parties and OtherNote 8 - Income TaxesNote 9 Preferred Stock Related PartiesNote 10 Common StockNote 11 - Stock Options and WarrantsNote 12 Concentrations and Credit RisksNote 13 LitigationNote 14 Business SegmentsNote 15 Discontinued OperationsNote 16 Other Subsequent Events