**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**Form 10-KSB/A**

**AmendmentNo. 1**

 

| **ý****  ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d)**                                                                                                                         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                           |
|                                                                                                                                                                                                  |   |   |
| **For the fiscal year ended December 31, 2004**                                                                                                                                                  |
|                                                                                                                                                                                                  |   |   |
| **Or**                                                                                                                                                                                                |
|                                                                                                                                                                                                  |   |   |
| **o****  TRANSISTION REPORT PURSUANT TO  SECTION 13 OR 15(d)**                                                                                                                         |
| **OF THE SECURITIES EXHANGE ACT OF  1934**                                                                                                                                                            |
| ** **                                                                                                                                                                                            | ** ** | ** ** |
| **For the  transition period from                  to            ** |
| ** **                                                                                                                                                                                            |
| **Commission  File Number: 000-29098**                                                                                                                                                                |

 

**BPZ Energy, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **Colorado**                                    | ** ** | **33-0502730**                           |
|-------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation) |       | (I.R.S. Employer  Identification Number) |

 

**580 WestlakePark Blvd., Suite 525****Houston, Texas 77079**(Address of principal executive office)

 

Registrant’stelephone number, including area code: **(281)556-6200**

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act: **Common Stock, Without Par Value**

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                         Yes ýNo o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-B is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.           o

 

Indicateby check mark whether the Registrant is a Shell Company (as defined inRule 12b-2 of the Exchange Act                             Yeso No ý)

 

Registrantdid not earn revenues for the fiscal year ended December 31, 2004.

 

Thenumber of shares of Common Stock held by non-affiliates as of March 31,2005 was 7,553,306 shares, all of one class of common stock, no par value,having an aggregate market value of approximately $46,830,477 based upon theclosing price of Registrant’s common stock on such date of $6.20 per share****as quoted****on the Over-the-Counter Bulletin Board (“OTCBB”).

 

Asof March 31, 2005, BPZ Energy, Inc. had 16,506,931 shares of commonstock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portionsof the registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholdersto be filed no later than April 30, 2005 are incorporated by reference in Part III****of this Form 10-KSB.

 

TransitionalSmall Business Disclosure Format (check one): Yes o   No ý

 

 

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**TABLEOF CONTENTS**

 

BPZ Energy, Inc. is filing this amendedAnnual Report on Form 10-KSB/A for the period ended December 31, 2004 (the“Amended Annual Report”), to amend its Annual Report on Form 10-KSB for theperiod ended December 31, 2004 (the “Original Annual Report”), which was filedwith the Securities and Exchange Commission on April 15, 2005. 

 

The Amended Annual Report amends thedisclosure under the Part I, Item 1 “Description of Business,” Part I, Item 2“Description of Property,” Part I, Item 5 “Market for Common Equity and RelatedStockholder Matters,” Part II, Item 6 “Management’s Discussion and Analysis andPlan of Operation,” Part II, Item 7 “Financial Statements and Supplementary Data,”and Part II, Item 8A “Controls and Procedures.” Except for these items, no other information in the Original AnnualReport is amended hereby. 

 
| **PART I**   |                                                                                            |   |
|-------------------|-------------------------------------------------------------------------------------------------|--------|
|              |                                                                                            |   |
| Item 1.           | Description of Business                                                                         |   |
| Item 2.           | Description of Property                                                                         |   |
| Item 3.           | Legal Proceedings                                                                               |   |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                            |   |
|              |                                                                                            |   |
| **PART II**  |                                                                                            |   |
| Item 5.           | Market for Common Equity and Related  Stockholder Matters                                       |   |
| Item 6.           | Management’s Discussion and Analysis and  Plan of Operation                                |   |
| Item 7.           | Financial Statements and Supplementary Data                                                     |   |
| Item 8.           | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures          |   |
| Item 8A.          | Controls and Procedures                                                                         |   |
| Item 8B.          | Other Information                                                                               |   |
|              |                                                                                            |   |
| **PART III** |                                                                                            |   |
| Item 9.           | Directors and Executive Officers of the  Registrant                                             |   |
| Item 10.          | Executive Compensation                                                                          |   |
| Item 11.          | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
| Item 12.          | Certain Relationships and Related  Transactions                                                 |   |
| Item 13.          | Exhibits                                                                                        |   |
| Item 14.          | Principal Accountant Fees and Services                                                          |   |
|              |                                                                                            |   |
| **SIGNATURES**    |                                                                                            |   |
|              |                                                                                            |   |
| Certifications    |                                                                                            |   |

 

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# **PART I**

 

*BPZ Energy, Inc. (“BPZ” or the “Company”)cautions that this document contains forward-looking statements within themeaning of Section 27A of the Securities Act and Section 21E of theExchange Act.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-KSB which address activities, events or developments whichthe Company expects, believes or anticipates will or may occur in the futureare forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts” and similar expressions are also intendedto identify forward-looking statements. These statements are based on certain assumptions and analyses made bythe management of BPZ in light of its experience and its perception ofhistorical trends, current conditions and expected future developments as wellas other factors it believes are appropriate in the circumstances.  BPZ cautions the reader that theseforward-looking statements are subject to risks and uncertainties, many ofwhich are beyond BPZ’s control that could cause actual events or results todiffer materially from those expressed or implied by the statements.  See “Risk Factors” included in Item 1 -Description of the Business of this Form 10-KSB.*

 

**Item 1.  Description ofBusiness**

 

**General**

 

BPZ Energy, Inc., a Colorado corporation (“BPZ” or the “Company”)was incorporated in 1993.  Based inHouston, Texas, BPZ is an international energy company with properties in northwestPeru and southwest Ecuador. The Company is focused on the development andproduction of oil and natural gas and the complementary development ofgas-fired power generation.

 

On September 10, 2004, BPZ Energy, Inc., a Texas corporation(“BPZ-Texas”), consummated a reverse merger with Navidec, Inc. (“Navidec”)whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).  The details of the Merger are discussed belowunder the heading, “Navidec Merger Transaction.”  On February 4, 2005, the Company changedits name to BPZ Energy, Inc. Although the Company’s name has been changed, the pre-merger company maybe referred to as Navidec in this filing to avoid confusion.

 

We maintain an office and a registered branch in Peru.  Currently, we have exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.76 million acres in northwest Peru. We acquired aminority working interest in the license contract for Block Z-1 in November 2001and subsequently acquired 100% ownership of the block in November 2004. Inaddition, we acquired a 100% working interest in the license contract for BlockXIX in December 2003. Generally, the terms of a license contract in Peruprovide for an initial exploration period of seven to ten years and a totalcontract period of 40 years for gas development and production and30 years for oil development and production.  In December 2003, we also entered into aTechnical Evaluation Agreement for Area VI and a Promotional TechnicalEvaluation Agreement for Area XVI. These latter two Agreements give us theright to conduct technical evaluations of those areas over a 24-month periodand the exclusive right to enter into license contracts if the evaluationsindicate the potential for profitable operations.

 

In June 2004, we acquired the capital stock of SMC Ecuador, Inc.,a Delaware corporation (“SMC”), which owns a 10% non-operated working interestin certain oil and gas producing properties located in the southwest region ofEcuador (the “Santa Elena Properties”). SMC has had its interest in the SantaElena Properties for the past eight years. The license agreement covering theproperty extends through May 2016.

 

The Company is in its development stage and to date our activities inPeru have been limited to analysis and evaluation of technical data on theproperties and preparation of the development plans for the properties. We havenot drilled any wells or recognized any revenues from our operations and do notanticipate generating significant revenues from our properties prior to mid-2006.

 

**NavidecMerger Transaction**

 

On July 8,2004, BPZ-Texas and Navidec entered into a Merger Agreement (the “MergerAgreement”) providing for the acquisition of BPZ-Texas by Navidec in atransaction intended to qualify as a tax free share exchange.  The Merger was consummated on September 10,2004.

 

As a result of the Merger, the shareholders of BPZ-Texas received themajority of the voting interests and control of the Board of Directors of thecombined entity.  Accordingly, the Mergerwas treated as a reverse acquisition of Navidec by BPZ-Texas and has beenaccounted for as a business combination as more fully described in Note 2 ofthe Notes to Consolidated

 

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Financial Statements.  Thehistorical financial statements of the Company for periods prior to the Mergerare the historical financial statements of BPZ-Texas.

 

The MergerAgreement provided for the immediate issuance by Navidec of 9,000,000 shares ofits common stock to the shareholders of BPZ-Texas and the future issuance of anadditional 18,000,000 shares on an earn-out basis if the Company achievescertain reserve and production goals. The first 9,000,000 earn-out shares were contingent on achieving certainreserve targets, which targets were achieved in December 2004.  The remaining 9,000,000 earn-out shares arecontingent on the Company achieving production of 2,000 barrels of oil per dayor its equivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007.  At present,Navidec has only 20,000,000 common shares authorized for issuance.  The earn-out shares cannot be issued untilthe Company amends its Articles of Incorporation to increase the number ofauthorized shares, which will require shareholder approval.  Should all of the earn-out shares be earned,the former shareholders of BPZ-Texas would receive, in the aggregate,27,000,000 shares of common stock of the Company.  Upon completion of the Merger, the officersand directors of Navidec resigned, except the former CEO of Navidec, John R.McKowen, who remains a director.  Mr. McKowen,together with the management and the four directors of BPZ-Texas, became theexecutive officers and directors of the surviving entity.

 

As part of theMerger transaction, Navidec agreed to provide through a private placement notless than $3 million or more than $6 million in additional equity capital forthe operations and working capital needs of BPZ-Texas.  As of September 30, 2004, this privateplacement was closed with $6.0 million of total gross proceeds.  Net proceeds of approximately$5.5 million became available for use in connection with the businessoperations of BPZ-Texas.

 

As of the effectivedate of the Merger, the Company was owned approximately 18.9% by the newinvestors in the Company who acquired their shares in the September 2004private placement, 24.4% by the legacy Navidec shareholders, and approximately56.7% by the former shareholders of BPZ-Texas. Assuming the pro forma issuance of the entire 18,000,000 shares ofNavidec common stock subject to the earn-out, the post-merger Company would beowned approximately 8.9% by the new private placement investors, 11.4% by thelegacy Navidec shareholders, and approximately 79.7% by the former shareholdersof BPZ-Texas.  In addition, as of theMerger date, the Company assumed or granted 4,961,076 dilutive securities,consisting of warrants and stock options. See Notes 2 and 9 of the Notes to Consolidated Financial Statement forthe nature and terms of these dilutive securities.

 

The Merger Agreement also provided that all of the pre-merger business operations, assets and liabilities of Navidec would be transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. (“NFS”), followed by the spin-off of NFS to the pre-merger shareholders of record as of September 9, 2004, the date prior to consummation of the Merger.  Accordingly, the pre-merger shareholders of BPZ-Texas will not be entitled to receive shares of NFS.  All legal requirements for the spin-off of NFS have been completed except for registration of the spin-off with the Securities and Exchange Commission and the final distribution of the common shares of NFS to the pre-merger shareholders of the Company.  Pending such final distribution of shares, the Company remains the nominal owner of the majority of the common shares of NFS, which shares are being held by the Company for the benefit of the spin-off shareholders.  The Company is continuing to assist the management of NFS, as requested, in its efforts to consummate the spin-off of NFS, but has no control over the registration process of NFS and cannot predict when the management of NFS will be able to complete the final distribution of NFS common shares.  NFS is organized into three divisions: business development, mortgage services and technology.  Subsequent to the Merger, NFS has operated independently of the Company.  Each company maintains separate offices, bank accounts and management and the lines of business and operations of the two companies are completely independent.  The Company does not control NFS and accounts for its nominal ownership in NFS under the equity method of accounting.

 

**AvailableInformation**

 

The Company files annual, quarterlyand current reports, proxy statements and other documents with the Securitiesand Exchange Commission (“SEC”) under the Securities Act of 1934.  The public may read and copy any materialsthat we file with the SEC at the SEC’s Public Reference Room atHeadquarters Office, 100 F Street, NE, Room 1580, Washington, DC20549.  The public may obtain informationon the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Also, the SEC maintains an Internet websitethat contains reports, proxy and information statements, and other informationregarding issuers, including us, that file electronically with the SEC.  The public can obtain any documents that wefile electronically with the SEC at http://www.sec.gov.  In addition, the Company has recently developeda website (http://www.bpzenergy.com), on which we make available, free ofcharge, all of the Company’s above mentioned filings with the SEC, includingForms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) ofthe Securities Act of 1934.  Thesefilings will be available as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

 

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**Competition**

 

There is intensecompetition in the oil and gas industry with respect to the acquisition ofproducing properties, undeveloped acreage, and rights to explore for theseproperties.  Many major and independentoil and gas companies actively pursue and bid for the mineral rights ofdesirable properties, and many companies have been actively engaged inacquiring oil and gas properties in Peru and Ecuador.

 

We believe that ourearly efforts and knowledge of our targeted areas have given us a competitiveadvantage in Peru, and to a lesser extent, in Ecuador.  Although there are unleased tracts within ourtarget area, we believe that these properties may be less attractive to othercompanies because it will be difficult for them to obtain a significant amountof contiguous mineral acres.  Thisresults in part from our significant holdings in the vicinity of these unleasedtracts. However, increased demand for license rights in surrounding areas mayimpact our ability to expand and grow in the future, particularly because manyof our competitors have substantially greater financial and other resources,better name recognition and longer operating histories.  As a result, we may not be able to acquireadditional oil and gas properties in desirable locations.

 

There is alsointense competition in the oil and gas industry for access to contractdrillers, geologists, and others needed to drill and complete wells.  Current demand for drilling and contractservices in our target area appears to be reasonably stable, and we believe ourearly entry will allow us to build the relationships necessary for oursuccess.  We do not anticipate thatcompetition in this area will dramatically affect our plan of operation.  However, increased future demand for drillersand contractors may limit our ability to expand in a timely manner and maynegatively impact our ability to grow.

 

**Regulation**

 

***General***

 

Various aspects of our oil and natural gas operations are currently orwill be subject to various foreign laws and governmental regulations. Theseregulations may be changed from time to time in response to economic orpolitical conditions. Although we believe that our operations are and will bein substantial compliance with existing legislation and requirements ofgovernmental bodies, our ability to conduct continued operations is subject tosatisfying applicable regulatory and permitting controls. Our principals havemany collective decades of experience in dealing directly with the Peruviangovernment on energy projects and in some cases have been directly involved inthe drafting and promulgation of petroleum legislation. Therefore we believe weare in a unique position to understand and comply with local rules andregulations. However, our current permits and authorizations and our ability toobtain future permits and authorizations may, over time, be susceptible toincreased scrutiny and greater complexity which could result in increased costsor delays in receiving appropriate authorizations.

 

***Peru***

 

***Peruvian hydrocarbonlegislation.*** Peru’s hydrocarbon legislation, which includes the Organic HydrocarbonLaw No. 26221 and the regulations thereunder (the “Organic Hydrocarbon Law”),governs our operations in Peru. This legislation covers the entire range ofpetroleum operations, defines the roles of Peruvian government agencies whichregulate and interact with the oil gas industry, requires that investments inthe petroleum sector be undertaken solely by private investors (either nationalor foreign), and provides for the promotion of the development of hydrocarbonactivities based on free competition and free access to all economicactivities. This law provides that pipeline transportation and natural gasdistribution must be handled via contracts. All other petroleum activities areto be freely operated and are subject only to local and international safetyand environment standards.

 

Under this legal system, Peru is the owner of the hydrocarbons locatedbelow the surface in its national territory. However, Peru has given theownership right to extracted hydrocarbons to Perupetro, a state company that isresponsible for promoting and overseeing the investment of hydrocarbonexploration and exploitation activities in Peru. Perupetro is empowered toenter into contracts for either the exploration and exploitation or theexploitation of petroleum and gas on behalf of Peru, which are describedfurther below. The Peruvian government also plays an active role in petroleumoperations through the involvement of the Ministry of Energy and Mines, thespecialized government department in charge of devising energy, mining andenvironmental protection policies, enacting the rules applicable to allthese sectors and supervising compliance with such policies and rules. Withinthe Ministry of Energy and Mines, the Supervising Office for Investments inEnergy (“OSINERG”) is the body charged with economic and technical supervision.We are subject to the laws and regulations of all of these entities andagencies.

 

Perupetro generally enters into either license contracts or servicecontracts for hydrocarbon exploration and exploitation. Peru’s laws also allowfor other contract models, but the investor must propose contract terms thatare compatible with Peru’s interests.

 

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A company must be qualified by Perupetro to enter into hydrocarbonexploration and exploitation contracts in Peru. In order to qualify, thecompany must meet the standards under the Regulations Governing theQualifications of Oil Companies. These qualifications generally require thecompany to have the technical, legal, economic and financial capacity to complywith all obligations it will assume under the contract based on thecharacteristics of the area requested, the possible investments and theenvironmental protection rules governing the performance of itsoperations. When a contractor is a foreign investor, it is expected toincorporate a subsidiary company or registered branch in accordance with Peru’smunicipal laws and appoint representatives who will interact with Perupetro.

 

Our Peruvian branch, BPZ Energy, Inc., Sucursal Peru, has beenqualified by Perupetro with respect to our current contracts. However,Perupetro reviews the qualification for each specific contract to be signed bya company. Additionally, the qualification for foreign companies is granted infavor of the home office or corporation, which is jointly and severally liableat all times for the technical, legal, economic and financial capacity of thePeruvian branch.

 

When operating under a license contract, the licensee is the owner ofthe hydrocarbons extracted from the contract area during the performance ofoperations, and pays royalties which are collected by Perupetro. The licenseecan dispose of the petroleum in any manner whatsoever, subject to a limitationin the case of natural emergencies where the law stipulates the manner ofdisposal.

 

Licensees are obligated to submit quarterly reports to the PetroleumBureau (Dirección General de Hidrocarburos). Licensees must also submit amonthly economic report to the Central Bank of Peru. These reports aregenerally combined and delivered together with other operating reports requiredto be submitted to Perupetro.

 

Previously, all license contracts were granted by the Ministry ofEnergy and Mines. The change to Perupetro as the license contract grantorsubjects all license contracts to a new legal framework. There is limitedprecedent for these new licensing procedures and there is some uncertainly asto exactly how the licensing procedure will function in the future.

 

Under service contracts, the ownership of all of the extracted petroleumis vested in Perupetro and the company will receive compensation agreed to bythe parties. However, Perupetro is granted the power to remunerate the investoreither in cash or in kind, depending on the level of investment and the volumeof production. We have no service contracts, nor do we foresee operating underthis form of contract.

 

The duration of the contracts is based on the nature of thehydrocarbons discovered. The contract duration for crude oil is thirty years,while the contract duration for natural gas and condensates is forty years. Theperiods commence on an agreed date and are determined based on location of thecontract area, season of the year in which exploration commences, and othersimilar factors. Contracts typically include an exploration phase and anexploitation phase, unless the contract is solely an exploitation contract.Within the contract term, seven years is allotted to exploration, with thepossibility of three extensions of one year each. There is also a potentialdeferment period for a maximum of ten years if certain factors recognized bylaw delay the economic viability of a discovery, such as lack of transportationfacilities or lack of a market. The exploration phase is generally divided intoseveral periods, and each period includes a minimum work program. Thefulfillment of work programs must be supported by an irrevocable bank guaranty,usually in the amount of thirty to forty percent of the estimated value of theminimum work program.

 

Perupetro also grants technical evaluation agreements. These agreementsgive the contractor the right to conduct technical evaluations of the areasunder such agreements and to enter into license contracts if the evaluationsindicate the potential for profitable operations. The technical evaluationagreement is generally for a period of twenty-four months, depending upon thevolume and nature of the work to be carried out.

 

We currently have two license contracts and two technical evaluationagreements. As of December 31, 2004, we believe we were in compliance withall of the material requirements of each of such contracts. We have executedcertain letters of guaranty to guarantee our performance under the licensecontracts and technical evaluation agreements, including a $1.3 million bondposted in January 2005 to secure part of our obligations under the licensecontract for Block Z-1. This bond was secured by the deposit of restricted cashwith the financial institution which issued the bond. Should we fail to fulfillour obligations under the license contracts, without technical justification orother good cause, Perupetro could seek recourse to the bond or terminate thelicense.

 

***Peruvian fiscalregime.*** Peru’s fiscal regime determines the levels of the government’sentitlement from petroleum activities. This regime is subject to change, whichcould negatively impact our business.

 

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Contractors under license agreements are subject to royalty payments,which are usually a fixed percentage of the actual production sold. Under aService Contract, Perupetro receives all of the petroleum produced on behalf ofPeru and the contractor is remunerated for the volume produced as stipulatedunder the contract.

 

The Organic Hydrocarbon Law and the Regulations Governing the TaxStability Guaranty and Other Tax Rules of the Organic Hydrocarbon Lawprovide that the tax regime in force on the date of signing a contract willremain unchanged during the term of the contract. Therefore, any change to thetax regime, which results in either an increase or decrease in the tax burden,will not affect the contractor.

 

At the exploration phase, contractors are exempt from import duties andother forms of taxation applicable to goods intended for exploration activities.Exemptions are withdrawn at the production phase. In certain instances, thecontractor is entitled to import goods tax-free for a two-year period.

 

Income tax is levied on the income of the contractor based upon thecurrent legal corporate tax rate in effect at the date the contract was signed.Contractors engaged in the exploration and production of crude oil, natural gasand condensates must determine their taxable income separately for each ofthese activities. Where a contractor carries out these activities in more thanone area under different individual contracts, it may consolidate all costs andexpenses incurred in overall operations for purposes of determining thecorporate income tax.

 

***Peruvian labor andsafety legislation.***  Our operations in Peru will also be subjectto the Unified Labor Law, which governs the labor force in the petroleumsector. In addition, the Organic Hydrocarbon Law and related Safety Regulationsfor the Petroleum Industry also regulate the safety and health of workers involvedin the development of hydrocarbon activities. All entities engaged in theperformance of activities related to the petroleum industry must provide theGeneral Hydrocarbons Bureau on a semi-annual basis with the list of theirpersonnel, indicating their nationality, specialty and position. These entitiesmust also permanently train their workers on the application of safety measuresin the operations, and control of disasters and emergencies. Each entity mustkeep detailed records of all accidents that occur in its operations and reportall accidents to the General Hydrocarbons Bureau. The regulations also containprovisions on accident prevention and personnel health and safety, which inturn include rules on living conditions, sanitary facilities, and waterquality at workplaces, medical assistance and first-aid services. Provisionsspecifically related to the exploration phase, which is our current phase ofoperations, are also contained in the regulations and include safety measuresin camps, medical assistance, food conditions, and handling of explosives.Additional safety regulations may also apply as we expand and develop ouroperations.

 

***Peruvian electricpower legislation.*** Our business plan envisions the generation of electricity and the sale ofsuch electric power in Peru. The basic laws in Peru governing electric power,which will apply to our future operations, are the Law of Electric PowerConcessions and the Regulations for the Environmental Protection of ElectricPower Activities, the corresponding regulations for each, as well as additionalrelated laws and regulations including all legislation regarding Electric PowerTariffs and all regulations and technical norms created by the NationalCommission of Electric Power Tariffs.

 

***Peruvian environmentalregulation.*** Our operations are subject to numerous and frequently changing laws andregulations governing the discharge of materials into the environment orotherwise relating to environmental protection. Peru has enacted specificenvironmental regulations applicable to the petroleum industry. The Code on theEnvironment and the Natural Resources establishes a framework within which allspecific laws and regulations applicable to each sector of the economy are tobe developed. These laws and regulations are designed to ensure the continualbalance of environmental and petroleum interests. The regulations stipulatecertain environmental standards expected from contractors. They also specifyappropriate sanctions to be enforced by the Ministry of Mines and Energy if acontractor fails to maintain such standards. The Ministry of Mines and Energyis charged with the responsibility of issuing the applicable standards. OSINERGis responsible for ensuring compliance with applicable environmental rules coveringhydrocarbon activities.

 

The Organic Hydrocarbon Law also addresses the environmental regulatoryregime in Peru. The law originally prohibited any mining or extractiveoperations within certain areas designated for protection. It was, however,subsequently modified to enable investors to prospect for hydrocarbons withinprotected areas, provided there is compliance with several obligations. We mustcomply with these obligations as we conduct our business on an ongoing basis.The Environmental Regulations for Hydrocarbon Activities provide that companiesparticipating in the implementation of projects, performance of work andoperation of facilities related to hydrocarbon activities are responsible forthe emission, discharge and disposal of wastes into the environment. Companiesmust annually file a report corresponding to the previous year describingthe company’s compliance with the environmental legislation in force.

 

Companies involved in hydrocarbon activities must also prepare and filean Environmental Impact Study (“EIS”) with the General Hydrocarbons Bureau,which is part of the Ministry of Energy and Mines, in order for the relevantactivities to comply

 

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with the maximum permissible emission limits set forth by the Ministryof Energy and Mines. An EIS must be prepared for each project to be carriedout. All of these proposals must be approved by the General EnvironmentalBureau, which is also part of the Ministry of Energy and Mines.

 

In addition, any party responsible for hydrocarbon activities must filean “Oil Spill and Emergency Contingency Plan” with the General HydrocarbonsBureau. The plan must be updated at least once a year and must containinformation regarding the measures to be taken in the event of spills,explosions, fires, accidents, evacuation, etc. It must also contain informationon the procedures, personnel and equipment required to be used and proceduresto be followed to establish uninterrupted communication between the personnel,the government representatives, the General Hydrocarbons Bureau and other Stateentities.

 

Any failure to comply with environmental protection rules, the importof contaminated products, or a company’s failure to keep a monitoring registeror send reports to the General Hydrocarbons Bureau in a timely fashion, couldsubject the company to fines. In addition, the General Hydrocarbons Bureau mayconsider imposing a prohibition or restriction of the relevant activity, anobligation to compensate the aggrieved parties and/or an obligation toimmediately restore the area. The company responsible for any default can alsobe subject to a suspension of operations for a term of one, two or threemonths, or indefinitely. Furthermore, any contract signed with the Peruviangovernment, the implementation of which jeopardizes or endangers the protectionor conservation of protected natural areas, can be terminated.

 

We are subject to all Peruvian environmental regulations now inexistence and those that exist in the future. The enactment and enforcement ofenvironmental laws and regulations in Peru is relatively new. We are thereforeuncertain how Peruvian authorities will enforce and supervise environmentalcompliance and standards. Further, we cannot predict any future regulation orthe cost associated with future compliance.

 

Although we believe that our operations are in substantial compliancewith existing environmental requirements, our ability to conduct continuedoperations is subject to satisfying applicable regulations. Our current permitsand authorizations and ability to obtain future permits and authorizations maybe susceptible, on a going forward basis, to increased scrutiny, greatercomplexity resulting in increased costs, or delays in receiving appropriateauthorizations. In particular, we may experience in the future delays inobtaining permits and authorizations in Peru necessary for our operations. Weare required to obtain an environmental permit or approval from the governmentin Peru prior to conducting any seismic operations, drilling a well orconstructing a pipeline in Peruvian territory, including the waters in offshorePeru where we intend to conduct oil and gas operations.

 

***Compliance withExisting Legislation in Peru***

 

Although we believe that our operations are and will be in substantialcompliance with existing legislation and requirements of Peruvian governmentalbodies, our ability to conduct continued operations is subject to satisfyingapplicable regulatory and permitting controls. As noted above, our principalshave many collective decades of experience in dealing directly with thePeruvian government on energy projects and in some past cases have beendirectly involved in the drafting and promulgation of petroleum legislation.Therefore we believe we are in a good position to understand and comply withlocal rules and regulations.

 

***Ecuador***

 

SMC Ecuador, Inc. has had its interest in the Santa Elena oilfields for the past eight years. As a non-operator, we are not directly subjectto the laws and regulations of Ecuador covering the oil and gas industry andthe environment. However, if we begin operating activities in Ecuador, we willbe directly subject to such laws and regulations.

 

**EnvironmentalCompliance and Risks**

 

As an owner or lessee and operatorof oil and gas properties throughout South America, we are subject to variousnational, state and local laws and regulations relating to discharge ofmaterials into, and protection of, the environment.  These laws and regulations may, among otherthings, impose liability on the contractor under an oil and gas licenseagreement for the cost of pollution clean-up resulting from operations, subjectthe contractor to liability for pollution damages, and require suspension orcessation of operations in affected areas.

 

We do not presently maintainenvironmental insurance coverage, because, in management’s best judgment, suchcoverage is not necessary at this time in view of our limited activities.  However, we may acquire such insurancecoverage in the future based on our assessment of the risks of our operationsand the costs of such coverage.  No suchcoverage can insure us fully against all environmental risks. We are not awareof any environmental claims existing which would have a material impact uponour financial position or results of operations.

 

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We have made and will continue ourefforts to comply with these requirements, which we believe are necessary tosuccessful long-term operations in the oil and gas industry.  We have established policies for continuingcompliance with environmental laws and regulations.  The costs incurred by these policies andprocedures are inextricably connected to normal operating expenses such that weare unable to separate the expenses related to environmental matters; however,we do not believe any such additional expenses are material to our financialposition or results of operations.

 

We do not believe that compliancewith federal, state or local provisions regulating the discharge of materialsinto the environment, or otherwise relating to the protection of theenvironment, will have a material adverse effect upon the capital expenditures,earnings or competitive position of the Company or its subsidiaries.  However, there is no assurance that changesin or additions to laws or regulations regarding the protection of theenvironment will not have such an impact.

 

**OperationalHazards and Insurance**

 

Our operations willbe subject to the usual hazards incident to the drilling and production of oiland gas, such as blowouts, cratering, explosions, uncontrollable flows of oil,gas or well fluids, fires, pollution, releases of toxic gas and otherenvironmental hazards and risks.  Thesehazards can cause personal injury and loss of life, severe damage to anddestruction of property and equipment, pollution or environmental damage andsuspension of operations.

 

We will evaluatewhether to obtain general liability insurance and in what amounts based onwhether we believe the terms and costs are reasonable for our operations.  Such insurance will not cover every potentialrisk associated with the drilling, production and processing of oil and gas. Inparticular, coverage is not obtainable for all types of environmental hazards.  The occurrence of a significant adverseevent, the risks of which are not fully covered by insurance, could have amaterial adverse effect on our financial condition and results of operations.Moreover, no assurance can be given that we will be able to obtain or maintainadequate insurance at rates we consider reasonable.

 

**Researchand Development**

 

BPZ seeks to use advancedtechnologies in the evaluation of its oil and gas properties and newopportunities.  The Company generallydoes not develop such technologies internally, but its technical team workswith outside vendors to test and utilize these technologies to the fullestpractical extent, particularly in the application of geophysical andexploration software.  In certain cases,the collaboration of the Company has aided the development of thesetechnologies.  The Company does notbelieve it has incurred any quantifiable incremental costs in research anddevelopment activities.

 

**Offices andEmployees**

 

Our corporateheadquarters office is in Houston, Texas, where, as of December 31, 2004,we had approximately 4,000 square feet of office space under a twelve-monthrenewable lease.  We also maintain anadministrative office in Lima, Peru under a month-to-month lease.

 

As of December 31,2004, we employed 9 full-time employees (of which 3 are executive officers) inthe Houston office, and 2 full-time employees and 1 part-time employee in thePeru office. BPZ believes that its relationship with its employees issatisfactory. None of our employees are represented by a union.

 

**RISKFACTORS**

 

**RisksRelated to the Company and Our Business**

 

***We have a limitedoperating history and have only engaged in start-up activities.***  Although BPZ-Texas was formed in 2001, we arein a formative stage because we have not had significant business operationssince formation and have generated no revenues from the production of oil orgas from our properties. We are also subject to all of the risks inherent inattempting to expand a relatively new business venture. Such risks include, butare not limited to, the possible inability to profitably operate our existingproperties or properties to be acquired in the future, our possible inabilityto fund the development requirements of such properties and our possibleinability to acquire additional properties that will have a positive effect onour operations. We can provide no assurance that we will achieve a level ofprofitability that will provide a return on invested capital or that willresult in an increase in the market value of our securities. The experience ofour management team has primarily been in the exploration and productionindustry and we have limited experience in the power generation business. Weare initially relying on consultants and outside engineering and technicalfirms to provide the expertise to plan and execute the power generation aspectsof our strategy and we have not yet hired all necessary full-time employees tomanage this line of business. Accordingly,

 

9

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we are subject to the risk thatbecause of these factors and other general business risks noted throughoutthese “Risk Factors” we may not be able to profitably execute our powergeneration strategy.

 

***We own rights to oil and gasproperties that have not yet been developed.***  We own rights to oil and gas properties thathave limited or no development. There are no guarantees that our propertieswill be developed profitably or that the potential oil and gas resources on theproperty will produce as expected if they are developed.

 

***Werequire significant additional financing for the exploration and development ofour foreign oil and gas properties and the construction of our proposed powergeneration facility, pipeline and gas processing facility.***  We currently have limited working capital.With the net proceeds from a recently completed $6 million private offeringlimited to accredited investors completed on September 30, 2004, we have begunto implement our plans to develop our existing oil and gas properties, but wedo not have sufficient funds required to bring our exploration, development andacquisition activities to profitability. We anticipate that full and profitable development of our existing andfuture oil and gas discoveries and prospects in South America may take severalyears and will require significant additional capital expenditures that we willnot be able to fund from operations.  Ifwe are unable to timely obtain adequate funds to finance these expenditures,our ability to develop our oil and gas reserves may be severely limited orsubstantially delayed.  Such limitationsor delay would likely result in substantial financial losses and the potentialloss of our oil and gas leases.

 

We anticipate thatfuture amounts required to fund our foreign activities will be funded from debtfinancing, sale of equity interests in the Company, joint venture arrangements,the sale of oil and gas interests, and/or future cash flows fromoperations.  The exact nature and termsof such funding sources is unknown at this time, and there can be no assurancethat we will obtain such funding or have adequate funding available to financeour operations in Peru.

 

***Our future operatingrevenue is dependent upon the performance of our properties.***  Our future operating revenue depends upon ourability to profitably operate our existing properties by drilling andcompleting wells that produce commercial quantities of gas and our ability toexpand our operations through the successful implementation of our plans toexplore and acquire additional properties. The successful development of oiland gas properties requires an assessment of potential recoverable reserves,future oil and gas prices, operating costs, potential environmental and otherliabilities and other factors. Such assessments are necessarily inexact. Therecan be no assurance that once in operation we can produce sufficient operatingrevenue to operate our existing properties or acquire additional oil and gasproducing properties and leases. We may not discover or successfully produceany recoverable reserves, or we may not be able to make a profit from thereserves that we discover. In the event that we are unable to producesufficient operating revenue to fund our future operations, we will be forcedto seek additional, third-party funding, if such funding can be obtained. Suchoptions would possibly include debt financing, sale of equity interests in theCompany, joint venture arrangements, or the sale of oil and gas interests. Ifwe are unable to secure such financing on a timely basis, we could be requiredto delay or scale back our operations. If such unavailability of fundscontinued for an extended period of time, this could result in the terminationof our operations and the loss of an investor’s entire investment.

 

***Our business involves manyuncertainties and operating risks that may prevent us from realizing profitsand can cause substantial losses.***  Our development activities may beunsuccessful for many reasons, including weather, the drilling of dry holes,cost overruns, equipment shortages and mechanical difficulties. Moreover, thesuccessful drilling of a natural gas or oil well does not ensure we willrealize a profit on our investment. A variety of factors, both geological andmarket-related, can cause a well to become uneconomical or only marginallyeconomical. Our business involves a variety of operating risks, including:

 

•                  fires;

 

•                  explosions;

 

•                  blow-outs and surface cratering;

 

•                  uncontrollable flows of natural gas, oil andformation water;

 

•                  natural disasters, such as hurricanes and otheradverse weather conditions;

 

•                  pipe, cement, subsea well or pipeline failures;

 

•                  casing collapses;

 

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•                  mechanical difficulties, such as lost or stuck oil fielddrilling and service tools;

 

•                  abnormally pressured formations;

 

•                  environmental hazards, such as natural gas leaks,oil spills, pipeline ruptures and discharges of toxic gases.

 

If we experience any of these problems, any well bores, platforms, gatheringsystems and processing facilities could be affected, which could adverselyaffect any drilling operations we may commence. We could also incur substantiallosses as a result of:

 

•                  injury or loss of life;

 

•                  severe damage to and destruction of property,natural resources and equipment;

 

•                  pollution and other environmental damage;

 

•                  clean-up responsibilities;

 

•                  regulatory investigation and penalties;

 

•                  suspension of our operations; and

 

•                  repairs to resume operations.

 

If any ofthese risks occur, and our resulting losses are significant, we may have tocurtail or suspend any drilling or production operations we may eventuallycommence.

 

***We plan to conduct offshoreexploration, exploitation and production operations off the coast of northwestPeru, all of which are also subject to a variety of operating risks peculiar tothe marine environment.***  Such risks include capsizing, collisions anddamage or loss from adverse weather conditions or interference from commercialfishing activities. These conditions can cause substantial damage to facilitiesand interrupt production. As a result, we could incur substantial liabilitiesthat could reduce or eliminate the funds available for exploration,exploitation and acquisitions or result in loss of equipment and properties.

 

***Construction and operation ofpower generation and gas processing facilities and pipelines involvesignificant risks that cannot always be covered by insurance or contractualprotections.*** The construction of power generation and gas processing facilities andpipelines involve many risks, including:

 

•                  supply interruptions,

 

•                  work stoppages,

 

•                  labor disputes,

 

•                  social unrest,

 

•                  inability to negotiate acceptable construction,supply or other contracts,

 

•                  inability to obtain required governmental permitsand approvals,

 

•                  weather interferences,

 

•                  unforeseen engineering, environmental and geologicalproblems, and

 

•                  unanticipated cost overruns.

 

The ongoing operation of these facilities involves all of the risksdescribed above, in addition to risks relating to the breakdown or failure ofequipment or processes and performances below expected levels of output orefficiency. We intend to obtain and maintain commercially reasonable levels ofinsurance where such insurance is available and cost effective, obtainwarranties from vendors and obligate contractors to meet certain performancelevels. However, the proceeds of any such insurance,

 

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warranties or performance guarantees may not be adequate to cover lostrevenues or increased expenses. Any of these risks could cause us to operatebelow expected capacity levels, which in turn could result in lost revenues,increased expense and higher maintenance costs.

 

***Our success dependson the existence and growth of markets for natural gas and electricity in Peruand Ecuador.*** Peru has a relatively well-developed and stable market for electricity,while the power market in Ecuador is not as well-developed or stable. Bothcountries rely on hydro-electric generating capacity for a significant portionof their power demand. Hydro plants are much less expensive to operate thanplants which utilize natural gas, but are subject to variable output based onrainfall and reservoir levels. The majority of the non-hydro, or thermal, powercapacity in both countries consists of generating plants that utilize diesel orfuel oil, which are significantly more costly than natural gas at this time.Both countries have natural gas reserves and production, but neither has a well-developednatural gas infrastructure. Our immediate business plan relies on the continuedstability of the power market in Peru (and Ecuador for the purpose of gas salesto third-party power producers in Ecuador) and our longer-term plans depend onthe further development of the electricity market in Ecuador. We are subject tothe risks that relatively more favorable business conditions for hydro plantsor other competitive issues may adversely affect the demand and prices for theelectricity that we expect to produce. We are also subject to the risksassociated with potential disruptions or changes to regulations of the naturalgas or power markets in these countries. We plan to enter into long-termcontracts to sell a significant part of our future power production. There is amarket for long-term purchases of power and natural gas, but there can be noassurance that we will be successful in obtaining such contracts on favorableterms. We will also be subject to the general commercial issues related tobeing in the power business, including the credit-worthiness of and collectionsfrom future customers and the ability to profitably operate our future powerplants.

 

***The geographicconcentration of our properties in northwest Peru and southwest Ecuador subjectsus to an increased risk of loss of revenue or curtailment of production fromfactors affecting that region specifically.***  The geographic concentration of ourproperties in northwest Peru and southwest Ecuador and adjacent waters meansthat some or all of our properties could be affected by the same event shouldthat region experience:

 

•                  severe weather (such as the effects of “El Nino”,which can cause excessive rainfall and flooding in Peru and Ecuador);

 

•                  delays or decreases in production, the availabilityof equipment, facilities or services;

 

•                  delays or decreases in the availability of capacityto transport, gather or process production; or

 

•                  changes in the regulatory environment.

 

Because all our properties could experiencethe same conditions at the same time, these conditions could have a relativelygreater impact on our results of operations than they might have on otheroperators who have properties over a wider geographic area.

 

***Instability ofInternational Operations.***  Presently, all of our oil and gas propertiesare located in South America, specifically Peru and Ecuador. The success andprofitability of our international operations may be adversely affected byrisks associated with international activities, including economic, labor and socialconditions, political instability, tax laws (including host-country export,excise and income taxes and U.S. taxes on foreign operations) and fluctuationsin the value of the U.S. dollar versus the local currencies in which oil andgas producing activities may be conducted. This instability in laws, expensesof operations and fluctuations in exchange rates may make our assumptions aboutthe economic viability of our oil and gas properties incorrect. If theseassumptions are incorrect, we may not be able to earn sufficient revenue tocover our costs of operations.

 

***Our operations inPeru and Ecuador involve substantial costs and are subject to certain risksbecause the oil and gas industry in Peru and Ecuador is less developed than inthe United States.*** The oil and gas industries in Peru and Ecuador are not as developed asthe oil and gas industry in the United States. As a result, our drilling anddevelopment operations in many instances will take longer to complete and maycost more than similar operations in the United States. The availability oftechnical expertise, specific equipment and supplies may be more limited inPeru and Ecuador than in the United States. Further, once oil and natural gasproduction is recovered, there are fewer ways to transport it to market forsale. Pipeline and trucking operations are subject to uncertainty and lack ofavailability. Oil and natural gas pipelines and truck transport travel throughmiles of territory and are subject to the risk of diversion, destruction or delay.We expect that such factors will continue to subject our internationaloperations to economic and operating risks that companies with domesticoperations do not experience.

 

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***The unavailabilityor high cost of drilling rigs, equipment, supplies, personnel and oil fieldservices could adversely affect our ability to execute our exploration andexploitation plans on a timely basis and within our budget.***  Shortages or the high cost of drilling rigs,equipment, supplies or personnel could delay or adversely affect ourexploitation and exploration operations, which could have a material adverseeffect on our business, financial condition or results of operations. If theunavailability or high cost of rigs, equipment, supplies or personnel wereparticularly severe in Peru and Ecuador, we could be materially and adverselyaffected because our operations and properties are concentrated in those areas.

 

***We are subject tonumerous foreign laws and regulations of the oil and natural gas industry thatcan adversely affect the cost, manner or feasibility of doing business.***  Our operations are subject to extensiveforeign laws and regulations relating to the exploration for and thedevelopment, production and transportation of oil and natural gas as well aselectrical power generation. Future laws or regulations, any adverse change inthe interpretation of existing laws or our failure to comply with existinglegal requirements may harm our results of operations and financial condition.We may be required to make large and unanticipated capital expenditures tocomply with governmental regulations, such as:

 

•                  work program guarantees and other financialresponsibility requirements;

 

•                  taxation;

 

•                  royalty requirements;

 

•                  customer requirements;

 

•                  operational reporting; and

 

•                  safety requirements.

 

•                  Underthese laws and regulations, we could be liable for:

 

•                  personal injuries; and

 

•                  property and natural resource damages; and

 

•                  governmental infringements and sanctions.

 

***If we fail to complywith the terms of certain contracts related to our foreign operations, we couldlose our rights under each of those contracts.***  The terms of each of our contracts with thegovernment of Peru, including our Peruvian license contracts and technicalevaluation agreements, require that we perform certain activities, such asseismic interpretations and the drilling of required wells in accordance withthose contracts and agreements. Our failure to timely perform those activitiesas required could result in the loss of our rights under a particular contractor the loss of the amounts we have posted as a guaranty for the performance ofsuch activities, which would likely result in a significant loss to us.

 

***We are subject tocomplex environmental regulatory and permitting laws and regulations that canadversely affect the cost, manner and feasibility of our planned operations.***  The development, production and sale of oiland gas in South America are subject to extensive environmental laws and regulations.Our ability to conduct continued operations is subject to satisfying applicableregulatory and permitting controls. For example, we are required to obtain anenvironmental permit or approval from the government in Peru prior toconducting seismic operations, drilling a well or constructing a pipeline inPeruvian territory, including the waters in offshore Peru, where we intend toconduct future oil and gas operations. Failure to comply with these laws andregulations also may result in the suspension or termination of our planneddrilling operations and subject us to administrative, civil and criminalpenalties.

 

Our current permits and authorizations and our ability to get futurepermits and authorizations may, over time, be susceptible to increasedscrutiny, resulting in increased costs, or delays in receiving appropriateauthorizations. In particular, we may experience delays in obtaining permitsand authorizations in Peru and Ecuador necessary for our operations. Compliancewith these laws and regulations may increase our costs of operations, as wellas further restrict our foreign operations. Moreover, these laws andregulations could change in ways that substantially increase our costs. Theselaws and regulations have changed in the past and have generally imposed morestringent requirements that increase operating costs or require capitalexpenditures in order to remain in compliance. It is also possible thatunanticipated developments could cause us to make environmental

 

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expenditures that are significantly higher from those we currentlyanticipate, thereby increasing our overall costs. Failure to comply with newregulations could cause us to suspend or terminate certain operations or subjectus to administrative, civil and criminal penalties. Any of these liabilities,penalties, suspensions, terminations or regulatory changes could materiallyadversely affect our financial condition and our ability to implement our planof operation.

 

***Compliance with, orbreach of, laws relating to the discharge of materials into, and the protectionof the environment, can be costly and could limit our operations.***  As an owner or lessee and operator of oil andgas properties in Peru and Ecuador, we are subject to various national, stateand local laws and regulations relating to discharge of materials into, andprotection of, the environment. These laws and regulations may, among otherthings, impose liability on the owner or lessee under an oil and gas lease forthe cost of property damage, oil spills, discharge of hazardous materials,remediation and clean-up resulting from operations, subject the owner or lesseeto liability for pollution damages and other environmental damages, and requiresuspension or cessation of operations in affected areas.

 

We have established practices for continued compliance withenvironmental laws and regulations. We believe the costs incurred by thesepolicies and procedures are necessary business costs in the oil and gas industry.There is no assurance that changes in or additions to laws or regulationsregarding the protection of the environment will not increase such compliancecosts, or have a material adverse effect upon our capital expenditures,earnings or competitive position.

 

***Our oil and gasoperations involve substantial costs and are subject to various economic risks.***  Our oil and gas operations are subject to theeconomic risks typically associated with exploration, development andproduction activities, including the necessity of significant expenditures tolocate and acquire producing properties and to drill exploratory wells. Thecost and length of time necessary to produce any reserves may be such that itwill not be economically viable. In conducting exploration and developmentactivities, the presence of unanticipated pressure or irregularities informations, miscalculations or accidents may cause our exploration, developmentand production activities to be unsuccessful. We also face the risk that theoil and/or gas reserves may be less than anticipated, that we will not havesufficient funds to successfully drill on the property, that we will not beable to market the oil and/or gas due to a lack of a market and thatfluctuations in the prices of oil and/or gas will make development of thoseleases uneconomical. This could result in a total loss of our investment. Inaddition, the cost and timing of drilling, completing and operating wells isoften uncertain.

 

***Competition for oiland natural gas properties and prospects is intense; some of our competitorshave larger financial, technical and personnel resources that give them anadvantage in evaluating and obtaining properties and prospects.***  We operate in a highly competitiveenvironment for reviewing prospects, acquiring properties, marketing oil andnatural gas and securing trained personnel and equipment. In addition, changesin Peruvian government regulation have enabled multinational and regionalcompanies to enter the Peruvian energy market. Competition in our businessactivities has increased and will increase further, as existing and newparticipants expand their activities as a result of these regulatory changes.Many of our competitors possess and employ financial resources that allow themto obtain substantially greater technical and personnel resources than we have.We actively compete with other companies in our industry when acquiring newleases or oil and gas properties. For example, Perupetro may choose to call forbids, either through international competitive biddings or through privatebidding processes by invitation, if several companies are interested in anarea, and award the contract to the highest bidder. These additional resourcescan be particularly important in reviewing prospects and purchasing properties.Our competitors may be able to evaluate, bid for and purchase a greater numberof properties and prospects than our financial or personnel resources permit.Our competitors may also be able to pay more for productive oil and natural gasproperties and exploratory prospects than we are able or willing to pay. On theacquisition opportunities made available to us, we compete with other companiesin our industry for properties operated by third parties through a privatebidding process, direct negotiations or some combination thereof. Our abilityto acquire additional prospects and to find and develop reserves in the futurewill depend on our ability to evaluate and select suitable properties and toconsummate transactions in a highly competitive environment. If we are unableto compete successfully in these areas in the future, our future revenues andgrowth may be diminished or restricted. The availability of properties foracquisition depends largely on the divesting practices of other oil and naturalgas companies, commodity prices, general economic conditions and other factorswe cannot control or influence.

 

***The loss of seniormanagement or key technical personnel could adversely affect us.***  We have engaged certain members of managementwho have substantial expertise in the type of endeavors that we presentlyconduct. We do not maintain any life insurance against the loss of any of theseindividuals. To the extent that their services become unavailable, we will berequired to retain other qualified personnel. There can be no assurance that wewill be able to recruit and hire qualified persons upon acceptable terms.

 

Similarly, the oil and gas exploration industry requires the use ofpersonnel with substantial technical expertise. In the event that the servicesof our current technical personnel become unavailable, we will need to hirequalified personnel to take their place. No assurance can be given that we willbe able to recruit and hire such persons on acceptable terms.

 

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***Insurance does not cover all risks.***  Exploration for and production of oil andnatural gas can be hazardous, involving unforeseen occurrences such asblowouts, cratering, fires and loss of well control, which can result in damageto or destruction of wells or production facilities, formations, injury topersons, loss of life, or damage to property or the environment. Even if we areable to secure additional financing, we may not have sufficient capital toestablish any reserves for contingent liabilities or workovers. We do notpresently maintain insurance against losses or liabilities arising from ouroperations or for environmental coverage. We will evaluate whether we willobtain insurance coverage and in what amounts, consistent with our businessactivities in the future, should our management determine that we havesufficient funds to do so. No such insurance coverage can insure for alloperational or environmental risks. The occurrence of an event that is notinsured or not fully insured could result in losses to us. For example,uninsured environmental damages, property damages or damages related topersonal injuries could divert capital needed to implement our plan ofoperation. If any such uninsured losses are significant, we may have to curtailor suspend our drilling operations until such time as replacement capital isobtained, if ever.

 

***A substantial orextended decline in oil and natural gas prices may adversely affect ourbusiness, financial condition, cash flow, liquidity or results of operationsand our ability to meet our capital expenditure obligations and financialcommitments to implement our business plan.***  With respect to our oil and gas business, anyrevenues, cash flow, profitability and future rate of growth we achieve will begreatly dependent upon prevailing prices for oil and gas. Our ability tomaintain or increase our borrowing capacity and to obtain additional capital onattractive terms is also expected to be dependent on oil and gas prices. Oil andnatural gas are commodities, and, therefore, their prices are subject to widefluctuations in response to relatively minor changes in supply and demand.Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future. Prices for oil and gas are subject topotentially wide fluctuations in response to relatively minor changes in supplyof and demand for oil and gas, market uncertainty, and a variety of additionalfactors that are beyond our control. Those factors include:

 

•                  international political conditions (including warsand civil unrest);

 

•                  the domestic and foreign supply of oil and gas;

 

•                  the level of consumer demand;

 

•                  weather conditions;

 

•                  domestic and foreign governmental regulations andother actions;

 

•                  actions taken by the Organization of PetroleumExporting Countries (OPEC);

 

•                  the price and availability of alternative fuels; and

 

•                  overall economic conditions.

 

Lower oil and natural gas prices may not only decrease our revenues ona per unit basis, but may also reduce the amount of oil and natural gas we canproduce economically, if any. A substantial or extended decline in oil andnatural gas prices may materially affect our future business, financialcondition, results of operations, liquidity and borrowing capacity we may haveand may require a reduction in the carrying value of our oil and gasproperties. While our revenues may increase if prevailing oil and gas pricesincrease significantly, exploration and acquisition costs for additionalreserves may also increase.

 

***We may not be ableto develop a proven reserve base.***  Our future success will depend upon ourability to find, acquire and develop oil and gas reserves that are economicallyrecoverable. Any reserves we develop will decline as they are produced, exceptto the extent that we conduct successful revitalization activities, or are ableto acquire properties containing proven reserves, or both. To develop reservesand production, we must implement our development and production programs,identify and produce previously overlooked or by-passed zones and shut-inwells, acquire additional properties or undertake other replacement activities.Our current strategy is to develop a reserve base, production and cash flowthrough the development of oil and gas fields to which we have developmentrights and selective acquisitions of other desirable oil and gas propertieswhere we can utilize new and existing technology. We can give no assurance thatour planned development, revitalization, and acquisition activities will resultin significant reserves or that we will have success in discovering andproducing reserves at economical exploration and development costs. We may notbe able to locate geologically satisfactory property, particularly since wewill be competing for such property with other oil and gas companies, most ofwhich have much greater financial

 

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resources than ourselves. Moreover, even if desirable properties areavailable to us, we may not have sufficient funds with which to acquireadditional leases.

 

**RisksRelating to Our Common Stock**

 

***Investorprofits, if any, may be limited for the near future.***  In the past, we have never paid a dividend.We do not anticipate paying any dividends in the near future. Accordingly,investors in our common stock may not derive any profits from their investmentin us for the foreseeable future, other than through any price appreciation ofour common stock that may occur. Further, any appreciation in the price of ourcommon stock may be limited or nonexistent as long as we continue to haveoperating losses. We have not been profitable since our inception and weincurred a net loss of $10,652,671 for the fiscal year ended December 31,2004.  To date we have not had anyrevenue or earnings from operations, and we will continue, in all likelihood,to sustain operating expenses without corresponding revenues until we are ableto successfully implement our plan of operation, if ever.

 

***Because our commonstock may be subject to the “penny stock” regulations, its liquidity may bereduced.*** Generally, penny stocks are equity securities (i) with a price ofless than $5.00 per share; (ii) that are not traded on a “recognized”national exchange; (iii) whose prices are not quoted on the Nasdaqautomated quotation system; (iv) that are Nasdaq Stocks that trade below$5.00 per share; or (v) of issuers with net tangible assets less than$2.0 million (if the issuer has been in continuous operation for at leastthree years), or with average revenues of less than $6.0 million for thelast three years. The penny stock rules require a broker/dealer todeliver, prior to a transaction in a penny stock, a standardized riskdisclosure document prescribed by the SEC and to provide the potentialpurchaser of penny stock with the following information:

 

•                                          information about penny stocks;

 

•                                          the nature and level of risk in the penny stockmarket;

 

•                                          the bid and offer quotations for the stock; and

 

•                                          other burdensome and detailed information.

 

Those delivery and disclosure requirementstend to reduce the level of interest of broker/dealers in dealing with pennystocks, which could have the effect of reducing the level of trading activityin the secondary market for our common stock during the time that our commonstock is subject to the penny stock regulations. Our common stock is quoted onthe OTC Bulletin Board and could be considered a penny stock subject to thepenny stock regulations if the price of our common stock remains below $5.00and we are not subject to any other exemptions. This could reduce the liquidityof our common stock and make it more difficult for investors to sell our commonstock.

 

***Additional infusionsof capital may have a dilutive effect on existing shareholders.***  To finance our operations we may selladditional shares of our stock. Any additional equity financing that we receivemay involve substantial dilution to our then-existing shareholders.Furthermore, we may issue stock to acquire properties, assets, or businesses.In the event that any such shares are issued, the proportionate ownership andvoting power of other shareholders will be reduced.

 

***We are controlled byour officers, directors and entities affiliated with them.***  In the aggregate, our management anddirectors owned or controlled approximately 44.5% of our common stockoutstanding as of December 31, 2004. These shareholders, if acting together, will be able to significantlyinfluence all matters requiring approval by our shareholders, including theelection of directors and the approval of mergers or other business combinationtransactions.

 

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** **

**Item 2.  Description ofProperties**

 

**BPZ’sProperties in Peru**

 

The Companycurrently owns a 100% working interest in license contracts for Block Z-1 andBlock XIX.  We have also entered into aTechnical Evaluation Agreement for Area VI and a Promotional TechnicalEvaluation Agreement for Area XVI.  Theselatter two Agreements give us the right to conduct technical evaluations ofthose areas over a 24-month period and the preferential right to enter intolicense contracts if the evaluations indicate the potential for profitableoperations.  These four blocks occupy acombined area of approximately 2.76 million acres.  The term of a license contract in Peru isgenerally 40 years for gas exploration, development and production and30 years for oil exploration, development and production. 

 

**BPZ’S EXPLORATION PROJECTS INNORTHWEST PERU**

 

| **CONTRACT /  AGREEMENT** | ** ** | **BASIN**              | ** ** | **AREA (c)**  | ** ** | **BPZ’s  Participation** | ** ** |
|---------------------------|------------|------------------------|------------|---------------|------------|-------------------------------|------------|
| ** **                | ** ** | ** **             | ** ** | **(acres)**   | ** ** | **(%)**                       | ** ** |
| **Block Z-1 (a)**         |       | Tumbes                 |       | 739,205       |       | 100                           | %          |
| **Block XIX (a)**         |       | Tumbes/Talara          |       | 472,860       |       | 100                           | %          |
| **Area XVI (b)**          |       | Talara                 |       | 107,095       |       | 100                           | %          |
| **Area VI (b)**           |       | Lancones               |       | 1,443,561     |       | 100                           | %          |
| ** **                | ** ** | **TOTAL ===>** | ** ** | **2,762,721** |       |                          |       |

 

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**(a) LicenseContract**

**(b) TechnicalEvaluation Agreement**

**(c) Allacreage is considered undeveloped**

 

**Descriptionof Block Z-1**

 

Block Z-1, acoastal offshore area encompassing 739,205 acres, is situated at the southernend of the Gulf of Guayaquil in northwest Peru. Geologically, the block lies within the Tumbes basin.  From the coastline, water depths increasegradually.  The average water depth ofthe area is approximately 200 feet and only 10% of the area has depths greaterthan 500 feet.  There are four structureswhich were drilled in the 1970’s and 1980’s by previous operators, includingTenneco, Inc. and Belco Oil and Gas Corporation.  These structures are known as the Albacora,Corvina, Delfin and Piedra Redonda fields. Wells drilled in each of these structures encountered hydrocarbons,principally natural gas, while drilling at depths ranging from 6,000 to 12,000feet.  However, at the time the wellswere drilled, it was not considered economic to produce and sell natural gasfrom the fields.  Accordingly, the wellswere either suspended or abandoned.  

 

BPZ originallyacquired its initial interest in Block Z-1 in a joint venture with SyntroleumCorporation, under an exploration and production license contract dated November 30,2001, with an effective date of January 29, 2002.  Under the original contract, BPZ owned a 5%non-operating working interest in the block. Syntroleum later transferred its interest to Nuevo Energy, Inc.  Subsequent to the merger of Nuevo Energy, Inc.and Plains Exploration and Production Company, Nuevo Energy, Inc.transferred its interest in Block Z-1 to BPZ, which assumed the remainingobligations under the contract.  Perupetroapproved the assumption of Nuevo’s interest by BPZ and the designation of BPZas a qualified operator under the contract in November 2004.  Such action was subject to officialratification and issuance of a Supreme Decree by the government of Peru, whichwas received in February 2005. Accordingly, an amended contract was signed with Perupetro, which namedBPZ as the owner of 100% of the participation under the license contract.  The Block Z-1 contract term is 30 years fromthe effective date for oil production and 40 years for gas production.  Royalties under the contract vary from 5% to20% based on production volumes.

 

The licensecontract provides for an initial exploration period of seven years, which isdivided into four periods, and can be extended under certain circumstances foran additional three years.  Each periodhas a commitment for exploration activities and requires a financial guaranteeto secure the performance of the work commitment during such period.  Block Z-1 is currently in the secondexploration period which will last for up to 18 months, ending in July 2006.  During the second exploration period, theCompany must drill at least one exploratory well or acquire 300 squarekilometers of seismic data.  The Companyposted a $1.3 million performance bond in January 2005 in connection withthe second exploration period.  The thirdexploration period is scheduled to begin in July 2006 and expire in January 2008and will require the drilling of an additional exploratory well or other equivalentwork commitments and will require a performance bond of $1.0 million.  The fourth and final exploration period isscheduled to begin in January 2008 and expire in January 2009.  It will also require the

 

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drilling of anadditional exploratory well or other equivalent work commitments and willrequire a performance bond of $1.0 million. The performance bond amounts are not cumulative, and are released assoon as the work commitment for that exploration period has beensatisfied.  In addition, BPZ is requiredto make technology transfer payments, related to training costs of Perupetroprofessional staff, during the exploration phase of $50,000 per year.

 

The exploitation,or development, period of the contract will commence as soon as the Companydeclares a commercial discovery and receives approval for a field developmentplan.  The Company must declare acommercial discovery no later than the end of the last exploration period,including any extensions or deferments. Under the terms of the contract, oil production can continue for a totalof 30 years from the effective date of the contract, and gas production cancontinue for 40 years.

 

**Descriptionof Block XIX**

 

Block XIX coversapproximately 472,860 acres, lying entirely onshore and adjacent to Block Z 1in northwest Peru.  Geologically, theblock lies primarily within the Tumbes basin of Oligocene-Neogene age, but alsocovers part of the Talara Basin to the south.

 

In February 2003,BPZ entered into a Technical Evaluation Agreement with Perupetro for BlockXIX.  In December 2003, the Companysigned a license contract whereby it acquired a 100% interest in BlockXIX.  The term for the exploration periodis seven years and can be extended under certain circumstances for anadditional period of up to three years. If a commercial discovery is made during the exploration period, thecontract will allow for the production of oil for a period of 30 years from theeffective date and the production of gas for a period of 40 years.  Royalties under the contract vary from 5% to20% based on production volumes.

 

The seven yearexploration phase is divided into 5 periods of 18 months, 24 months, 15 months,15 months and 12 months, respectively. BPZ is currently in the first exploration period which is scheduled toend in June 2005 unless an extension is requested.  In connection with the second explorationperiod, the Company will be obligated to post a $350,000 performance bond in May 2005.  The third exploration period is schedule tobegin in July 2007 and will require a performance bond of $585,000.  The fourth exploration period is scheduled tobegin in October 2008 and will require a performance bond of$585,000.  The fifth and finalexploration period is scheduled to begin in January 2009 and will requirea performance bond of $585,000.  Theperformance bond amounts are not cumulative, and are released as soon as thework commitment for that exploration period has been satisfied.  In addition, BPZ is required to maketechnology transfer payments, related to training costs of Perupetroprofessional staff, during the exploration phase of $5,000 per year.

 

The exploitation,or development, period of the contract will commence as soon as the Companydeclares a commercial discovery and receives approval for a field developmentplan.  The Company must declare acommercial discovery no later than the end of the last exploration period,including any extensions or deferments.  

 

**Descriptionof Area XVI**

 

Area XVI is locatedonshore in northwest Peru, in the prolific oil-bearing Talara Basin, and coversan area of approximately 107,095 acres. Area XVI lies about 85 kilometers northeast of the city of Talara, andimmediately to the east of Block X, currently operated by Petrobras EnergíaS.A.  Block X is one of the mostproductive blocks in the Talara Basin.  

 

In December 2003,BPZ entered into a Technical Evaluation and Promotion Agreement for AreaXVI.  The purpose of the agreement is toenable BPZ to perform technical studies based on existing information, applyingnew concepts, new interpretations and new exploration models, with theobjective of obtaining evidence of potential exploratory success under alicense contract.  The agreement covers aperiod of 24 months.  At the end of thisperiod, the Company has the preferential right to obtain a license contractcovering the area.  In connection withthe signing of this Agreement, the Company posted a $20,000 performancebond.  In addition, BPZ is obligated toarrange for technology transfer to Perupetro professional staff.  The costs associated with this training areexpected to be less than $5,000.

 

**Descriptionof Area VI**

 

Area VI is locatedonshore in northwest Peru, within the Lancones Basin of Cretaceous – Upper EoceneAge, and covers an area of approximately 1,443,561 acres.  The Lancones Basin is primarily anexploratory area and has had limited drilling activity to date.

 

In December 2003,BPZ entered into a Technical Evaluation and Promotion Agreement for Area VI.  The purpose of the

 

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agreement is toenable BPZ to perform technical studies based on existing information, applyingnew concepts, new interpretations and new exploration models, with theobjective of obtaining evidence of potential exploratory success under alicense contract.  The agreement covers aperiod of 24 months.  At the end of thisperiod, the Company has the preferential right to obtain a license contractcovering the area.  In connection withthe signing of this Agreement, the Company posted a $20,000 performancebond.  In addition, BPZ is obligated toarrange for technology transfer to Perupetro professional staff.  The costs associated with this training areexpected to be less than $10,000.

 

**Oiland Gas Resources**

 

During 2004, the Company retainedGaffney Cline & Associates, Inc. (“GCA”), an internationallyrecognized firm of independent reserve engineers, to evaluate the oil and gasresource potential of the Corvina and Piedra Redonda Fields in the Block Z-1license contract area.  GCA focused itsevaluation on the wells which were drilled by previous operators of Block Z-1,and the seismic and other geological and geophysical data available on the block.

 

In the Corvina Field, five wells weredrilled, including two wells drilled by Tenneco, Inc. in the mid-1970’sand three wells drilled by Belco Oil and Gas Corporation (“Belco”) in the early1980’s.  Two existing drilling andproduction platforms were set during this period and are still in place in theCorvina Field.  The platforms need to berepaired and refurbished, but are structurally sound and believed to besuitable for the Company’s future operations. Four of the five wells in the Corvina Field encountered hydrocarbons andapparent reservoir-quality formations. One of the wells, the CX11-16X, produced natural gas at rates of 16.6million cubic feet of gas per day (“MMcf/d”). This well was completed and successfully tested over an extended periodand was later temporarily abandoned.  TheCompany believes this well can be reestablished as a producing well.

 

In the Piedra Redonda Field, twowells were drilled by Belco in the late 1970’s and early 1980’s.  Hydrocarbons were present in both wells.  One well was completed, while the other wellencountered high pressures and was abandoned prior to reaching the intendedtotal depth.  As in the Corvina Field,there is a drilling and production platform in place in the Piedra RedondaField.  The completed well in the PiedraRedonda Field, the C18X, produced natural gas at rates of 8.3 MMcf/d and wasalso successfully tested over an extended period.

 

GCA reviewed all availabletechnical data, including a large volume of 2-D seismic data, well logs,drilling and completion reports, well test information, and other geologicaland geophysical data and analysis.  TheCompany intends to develop these resources as discussed in “Management’sDiscussion and Analysis and Plan of Operation” of this Form 10-KSB.  The development of these resources will requirea significant financial investment which is estimated at $90.0 million.  The Company does not currently have thefinancial capacity or commitments for a development program of this magnitude.  Accordingly, the Company is not disclosingproved reserves in this Form 10-KSB filing.  At such time as the Company has obtainedsufficient financial commitments to proceed with the full development of BlockZ-1 and all other conditions necessary to record proved reserves are met, weexpect to record SEC proved reserves and disclose such reserves in future SECfilings.

 

**BPZ’sProperties in Ecuador**

 

In June 2004, BPZ acquired the common stock of SMC Ecuador, Inc.,a Delaware corporation (“SMC”), the owner of a 10% interest in a non-operatedoil and gas producing property located in the Republic of Ecuador (the “SantaElena Property”). We have made an election to account for this investment underthe cost method. Since substantially all of the assets of SMC consist ofproducing oil and gas properties, we are amortizing the cost of this investmentover the remaining term of the license agreement which expires in May 2016.

 

The Santa Elena Property is located west of the city of Guayaquil alongthe coast of Ecuador. The license contract provides for royalty payments equalto 23% of production. There have been almost 3,000 wells drilled in the fieldsince production began in the 1920’s. Currently, there are approximately 1,258active wells which produce approximately 2,000 barrels of oil per day. Themajority of the wells produce intermittently by gas lift, mechanical pump orswabbing techniques. Crude oil is gathered in holding tanks and pumped via apipeline to an oil refinery in the city of Libertad, Ecuador.

 

In order to finance the acquisition, BPZ entered into a debt arrangementin the amount of $1,375,000 (the “Loan”) with an individual (the “Lender”). TheLoan was to be repaid in 36 equal installments, paid monthly, bearing interestat 15%. The Lender held a first lien on the common stock of SMC as collateral.Upon full repayment of the Loan by BPZ, the Lender was entitled to receive a 4%derivative working interest in the Santa Elena Property.

 

In September 2004, BPZ reached an agreement with the Lender tocancel the above agreement and enter into a new agreement

 

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whereby BPZ converted $1,000,000 of the principal balance of the Loan,plus $20,529 of accrued interest, into 500,000 shares of BPZ common stock. Theremaining balance of the Loan, or $293,136, is payable in 10 equal monthlyinstallments with interest imputed at 15% ending in July 2005. Theagreement to convey beneficial ownership of a 4% derivative working interest inthe Santa Elena Property was also accelerated to the date of theagreement.  Accordingly, BPZ now owns a6% effective working interest in the Santa Elena Property.

 

**Item 3.  Legal Proceedings**

 

Navidec, Inc. was advised in aletter dated February 24, 2004 that the SEC was conducting an informalinquiry to determine whether Navidec, Inc. had violated federal securitieslaws.  The SEC made an informal requestthat Navidec voluntarily produce certain documents, which were provided to theSEC in May 2004.  Based on theinquiries made and the information requested, the Company believes that the SEC’sinvestigation relates, at least in part, to the restatement of reportedearnings for the first and second quarters of 2003 by Navidec, Inc.  This restatement was reported in Navidec, Inc.’sForm 10-Q for the third quarter of 2003 filed on December 11, 2003. 

 

On December 22, 2004, theCompany received notice that the SEC had issued an Order Directing a PrivateInvestigation and Designating Officers to take Testimony, and would beconducting a formal investigation.  Weare cooperating fully with the SEC and are in discussions with the Commissionregarding this matter.  Although weintend to work to bring this matter to a prompt conclusion, we cannot make anyassurance that the investigation will be solved positively or that it will nothave negative effects on our limited resources or our ability to raise capitalduring the period of the investigation.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

There were no matters submittedduring the fourth quarter of the fiscal year covered by this Report to a voteof stockholders, through the solicitation of proxies, or otherwise.

 

Subsequent to year end, the Companyheld a special meeting of shareholders on February 4, 2005, the purpose ofwhich was to amend the Company’s articles of incorporation to change the nameof the Company to BPZ Energy, Inc. The matter passed with 64.2% of the votes in favor of the name change asdetailed in the table below:

 

| **Type of vote** | ** ** | **Outstanding****Voting  Shares** | ** ** | **%**  | ** ** |
|------------------|------------|-----------------------------------|------------|--------|------------|
|             |       |                              |       |   |       |
| For              |       | 10,604,322                        |       | 64.2   | %          |
| Against          |       | 15,057                            |       | 0.1    | %          |
| Abstain          |       | —                            |       | 0.0    | %          |
| Did not vote     |       | 5,906,469                         |       | 35.7   | %          |
| Total Shares     |       | 16,525,848                        |       | 100.0  | %          |

 

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# **PART II**

#  

**Item 5. Market forCommon Equity and Related Stockholder Matters**

 

**Descriptionof Securities – Common Stock**

** **

Our common stock, no par value pershare, has been traded on the OTC Bulletin Board since August 18,2003.  Prior to that date, it was tradedon the Nasdaq Small Cap Market. Effective February 7, 2005, the stock began trading under thesymbol “BPZI”.  Prior to that date, thestock traded under the symbol “NVDC”.

 

There are 20,000,000 sharesauthorized.  As of December 31,2004, we had 16,529,848 shares issued and outstanding.  The following table sets forth the high andlow quarterly closing prices for our common stock as reported by the OTCBulletin Board or the Nasdaq Small Cap Market. Such market prices reflect inter-dealer prices, without retail mark-up,mark-down or commissions, and may not represent actual transactions.

 

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2004**       |       |     |       |    |       |
| Fourth quarter |       | $        | 5.25       |    | $          | 3.30 |   |
| Third quarter  |       | 3.65     |       | 1.25    |       |
| Second quarter |       | 2.05     |       | 1.30    |       |
| First quarter  |       | 1.20     |       | 0.98    |       |
|           |       |     |       |    |       |
| **2003**       |       |     |       |    |       |
| Fourth quarter |       | 1.26     |       | 1.03    |       |
| Third quarter  |       | 3.20     |       | 1.05    |       |
| Second quarter |       | 3.10     |       | 1.91    |       |
| First quarter  |       | 2.55     |       | 1.90    |       |
|                |            |          |            |         |            |  |  |

 

**Holders**

 

As of December 31, 2004, wehad approximately 300 shareholders of record, plus an estimated 2,500beneficial owners of our common stock.

 

**DividendPolicy on Common Stock**

 

We have never paidcash dividends on our stock.  For theforeseeable future, we intend to retain earnings, if any, to meet our workingcapital requirements and to finance future operations.  Accordingly, we do not plan to declare ordistribute cash dividends to the holders of our common stock in the foreseeablefuture.

 

**RecentSales of Unregistered Securities**

 

On September 2,2003, the Company began a private placement offering of up to 1,250,000 unitsat $1, each unit consisting of one common share, one ‘‘A’’ Warrant and one ‘‘B’’Warrant.  The ‘‘A’’ Warrants areexercisable at $2.00 per share and the “B” warrants are exercisable at $4.00per share.  Both warrants expire on August 31,2005, unless there are delays in obtaining the effectiveness of a registrationstatement which includes the warrants. The Company has the right to call the ‘‘A’’ and “B” warrants if thetrading price of the Company’s common stock is above the exercise price formore than 10 consecutive trading days and there is an effective registrationstatement covering the warrants.  TheCompany closed the private placement on January 30, 2004.  The Company sold a total of 564,500 units forgross proceeds of $564,000, of which $215,000 was received in the first quarterof 2004.

 

In connection with the Merger ofthe Company and BPZ Energy, Inc. (the “Merger”), the Company issued9,000,000 shares of common stock in a stock for stock exchange to theshareholders of BPZ Energy, Inc. This transaction is more fully discussed in Note 9 of the Notes toConsolidated Financial Statements.

 

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In connection with the Merger, theCompany issued 662,149 shares of common stock to Navidec Financial Services (“NFS”),an affiliate of the Company.  Pursuant tothe terms of the Merger agreement, NFS will be spun off to the shareholders ofrecord of Navidec, Inc. as of September 9, 2004, the date prior tothe consummation of the Merger.

 

On September 29, 2004, theCompany issued 500,000 shares of common stock to an individual in exchange forthe retirement of $1,020,529 of debt and accrued interest.

 

As of September 30, 2004, theCompany closed a private placement of common stock for cash that began on July 27,2004.  The offering raised a total of$6,000,000 in gross proceeds through the sale of 3,000,000 common shares at aprice of $2.00 per share to a total of 89 accredited investors.  The Company intends to use the net proceedsof this offering to develop its existing oil and gas properties, to acquire newproperties, and for general working capital purposes, as management deemsappropriate.  The net proceeds of theoffering were approximately $5,507,000 after deducting placement agent fees of$360,000 and other offering costs.

 

The shares of common stock issuedduring the period were exempt from registration in reliance upon Section 4(2) ofthe Securities Act of 1933, as amended (the “Securities Act”), andRegulation D promulgated thereunder. Shares in the private placements were only offered to accreditedinvestors, as such term is defined in Rule 501(a) of Regulation Dunder the Securities Act.

 

**Item  6. Management’s Discussion and Analysis and Plan of Operation**

 

***SEE RISK FACTORS IN ITEM 1 “DESCRIPTION OF BUSINESS” OF THIS ANNUALREPORT FORM 10-KSB***

 

**Resultsof Operations**

 

We are in the earlystage of developing our properties in Peru and do not currently have anyproduction or revenues from these properties. Our operations to date have been limited to technical evaluation of theproperties and the design of development plans to exploit the oil and gasresources on those properties.

 

Our operating andadministrative expenses to date have consisted principally of general andadministrative costs and geological, geophysical and engineering costs.  These general and administrative costs haveincreased significantly from $96,067 in 2003 to $1,753,084 in 2004 as ouractivity levels have increased.  We alsoincurred $360,965 of geological, geophysical and engineering costs in 2004,compared to no costs incurred in this category in 2003.  We expect both of these costs to increase aswe proceed with our development plans. In addition, we incurred stock-based compensation expense of $4,414,935during 2004 as a result of the issuance of common stock to certain Companyemployees, directors and consultants for past services and stock optionsgranted to the former CEO of Navidec.

 

We also incurredinterest expense of $66,959 and amortization of debt financing costs of$360,439 in 2004, principally from the financing of the acquisition of theSanta Elena Property in June 2004. This property generated cash distributions of $190,621 during the lasthalf of 2004, which were partially offset by non-cash amortization expense of$42,760.

 

During the period from the date of the Merger to December 31,2004, we recorded a loss attributable to our equity ownership of NFS in theamount of $1,964,103.  In addition, theissuance by NFS of its equity securities at a price below the Company’s bookvalue per share resulted in a loss to the Company of $1,893,176.

 

The Companyrealized a net loss of $10,652,671, or $1.24 per share, for the year ended December 31,2004, as compared to a net loss of $94,622 or $0.02 per share for the yearended December 31, 2003.

 

**Planof Operation**

 

Our plan ofoperation for the next twelve months is focused primarily on exploiting theresource opportunities in the offshore Block Z-1 in northwest Peru.  To achieve our objectives, we must obtainsignificant financing from external sources. We are working to develop external financing options, but we do not currentlyhave sufficient capital resources, nor do we currently have firm commitmentsfrom external sources to allow us to undertake all of the operations envisionedin this plan.

 

Our plan ofoperation envisions the installation of a 140 megawatt (‘‘MW’’) gas-fired electricgeneration complex near the town of Caleta Cruz, in northwest Peru.  This power plant will initially use gas fromthe Corvina Field in Block Z-1, which is located approximately 10 milesoffshore from the power plant site.  TheCorvina Field has an existing platform which will be

 

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refurbished to makeit suitable for drilling operations. There is also a shut-in gas well which we intend to recomplete andutilize for gas production.  Our initialplans call for the drilling of six additional wells from the existingplatform.  We are working to have theenvironmental and drilling permits and platform refurbishment completed by October 2005and we expect to commence workover and drilling operations at that time.  The drilling of the additional six wells willextend into 2006.

 

We must construct a10 mile natural gas pipeline to transport natural gas from the Corvina Field tothe power plant site at Caleta Cruz.  Thepower plant site has an existing substation and power transmission lines thatwith certain upgrades are capable of handling up to 300 MW of power.  Our plan is to own 100% of the powerplant.  Accordingly, our revenues fromthe natural gas delivered to the power plant will be derived from the sale ofelectricity.  

 

In order to supportour proposed electric generation project, we recently commissioned anindependent power market analysis for the region.  The Peruvian electricity market isderegulated and power is transportable on an interconnected national gridmanaged by the Committee for Economic Dispatching of Electricity (known as “COES”).  Based on this study, we are confident that wewill be able to sell economic quantities of electricity from our initial 140 MWpower plant at Caleta Cruz.  We believethere may be an opportunity in the future to generate and profitably sell up to600 MW of power into the Peruvian and Ecuadorian power markets.  Our goal is to commence initial sales ofelectricity by July 2006.  However,many factors required to meet this goal are outside the control of the Companyand no assurance can be given that we can meet this schedule.  

 

The environmentalstudies for the operations needed to develop and transport natural gas from theCorvina Field to the power plant site and construct the power plant wereinitiated during the first quarter of 2005. These studies must be completed and approved before the gas pipeline andpower plants may be built. 

 

In addition to thelocal power market targeted by our project in Peru, we intend to simultaneouslydevelop a gas-power strategy in nearby Ecuador to capitalize on what we believeto be the large upside gas potential of the Corvina and Piedra Redonda Fieldslocated in Block Z-1, as well as the potentially significant natural gas resourcesin the adjacent onshore Block XIX.  Theseareas are within 30 miles of the Ecuadorian border and can be developed forexport sales of either raw gas or power generation via connection to thetransmission system of Ecuador.  Ourinitial plan of operation calls for the Company to construct a 40-mile pipelinefrom Caleta Cruz, the terminal point of our offshore pipeline from the CorvinaField, to Arenillas, Ecuador.  We intendto sell gas for the generation of electricity by third party power producers inthe local market in Ecuador.  We havenegotiated three preliminary agreements for delivery of gas.  We are planning to have this pipelinecompleted for first sales by October 2006. However, many factors required to meet this goal are outside the controlof the Company and no assurance can be given that we can meet this schedule.

 

We have secured theenvironmental permits and other authorizations to shoot seismic in Block Z-1and Block XIX.  However, our primary goalis development of the gas production from Block Z-1 to supply the proposedpower plant at Caleta Cruz.  Accordingly,seismic acquisition may be deferred until such time as we have sufficientfinancial and technical resources available for that project.

 

Our other twoexploration areas in Peru, Area VI and Area XVI, which are held by BPZ underexclusive Technical Evaluation Agreements, will undergo geochemical studiesduring calendar year 2005.  Whilerelatively inexpensive, these geochemical studies, when integrated withpreviously acquired geophysical and geological data, should provide us with anindication of the exploration and development potential of these areas. 

 

We are currentlydeveloping engineering plans and designs for the various components of our planof operation.  We have not obtainedoutside bids for all of the major equipment components, shipping andinstallation and associated services. Such bids and estimates, when obtained, will be subject to change andcontingencies.  Accordingly, we do nothave a complete estimate of the total costs of the initial phases of theproject.  However, based on our currentestimates, we expect that the initial phases of the project, including the costof the natural gas pipeline to Arenillas, Ecuador, will require total capitalexpenditures on the order of $90.0 million. 

 

We are seekingfinancing for the natural gas exploitation and power development projectthrough a combination of leasing, debt and/or equity funding.  The timing of this project is dependent on avariety of factors, including technical design of facilities, permitting,availability of equipment, delivery lead times, execution by contractors, andavailability of financing, many of which are outside the control of theCompany.  While we believe we haveadequate capital on hand to begin implementing the ongoing gas-power strategy,our plan of operation will require substantial financing for the Corvina Fielddevelopment, gas pipeline and power plant installation, for which no firmcommitments have been received.  Wecannot provide assurance that the Company will be successful in obtaining thisfinancing.

 

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**Liquidity,Capital Resources and Capital Expenditures**

 

Prior to theMerger, the Company primarily used debt financing to fund its operations. Inconnection with the Merger, the Company received total net proceeds ofapproximately $5.5 million from a private placement of its commonstock.  The cash on hand at December 31,2004 of approximately $4.0 million is expected to be sufficient to cover thegeneral and administrative overhead of the Company for the next twelve monthsand also permit limited expenditures to advance the project, such asenvironmental and engineering studies and other design expenditures.  However, we will require significantadditional financing (currently estimated to be on the order of$90 million) to develop our properties and begin producing meaningfulrevenues.  As discussed above in our planof operation, we are seeking financing through a combination of leasing, debtand/or equity financing.  We will bedependent on the capital markets for these funds and there can be no assurancethat we will be successful in our efforts to secure such additional capital.

 

**Off-BalanceSheet Arrangements**

 

As of December 31,2004, we had no transactions, agreements or other contractual arrangements withunconsolidated entities or financial partnerships, often referred to as specialpurpose entities (“SPEs”), which generally are established for the purpose offacilitating off-balance sheet arrangements. 

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (“GAAP”).  Management uses estimates and assumptions inpreparing the consolidated financial statements in accordance with GAAP.  Those estimates and assumptions affect thereported amounts of assets, liabilities, revenues and expenses in theconsolidated financial statements, and the disclosure of contingent assets andliabilities.  We have identified thefollowing as critical accounting policies as directly related to our businessand its operations, and the understanding of our financial statements.  The impact of these policies and associatedrisks, as they affect our reported and/or expected financial results, arediscussed throughout Management’s Discussion and Analysis.  A complete discussion of our accountingpolicies is included in Note 1 of the Notes to Consolidated FinancialStatements.

 

***Successful Efforts Method of Accounting***

 

We follow thesuccessful efforts method of accounting for our investments in oil and gasproperties.  Under this method, oil andgas lease acquisition costs and intangible drilling costs associated withexploration efforts that result in the discovery of proved reserves and costsassociated with development drilling, whether or not successful, arecapitalized when incurred.  Certain costsof exploratory wells are capitalized pending determinations that provedreserves have been found.  If thedetermination is dependent upon the results of planned additional wells andrequired capital expenditures to produce the reserves found, the drilling costswill be capitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as describe in the preceding sentence are notrequired.  We assess our capitalizedexploratory wells pending evaluation each quarter to determine whether costsshould remain capitalized or should be charged to earnings.  Other exploration costs, including geologicaland geophysical costs, are expensed as incurred.  We will recognize gains or losses on the saleof properties, should they occur, on a field-by-field basis.

 

The application ofthe successful efforts method of accounting requires management’s judgment todetermine the proper designation of wells as either developmental orexploratory, which will ultimately determine the proper accounting treatment ofthe costs incurred.  The results from adrilling operation can take considerable time to analyze, and the determinationthat commercial reserves have been discovered requires both judgment andapplication of industry experience. Wells may be completed that are assumed to be productive and actuallydeliver oil and gas in quantities insufficient to be economic, which may resultin the abandonment of the wells at a later date.  Seismic costs incurred to select developmentlocations within a productive oil and gas field are typically treated asdevelopment costs and capitalized. Judgment is required to determine when the seismic programs are notwithin proved reserve areas and therefore would be charged to expense asexploratory.  The evaluations of oil andgas leasehold acquisition costs requires management’s judgment to estimate thefair value of exploratory costs related to drilling activity in a given area.

 

The successfulefforts method of accounting can have a significant impact on the operationalresults reported when we enter a

 

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new exploratoryarea in hopes of finding oil and gas reserves. Seismic costs can be substantial which will result in additionalexploration expenses when incurred.  Theinitial exploratory wells may be unsuccessful and the associated costs willthen be expensed as dry hole costs and any associated leasehold costs may beimpaired.  

 

***Impairment of Long-Lived Assets***

 

We periodicallyevaluate the recoverability of the carrying value of its long-lived assets andidentifiable intangibles by monitoring and evaluating changes in circumstancesthat may indicate that the carrying amount of the asset may not berecoverable.  Examples of events orchanges in circumstances that indicate that the recoverability of the carryingamount of an asset should be assessed include but are not limited to thefollowing:  a significant decrease in themarket value of an asset, a significant change in the extent or matter in whichan asset is used or a significant physical change in an asset, a significantadverse change in legal factors or in the business climate that could affectthe value of an asset or an adverse action or assessment by a regulator, anaccumulation of costs significantly in excess of the amount originally expectedto acquire or construct an asset, and/or a current period operating or cashflow loss combined with a history of operating or cash flow losses or aprojection or forecast that demonstrates continuing losses associated with anasset used for the purpose of producing revenue.

 

We considerhistorical performance and anticipated future results in its evaluation ofpotential impairment.  Accordingly, whenindicators or impairment are present, we evaluate the carrying value of theseassets in reaction to the operating performance of the business and futurediscounted and non-discounted cash flows expected to result from the use ofthese assets.  Impairment losses arerecognized when the expected future cash flows from an asset are less itscarrying value.

 

***Future Dismantlement, Restoration, and Abandonment Costs***

 

The accounting forfuture development and abandonment costs changed on January 1, 2003, withthe issuance of Statement of Financial Accounting Standards (“SFAS”) No. 143“Accounting for Asset Retirement Obligation” (“ARO”), which requires the fairvalue of a liability for an asset retirement obligation to be recognized in theperiod in which it is incurred if a reasonable estimate of fair value can bemade.  The associated asset retirementcosts are capitalized as part of the carrying amount of the long-lived asset.  The accrual is based on estimates of thesecosts for each of our properties based upon the type of production structure,reservoir characteristics, depth of the reservoir, market demand for equipment,currently available procedures and consultations with construction andengineering consultants.  Because thesecosts typically extend many years into the future, estimating these costs isdifficult and requires management to make estimates and judgments that aresubject to future revisions based on numerous factors, including changingtechnology, the political and regulatory environment and estimates as to theproper discount rate to use and timing of abandonment.

 

Our plan ofoperations entails the drilling of wells and the construction of an electricpower generation plant.  We will berequired to plug and abandon those wells and restore the well site and powergeneration site upon completion of their production.  However, due to the fact that we have not yetbegun operations, we do not have sufficient information to determine thetiming, nor calculate the present value, of the obligation.  Therefore, no such provision is reflected inthe accompanying consolidated financial statements. 

 

***Stock Based Compensation***

 

As permitted underSFAS No. 123, “Accounting for Stock-Based Compensation,” the Companyaccounts for its stock-based compensation for options issued to employees inaccordance with the provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”).  As such, for options granted to employees anddirectors, compensation expense is recorded on a straight-line basis over theshorter of the period that the services are provided or the vesting period,only if the current market price of the underlying stock exceeds the exerciseprice.  Certain pro forma net income andearnings per share disclosures for employee stock option grants are alsoincluded in the notes to the financial statements as if the fair value methodas defined in SFAS 123 had been applied.

 

Transactions inequity instruments with non-employees for goods or services are accounted forby the fair value method.

 

***Recent Accounting Pronouncements***

 

In December 2004,the FASB issued SFAS No. 123(R) Share-Based Payment, which supersedes SFASNo. 148 “Accounting for Stock-Based Compensation – Transition andDisclosure” an amendment to SFAS No. 123. SFAS 123(R) establishes standards for transactions in which an entityexchanges its equity instruments for goods or services.  This standard requires a public entity to measurethe cost of employee services received in exchange for an award of equityinstruments based on the

 

25

----

 

grant-date fairvalue of the award.  This eliminates theexception to account for such awards using the intrinsic method previouslyallowable under APB Opinion No. 25. SFAS No. 123(R) also requires a public entity to present its cashflows provided by tax benefits from stock options exercised in the FinancingCash Flows section of the Statement of Cash Flows.  Public companies with a calendar year-endwill be required to adopt the provisions of the standard effective for periodsbeginning on or after December 15, 2005. As we intend to use stock-based compensation in the future as acomponent of employee compensation, and we have previously followed theintrinsic method, the implementation of this pronouncement will reduce ourfuture earnings or increase our future losses. The amount of such reductions may be significant, but cannot be quantifiedat this time.

 

For further discussion on RecentAccounting Pronouncements, see Note 1 of the Notes to Consolidated FinancialStatements.

 

**ForeignExchange**

 

The U.S. Dollar isthe functional currency for our operations in both Peru and Ecuador.  Ecuador has adopted the U.S. Dollar as itsofficial currency.  Peru, however, stilluses its local currency, Nuevo Soles, in addition to the U.S. Dollar andtherefore our financial results are subject to favorable or unfavorablefluctuations in the exchange rate and inflation of that country.  We have adopted SFAS No. 52, “ForeignCurrency Translation,” which requires that the translation of the applicableforeign currency into U.S. dollars be performed for balance sheet monetaryaccounts using current exchange rates in effect at the balance sheet date,non-monetary accounts using historical exchange rates in effect at the time thetransaction occurs, and for revenue and expense accounts using a weightedaverage exchange rate during the period reported.  Accordingly, the gains or losses resulting fromsuch translation are included in other income and expense in the consolidatedstatements of operations.  Due to therelatively low level of activity to-date and the relatively steady exchangerate in Peru, translation differences, if any, are considered to be immaterial.

 

26

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**Item 7.****                                  ****Financial Statements**

 

BPZ Energy, Inc.

Index to Consolidated Financial Statements

 
|   |   | Report of  Independent Registered Public Accounting Firm                                                             |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                 |   |
|   |   | Consolidated Balance  Sheets as of December 31, 2004 and 2003                                                   |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated  Statements of Operations for the Years Ended December 31, 2004 and 2003                           |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated  Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,  2004 and 2003 |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated  Statements of Cash Flows for the Years Ended December 30, 2004 and 2003                           |   |
|   |   |                                                                                                                 |   |
|   |   | Notes  to Consolidated Financial Statements                                                                          |   |

 

27

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors

BPZ Energy, Inc. and Subsidiaries

(A Development Stage Company)

 

We have audited the consolidated balance sheets of BPZ Energy, Inc.and Subsidiaries (A Development Stage Company), as of December 31, 2004and 2003, and the related consolidated statements of operations, stockholders’equity (deficit) and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of BPZ Energy, Inc.and Subsidiaries (A Development Stage Company) as of December 31, 2004 and2003, and the results of its operations and its cash flows for the years thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 

Asdiscussed in Note 3 to the Consolidated Financial Statements, the accompanyingconsolidated balance sheet as of December 31, 2004 and consolidated statementsof operations, stockholders’ equity (deficit) and cash flows for the year thenended have been restated to reflect the Company’s previously unrecorded nominalownership interest in Navidec Financial Services, Inc. using the equity methodof accounting, the reclassification of certain reorganization, acquisition andmerger costs and the Company’s presentation as a development stage company.

 
| */s/ Johnson, Miller & Co.*                                                                         | * * |
|--------------------------------------------------------------------------------------------------------------|----------|
| Johnson, Miller & Co.                                                                               |
| Midland, Texas                                                                                               |
| April 11, 2005, (December 20,  2005 as to the effects of the restatement described in Note 3) |

 

28

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedBalance Sheets**

**As of December 31,2004 and 2003**

 
| ** **                                                                                                                                                                                               | ** ** | **2004**       | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                               |       |           |       |       |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Current  assets:                                                                                                                                                                                         |       |           |       |       |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $              | 4,014,191  |       | $          | 8,156 |   |
| Restricted cash                                                                                                                                                                                          |       | 100,000        |       | —     |       |
| Other assets                                                                                                                                                                                             |       | 72,159         |       | 4,180      |       |
| Total current assets                                                                                                                                                                                     |       | 4,186,350      |       | 12,336     |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Property and equipment, net                                                                                                                                                                              |       | 5,505          |       | —     |       |
| Advances to affiliates                                                                                                                                                                                   |       | —         |       | 162,890    |       |
| Other assets                                                                                                                                                                                             |       | —         |       | 240,000    |       |
| Investment in SMC Ecuador, net                                                                                                                                                                           |       | 969,240        |       | —     |       |
| Investment in Navidec Financial Services                                                                                                                                                                 |       | 1,130,511      |       | —     |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Total assets                                                                                                                                                                                             |       | $              | 6,291,606  |       | $          | 415,226 |   |
|                                                                                                                                                                                                     |       |           |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                                                                                                                 |       |           |       |       |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Current  liabilities:                                                                                                                                                                                    |       |           |       |       |       |
| Accounts payable                                                                                                                                                                                         |       | $              | 311,613    |       | $          | 10,475 |   |
| Accrued liabilities                                                                                                                                                                                      |       | 54,342         |       | 14,650     |       |
| Notes payable                                                                                                                                                                                            |       | 208,986        |       | —     |       |
| Total current liabilities                                                                                                                                                                                |       | 574,941        |       | 25,125     |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Long-term  debt                                                                                                                                                                                          |       | —         |       | 755,000    |       |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Stockholders’  equity (deficit):                                                                                                                                                                    |       |           |       |       |       |
| Common stock, no par value, 20,000,000  authorized; 16,581,385 and 4,103,454 shares issued and 16,128,454 and 4,103,454  outstanding at December 31, 2004 and December 31, 2003,  respectively |       | 17,478,446     |       | 1,000      |       |
| Additional paid in capital – warrants and  stock options                                                                                                                                            |       | 2,341,795      |       | —     |       |
| Common stock and warrants held by affiliate                                                                                                                                                              |       | (2,854,181     | )          | —     |       |
| Stock subscription receivable                                                                                                                                                                            |       | (230,825       | )          | —     |       |
| Deficit accumulated during the development  stage                                                                                                                                                        |       | (11,018,570    | )          | (365,899   | )          |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Total stockholders’ equity (deficit)                                                                                                                                                                |       | 5,716,665      |       | (364,899   | )          |
|                                                                                                                                                                                                     |       |           |       |       |       |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                               |       | $              | 6,291,606  |       | $          | 415,226 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

29

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**BPZ Energy, Inc.and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedStatements of Operations**

**Yearsended December 31, 2004 and 2003**

 
| ** **                                                           | ** ** | **Cumulative  Amounts from  Inception to  December 31, 2004** | ** **  | **2004**    | ** ** | **2003**    | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|-------------|-------------|------------|-------------|------------|
| ** **                                                           | ** ** | **(Restated)**                                                     | ** **  |
|                                                                 |       |                                                               |        |        |       |        |       |
| Revenue                                                              |       | $                                                                  | —      |        | $          | —      |       | $ | — |   |
|                                                                 |       |                                                               |        |        |       |        |       |
| Operating  and administrative expenses:                              |       |                                                               |        |        |       |        |       |
| General and administrative                                           |       | 2,125,590                                                          |        | 1,753,084   |       | 96,067      |       |
| Stock-based compensation                                             |       | 4,414,935                                                          |        | 4,414,935   |       | —      |       |
| Geological, geophysical and engineering                              |       | 360,965                                                            |        | 360,965     |       | —      |       |
|                                                                 |       |                                                               |        |        |       |        |       |
| Total operating expenses                                             |       | 6,901,490                                                          |        | 6,528,984   |       | 96,067      |       |
|                                                                 |       |                                                               |        |        |       |        |       |
| Operating  loss                                                      |       | (6,901,490                                                         | )           | (6,528,984  | )          | (96,067     | )          |
|                                                                 |       |                                                               |        |        |       |        |       |
| Other income  (expense):                                             |       |                                                               |        |        |       |        |       |
| Investment income from SMC Ecuador, net of  amortization             |       | 147,861                                                            |        | 147,861     |       | —      |       |
| Equity in loss of Navidec Financial  Services                        |       | (1,964,103                                                         | )           | (1,964,103  | )          | —      |       |
| Loss on issuance of equity securities by  Navidec Financial Services |       | (1,893,176                                                         | )           | (1,893,176  | )          | —      |       |
| Interest expense                                                     |       | (66,959                                                            | )           | (66,959     | )          | —      |       |
| Amortization of deferred financing costs                             |       | (360,439                                                           | )           | (360,439    | )          | —      |       |
| Miscellaneous income                                                 |       | 19,736                                                             |        | 13,129      |       | 1,445       |       |
|                                                                 |       |                                                               |        |        |       |        |       |
| Total other income (expense)                                         |       | (4,117,080                                                         | )           | (4,123,687  | )          | 1,445       |       |
|                                                                 |       |                                                               |        |        |       |        |       |
| Loss before  income taxes                                            |       | (11,018,570                                                        | )           | (10,652,671 | )          | (94,622     | )          |
|                                                                 |       |                                                               |        |        |       |        |       |
| Income taxes                                                         |       | —                                                             |        | —      |       | —      |       |
|                                                                 |       |                                                               |        |        |       |        |       |
| Net loss                                                             |       | $                                                                  | (11,018,570 | )           | $          | (10,652,671 | )          | $ | (94,622 | ) |
|                                                                 |       |                                                               |        |        |       |        |       |
| Basic and  diluted net loss per share                                |       | $                                                                  | —      |        | $          | (1.24       | )          | $ | (.02 | ) |
|                                                                 |       |                                                               |        |        |       |        |       |
| Weighted average  common shares outstanding                          |       | —                                                             |        | 8,558,528   |       | 4,103,454   |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

30

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**BPZ Energy, Inc. and Subsidiaries**

# **Consolidated Statements ofStockholders’ Equity (Deficit)**

**(ADevelopment Stage Company)**

**Years ended December 31, 2004 (Restated) and 2003**

 
| ** **                                                   | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | **Common**       | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** **  | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                                                   | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | **Stock and**    | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                   | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Warrants**     | ** ** | **Stock**       | ** ** | **During the**  | ** ** | ** **  | ** ** |
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Held by**    | ** ** | **Subscription** | ** ** | **Development** | ** ** | ** **      | ** ** |
| ** **                                                   | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Affiliate**    | ** ** | **Receivable**  | ** ** | **Stage**       | ** ** | **Total**   | ** ** |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Balance, December 31, 2002                              |       | 4,103,454        |       | $           | 1,000      |           | $          | —           |       | $               | —     |            | $          | —      |       | $ | (271,277 | ) | $ | (270,277 | ) |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Net loss for the  year                                       |       | —           |       | —      |       | —         |       | —           |       | —          |       | (94,622         | )          | (94,622     | )          |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Balance, December 31, 2003                              |       | 4,103,454        |       | 1,000       |       | —         |       | —           |       | —          |       | (365,899        | )          | (364,899    | )          |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Common stock  issued for services                            |       | 2,857,642        |       | 3,714,935   |       | —         |       | —           |       | —          |       | —          |       | 3,714,935   |       |
| Stock-based  compensation                                    |       | —           |       | —      |       | 700,000        |       | —           |       | —          |       | —          |       | 700,000     |       |
| Common stock  issued in acquisition                          |       | 3,860,517        |       | 5,713,565   |       | —         |       | —           |       | —          |       | —          |       | 5,713,565   |       |
| Warrants and  stock options issued or assumed in acquisition |       | —           |       | —      |       | 1,785,359      |       | —           |       | —          |       | —          |       | 1,785,359   |       |
| Conversion of  long-term debt to common stock                |       | 1,802,376        |       | 685,000     |       | —         |       | —           |       | —          |       | —          |       | 685,000     |       |
| Common stock  issued for cash and future consideration       |       | 236,528          |       | 350,000     |       | —         |       | —           |       | (230,825        | )          | —          |       | 119,175     |       |
| Exercise of stock  options assumed in acquisition            |       | 220,868          |       | 486,610     |       | (143,564       | )          | —           |       | —          |       | —          |       | 343,046     |       |
| Common stock sold  for cash, net of offering costs           |       | 3,000,000        |       | 5,506,807   |       | —         |       | —           |       | —          |       | —          |       | 5,506,807   |       |
| Conversion of notes  payable to common stock                 |       | 500,000          |       | 1,020,529   |       | —         |       | —           |       | —          |       | —          |       | 1,020,529   |       |
| Adjustment for  common stock and warrants held by affiliate  |       | —           |       | —      |       | —         |       | (2,854,181       | )          | —          |       | —          |       | (2,854,181  | )          |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Net loss for the  year                                       |       | —           |       | —      |       | —         |       | —           |       | —          |       | (10,652,671     | )          | (10,652,671 | )          |
|                                                         |       |             |       |        |       |           |       |             |       |            |       |            |       |        |       |
| Balance, December 31, 2004                              |       | 16,581,385       |       | $           | 17,478,446 |           | $          | 2,341,795        |       | $               | (2,854,181 | )               | $          | (230,825    | )          | $ | (11,018,570 | ) | $ | 5,716,665 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

31

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**BPZ Energy, Inc.and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedStatements of Cash Flows**

**Years ended December 31,2004 and 2003**

 
| ** **                                                                   | ** ** | **Cumulative  Amounts from  Inception to** | ** **  | ** **     | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|----------------|------------|-------------|------------|
| ** **                                                                   | ** ** | **December 31, 2004**                 | ** **  | **2004**       | ** ** | **2003**    | ** ** |
| ** **                                                                   | ** ** | ** **                                 | ** **  | **(Restated)** | ** ** | ** **  | ** ** |
| Cash flows  from operating activities:                                       |       |                                       |        |           |       |        |       |
| Net loss                                                                     |       | $                                          | (11,018,570 | )              | $          | (10,652,671 | )          | $ | (94,622 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                       |        |           |       |        |       |
| Stock-based compensation                                                     |       | 4,414,935                                  |        | 4,414,935      |       | —      |       |
| Depreciation expense                                                         |       | 157                                        |        | 157            |       | —      |       |
| Amortization of investment in SMC Ecuador                                    |       | 42,760                                     |        | 42,760         |       | —      |       |
| Amortization of deferred financing fees                                      |       | 360,439                                    |        | 360,439        |       | —      |       |
| Loss on issuance of equity securities by Navidec  Financial Services         |       | 1,964,103                                  |        | 1,964,103      |       | —      |       |
| Equity in loss of Navidec Financial  Services                                |       | 1,893,176                                  |        | 1,893,176      |       | —      |       |
| Changes in operating assets and  liabilities:                                |       |                                       |        |           |       |        |       |
| (Increase) decrease in other assets                                          |       | 2,051                                      |        | (418           | )          | —      |       |
| Increase in accounts payable                                                 |       | 311,613                                    |        | 301,137        |       | 4,616       |       |
| Increase in accrued liabilities                                              |       | 54,342                                     |        | 39,692         |       | 10,470      |       |
| Net cash used by operating activities                                        |       | (1,974,994                                 | )           | (1,636,690     | )          | (79,536     | )          |
|                                                                         |       |                                       |        |           |       |        |       |
| Cash flows  from investing activities:                                       |       |                                       |        |           |       |        |       |
| Property and equipment additions                                             |       | (5,662                                     | )           | (5,662         | )          | —      |       |
| Restricted cash                                                              |       | (100,000                                   | )           | 140,000        |       | (240,000    | )          |
| Investment in SMC Ecuador                                                    |       | (1,440,000                                 | )           | (1,440,000     | )          | —      |       |
| Net cash used by investing activities                                        |       | (1,545,662                                 | )           | (1,305,662     | )          | (240,000    | )          |
|                                                                         |       |                                       |        |           |       |        |       |
| Cash flows  from financing activities:                                       |       |                                       |        |           |       |        |       |
| Borrowings                                                                   |       | 2,130,000                                  |        | 1,375,000      |       | 755,000     |       |
| Repayments of borrowings                                                     |       | (215,485                                   | )           | (215,485       | )          | —      |       |
| Proceeds from sale of common stock, net                                      |       | 5,625,982                                  |        | 5,625,982      |       | —      |       |
| Advances to affiliates                                                       |       | —                                     |        | 162,890        |       | (449,270    | )          |
| Net cash provided by financing activities                                    |       | 7,371,957                                  |        | 6,948,387      |       | 305,730     |       |
|                                                                         |       |                                       |        |           |       |        |       |
| Net increase  (decrease) in cash and cash equivalents                        |       | 4,014,191                                  |        | 4,006,035      |       | (13,806     | )          |
| Cash and  cash equivalents at beginning of period                            |       | —                                     |        | 8,156          |       | 21,962      |       |
| Cash and  cash equivalents at end of period                                  |       | $                                          | 4,014,191   |           | $          | 4,014,191   |       | $ | 8,156 |   |
|                                                                         |       |                                       |        |           |       |        |       |
| Supplemental  cash flow information:                                         |       |                                       |        |           |       |        |       |
| **Cash  paid for:**                                                          |       |                                       |        |           |       |        |       |
| Interest                                                                     |       | $                                          | 63,943      |           | $          | 63,943      |       | $ | — |   |
| **Non –  cash items:**                                                  |       |                                       |        |           |       |        |       |
| Common stock  issued in acquisition                                          |       | $                                          | 5,713,565   |           | $          | 5,713,565   |       | $ | — |   |
| Warrants and  stock options assumed in acquisition                           |       | 1,785,359                                  |        | 1,785,359      |       | —      |       |
| Common stock  and warrants held by affiliate                                 |       | 2,854,181                                  |        | 2,854,181      |       | —      |       |
| Imputed  financing costs                                                     |       | 428,000                                    |        | 428,000        |       | —      |       |
| Proceeds  received by NFS from exercise of stock options                     |       | 343,046                                    |        | 343,046        |       | —      |       |
| Issuance of  common stock for subscription receivable                        |       | 230,825                                    |        | 230,825        |       | —      |       |
| Conversion  of long-term debt to common stock                                |       | 685,000                                    |        | 685,000        |       | —      |       |
| Conversion  of notes payable to common stock                                 |       | 1,020,529                                  |        | 1,020,529      |       | —      |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

32

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**BPZ Energy,Inc and Subsidiaries**

(A Development Stage Company)

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**December 31, 2004 and 2003**

 

**Note1 – Basis of Presentation and Significant Accounting Policies**

** **

**Organization and Basis of Presentation**

 

BPZ Energy, Inc., a Colorado corporation (“BPZ” or the “Company”)was incorporated in 1993.  Based inHouston, Texas, BPZ is a development stage company with properties in northwestPeru and southwest Ecuador. The Company is focused on the development andproduction of oil and natural gas and the complementary development ofgas-fired power generation.

 

On September 10, 2004, BPZ Energy, Inc., a Texas corporation(“BPZ-Texas”), consummated a reverse merger with Navidec, Inc. (“Navidec”)whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).  The details of the Merger are discussed inNote 2 to the Consolidated Financial Statements.  On February 4, 2005, the Company changedits name to BPZ Energy, Inc. Although the Company’s name has been changed, the pre-merger company maybe referred to as Navidec in this filing to avoid confusion.

 

We maintain an office and a registered branch in Peru.  Currently, we have exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.76 million acres in northwest Peru. We acquired aminority working interest in the license contract for Block Z-1 in November 2001and subsequently acquired 100% ownership of the block in November 2004. Inaddition, we acquired a 100% working interest in the license contract for BlockXIX in December 2003. Generally, the terms of a license contract in Peruprovide for an initial exploration period of seven to ten years and a totalcontract period of 40 years for gas development and production and30 years for oil development and production.  In December 2003, we also entered into aTechnical Evaluation Agreement for Area VI and a Promotional TechnicalEvaluation Agreement for Area XVI. These latter two Agreements give us theright to conduct technical evaluations of those areas over a 24-month periodand the exclusive right to enter into license contracts if the evaluationsindicate the potential for profitable operations.

 

In June 2004, we acquired the capital stock of SMC Ecuador, Inc.,a Delaware corporation (“SMC”), which owns a 10% non-operated working interestin certain oil and gas producing properties located in the southwest region ofEcuador (the “Santa Elena Properties”). SMC has had its interest in the SantaElena Properties for the past eight years. The license agreement covering theproperty extends through May 2016.

 

The Company is in the development stage and to date our activities inPeru have been limited to analysis and evaluation of technical data on theproperties and preparation of the development plans for the properties. We havenot drilled any wells or recognized any revenues from our operations and do notanticipate generating significant revenues from our properties prior to mid-2006.

 

**Principles of Consolidation**

 

The consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries and branch offices.  Asdiscussed in Note 6 to the Consolidated Financial Statements, the Companyaccounts for its nominal ownership in Navidec Financial Services, Inc. (“NFS”)under the equity method.  Pursuant to theMerger Agreement, the Company is contractually bound to spin-off NFS to thepre-merger shareholders of Navidec. Pending the final distribution of NFS shares in the spin-off, theCompany is the nominal owner of a majority of the common shares of NFS, butdoes not control NFS.

 

The Company’saccounting policy regarding partnership or joint venture interests in oil andgas properties is to consolidate such interests on a pro-rata basis inaccordance with accepted practice in the oil and gas industry.  However, the Company has not been able toreceive timely information to allow it to proportionately consolidate the 10%non-operated working interest owned by its consolidated subsidiary, SMC EcuadorInc.  See Note 5 to the ConsolidatedFinancial Statements for detailed discussion regarding the Company’s investmentin SMC Ecuador.  Accordingly, the Companyhas made an election to account for this investment under the cost method.  As such, the Company will record its share ofcash received or paid attributable to this investment as other income orexpense.  Allintercompany balances and transactions have been eliminated.

 

**Reporting and Functional Currency**

 

The U.S. Dollar is the functional currency for our operations in bothPeru and Ecuador.  Ecuador has adoptedthe U.S. Dollar

 

33

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as its official currency.  Peru,however, uses its local currency, Nuevo Soles, in addition to the U.S. Dollarand therefore our financial results are subject to foreign currency gains andlosses.  We have adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 52, “Foreign CurrencyTranslation”, which requires that the translation of the applicable foreigncurrency into U.S. dollars be performed for balance sheet monetary accountsusing current exchange rates in effect at the balance sheet date, non-monetaryaccounts using historical exchange rates in effect at the time the transactionoccurs, and for revenue and expense accounts using a weighted average exchangerate during the period reported. Accordingly, the gains or losses resulting from such translation areincluded in other income and expense in the consolidated statements ofoperations.  Due to the relatively lowlevel of activity to-date and the relatively steady exchange rate in Peru, translationdifferences were immaterial.

 

**Use of Estimates**

 

Thepreparation of the consolidated financial statements in accordance with U.S.generally accepted accounting principles requires management to make certainestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets, liabilities,revenues and expenses in the consolidated financial statements, and thedisclosure of contingent assets and liabilities.  Actual results could differ from these estimates.

 

**Reclassifications**

 

Certain prior period amounts have been reclassified to conform to thecurrent financial statement presentation.

 

**Cash and Cash Equivalents**

 

The Company considers cash on hand, cash inbanks, money market mutual funds and highly liquid debt instruments purchasedwith an original maturity of three months or less to be cash equivalents.  Certain of the Company’s cash balances aremaintained in foreign banks which are not covered by deposit insurance.  The cash balance in the Company’s U.S. bankaccounts may exceed federally insured limits.

 

****Restricted Cash****

 

Asdiscussed in Note 7 to the Consolidated Financial Statements, the Company hassecured various performance bonds, primarily collateralized by certificates ofdeposit, to guarantee its obligations and commitments in connection with itsexploratory properties in Peru.  All ofthe performance bonds have been issued by Peruvian banks and their terms aredictated by the corresponding License Contract or Technical Evaluation Agreement.

 

**DebtFinancing Costs**

 

Asdiscussed in Note 4 to the Consolidated Financial Statements, certain financingcosts related to the acquisition of SMC Ecuador, Inc. have beencapitalized.  The deferred debt financingcosts are being amortized over the term of the financing.

 

****Property and Equipment****

 

TheCompany follows the “successful efforts” method of accounting of its costs ofacquisition, exploration and development of oil and gas properties.  Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the discovery of proved reserves and costs associatedwith development drilling, whether or not successful, are capitalized whenincurred.  Certain costs of exploratorywells are capitalized pending determinations that proved reserves have beenfound.  If the determination is dependentupon the results of planned additional wells and required capital expendituresto produce the reserves found, the drilling costs will be capitalized as longas sufficient reserves have been found to justify completion of the exploratorywell and additional wells are underway or firmly planned to complete theevaluation of the well.  All costsrelated to unsuccessful exploratory wells are expensed when such wells aredetermined to be non-productive or at the one year anniversary of completion ofthe well if proved reserves have not been attributed and capital expendituresas describe in the preceding sentence are not required.

 

Weassess our capitalized exploratory wells pending evaluation each quarter todetermine whether costs should remain capitalized or should be charged toearnings.  Other exploration costs,including geological and geophysical costs, are expensed as incurred.  Seismic costs incurred to select developmentlocations within a productive oil and gas field are typically treated asdevelopment costs and capitalized. Judgment is required to determine when the seismic programs are notwithin proved reserve areas and therefore would be charged to expense asexploration costs.  We recognize gains orlosses on the sale of properties, should they occur, on a field-by-field basis.

 

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As of December 31, 2004, property and equipmentconsists only of office equipment which is stated at cost and is depreciated ona straight-line basis over the estimated 3 year useful life of the assets.  Maintenance and repairs are expensed asincurred.  Replacements, upgrades orexpenditures which improve and extend the life of the assets arecapitalized.  When assets are sold,retired or otherwise disposed, the applicable costs and accumulateddepreciation and amortization are removed from the appropriate accounts and theresulting gain or loss is recorded.

 

**Impairment ofLong-Lived Assets**

 

TheCompany periodically evaluates the recoverability of the carrying value of itslong-lived assets, goodwill and identifiable intangibles by monitoring andevaluating changes in circumstances that may indicate that the carrying amountof the asset may not be recoverable. Examples of events or changes in circumstances that indicate that therecoverability of the carrying amount of an asset should be assessed includebut are not limited to the following:  asignificant decrease in the market value of an asset, a significant change inthe extent or manner in which an asset is used or a significant physical changein an asset, a significant adverse change in legal factors or in the businessclimate that could affect the value of an asset or an adverse action orassessment by a regulator, an accumulation of costs significantly in excess ofthe amount originally expected to acquire or construct an asset, and/or acurrent period operating or cash flow loss combined with a history of operatingor cash flow losses or a projection or forecast that demonstrates continuinglosses associated with an asset used for the purpose of producing revenue.

 

TheCompany considers historical performance and anticipated future results in itsevaluation of potential impairment. Accordingly, when indicators of impairment are present, the Companyevaluates the carrying value of these assets in relation to the operatingperformance of the business and future discounted and non-discounted cash flowsexpected to result from the use of these assets.  Impairment losses are recognized when theexpected future cash flows from an asset are less than its carrying value.

 

**Start-up Costs**

 

Start-up costs, including organizational restructuring expenses, areexpensed as incurred.

 

**Stock Based Compensation**

 

Aspermitted under SFAS 123, “Accounting for Stock-Based Compensation,” theCompany accounts for its stock-based compensation for options issued toemployees in accordance with the provisions of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”).  As such, for options granted to employees anddirectors, compensation expense is recorded on a straight-line basis over theshorter of the period that the services are provided or the vesting period,only if the current market price of the underlying stock exceeds the exerciseprice.  Transactions in equityinstruments with non-employees for goods or services are accounted for underthe fair value method.

 

**Income Taxes**

 

TheCompany accounts for income taxes using the liability method.  Under this method, deferred tax assets andliabilities are determined based on differences between the financial reportingand tax basis of assets and liabilities, and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse.  Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.

 

**Environmental**

 

TheCompany is subject to environmental laws and regulations of various U.S. andinternational jurisdictions.  These laws,which are constantly changing, regulate the discharge of materials into theenvironment and may require the Company to remove or mitigate the environmentaleffects of the disposal or release of petroleum or chemical substances atvarious sites.

 

Environmentalcosts that relate to current operations are expensed or capitalized asappropriate.  Costs are expensed whenthey relate to an existing condition caused by past operations and will notcontribute to current or future revenue generation.  Liabilities related to environmentalassessments and/or remedial efforts are accrued when property or services areprovided or can be reasonably estimated.

 

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**Loss per Common Share**

 

In accordance with provisions of SFAS No. 128, Earnings per Share,basic earnings per share is computed on the basis of the weighted-averagenumber of common shares outstanding during the periods.  Diluted earnings per share is computed basedupon the weighted-average number of common shares outstanding plus the assumedissuance of common shares for all potentially dilutive securities.  Diluted earnings per share equals basicearnings per share for the periods presented because the effects of potentiallydilutive securities are antidilutive.

 

**New Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123(R) “Share-Based Payment”, which supersedes SFAS No. 148“Accounting for Stock-Based Compensation – Transition and Disclosure” anamendment to SAFS No. 123.  SFAS123(R) establishes standards for transactions in which an entity exchanges itsequity instruments for goods or services. This standard requires a public entity to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thiseliminates the exception to account for such awards using the intrinsic methodpreviously allowable under APB 25.  SFAS No. 123(R)also requires a public entity to present its cash flows provided by taxbenefits from stock options exercised in the Financing Cash Flows section ofthe Statement of Cash Flows.  Publiccompanies with a calendar year-end will be required to adopt the provisions ofthe standard effective for periods beginning on or after December 15,2005.  As we intend to use stock-basedcompensation in the future as a component of employee compensation, and we havepreviously followed the intrinsic method, the implementation of thispronouncement will reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be quantified at this time.

 

In December 2004, the FASB issued SFAS No. 153 “Exchanges ofNon-monetary Assets”, an amendment of APB Opinion 29, for non-monetaryexchanges of similar productive assets. SFAS No. 153 replaces this exception with a general exception fromfair value measurement for exchanges of non-monetary assets that do not havecommercial substance.  A non-monetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS No. 153 is not expected to effectour consolidated financial statements.

 

**Note 2 – Acquisition of Navidec**

 

On July 8, 2004, Navidec and BPZ-Texasentered into a Merger Agreement which wasconsummated on September 10, 2004. The Merger was structured from a legalstandpoint as the acquisition of BPZ-Texas by Navidec.  However, in the Merger, the stockholder groupof BPZ-Texas obtained majority ownership and management control of the combinedCompany.  Accordingly, for accounting purposes,the Merger was treated as a reverse merger of Navidec by BPZ-Texas.  All financial statements presented hereinrepresent the historical financial statements of the accounting acquirer,BPZ-Texas.  BPZ entered into the mergerprimarily to give it access to the public markets in financing its developmentactivities in South America.

 

As consideration for the Merger, BPZ-Texas issued 3,198,368 shares of its common stock in a one-for-one exchange for all of the outstanding common shares of Navidec.  In addition, BPZ-Texas assumed options to purchase 1,332,076 shares of Navidec common stock, which had previously been issued to employees, directors and consultants of Navidec and were outstanding on the date of the Merger.  Under the terms of the Merger Agreement, the proceeds received from the exercise of these stock options are payable to NFS.  BPZ-Texas also assumed outstanding warrants to purchase 1,129,000 shares of Navidec common stock.  In addition, BPZ-Texas granted to NFS fully vested warrants to purchase 1,500,000 shares of common stock at an exercise price of $2.00 per share and issued 662,149 new shares of common stock to NFS.  See Note 9 of the Notes to Consolidated Financial Statements for details about the stock options and warrants assumed or granted in connection with the Merger.

 

The aggregate consideration given by BPZ-Texas for the acquisition of Navidec was $7,498,924, consisting wholly of equity securities issued. The BPZ-Texas stock issued in connection with the acquisition was valued at $1.48 per share, which was the average closing price of Navidec’s common stock quoted on the OTCBB market during a five-day trading period beginning two trading days prior to the announcement of the Merger Agreement on July 8, 2004.  Navidec was publicly traded and had a market for its equity while BPZ-Texas was privately owned.  The stock options assumed and warrants issued or assumed were valued using the Black-Scholes model.  Inputs into the Black–Scholes valuation model for the valuation of the warrants and stock options included the exercise price and remaining term for the stock options and warrants, and a volatility factor based on historical stock prices of Navidec.

 

The merger has been accounted for using the purchase method of accounting, in accordance with SFAS No. 141.  The

 

36

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acquisition was recorded on September 10, 2004, the date the Merger was consummated.  The results of operations of Navidec have been included in the Company’s results since September 1, 2004, for convenience purposes.

 

The following summarizes the purchase consideration given for the acquisition of Navidec:

 

**PurchaseConsideration**

 
| **Description**                              | ** ** | **Shares** | ** ** | **Purchase Consideration** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|
| Common stock  issued to Navidec shareholders |       | 3,198,368  |       | $                          | 4,733,585  |   |
| BPZ common  stock issued to NFS              |       | 662,149    |       | 979,980                    |       |
| BPZ warrants  issued to NFS                  |       | 1,500,000  |       | 705,000                    |       |
| Assumption  of Navidec stock options         |       | 1,332,076  |       | 865,849                    |       |
| Assumption  of Navidec warrants              |       | 1,129,000  |       | 214,510                    |       |
| Total purchase consideration                 |       |       |       | $                          | 7,498,924  |   |

 

BPZ allocated the purchase price to assets acquired and liabilities assumed at estimated fair values at the acquisition date.  The excess of purchase price over the fair value of the net assets acquired as of the acquisition date have been reflected as goodwill in accordance with SFAS No. 141.  The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

**Purchase Price Allocation**

 
| ** **                                                                  | ** ** | **Value**     | ** ** |
|-----------------------------------------------------------------------------|------------|---------------|------------|
| **Description**                                                             | ** ** | **Allocated** | ** ** |
| Cash and  marketable securities                                             |       | $             | 681,220    |   |
| Property,  equipment and other                                              |       | 85,658        |       |
| BPZ common  stock issued to NFS (662,149 shares)                            |       | 2,125,498     |       |
| Warrants to  purchase BPZ common stock issued to NFS (1.5 million warrants) |       | 2,640,000     |       |
| Mortgage  business, net of minority interest                                |       | 240,000       |       |
| Goodwill                                                                    |       | 2,160,753     |       |
| Accounts  payable, accrued liabilities and note payable                     |       | (434,205      | )          |
|                                                                        |       |          |       |
| Total purchase price allocation                                             |       | $             | 7,498,924  |   |

 

Of the amounts shown above, $681,220 has been allocated to cash and marketable securities instead of a reduction to the purchase price because the cash remained with NFS following the Merger and is not available for use by the Company.  The tax consequences of the merger have not been fully analyzed. However, it is believed that the excess of the purchase price over the net assets acquired will not be deductible for tax purposes.

 

The following unaudited information presents the pro forma effects of the Merger as if it had occurred on January 1, 2003:

 

Pro Forma Effects of the Merger (Unaudited)

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** **  |
|---------------------------------------------|------------|----------------------------------|-------------|
| ** **                                  | ** ** | **2004**                         | ** **  | **2003** | ** ** |
| Revenues                                    |       | $                                | —      |   | $ | — |   |
| Net loss                                    |       | $                                | (11,191,671 | ) | $ | (4,205,622 | ) |
| Net loss per  share (basic and diluted)     |       | $                                | (1.00       | ) | $ | (0.53 | ) |
| Weighted  average common shares outstanding |       | 11,227,137                       |        | 7,963,971 |   |

 

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**NFS Spin-off**

 

TheMerger Agreement also required the transfer of all of the pre-merger businessassets and liabilities of Navidec to its wholly owned subsidiary, NFS, and thespin-off of NFS to the shareholders of record of Navidec as of September 9,2004, the date prior to the Merger.  Upon consummation of the Merger, BPZbecame contractually and irrevocably bound to the spin-off of NFS to suchpre-Merger shareholders.  All legalrequirements for the spin-off of NFS have been completed except forregistration of the spin-off with the Securities and Exchange Commission andthe final distribution of NFS common shares to the pre-merger shareholders ofthe Company.  Pending such finaldistribution of NFS common shares, the Company remains the nominal owner ofthose shares, which are being held for the benefit of the spin-offshareholders.  The Company accounts forits nominal investment in NFS under the equity method, as discussed in Note 6of the Notes to Consolidated Financial Statements.  The Company is continuing to assist themanagement of NFS, as requested, in its efforts to consummate the spin-off ofNFS, but has no control over the registration process of NFS and cannot predictwhen the management of NFS will be able to complete the final distribution ofNFS common shares.

 

**Note 3 - Restatement of Financial Statements**

 

Thepreviously issued consolidated financial statements of the Company for the yearended December 31, 2004 have been restated for the issues described below:

 

**Accountingfor NFS**

 

OnNovember 17, 2005, the Company concluded that it needed to amend and restatecertain of its previously issued financial statements and other financialinformation to reflect its nominal ownership interest in NFS.

 

Upon consummation of the Merger, BPZ became contractually and irrevocablybound to spin-off NFS to the pre-merger shareholders of Navidec.  Subsequent to the Merger, the Company and NFShave operated their respective businesses autonomously and the Company does notcontrol NFS.  The Company, inconsultation with its independent accountants and legal counsel, had previouslyconcluded that the spin-off of NFS had been consummated in substance from alegal perspective prior to the Merger, and that the financial statements of theCompany should properly reflect the spin-off transaction as legally consummatedon the date of the Merger.  Accordingly,the previous consolidated financial statements of the Company excluded itsnominal ownership of NFS.  Based on thefact that NFS had not completed the final distribution of its shares to thepre-merger shareholders, the Company now concludes that its consolidatedfinancial statements should be restated to reflect the inclusion of NFS untilsuch time as the final distribution of NFS shares to the shareholders entitledto such spin-off shares has been completed in all respects.

 

NFS will continue to be reflected in the financial statements of theCompany until such time as the final spin-off is consummated.  Based on the fact that the Company does notcontrol NFS, the Company is accounting for its nominal investment in NFS underthe equity method until the spin-off is consummated.  Under the equity method, the Company recordsits proportionate share of NFS’ net income or losses.  Additionally, to the extent that NFS engagesin independent common stock transactions with third parties, the Company willrecord a gain or loss to the extent that the consideration received by NFS fromsuch transactions is more or less than the Company’s cost basis per share.

 

The Company has now restated its financial statements to account forthe Merger with Navidec, Inc. under FASB 141. The details of the accounting for this business combination arepresented in Note 2 to the Consolidated Financial Statements.

 

**Intercompany Transactions with BPZ and Associates, Inc.**

 

AtDecember 31, 2003, the Company had a net receivable of $162,890 due fromBPZ & Associates, Inc., which was the parent of the Company priorto the Merger.  Additionally, BPZ Energy, Inc.made additional cash payments to BPZ & Associates, Inc. totaling$789,501 prior to the Merger.  Inconnection with the Merger, the shares of BPZ-Texas which were held by BPZ &Associates, Inc. were distributed to the shareholders of BPZ &Associates, Inc. in a corporate reorganization. Additionally, all intercompany advances receivable from BPZ &Associates, Inc. were forgiven.  TheCompany initially recorded the forgivenss of these intercompany advances as ifthey were a dividend payment from BPZ-Texas to BPZ & Associates, Inc.  However, BPZ-Texas did not have sufficientcapital to declare a dividend of this amount. Accordingly, the Company re-analyzed the nature of these expendituresand concluded that essentially all of these costs should be characterized asexpenditures which were incurred for the benefit of BPZ-Texas.  Of such payments, $370,000 was determined torelate to the acquisition of SMC Ecuador, Inc., of which $167,500 was paidto third parties and $202,500 was for the benefit of BPZ & Associates, Inc.  The remaining balance of $582,391 was attributableto personnel and office expenses incurred by BPZ & Associates, Inc.on behalf of BPZ-Texas and has been recorded as part of the Company’s generaland administrative expenses.

 

**Development Stage Company**

 

In connection with the accounting restatement, the Company alsoreviewed the current state of its operations to determine whether it should beclassified as a “development stage company.” With the June 2004 acquisition of SMC Ecuador, Inc., which owns adirect interest in the Santa Elena Property, the Company expected to recordrevenues from this property using the pro-rata method of consolidation as iscustomary in the oil and gas industry. However, difficulties in getting accurate and timely information fromthe operator of the property prevented the Company from using the pro-ratamethod of consolidation.  Accordingly,the Company accounts for this property under the cost method and no revenuesare recorded.

 

A development stage company is defined as one in which (a) plannedprincipal operations have not commenced, or (b) planned principaloperations have commenced, but there has been no significant revenuetherefrom.  Based on this definition, theCompany concluded that it is most appropriate to classify itself as a “developmentstage company” and now includes this description on its financial statements.The Company also reports cumulative amounts from inception in its financialstatements.

 

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**Amortization of Stock-based Compensation**

 

In connection with the restatement, the Company realized that it hadinadvertently failed to continue the amortization of the stock-basedcompensation attributable to the 500,000 stock options granted to the formerCEO of Navidec.  These shares vest whenthe Company receives additionalinvestment proceeds totaling $6 million, including proceeds from the exerciseof outstanding warrants, provided such funding is received no later than September 10,2006.  The additionalamortization was $75,000 for the period ended December 31, 2004.

 

**Amortization of Investment in SMC Ecuador**

 

The Company established an accounting policy in the first quarter of2005 to amortize the investment in SMC Ecuador over the expected life of thecontract, since the investment consists primarily of oil and gas properties,which are a depleting asset.  This changewas made prospectively at the time.  Inconnection with the restatement, the Company adjusted its results for the yearended December 31, 2004 to commence this amortization on the date of theacquisition of the interest.  Thisadditional amortization totaled $42,760 for the year ended December 31,2004.

 

The effects of the restatement on the balance sheet as of December 31,2004 are reflected in the table below:

 
| ** **                                                 | ** ** | ** **   | ** ** | **Originally** | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|
| ** **                                                 | ** ** | **Restated** | ** ** | **Reported**   | ** ** | **Difference** | ** ** |
| ASSETS                                                     |       |         |       |           |       |           |       |
| Current  assets                                            |       | $            | 4,186,350  |           | $          | 4,186,350      |       | $ | — |   |
| Property and  equipment, net                               |       | 5,505        |       | 5,505          |       | —         |       |
| Investment  in Navidec Financial Services                  |       | 1,130,511    |       | —         |       | 1,130,511      |       |
| Investment  in SMC Ecuador, net                            |       | 969,240      |       | 642,000        |       | 327,240        |       |
| Total assets                                               |       | $            | 6,291,606  |           | $          | 4,833,855      |       | $ | 1,457,751 |   |
|                                                       |       |         |       |           |       |           |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                  |       |         |       |           |       |           |       |
| Liabilities                                                |       | $            | 574,941    |           | $          | 574,940        |       | $ | — |   |
| Stockholders’  equity:                                |       |         |       |           |       |           |       |
| Common stock                                               |       | 17,478,446   |       | 13,393,286     |       | 4,085,160      |       |
| Additional paid-in capital                                 |       | 2,341,795    |       | 9,502,625      |       | (7,160,830     | )          |
| Common stock and warrants held by affiliate                |       | (2,854,181   | )          | —         |       | (2,854,180     | )          |
| Stock subscription receivable                              |       | (230,825     | )          | (230,825       | )          | —         |       |
| Deficit accumulated during the development  stage          |       | (11,018,570  | )          | (18,406,171    | )          | 7,387,601      |       |
| Total stockholders’ equity                            |       | 5,716,665    |       | 4,258,915      |       | 1,457,751      |       |
| Total liabilities and stockholders’ equity  (deficit) |       | $            | 6,291,606  |           | $          | 4,833,855      |       | $ | 1,457,751 |   |

 

The net effect of the above adjustments on the balance sheet was toincrease total assets and stockholders’ equity by $1,457,751.  Of such amount, the effect of the decision toaccount for NFS as an acquisition under SFAS 141 resulted in a increase of $1,130,511and the net effect of adjustments to SMC Ecuador totaled $327,240.  The accumulated deficit was reduced by $7,387,601as a result of the reduction to the loss for the year ended December 31,2004, as discussed below.

 

The effects of the restatement on the income statement for the yearended December 31, 2004 are reflected in the table below:

 
| ** **                                               | ** ** | ** **   | ** ** | **Originally** | ** ** | ** **     | ** ** |
|----------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|
| ** **                                               | ** ** | **Restated** | ** ** | **Reported**   | ** ** | **Difference** | ** ** |
|                                                     |       |         |       |           |       |           |       |
| Revenue                                                  |       | $            | —     |           | $          | —         |       | — |   |
| Operating  and administrative expenses:                  |       |         |       |           |       |           |       |
| General and administrative                               |       | 1,753,084    |       | 1,170,536      |       | 582,391        |       |
| Stock-based compensation                                 |       | 4,414,935    |       | —         |       | 4,414,935      |       |
| Geological, geophysical and engineering                  |       | 360,965      |       | 360,965        |       | —         |       |
| Total operating expenses                                 |       | 6,528,984    |       | 1,531,658      |       | 4,997,326      |       |
| Operating loss                                           |       | (6,528,984   | )          | (1,531,658     | )          | (4,997,326     | )          |
|                                                     |       |         |       |           |       |           |       |
| Other income  (expense):                                 |       |         |       |           |       |           |       |
| Investment income from SMC Ecuador, net of  amortization |       | 147,861      |       | 190,621        |       | (42,760        | )          |
| Equity in loss of Navidec Financial  Services            |       | (1,964,103   | )          | —         |       | (1,964,103     | )          |
| Loss on issuance of equity securities by  NFS            |       | (1,893,176   | )          | —         |       | (1,893,176     | )          |
| Interest expense                                         |       | (66,959      | )          | (66,959        | )          | —         |       |
| Amortization of deferred financing costs                 |       | (360,439     | )          | (360,439       | )          | —         |       |
| Merger costs                                             |       | —       |       | (16,284,966    | )          | 16,284,966     |       |
| Miscellaneous income                                     |       | 13,129       |       | 13,129         |       | —         |       |
| Total other income (expense)                             |       | (4,123,687   | )          | (16,508,614    | )          | 12,384,927     |       |
|                                                     |       |         |       |           |       |           |       |
| Net loss                                                 |       | (10,652,671  | )          | (18,040,272    | )          | 7,387,601      |       |
|                                                     |       |         |       |           |       |           |       |
| Basic and  diluted net loss per share                    |       | $            | (1.24      | )              | $          | (2.08          | )          | $ | 0.84 |   |
|                                                     |       |         |       |           |       |           |       |
| Weighted  average common shares outstanding              |       | 8,558,528    |       | 8,689,988      |       | (131,460       | )          |
|                                                          |            |              |            |                |            |                |            |  |  |  |

 

39

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Theprimary differences between the restated and originally reported incomestatement amounts relate to the treatment of the Navidec merger transaction asan acquisition pursuant to SFAS No. 141, whereas the majority of these amountswere originally expensed as Merger costs, with a total charge of$16,284,966.  Of this amount, $11,945,031was eliminated in the restatement and $4,339,935 was reclassified tostock-based compensation expense.  Inconnection with the re-characterization of these Merger costs to acquisitionaccounting under SFAS 141, the Company also concluded that it was mostappropriate to value the equity instruments issued or assumed in the Merger asof the date the Merger was announced, July 8, 2004, in accordance with SFAS141.  The Merger costs were originallymeasured on the date of closing.

 

Inaddition to the above adjustments, the Company’s continuing nominal ownershipof NFS pending consummation of the spin-off caused the Company to record itsproportionate share of NFS’s losses, totaling $1,964,103.  Additionally, equity issuances by NFS atprices below the Company’s basis per share caused additional charges toearnings totaling $1,893,176.

 

Insummary, the modification to treat the Company’s nominal ownership of NFS as anacquisition pursuant to SFAS No. 141 and the results from its continuingownership resulted in an overall reduction to the previously reported net lossof $8,087,752.  This amount was partiallyoffset by increased expenses of $582,391 related to the re-characterization ofintercompany transactions with BPZ & Associates, Inc. and other adjustmentsto stock-based compensation and amortization of the investment in SMC Ecuador,which together totaled $117,760.  Theoverall effect was a reduction in the net loss of $7,387,601.

 

**Note 4 – Other Current Assets**

 

Othercurrent assets of $72,159 at December 31, 2004 consisted primarily ofcapitalized financing costs related to the acquisition of SMC Ecuador, Inc. The Company is amortizing these costs toexpense over the term of the financing. In addition, the Company expensed $360,439 of deferred financing costspursuant to the conversion of part of the note payable to common stock, asdiscussed in Note 5 of the Notes to Consolidated Financial Statements.

 

**Note 5 – Investment in SMC Ecuador and Notes Payable**

 

In June 2004, BPZacquired 100% of the common stock of SMC Ecuador, Inc., a Delawarecorporation (“SMC”), the owner of a 10% interest in a non-operated oil and gasproducing property located in the Republic of Ecuador (the “Santa ElenaProperty”).  The total purchase price forthe property was $1,440,000, including $1,070,000 paid to the seller to acquirethe common stock of SMC, $100,000 in transaction costs and $270,000 to acquirea separate net profits interest in the Santa Elena Property.  This net profits interest had been acquiredin 2002 by an affiliate of the Company and a third party.  The amount paid for of the net profitsinterest owned by the affiliate was $202,500 as discussed in Note 10 of theNotes to Consolidated Financial Statements.

 

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To finance theacquisition, BPZ entered into a debt arrangement in the amount of $1,375,000(the “Loan”) with an individual (the “Lender”). The Loan was to be repaid in 36 monthly installments with interest at15%.  The Lender held a first lien on thecommon stock of SMC as collateral.  Uponfull repayment of the Loan by BPZ, the Lender was entitled to receive ownershipof forty percent (40%) of the interest of SMC in the Santa Elena Property (or a4% derivative working interest in the Santa Elena Property).  Accordingly40% of the direct acquisition cost, or $428,000, was treated for accountingpurposes as deferred financing costs. These deferred financing costs were recorded as a reduction of therecorded cost of the investment and were capitalized as other assets, pendingamortization as additional financing costs over the term of the Loan.

 

In September 2004, BPZ entered into a newagreement under which BPZ converted $1,000,000 of the principal balance of theLoan, plus $20,529 of accrued interest, into 500,000 shares of Companystock.  The remaining balance of theLoan, or $293,136, will be payable in 10 equal monthly installments withinterest imputed at 15%.  The agreementto convey beneficial ownership of a 4% derivative working interest in the SantaElena Properties was also accelerated to the date of the agreement.  Accordingly, BPZ now owns a 6% effective workinginterest in the Santa Elena Properties. As of December 31, 2004, theremaining balance of the note payable, or $208,986, will be payable in sevenmonthly installments plus interest.

 

The Company’s accounting policy regardingpartnership or joint venture interests in oil and gas properties is toconsolidate such interests on a pro-rata basis in accordance with acceptedpractice in the oil and gas industry. However, the Company has not been able to receive timely information toallow it to proportionately consolidate its 6% non-operated working interest inthe Santa Elena Property.  Accordingly,the Company has made an election to account for this investment under the costmethod.  As such, the Company records itsshare of cash received or paid attributable to this investment as other incomeor expense.  Since substantially all of theassets of SMC consist of producing oil and gas properties, the Company isamortizing this investment on a straight-line basis over the remaining term ofthe license agreement which expires in May of 2016.  Accordingly, we recorded $42,760 ofamortization expense for the year ended December 31, 2004.

 

**Note 6 – Investment in Navidec Financial Services(NFS)**

 

As discussed in Note 2 to theConsolidated Financial Statements, the Company is contractually bound tospin-off NFS to the pre-merger shareholders of Navidec.  Pending the distribution of NFS common sharesto the beneficiaries of the spin-off, the Company is the nominal owner of thoseshares.  While the Company may be deemedto have majority nominal ownership of the common stock of NFS, it does notcontrol NFS.  As such, the Company hasdetermined that the equity method of accounting is the most appropriate mannerto reflect its nominal ownership of NFS during the period of time between theMerger and its ultimate spin-off to the pre-merger shareholders of Navidec.

 

NFS was formed in December 2002and is organized into three divisions: business development, mortgage servicesand technology.  The business developmentdivision focuses on identifying development stage companies and assisting intheir growth by providing capital, consulting, personnel and other services,both internally and through the use of subcontractors.  The mortgage division provides loanorigination and refinancing services in the residential and commercial mortgagemarket, primarily in the Phoenix, Arizona area. NFS previously had technology operations which provided solutions thatenabled organizations to manage secure access to web applications within theenterprise and across the business value chain. Such operations were inactive as of December 31, 2004, but NFS hasindicated that it intends to re-enter this line of business.  The majority of the revenues of NFS for theperiod subsequent to the Merger were derived from mortgage services.

 

As of the date of the Merger, NFShad 5,177,748 common shares outstanding, which shares are held by the Companyfor the benefit of the spin-off shareholders. On September 21, 2004, the Board of Directors of NFS awarded1,200,000 fully vested NFS common shares and options to purchase 1,200,000 NFScommon shares at a cost of $0.05 per share to the management of NFS.  This transaction resulted in the nominalownership of BPZ being reduced from 100% to 81.2% (68.3% on a fully dilutedbasis).  To the extent that NFS conveysit shares or stock options to third parties for a per-share value less than theCompany’s nominal basis in its investment in NFS, the issuance of these sharesor stock options by NFS will result in a loss to the Company.  The issuance of the above shares and stockoptions to the management of NFS resulted in a recorded loss to the Company of$1,784,528.

 

Additionally, pursuant to theMerger Agreement, NFS is entitled to the proceeds received from the exercise ofpre-merger stock options which were assumed by the Company in the Merger.  During the period from the effective date ofthe Merger through December 31, 2004, NFS received stock option proceedsof $343,046.  This amount is treated foraccounting purposes as an additional investment in NFS by the Company.  To the extent that the Company has less than100% nominal ownership of NFS, the receipt of stock option proceeds by NFSresults in a loss to the Company based on the minority interest in NFS.  During this period, the Company recorded aloss of $108,648 attributable to these stock option exercises.

 

41

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NFS recognized a net loss of$2,419,000 during the period from the date of the Merger through December 31,2004.  The majority of this loss resultedfrom non-cash charges of $1,861,000 related to stock-based compensation and theconveyance of BPZ warrants held by NFS to third parties.  Additionally, there were cash bonuses of$448,000 paid to the management of NFS during the period.  Based on its nominal ownership of 81.2% ofNFS, the Company recognized a loss of $1,964,000 during the period from itsinvestment in NFS.

 

The Company will not benefiteconomically from any positive operating results of NFS because it does nothave beneficial ownership of or access to the cash or other assets of NFS.  The Company is not entitled to receive anydistributions or dividends from NFS, nor could it cause NFS to declare adividend because it does not control NFS. Additionally, the Company is not directly or indirectly obligated forthe liabilities, commitments or other obligations of NFS.  However, the Company’s reported financialresults may be materially affected should NFS continue to suffer adverseoperating results even though these adverse results would not affect the cashflows of the Company.

 

NFS will continue to be reflectedas an equity investment in the financial statements of the Company until suchtime as the final distribution of NFS shares in the spin-off isconsummated.  This is expected to requirean effective registration statement with the SEC.  The Company is continuing to assist themanagement of NFS, as requested, in its efforts to consummate the spin-off ofNFS, but has no control over the registration process of NFS and cannot predictwhen the management of NFS will be able to complete the final distribution ofNFS common shares.  The Company’sstockholders’ equity will be reduced by the recorded amount of the investmentin NFS at such time as the spin-off is consummated.  As of December 31, 2004, stockholders’equity and the investment in NFS would have been reduced by $1.1 millionif the spin-off had been consummated on that date.

 

The following table presents the condensed statement of operationsinformation for the period from the effective date of the Merger through December 31,2004 and the condensed balance sheet information for NFS as of December 31,2004:

 

**Navidec Financial Services, Inc. (NFS):**

 
| ** **                                      | ** ** | **From September 10, 2004  through** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **December 31, 2004**           | ** ** |
| Condensed  income statement information:        |       |                                 |       |
|                                            |       |                                 |       |
| Net revenues                                    |       | $                                    | 576,000    |   |
|                                            |       |                                 |       |
| Gross margin                                    |       | $                                    | 521,000    |   |
|                                            |       |                                 |       |
| Net loss                                        |       | $                                    | (2,419,000 | ) |
|                                            |       |                                 |       |
| Company’s  equity in net loss of affiliate |       | $                                    | (1,964,000 | ) |

 
| ** **                                 | ** ** | **As of  December 31, 2004** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| Condensed  balance sheet information:      |       |                              |       |
|                                       |       |                              |       |
| Current  assets                            |       | $                                 | 550,000    |   |
| Investment  in BPZ securities              |       | 4,276,000                         |       |
| Goodwill                                   |       | 2,139,000                         |       |
| Other  noncurrent assets                   |       | 34,000                            |       |
| Total assets                               |       | $                                 | 6,999,000  |   |
|                                       |       |                              |       |
| Current  liabilities                       |       | $                                 | 483,000    |   |
| Minority  interest                         |       | 64,000                            |       |
| Stockholders’  equity                 |       | 6,452,000                         |       |
| Total liabilities and stockholders' equity |       | $                                 | 6,999,000  |   |

 

As of December 31,2004, the carrying amount of the Company’s investment in NFS, including theadjustment for BPZ common stock and warrants held by NFS, was less than itsproportionate fully diluted share of stockholders’ equity of NFS byapproximately $424,000.  This differenceresulted primarily from unrealized gains on BPZ securities which were recordedby NFS, but eliminated from the consolidated financial statements of theCompany and differences in the accounting for stock option proceeds received byNFS.

 

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###### **Note7 – Restricted Cash and Other Assets**

###### ** **

As of December 31,2004, the Company had posted performance bonds totaling $340,000 to secure theperformance of its obligations and commitments related to its properties inPeru.  Of such amount, $100,000 wascollateralized by a restricted cash deposit. The $100,000 restricted cash deposit is classified as a current asset asthe Company had met its obligations under the license contract and theperformance bond expires in March 2005. The remaining $240,000 performance bonds have been guaranteed bytwo individual shareholders of the Company. As of December 31, 2003, the Company had performance bonds totaling$240,000 to guarantee its obligations and commitments.  All of the performance bonds were issuedby Peruvian banks and their terms are governed by the corresponding licensecontract or technical evaluation agreement.

 

###### **Note8 – Long-Term Debt**

###### ** **

On December 31, 2003, the Company hadlong-term debt of $755,000, consisting of two unsecured notes payable toindividuals.  Both notes had similarterms, bearing interest at 7%, with payments of interest due on a monthly basisand the principal balance due at maturity in February 2006.  Pursuant to the Merger, the outstanding long-term debt of theCompany, totaling $685,000, was converted into 1,802,376 shares of common stock.  Therewas no long-term debt outstanding at December 31, 2004.

 

**Note 9 – Stockholders’ Equity**

 

As of December 31, 2004, the Company had 20,000,000 shares ofcommon stock, no par value, authorized by its Amended and Restated Certificateof Incorporation, of which 16,581,385 had been issued.  Of such shares, 557,903 were held byNFS.  For accounting purposes, the452,931 shares attributable to the Company’s 81.2% equity interest in NFS arereflected as treasury shares. Accordingly, there were 16,128,454 shares outstanding as of December 31,2004.  As of December 31, 2003,there were 4,103,454 shares issued and outstanding.

 

**Private Placement of Common Stock**

 

On September 30, 2004, the Company completed a private placement of 3,000,000 shares of common stock for total gross proceeds of $6,000,000.  Net proceeds were approximately $5,507,000 after payment of placement agent fees of $360,000 and other offering expenses.  Completion of this offering with gross proceeds of at least $3,000,000 was a requirement of the Merger.

 

Additionally, the Company issued 236,528 shares to an individual investor for $119,175 of cash proceeds and a subscription receivable of $230,825.  This investor has pledged assets to a Peruvian bank which secure one of the Company’s performance bonds.  The subscription receivable is due at such time as the Company obtains its own performance bond to replace the one posted by the investor or until such performance bond is no longer required.

 

**Stock Issued for Services**

 

Prior to the Merger, BPZ issued 2,857,642 shares of common stock to directors, officers, employees, consultants and financial advisors of BPZ Energy, Inc. as compensation for services.  Such shares were valued at $1.30 per share, which was the price of the Company’s common stock on July 8, 2004, the date such shares were granted.  All of the shares were fully vested on the date of issuance.  The issuance of these common shares for services resulted in a charge to the income statement for stock-based compensation of $3,714,935.

 

**Common Stock and Warrants Held by Affiliate**

 

As discussed in Note 2 to the Consolidated Financial Statements, NFS holds common stock and warrants in the Company.  For accounting purposes, these common shares and warrants are treated as treasury securities and are recorded as a reduction of stockholders’ equity.  As of December 31, 2004, NFS held 557,903 shares of the BPZ common stock valued at $3.21 per share at the date of the Merger, or $1,790,869 in the aggregate, and warrants to purchase 980,000 shares of BPZ common stock at an exercise price of $2.00 per share.  The warrants were valued using the Black-Scholes model at $1.76 per share at the date of the Merger, or $1,724,800 in the aggregate.  The BPZ common stock and warrants held by NFS attributable to the Company’s 81.2% interest in NFS have an aggregate value of $2,854,181.

 

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**Potentially Dilutive Securities**

 

In addition to the shares issued and outstanding, the Company has the following potentially dilutive securities.  None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive.

 
| ** **                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Stock  options outstanding            |       | 2,055,041             |       | —                |       |
| Warrants  outstanding                 |       | 2,629,000             |       | —                |       |
| Contingent  Merger earn-out shares    |       | 18,000,000            |       | —                |       |
| Total potentially dilutive securities |       | 22,684,041            |       | —                |       |

 

**Stock Options Outstanding**

 

In connection with the Merger, BPZ, as the accounting acquirer, assumed1,332,076 Navidec stock optionsoutstanding.  All stockoptions were fully vested on the date of the Merger and expire on September 10,2007.  Exercise prices on these stock options rangefrom $1.30 to $2.70 per share.  Under theterms of the Merger agreement, the Company does not receive any of the proceedsfrom the exercise of these stock options. Pursuant to the Merger agreement, NFS is entitled to receive allproceeds from the exercise of these options. During the period between the Merger and December 31, 2004, 220,868stock options were exercised and 56,167 stock options expired.  As of December 31, 2004, there were1,055,041 Navidec stock options outstanding.

 

Additionally, the Company granted options topurchase 1,000,000 shares of common stock at an exercise price of $1.30 pershare to the former CEO of Navidec in connection with his service as a directorand financial consultant to the Company. Of such stock options, 500,000 were fully vested on the date of theMerger.  The remaining 500,000 stockoptions will vest upon the receipt of additional investment proceeds totaling$6 million, including proceeds from the exercise of outstanding warrants,provided such funding is received no later than September 10, 2006.  These stock options, when vested, expire 10years from date of grant.  They wererecorded at a fair value of $1.20 per share using the Black-Scholes model.  This resulted in stock-based compensation of$600,000 for the fully-vested options and $100,000 for the amortization of theunvested options.  The unvested optionswill be amortized over the remaining 20-month vesting period unless the Companyconcludes that suchoptions are no longer probable of vesting.

 

All of the above stock options were recorded at fairmarket value on the date of the Merger. Accordingly, no disclosure of pro forma results of operations under SFASNo. 123 is required.

 

**Warrants Outstanding**

 

In connection with the Merger, BPZ, as theaccounting acquirer, assumed outstanding warrants to purchase 1,129,000 sharesof the Company’s common stock.  Of thistotal, 564,500 Class A warrants have an exercise price of $2.00 per shareand 564,500 Class B warrants have an exercise price of $4.00 pershare.  All of such warrants expire on August 31,2005, unless there are delays in obtaining the effectiveness of a registrationstatement which includes the warrants. The warrants are callable if the stock trades at or above the exerciseprice for a period of 10 consecutive days and there is an effectiveregistration statement which includes the warrants.

 

Also in connection with the Merger, BPZ issued toNFS warrants to purchase 1,500,000 shares of common stock at an exercise priceof $2.00 per share.  Such warrants expireon July 31, 2006.

 

**Merger Earn-Out Shares**

 

Underthe terms of the Merger Agreement, the Company is committed to issue anadditional 18,000,000 shares to the former shareholders of BPZ-Texas on acontingent earn-out basis if the Company achieves certain reserve andproduction goals.  The first earn-outtarget relating to reserves was achieved in December 2004 and 9,000,000 ofthe earn-out shares are issuable at this time. However, the contingent earn-out shares can only be issued after theshareholders have approved an increase in the number of authorized shares ofthe Company.  Accordingly the 9,000,000shares which have been earned are not recorded as outstanding of December 31,2004.  The remaining 9,000,000 earn-outshares are contingent on the Company achieving production of 2,000 barrels ofoil per day or its equivalent (approximately 12 million cubic feet of gas perday) prior to December 28, 2007.

 

Theearn-out arrangement will be treated for accounting purposes as a stockdividend because the earn-out is payable to the shareholders of the accountingacquirer, BPZ-Texas.  Accordingly, exceptfor an increase in the number of common shares 

 

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outstanding,no accounting entry will be required.

 

**Note 10 – Affiliate and Related Party Transactions**

 

AtDecember 31, 2003, the Company had a net receivable of $162,890 due fromBPZ & Associates, Inc., which was the parent of the Company priorto the Merger.  Additionally, BPZ Energy, Inc.made additional cash payments to BPZ & Associates, Inc. totaling$789,501 prior to the Merger.  Of suchpayments, $370,000 relates to the acquisition of SMC Ecuador, Inc., ofwhich $167,500 was paid to third parties and $202,500 was for the benefit ofBPZ & Associates, Inc.  Theremaining balance of $582,391 was attributable to personnel and office expensesincurred by BPZ & Associates, Inc. on behalf of BPZ-Texas and hasbeen recorded as part of the Company’s general administrative expenses.

 

Asreflected in the Merger Agreement, BPZ & Associates, Inc.retained a 10% overriding royalty interest in the four blocks in Peruconsisting of Block Z-1, Block XIX, Area VI and Area XVI on which the Companyhas exclusive rights and licensing agreements for oil and gasexploration and production.  BPZ & Associates, Inc. is anentity controlled by certain officers and directors of the Company.  After further consideration, the principalsof BPZ & Associates, Inc. concluded that it would be in the bestinterests of the Company and its shareholders to eliminate this overridingroyalty interest and to put into place a more traditional management incentiveplan based upon the results of the Company and other appropriate measures ofCompany success.  Accordingly, BPZ &Associates, Inc. has relinquished this 10% overriding royalty interest.

 

**Note 11 – Income Taxes**

 

There was no income tax expense or benefit for the years ended December 31,2004 and 2003.  The following tablereconciles income taxes at the statutory rate to the Company’s effective ratefor the years ended December 31, 2004 and 2003:

 
| ** **                                       | ** ** | **2004**  | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|-----------|------------|----------|------------|
|                                             |       |      |       |     |       |
| Benefit  computed at the expected statutory rate |       | $         | (3,621,908 | )        | $          | (32,154 | ) |
|                                             |       |      |       |     |       |
| Less:  valuation allowance                       |       | 3,621,908 |       | 32,154   |       |
| Income tax  expense                              |       | $         | —     |     | $          | — |   |

 

**Note 12 – Commitments and Contingencies**

 

The Company has various obligations and commitments in connection withits properties in Peru.  At the currentstage of operations, these obligations relate primarily to technical servicesand evaluations and are largely discretionary as to timing and amount.  The Company performs a significant amount ofthese technical services using its internal staff and systems.

 

In connection with its Block Z-1 property, the Company was obligated topost a $1,300,000 performance bond in January 2005.  In order to obtain the performance bond, theCompany deposited an equivalent amount in a restricted account in a Peruvianbank.  To satisfy its performanceobligation, the Company must drill at least one well before July 2006.  This well is currently budgeted to costapproximately $2,500,000.

 

The Company will continue to make commitments in the ordinary course ofbusiness as it pursues its development plans for the properties.

 

**Note 13 – Legal Proceedings**

 

Navidec, Inc. was advised in a letter dated February 24, 2004 that the SEC was conducting an informal inquiry to determine whether Navidec, Inc. had violated federal securities laws.  The SEC made an informal request that Navidec voluntarily produce certain documents, which were provided to the SEC in May 2004.  Based on the inquiries made and the information requested, the Company believes that the SEC’s investigation relates, at least in part, to the restatement of reported earnings for the first and second quarters of 2003 by Navidec, Inc.  This restatement was reported in Navidec, Inc.’s Form 10-Q for the third quarter of 2003 filed on December 11, 2003.

 

On December 22, 2004, the Company received notice that the SEC hadissued an Order Directing a Private Investigation and Designating Officers totake Testimony, and would be conducting a formal investigation.  We are cooperating fully with the SEC and arein discussions with the Commission regarding this matter.  Although we intend to work to bring thismatter to a prompt conclusion, we cannot make any assurance that theinvestigation will be solved positively or that it will not have

 

45

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negative effects on our limited resources or our ability to raisecapital during the period of the investigation.

 

**Note 14 – Minimum Lease Payments**

 

**The Company leases office space inHouston, Texas under a twelve-month renewable operating lease and in Lima, Peruunder a month-to-month operating lease. The Company assumed the lease for the Houston office in connection withthe Merger.  Prior to September 2004,the lease was paid by BPZ & Associates, Inc.  Total rent expense incurred for the yearsended December 31, 2004 and 2003 was approximately $18,000 and $4,600respectively.**

 

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**Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures**

 

On November 17, 2004, the Company engaged Johnson, Miller & Co. to replace Hein & Associates LLP as the Company’s independent accountant to audit the Company’s financial statements for the year ended December 31, 2004.  Johnson, Miller & Co. had been the auditors of BPZ Energy, Inc. for the years ended December 31, 2002 and 2003.  Hein & Associates LLP was dismissed as the Company’s independent accountant on the same date.  The Company’s Board of Directors approved the change in the Company’s independent accountant.

 

The independent auditor’s report of Hein & Associates LLP dated March 13, 2004 for Navidec’s financial statements for the year ended December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion, and was not modified as to audit scope or accounting principles.  However, the report did contain an explanatory fourth paragraph related to the uncertainty about Navidec’s ability to continue as a going concern.

 

The Company did not have any disagreements with Hein & Associates LLP during their engagement as the Company’s auditors.

 

**Item 8A.  Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

Prior to the completion of the reverse merger with Navidec, Inc.,BPZ Energy, Inc. was a private company and lacked many of the accountingprocedures and disclosure controls necessary to operate effectively as a publiccompany in the current regulatory environment. The Chief Executive Officer of the Company, Thomas E. Kelly, iscurrently serving as the Chief Financial Officer of the Company.  Mr. Kelly is not a certified publicaccountant, nor did the Company have any full-time employees or officers whopossess the training and experience typically expected of the Chief AccountingOfficer or Chief Financial Officer of a public company as of December 31,2004.  Mr. Kelly, in conjunctionwith the Company’s accounting and legal advisors, reviewed the Company’sdisclosure controls and procedures as of December 31, 2004 and concludedthat the Company’s current disclosure controls and procedures were not adequateto ensure that (i) the information required to be disclosed by the Companyin its SEC reports is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure, and (ii) that the information required tobe disclosed in its SEC reports is consistently recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms.

 

As described in Note 3 of the Notes toConsolidated Financial Statements, the Company restated its previously issuedConsolidated Financial Statements for the year ended December 31, 2004, toreflect the previously unrecorded nominal ownership interest in NavidecFinancial Services, Inc. (“NFS”) using the equity method of accounting, thereclassification of certain reorganization, acquisition and merger costs andthe Company’s presentation as a development stage company.  Previously, management of the Companyconcluded that the spin-off of NFS had been legally consummated as of theMerger date on September 10, 2004.  Managementof the Company believes that the accounting and disclosure decisions related tothe restatement are complex and require substantial judgment based oninterpretations of various accounting standards.

 

In light of the deficiencies and weaknesses identified in the Company’sdisclosure controls and procedures as discussed above, the Company engagedvarious consultants to assist it in preparing the financial statements for theperiods contained in this report and Mr. Kelly and the Board of Directorshave concluded, to the best of their knowledge and belief, that the financial informationand disclosures contained in this report are complete and accurate.

 

Further, subsequent to December 31, 2004 the Company has hiredadditional personnel, including a Controller who is a Certified PublicAccountant, and engaged consultants to assist it in taking the necessarycorrective actions to establish and/or improve the Company’s disclosurecontrols and procedures to ensure that material information relating to theCompany and its consolidated subsidiaries will be made known to it by individualswithin those entities, and that information required to be disclosed in theCompany’s SEC reports is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.

 

**Management’s Report on Internal Control overFinancial Reporting**

 

On March 2, 2005, the SEC announced that it has postponed for oneyear the compliance date for reporting on internal control by non-acceleratedfilers and foreign private issuers regarding amendments to its rules underthe Securities Exchange Act of 1934 that were adopted on June 5, 2003,pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  These registrants were scheduled to includein their annual report, a report by management on the company’s internal controlover financial reporting and an accompanying auditor’s report, for fiscal yearsending on or after July 15, 2005. They must now begin to comply in their annual reports for fiscal yearsending on or before July 15, 2006. Nevertheless, the Company has contracted with an external consultant toassist management in complying with the internal control documentation,evaluation, and reporting provisions of Sarbanes-Oxley and plans to proceedwith the project during the 2005 fiscal year.

 

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**Changes in Internal Controls**

 

There have been no significant changes in our internal controls or inother factors that could materially affect, or is likely to materially affect,our disclosure controls and procedures during the quarter ended December 31,2004.

 

**Limitations on the Effectiveness of Controls**

 

A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met.  Further, thedesign of a control system must reflect the fact that there are resourcesconstraints, and the benefits of controls must be considered relative to theircosts.  Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

**Item 8B.  Other Information**

 

None.

 

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# **PART III**

#  

**Item 9.  Directors and Executive Officers****of the Registrant**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item 10.  Executive Compensation**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item 11.  Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item12.  Certain Relationships and RelatedTransactions**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

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**Item 13.  Exhibits**

 

(a) Exhibits.

 
| 3.1    |   | Second Amended and Restated Articles of Incorporation of  Navidec, Inc. (incorporated by reference to Exhibit 3.1 to the  Company’s Annual Report on Form 10-K for the year ended December 31,  2000).                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Amended and Restated Bylaws of Navidec Inc.  (formerly ACI Systems, Inc.) incorporated by reference to  Exhibit 3.2 to the Company’s Form SB-2 (SEC File  No. 333-14497) filed on October 18, 1996).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 3.3    |   | Amendment to Second Amended and Restated Articles of Incorporation of  Navidec, Inc. (incorporated by reference to Exhibit 3.4 to the  Company’s Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Form of Certificate for Common Stock of BPZ Energy, Inc., a  Colorado corporation (incorporated by reference to Exhibit 4.1 to the  Company’s Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Merger Agreement between Navidec, Inc. and BPZ, Inc.  (incorporated by reference to Exhibit 10.1 from the Company’s  Form 8-K filed July 13, 2004).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Closing Agreement between Navidec, Inc. and BPZ, Inc.  (incorporated by reference to Exhibit 10.1 from the Company’s  Form 8-K filed September 14, 2004).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.3   |   | Business Consulting Agreement dated July 8, 2004 by and between  BPZ Energy, inc., a Colorado corporation, and Navidec Financial  Services, Inc., a Colorado corporation (incorporated by reference to  Exhibit 10.3 to the Company’s Form SB-2 (SEC File  No. 333-122816) filed on February 14, 2005). |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | License Contract from the Government of Peru for Block Z-1  (incorporated by reference to Exhibit 10.5 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on February 14,  2005).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Amendment to License Contract from the Government of Peru for Block  Z-1 (incorporated by reference to Exhibit 10.5 of the Company’s Annual  Report on Form 10-KSB for the year ended December 31, 2004).                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | License Contract from the Government of Peru for Block XIX  (incorporated by reference to Exhibit 10.6 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on February 14,  2005).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Technical Evaluation Agreement from the Government of Peru for Area  VI (incorporated by reference to Exhibit 10.7 to the Company’s  Form SB-2 (SEC File No. 333-122816) filed on February 14,  2005).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Promotional Technical Evaluation Agreement from the Government of  Peru for Area XVI (incorporated by reference to Exhibit 10.8 to the  Company’s Form SB-2 (SEC File No. 333-122816) filed on  February 14, 2005).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 16.1   |   | Letter from Hein & Associates, LLP (incorporated by  reference to Exhibit 16.1 from Navidec’s Form 8-K filed  November 18, 2004)                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of the Small Business Issuer (incorporated by reference  to Exhibit 21.1 to the Company’s Form SB-2 (SEC File  No. 333-122816) filed on February 14, 2005).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith).                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith).                                                                                                                                                                                       |

 

**Item 14.  Principal Accountant Fees and Services**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

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**SIGNATURES**

 

In accordance with 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.

 

 
| BPZ ENERGY, INC.                             |
|----------------------------------------------|
|                                         |
| */s/ Manuel Pablo Zuniga - Pflucker*         | * * |
| Manuel Pablo Zuniga - Pflucker               |
| President & Chief Executive Officer |
|                                         |
| Date: December 23, 2005                 |

 

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