**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-QSB/A**

**Amendment No. 1**

 

**(Mark One)**

 

**ý****                           ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period ended March 31, 2005**

 

**o****                           ****TRANSITION REPORT UNDER SECTION 13or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom           to           **

 

**Commission File Number: 000-29098**

 

**BPZENERGY, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

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

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o No ý

 

Asof May 1, 2005, there were 16,526,931 shares of common stock outstanding.  Such total excludes 9,000,000 shares ofcommon stock which are issuable pursuant to the terms of the MergerAgreement with Navidec, Inc., but which cannot be issued until theshareholders have approved an increase in the number of authorized shares ofthe Company.

 

Transitional Small BusinessDisclosure Format:  Yes o No ý

 

 

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**TABLE OF CONTENTS**

 

BPZ Energy, Inc. is filing this amended Quarterly Report on Form 10-QSB/Afor the quarterly period ended March 31, 2005 (the “Amended QuarterlyReport”), to amend its Quarterly Report on Form 10-QSB for the quarterlyperiod ended March 31, 2005 (the “Original Quarterly Report”), which wasfiled with the Securities and Exchange Commission on May 16, 2005.

 

The Amended Quarterly Report amends the disclosure under the Part I,Item 1 “Financial Statements,” Part I, Item 2 “Management’s Discussion andAnalysis and Plan of Operation” and Part I, Item 3 “Controls andProcedures.”  Except for these items, noother information in the Original Quarterly Report is amended hereby.

 
|    |   | **PART I.  FINANCIAL INFORMATION**                                                              |   |   |
|---------|--------|------------------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                                 |   |   |
| Item 1. |   | Financial Statements  (unaudited as to March 31, 2005 and 2004)                                 |   |   |
|    |   |                                                                                                 |   |   |
|    |   | Consolidated Balance  Sheets as of March 31, 2005 and December 31, 2004                    |   |   |
|    |   |                                                                                                 |   |   |
|    |   | Consolidated  Statements of Operations for the Three Months Ended March 31, 2005 and  2004      |   |   |
|    |   |                                                                                                 |   |   |
|    |   | Consolidated  Statement of Stockholders’ Equity for the Three Months Ended March 31,  2005 |   |   |
|    |   |                                                                                                 |   |   |
|    |   | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2005 and  2004      |   |   |
|    |   |                                                                                                 |   |   |
|    |   | Notes to  Consolidated Financial Statements                                                          |   |   |
|    |   |                                                                                                 |   |   |
| Item 2. |   | Management’s  Discussion and Analysis and Plan of Operation                                     |   |   |
|    |   |                                                                                                 |   |   |
| Item 3. |   | Controls and Procedures                                                                              |   |   |
|    |   |                                                                                                 |   |   |
|    |   | **PART II.  OTHER INFORMATION**                                                                 |   |   |
|    |   |                                                                                                 |   |   |
| Item 1. |   | Legal Proceedings                                                                                    |   |   |
|    |   |                                                                                                 |   |   |
| Item 2. |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                         |   |   |
|    |   |                                                                                                 |   |   |
| Item 3. |   | Defaults Upon  Senior Securities                                                                     |   |   |
|    |   |                                                                                                 |   |   |
| Item 4. |   | Submission of  Matters to a Vote of Security Holders                                                 |   |   |
|    |   |                                                                                                 |   |   |
| Item 5. |   | Other Information                                                                                    |   |   |
|    |   |                                                                                                 |   |   |
| Item 6. |   | Exhibits and  Reports on Form 8-K                                                               |   |   |
|    |   |                                                                                                 |   |   |
|    |   | **SIGNATURES**                                                                                       |   |   |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BPZ Energy, Inc. and Subsidiaries**

**(ADevelopment Stage Company)**

**ConsolidatedBalance Sheets**

 
| ** **                                                    | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(Restated)**           | ** ** | **(Restated)**              | ** ** |
| ** **                                                    | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                    |       |                     |       |                        |       |
| Current assets:                                               |       |                     |       |                        |       |
| Cash and  cash equivalents                                    |       | $                        | 1,771,301  |                        | $          | 4,014,191 |   |
| Restricted  cash                                              |       | —                   |       | 100,000                     |       |
| Other                                                         |       | 54,240                   |       | 72,159                      |       |
| Total  current assets                                         |       | 1,825,541                |       | 4,186,350                   |       |
|                                                          |       |                     |       |                        |       |
| Property and  equipment, net                                  |       | 13,076                   |       | 5,505                       |       |
| Restricted  cash                                              |       | 1,300,000                |       | —                      |       |
| Investment  in Ecuador property, net                          |       | 947,860                  |       | 969,240                     |       |
| Investment  in Navidec Financial Services                     |       | 1,243,832                |       | 1,130,511                   |       |
|                                                          |       |                     |       |                        |       |
| Total assets                                                  |       | $                        | 5,330,309  |                        | $          | 6,291,606 |   |
|                                                          |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                |       |                     |       |                        |       |
|                                                          |       |                     |       |                        |       |
| Current liabilities:                                          |       |                     |       |                        |       |
| Accounts  payable                                             |       | $                        | 212,994    |                        | $          | 311,613 |   |
| Accrued  liabilities                                          |       | 203,536                  |       | 54,342                      |       |
| Note payable                                                  |       | 121,641                  |       | 208,986                     |       |
| Total  current liabilities                                    |       | 538,171                  |       | 574,941                     |       |
|                                                          |       |                     |       |                        |       |
| Stockholders’ equity:                                    |       |                     |       |                        |       |
| Common  stock, no par value, 20,000,000 authorized            |       | 18,292,491               |       | 17,478,446                  |       |
| Additional  paid in capital — warrants and stock options |       | 2,181,892                |       | 2,341,795                   |       |
| Common stock  and warrants held by affiliate                  |       | (2,746,497               | )          | (2,854,181                  | )          |
| Stock  subscription receivable                                |       | (230,825                 | )          | (230,825                    | )          |
| Deficit  accumulated during the development stage             |       | (12,704,923              | )          | (11,018,570                 | )          |
|                                                          |       |                     |       |                        |       |
| Total  stockholders’ equity                              |       | 4,792,138                |       | 5,716,665                   |       |
|                                                          |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity              |       | $                        | 5,330,309  |                        | $          | 6,291,606 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

3

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**BPZ Energy, Inc. and Subsidiaries**

**(ADevelopment Stage Company)**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Cumulative Amounts  from Inception to** | ** **  | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|-------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2005**                   | ** **  | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | ** **                                | ** **  | **(Restated)**                        | ** ** | **(Restated)** | ** ** |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Revenue                                                              |       | $                                         | —      |                                  | $          | — |   | $ | — |   |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Operating and administrative expenses:                               |       |                                      |        |                                  |       |   |   |
| General and  administrative                                          |       | 3,086,222                                 |        | 960,789                               |       | 198,195 |   |
| Stock-based  compensation                                            |       | 4,489,935                                 |        | 75,000                                |       | — |   |
| Geological,  geophysical and engineering                             |       | 499,030                                   |        | 138,065                               |       | 238 |   |
| Depreciation  expense                                                |       | 807                                       |        | 650                                   |       | — |   |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Total  operating expenses                                            |       | 8,075,994                                 |        | 1,174,504                             |       | 198,433 |   |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Operating loss                                                       |       | (8,075,994                                | )           | (1,174,504                            | )          | (198,433 | ) |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Other income (expense):                                              |       |                                      |        |                                  |       |   |   |
| Investment  income from Ecuador property, net of amortization        |       | 235,655                                   |        | 87,794                                |       | — |   |
| Equity in  loss of Navidec Financial Services                        |       | (2,263,309                                | )           | (299,206                              | )          | — |   |
| Loss on  issuance of equity securities by Navidec Financial Services |       | (2,167,474                                | )           | (274,298                              | )          | — |   |
| Interest  expense                                                    |       | (72,621                                   | )           | (5,662                                | )          | (15,800 | ) |
| Amortization  of deferred financing costs                            |       | (389,394                                  | )           | (28,955                               | )          | — |   |
| Miscellaneous  income                                                |       | 28,214                                    |        | 8,478                                 |       | — |   |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Total other  income (expense)                                        |       | (4,628,929                                | )           | (511,849                              | )          | (15,800 | ) |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Loss before income taxes                                             |       | (12,704,923                               | )           | (1,686,353                            | )          | (214,233 | ) |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Income taxes                                                         |       | —                                    |        | —                                |       | — |   |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Net loss                                                             |       | $                                         | (12,704,923 | )                                     | $          | (1,686,353 | ) | $ | (214,233 | ) |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Basic and diluted net loss per share                                 |       |                                      |        | $                                     | (0.10      | ) | $ | (0.05 | ) |
|                                                                 |       |                                      |        |                                  |       |   |   |
| Weighted average common shares outstanding                           |       |                                      |        | 16,303,463                            |       | 4,103,454 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

4

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**BPZ Energy, Inc. and Subsidiaries**

**(ADevelopment Stage Company)**

# **Consolidated Statement of Stockholders’ Equity**

**ThreeMonths Ended March 31, 2005**

**(Unaudited)**

**(Restated)**

 
| ** **                                                 | ** ** | **Common Stock Issued** | ** ** | **Additional  Paid-in** | ** ** | **Common Stock  and Warrants  Held by** | ** ** | **Stock Subscription** | ** ** | **Deficit  Accumulated  During the  Development** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Shares (a)**          | ** ** | **Amount**              | ** ** | **Capital**                             | ** ** | **Affiliate**          | ** ** | **Receivable**                                    | ** ** | **Stage**  | ** ** | **Total** | ** ** |
|                                                       |       |                    |       |                    |       |                                    |       |                   |       |                                              |       |       |       |   |   |
| Balances at December 31, 2004 (audited)               |       | 16,581,385              |       | $                       | 17,478,446 |                                    | $          | 2,341,795              |       | $                                                 | (2,854,181 | )          | $          | (230,825 | ) | $ | (11,018,570 | ) | $ | 5,716,665 |   |
|                                                       |       |                    |       |                    |       |                                    |       |                   |       |                                              |       |       |       |   |   |
| Stock-based compensation                                   |       | —                  |       | —                  |       | 75,000                                  |       | —                 |       | —                                            |       | —     |       | 75,000 |   |
| Exercise of stock options                                  |       | 361,389                 |       | 814,045                 |       | (234,903                                | )          | —                 |       | —                                            |       | —     |       | 579,142 |   |
| Net change in common stock and warrants held by  affiliate |       | —                  |       | —                  |       | —                                  |       | 107,684                |       | —                                            |       | —     |       | 107,684 |   |
| Net loss for the period                                    |       | —                  |       | —                  |       | —                                  |       | —                 |       | —                                            |       | (1,686,353 | )          | (1,686,353 | ) |
| Balances at March 31, 2005                            |       | 16,942,774              |       | $                       | 18,292,491 |                                    | $          | 2,181,892              |       | $                                                 | (2,746,497 | )          | $          | (230,825 | ) | $ | (12,704,923 | ) | $ | 4,792,138 |   |

 

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(a)          As discussed in Note 8, such totals exclude 9,000,000 shares of commonstock which are issuable pursuant to the terms of the Merger Agreement with Navidec, Inc.,but which can not be issued until the shareholders have approved an increase inthe number of authorized shares of the Company.

 

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

 

5

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**BPZ Energy, Inc. and Subsidiaries**

**(ADevelopment Stage Company)**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Cumulative  Amounts from  Inception to** | ** **  | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **March 31, 2005**                    | ** **  | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                                 | ** **  | **(Restated)**                        | ** ** | **(Restated)** | ** ** |
| Cash flows from operating activities:                                        |       |                                       |        |                                  |       |   |   |
| Net loss                                                                     |       | $                                          | (12,704,923 | )                                     | $          | (1,686,353 | ) | $ | (214,233 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                       |        |                                  |       |   |   |
| Stock-based  compensation                                                    |       | 4,489,935                                  |        | 75,000                                |       | — |   |
| Depreciation  expense                                                        |       | 807                                        |        | 650                                   |       | — |   |
| Amortization  of investment in Ecuador property                              |       | 64,140                                     |        | 21,380                                |       | — |   |
| Amortization  of deferred financing fees                                     |       | 389,394                                    |        | 28,955                                |       | — |   |
| Equity in  loss of Navidec Financial Services                                |       | 2,263,309                                  |        | 299,206                               |       | — |   |
| Loss on  issuance of equity securities by Navidec Financial Services         |       | 2,167,474                                  |        | 274,298                               |       | — |   |
| Net change  in operating assets and liabilities:                             |       |                                       |        |                                  |       |   |   |
| Increase in  other assets                                                    |       | (15,635                                    | )           | (11,036                               | )          | 57,950 |   |
| Increase  (decrease) in accounts payable                                     |       | 212,995                                    |        | (98,618                               | )          | 3,975 |   |
| Increase in  accrued liabilities                                             |       | 203,536                                    |        | 149,194                               |       | 1,150 |   |
| Net cash  used in operating activities                                       |       | (2,928,968                                 | )           | (947,324                              | )          | (151,158 | ) |
|                                                                         |       |                                       |        |                                  |       |   |   |
| Cash flows from investing activities:                                        |       |                                       |        |                                  |       |   |   |
| Property and  equipment additions                                            |       | (13,883                                    | )           | (8,221                                | )          | — |   |
| Restricted  cash                                                             |       | (1,300,000                                 | )           | (1,200,000                            | )          | — |   |
| Investment  in Ecuador property.                                             |       | (1,440,000                                 | )           | —                                |       | — |   |
| Net cash  used in investing activities                                       |       | (2,753,883                                 | )           | (1,208,221                            | )          | — |   |
|                                                                         |       |                                       |        |                                  |       |   |   |
| Cash flows from financing activities:                                        |       |                                       |        |                                  |       |   |   |
| Borrowings                                                                   |       | 2,130,000                                  |        | —                                |       | 150,000 |   |
| Repayments  of borrowings                                                    |       | (302,830                                   | )           | (87,345                               | )          | — |   |
| Proceeds  from sale of common stock                                          |       | 5,626,982                                  |        | —                                |       | — |   |
| Net cash  (used in) provided by financing activities                         |       | 7,454,152                                  |        | (87,345                               | )          | 150,000 |   |
|                                                                         |       |                                       |        |                                  |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 1,771,301                                  |        | (2,242,890                            | )          | (1,158 | ) |
| Cash and cash equivalents at beginning of  period                            |       | —                                     |        | 4,014,191                             |       | 8,156 |   |
| Cash and cash equivalents at end of period                                   |       | $                                          | 1,771,301   |                                  | $          | 1,771,301 |   | $ | 6,998 |   |
|                                                                         |       |                                       |        |                                  |       |   |   |
| Supplemental cash flow information:                                          |       |                                       |        |                                  |       |   |   |
| **Cash paid for:**                                                           |       |                                       |        |                                  |       |   |   |
| Interest                                                                     |       | 70,697                                     |        | $                                     | 6,754      |   | $ | — |   |
| **Non – cash items:**                                                   |       |                                       |        |                                  |       |   |   |
| Common stock issued in acquisition                                           |       | 5,713,565                                  |        | $                                     | —     |   | $ | — |   |
| Warrants and stock options assumed in  acquisition.                          |       | 1,785,359                                  |        | —                                |       | — |   |
| Common stock and warrants held by affiliate                                  |       | 2,746,497                                  |        | (107,684                              | )          | — |   |
| Imputed financing costs                                                      |       | 428,000                                    |        | —                                |       | — |   |
| Proceeds received by NFS from exercise of  stock options                     |       | 922,188                                    |        | 579,142                               |       | — |   |
| Issuance of common stock for subscription  receivable                        |       | 230,825                                    |        | —                                |       | — |   |
| Conversion of long-term debt to common  stock.                               |       | 685,000                                    |        | —                                |       | — |   |
| Conversion of notes payable to common stock                                  |       | 1,020,529                                  |        | —                                |       | — |   |

 

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

 

6

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**BPZ Energy, Inc. and Subsidiaries**

**(ADevelopment Stage Company)**

**NotesTo Consolidated Financial Statements**

**March 31,2005**

**(Unaudited)**

 

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

** **

**Interim Reporting**

 

The unaudited consolidated financial statements of BPZ Energy, Inc.and its subsidiaries (the “Company”) included herein have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission as they pertain to Form 10-QSB. Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations.  The unaudited financial statements reflectall adjustments which are, in the opinion of management, necessary for a fairpresentation of the financial position and results of operations for theinterim periods, on a basis consistent with the annual audited financialstatements.  Except for the restatementdescribed in Note 2 to the Consolidated Financial Statements, all suchadjustments are of a normal recurring nature. The Company believes that the disclosures contained herein are adequateto make the information presented not misleading.  The consolidated balance sheet at December 31,2004 is derived from the December 31, 2004 audited consolidated financialstatements.  These interim financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form 10-KSB/Afor the year ended December 31, 2004. The results of operations for interim periods are not necessarilyindicative of the results to be expected for the full year.

 

**Organization**

 

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 Merger with Navidec, Inc. (“Navidec”) wherebyBPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).  For accounting purposes, the Merger wastreated as reverse acquisition of Navidec by BPZ-Texas.  Accordingly, all financial statements forperiods prior to the Merger represent the historical financial statements ofBPZ-Texas.  The details of the Merger arediscussed in Note 3 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.

 

BPZ maintains an office and a registered branch in Peru.  Currently, it has exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.76 million acres in northwest Peru. BPZ has licensecontracts covering 100% ownership of both Block Z-1, which was signed in November 2001and Block XIX, which was signed in December 2003. The Company’s licensecontracts provide for an initial exploration period of seven to ten years andrequire that the Company conduct specified activities on the properties duringthis period.  The total contract term canextend up to 30 years for oil development and production and 40 years for gasdevelopment and production.  In December 2003,the Company entered into a Technical Evaluation Agreement for Area VI and aPromotional Technical Evaluation Agreement for Area XVI.  These latter agreements give BPZ the right toconduct technical evaluations of those areas over a 24-month period and theexclusive right to enter into license contracts if the evaluations indicate thepotential for profitable operations.

 

In June 2004, the Company acquired the capital stock of SMCEcuador, Inc., a Delaware corporation (“SMC”), which owns a minoritynon-operated working interest in an oil and gas producing property located inthe southwest region of Ecuador (the “Santa Elena Property”). SMC has had itsinterest in the Santa Elena Property for the past eight years. The licenseagreement covering the property extends through May 2016.

 

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

 

7

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**New Accounting Pronouncements**

 

In April 2005, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) 19-1 (“FSP 19-1”) “Accounting for SuspendedWell Costs.”  This FSP provides guidanceon the accounting for exploratory well costs to companies which use thesuccessful efforts method of accounting. The FSP states that exploratory well costs should continue to becapitalized if:  1) a sufficient quantityof reserves are discovered in the well to justify its completion as a producingwell and 2) sufficient progress is made in assessing the reserves and the well’seconomic and operating feasibility.  Ifthe exploratory well costs do not meet both to these criteria, these costsshould be expensed, net of any salvage value. Additional annual disclosures are required to provide information aboutmanagement’s evaluation of capitalized exploratory well costs.  In addition, the FSP requires the annualdisclosure of 1) net changes from period to period of capitalized exploratorywell costs for wells that are pending the determination of proved reserves, 2)the amount of exploratory well costs that have been capitalized for a periodgreater than one year after the completion of drilling and 3) an aging ofexploratory well costs suspended for greater than one year with the number ofwells it relates to.  Further, thedisclosures should describe the activities undertaken to evaluate the reservesand the projects, the information still required to classify the associatedreserves as proved and the estimated timing for completing the evaluation.  The guidance in the FSP is required to beapplied to the first reporting period beginning after April 4, 2005 on aprospective basis to existing and newly capitalized exploratory wellcosts.  The guidance provided in FSP 19-1may affect the treatment of costs capitalized in future operations, but itwould not have had a material effect on amounts recorded in our consolidatedstatements of financial position, results of operations or cash flow for theperiods presented.

 

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN47”), “Accounting for Conditional Asset Retirement Obligations.”  FIN 47 clarifies the definition and treatmentof conditional asset retirement obligations as discussed in SFAS Statement No. 143“Accounting for Asset Retirement Obligations.” A conditional asset retirement obligation is defined as an assetretirement activity in which the timing and/or method of settlement aredependent on future events that may be outside the control of the Company.  FIN 47 states that a Company must record aliability when incurred for conditional asset retirement obligations if thefair value of the obligation can be reasonably estimated.  FIN 47 is intended to provide more informationabout long-lived assets, more information about future cash outflows for theseobligations and more consistent recognition of these liabilities.  FIN 47 is effective for fiscal years endingafter December 15, 2005.  TheCompany does not believe that its financial position, results of operations orcash flows will be impacted FIN 47.

 

In December 2004, the FASB issued Statement of FinancialAccounting Standards (SFAS”) No. 123(R) “Share-Based Payment,” anamendment to SAFS No. 123 which supersedes SFAS No. 148 “Accountingfor Stock-Based Compensation — Transition and Disclosure.”  SFAS 123(R) establishes standards fortransactions in which an entity exchanges its equity instruments for goods orservices.  This standard requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of theaward.  This eliminates the exception toaccount for such awards using the intrinsic method previously allowable underAPB 25.  SFAS No. 123(R) alsorequires a public entity to present its cash flows provided by tax benefitsfrom stock options exercised in the Financing Activities section of theStatement of Cash Flows.  In April 2005,the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) which providesguidance on SFAS No. 123 (R).  SAB107 permits registrants to choose an appropriate valuation technique or modelto estimate the fair value of share options, assuming consistent application,and provides guidance for the development of assumptions used in the valuationprocess.  Additionally, SAB 107 discussesadditional disclosures to be made in registrants’ periodic reports.  Public companies will be required toimplement SFAS 123(R) in the first fiscal year which begins 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 may reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be estimated at this time.

 

**Note 2 — Restatement of Financial Statements**

 

The previouslyissued consolidated financial statements of the Company as of March 31, 2005and December 31, 2004 and for the three months ended March 31, 2005 and2004 have been restated for the issues described below:

 

**Accountingfor Navidec Financial Services (NFS)**

 

On November 17,2005, the Company concluded that it needed to amend and restate certain of itspreviously issued financial statements and other financial information toreflect its nominal ownership interest in NFS.

 

Upon consummationof the Merger, BPZ became contractually and irrevocably bound to spin-off NFSto the pre-merger shareholders of Navidec. Subsequent to the Merger, the Company and NFS have operated theirrespective businesses

 

8

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autonomously andthe Company does not control NFS.  TheCompany, in consultation with its independent accountants and legal counsel,had previously concluded that the spin-off of NFS had been consummated insubstance from a legal perspective prior to the Merger, and that the financialstatements of the Company should properly reflect the spin-off transaction aslegally consummated on the date of the Merger. Accordingly, the previous consolidated financial statements of theCompany excluded its nominal ownership of NFS. Based on the fact that NFS had not completed the final distribution ofits shares to the pre-merger shareholders, the Company now concludes that itsconsolidated financial statements should be restated to reflect the inclusionof NFS.

 

NFS will continueto be reflected in the financial statements of the Company until such time asthe final distribution of NFS shares to the shareholders entitled to suchspin-off shares has been completed in all respects.  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 loss to the extent that the consideration received by NFS from suchtransactions is less than the Company’s cost basis per share.

 

The Company has nowrestated its financial statements to account for the Merger with Navidec, Inc.under FASB 141.  The details of theaccounting for this business combination are presented in Note 3 to theConsolidated Financial Statements.

 

**IntercompanyTransactions with BPZ & Associates, Inc.**

 

At December 31,2003, the Company had a net receivable of $162,890 due from BPZ &Associates, Inc., which was the parent of the Company prior to theMerger.  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 advancesreceivable from BPZ & Associates, Inc. were forgiven.  The Company initially recorded theforgiveness of these intercompany advances as if they were a dividend paymentfrom 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 wasattributable to personnel and office expenses incurred by BPZ &Associates, Inc. on behalf of BPZ-Texas and has been recorded as part ofthe Company’s general and administrative expenses.  The amount of such additional general andadministrative expenses attributable to the three-month period ended March 31,2004 was $95,750.  Additionally, theincrease in basis in the Ecuador property resulted in additional amortizationof $7,301 for the three-month period ended March 31, 2005.

 

**DevelopmentStage Company**

 

In connection withthe accounting restatement, the Company also reviewed the current state of itsoperations to determine whether it should be classified as a “development stagecompany.”  With the June 2004acquisition of SMC Ecuador, Inc., which owns a direct interest in theSanta Elena Property, the Company expected to record revenues from thisproperty using the pro-rata method of consolidation as is customary in the oiland gas industry.  However, difficultiesin getting accurate and timely information from the operator of the propertyprevented the Company from using the pro-rata method of consolidation.  Accordingly, the Company accounts for thisproperty under the cost method and no revenues are recorded.

 

A development stagecompany is defined as one in which (a) planned principal operations havenot commenced, or (b) planned principal operations have commenced, butthere has been no significant revenue therefrom.  Based on this definition, the Companyconcluded 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.

 

**Amortizationof Stock-based Compensation**

 

In connection withthe restatement, the Company realized that it had inadvertently failed tocontinue the amortization of the stock-based compensation attributable to the500,000 stock options granted to the former CEO of Navidec.  These shares vest when the Company receivesadditional investment proceeds totaling $6 million, including proceeds from theexercise of outstanding warrants, provided such funding is received no laterthan September 10, 2006.  Theadditional amortization was $75,000 for the three-month period ended March 31,2005.

 

9

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**Effects of Restatement**

 

Theeffects of the restatement on the balance sheet as of March 31, 2005 arereflected in the table below:

 
| ** **                                        | ** ** | **Condensed Balance Sheet  March 31, 2005** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                       | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Restated**                                     | ** ** | **Reported** | ** ** | **Difference** | ** ** |
|                                              |       |                                             |       |   |   |   |   |
| **Assets**                                        |       |                                             |       |   |   |   |   |
| Total current assets                              |       | $                                                | 1,825,541  |   | $ | 1,825,541 |   | $ | — |   |
| Property and equipment                            |       | 13,076                                           |       | 13,076 |   | — |   |
| Restricted cash                                   |       | 1,300,000                                        |       | 1,300,000 |   | — |   |
| Investment in Navidec Financial Services          |       | 1,243,832                                        |       | — |   | 1,243,832 |   |
| Investment in Ecuador property, net               |       | 947,860                                          |       | 627,921 |   | 319,939 |   |
| Total assets                                      |       | $                                                | 5,330,309  |   | $ | 3,766,538 |   | $ | 1,563,771 |   |
|                                              |       |                                             |       |   |   |   |   |
| **Liabilities  And Stockholders’ Equity**    |       |                                             |       |   |   |   |   |
|                                              |       |                                             |       |   |   |   |   |
| Total current liabilities                         |       | $                                                | 538,171    |   | $ | 538,171 |   | $ | — |   |
| Stockholders’ equity:                        |       |                                             |       |   |   |   |   |
| Common stock                                      |       | 18,292,491                                       |       | 14,553,345 |   | 3,739,146 |   |
| Additional  paid-in capital                       |       | 2,181,892                                        |       | 8,342,566 |   | (6,160,674 | ) |
| Common stock  and warrants held by affiliate      |       | (2,746,497                                       | )          | — |   | (2,746,497 | ) |
| Stock  subscription receivable                    |       | (230,825                                         | )          | (230,825 | ) | — |   |
| Deficit  accumulated during the development stage |       | (12,704,923                                      | )          | (19,436,719 | ) | 6,731,796 |   |
| Total  stockholders’ equity                  |       | 4,792,138                                        |       | 3,228,367 |   | 1,563,771 |   |
| Total  liabilities and stockholders’ equity  |       | $                                                | 5,330,309  |   | $ | 3,766,538 |   | $ | 1,563,771 |   |

 

Thenet effect of the above adjustments on the balance sheet was to increase totalassets and stockholders’ equity by $1,563,771. Of such amount, the effect of the decision to account for NFS as anacquisition under SFAS 141 resulted in an increase of $1,243,832 and the neteffect of adjustments to the investment in Ecuador property totaled$319,939.  The accumulated deficit wasreduced by $6,731,796 as a result of the reduction in accumulated lossesthrough March 31, 2005.

 

Theeffects of the restatement on the statements of operations for the quartersended March 31, 2005 and 2004 are reflected in the table below:

 

**Statement of OperationInformation**

 
| ** **                                    | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                  | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Restated**                                | ** ** | **Reported** | ** ** | **Difference** | ** ** |
|                                          |       |                                        |       |   |   |   |   |
| **Revenue**                                   |       | $                                           | —     |   | $ | — |   | $ | — |   |
|                                          |       |                                        |       |   |   |   |   |
| **Operating and administrative expenses:**    |       |                                        |       |   |   |   |   |
| General and administrative                    |       | 960,789                                     |       | 960,789 |   | — |   |
| Stock-based compensation                      |       | 75,000                                      |       | — |   | 75,000 |   |
| Geological, geophysical and engineering       |       | 138,065                                     |       | 138,065 |   | — |   |
| Depreciation expense                          |       | 650                                         |       | 650 |   | — |   |
| Total  operating expenses                     |       | 1,174,504                                   |       | 1,099,504 |   | 75,000 |   |
|                                          |       |                                        |       |   |   |   |   |
| Operating loss                                |       | (1,174,504                                  | )          | (1,099,504 | ) | (75,000 | ) |
|                                          |       |                                        |       |   |   |   |   |
| **Other income / (expense):**                 |       |                                        |       |   |   |   |   |
| Investment income in Ecuador property, net    |       | 87,794                                      |       | 95,095 |   | (7,301 | ) |
| Equity in loss of Navidec Financial  Services |       | (299,206                                    | )          | — |   | (299,206 | ) |
|                                               |            |                                             |            |  |  |  |  |  |  |  |

 

10

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| Loss on  issuance of equity securities by Navidec Financial Services |   | (274,298   | )          | —     |   | (274,298   | )      |
|----------------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Interest expense                                                     |   | (5,662     | )          | (5,662     | )      | —     |   |
| Amortization of deferred financing costs                             |   | (28,955    | )          | (28,955    | )      | —     |   |
| Miscellaneous income                                                 |   | 8,478      |       | 8,478      |   | —     |   |
| Total other  income                                                  |   | (511,849   | )          | 68,956     |   | (580,805   | )      |
| Loss before  income taxes                                            |   | (1,686,353 | )          | (1,030,548 | )      | (655,805   | )      |
| Income taxes                                                         |   | —     |       | —     |   | —     |   |
| Net loss                                                             |   | $          | (1,686,353 | )          | $      | (1,030,548 | )      | $ | (655,805 | ) |
|                                                                 |   |       |       |       |   |       |   |
| Basic and diluted net loss per share                                 |   | $          | (0.10      | )          | $      | (0.06      | )      | $ | (0.04 | ) |
|                                                                 |   |       |       |       |   |       |   |
| Weighted average common shares outstanding                           |   | 16,303,463 |       | 16,706,527 |   | (403,064   | )      |

 

The primary differences between the restated andoriginally reported income statement amounts relate to the treatment of theNavidec Merger transaction as an acquisition pursuant to SFAS No. 141.  The Company’s continuing nominal ownership ofNFS, pending consummation of the spin-off, caused the Company to record itsproportionate equity share of NFS’s losses, totaling $299,206.  Likewise, equity issuances by NFS at pricesbelow the Company’s basis per share caused an additional charge to earningstotaling $274,298.  Both of these amountswere non-cash accounting charges to the Company.

 

The differences to stock-based compensation andinvestment income from the Ecuador property are discussed above.

 

The differences to weighted average common sharesoutstanding result primarily from the treatment of common stock and warrantsheld by NFS as treasury securities for accounting purposes.

 

**Condensed Statement of OperationInformation**

 
| ** **                                 | ** ** | **Three Months Ended March 31,  2004** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                  | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Restated**                                | ** ** | **Reported** | ** ** | **Difference** | ** ** |
| General and administrative expenses        |       | $                                           | 198,195    |   | $ | 102,445 |   | $ | 95,750 |   |
|                                       |       |                                        |       |   |   |   |   |
| Net loss                                   |       | $                                           | (214,233   | ) | $ | (118,483 | ) | $ | (95,750 | ) |
|                                       |       |                                        |       |   |   |   |   |
| Basic and diluted net loss per share       |       | $                                           | (0.05      | ) | $ | (0.03 | ) | $ | (0.02 | ) |
|                                       |       |                                        |       |   |   |   |   |
| Weighted average common shares outstanding |       | 4,103,454                                   |       | 4,103,454 |   | — |   |

 

The difference of $95,750 results from additional general andadministrative expenses associated with the re-characterization of intercompanytransactions with BPZ & Associates, Inc.

 

**Note 3 – Acquisition of Navidec**

 

On July 8, 2004, Navidec and BPZ-Texas enteredinto a Merger Agreement which was consummated on September 10, 2004. TheMerger was structured from a legal standpoint as the acquisition of BPZ-Texasby Navidec.  However, in the Merger, thestockholder group of BPZ-Texas obtained majority ownership and managementcontrol of the combined Company. Accordingly, for accounting purposes, the Merger was treated as areverse merger of Navidec by BPZ-Texas. All financial statements presented herein represent the historicalfinancial statements of the accounting acquirer, BPZ-Texas.  BPZ entered into the merger primarily to giveit access to the public markets in financing its development activities inSouth America.

 

As consideration for the Merger, BPZ-Texas issued3,198,368 shares of its common stock in a one-for-one exchange for all of theoutstanding common shares of Navidec.  Inaddition, BPZ-Texas assumed options to purchase 1,332,076 shares of Navideccommon stock, which had previously been issued to employees, directors andconsultants of Navidec and were outstanding on the date of the Merger.  Under the terms of the Merger Agreement, theproceeds received from the exercise of these stock options are payable to NFS.  BPZ-Texas also assumed outstanding warrantsto purchase 1,129,000 shares of Navidec common stock.  In addition, BPZ-Texas granted to NFS fullyvested warrants to purchase 1,500,000 shares of common stock at an exerciseprice of $2.00 per share and issued 662,149 new shares of common stock toNFS.  See Note 8 to the ConsolidatedFinancial Statements for details about the stock options and warrants assumedor granted in connection with the Merger.

 

11

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

 

The merger has been accounted for using the purchasemethod of accounting, in accordance with SFAS No. 141.  The 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’sresults since September 1, 2004, for convenience purposes.

 

The following summarizes the purchase considerationgiven for the acquisition of Navidec:

 
| **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  |   |

 

BPZallocated the purchase price to assets acquired and liabilities assumed atestimated fair values at the acquisition date. The excess of purchase price over the fair value of the net assetsacquired as of the acquisition date has been reflected as goodwill inaccordance with SFAS No. 141.  Thefollowing summarizes the estimated fair values of the assets acquired andliabilities 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 (1,500,000 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  |   |

 

Ofthe amounts shown above, $681,220 has been allocated to cash and marketablesecurities instead of a reduction to the purchase price because the cashremained with NFS following the Merger and is not available for use by theCompany.  The tax consequences of themerger have not been fully analyzed. However, it is believed that the excess ofthe purchase price over the net assets acquired will not be deductible for taxpurposes.

 

Thefollowing unaudited information presents the pro forma effects of the Merger asif it had occurred on January 1, 2004:

 

ProForma Effects of the Merger

 
| ** **                                 | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **March 31, 2004** | ** ** |
| Revenues                                   |       | $                       | —     |   |
| Net loss                                   |       | $                       | (540,233   | ) |
| Basic and diluted net loss per share       |       | $                       | (0.04      | ) |
| Weighted average common shares outstanding |       | 12,104,198              |       |

 

12

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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 legal requirementsfor the spin-off of NFS have been completed except for registration of thespin-off with the Securities and Exchange Commission and the final distributionof NFS common shares to the pre-merger shareholders of the Company.  Pending such final distribution of NFS commonshares, the Company remains the nominal owner of those shares, which are beingheld for the benefit of the spin-off shareholders.  The Company accounts for its nominalinvestment in NFS under the equity method, as discussed in Note 4 to theConsolidated Financial Statements.  TheCompany is continuing to assist the management of NFS, as requested, in itsefforts to consummate the spin-off of NFS, but has no control over theregistration process of NFS and cannot predict when the management of NFS willbe able to complete the final distribution of NFS common shares.

 

**Note 4 – Investment in Navidec Financial Services(NFS)**

 

As discussed in Note 3 to the Consolidated FinancialStatements, the Company is contractually bound to spin-off NFS to thepre-merger shareholders of Navidec. Pending the distribution of NFS common shares to the beneficiaries ofthe spin-off, the Company is the nominal owner of those shares.  While the Company may be deemed to havemajority nominal ownership of the common stock of NFS, it does not controlNFS.  As such, the Company has determinedthat the equity method of accounting is the most appropriate manner to reflectits nominal ownership of NFS during the period of time between the Merger andits ultimate spin-off to the pre-merger shareholders of Navidec.

 

NFS was formed in December 2002 and isorganized into three divisions: business development, mortgage services andtechnology.  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 March 31, 2005, but NFS hasindicated that it intends to re-enter this line of business.  The majority of the revenues of NFS for thethree months ended March 31, 2005 were derived from mortgage services.

 

As of the date of the Merger, NFS had 5,177,548common shares outstanding, which shares are held by the Company for the benefitof the spin-off shareholders.  On September 21,2004, the Board of Directors of NFS awarded 1,200,000 fully vested NFS commonshares and options to purchase 1,200,000 NFS common shares at a cost of $0.05per share to the management of NFS.  Thistransaction resulted in the nominal ownership of BPZ being reduced from 100% to81.2% (68.3% on a fully diluted basis) at December 31, 2004. During thethree months ended March 31, 2005, NFS issued 370,000 additional stockoptions to directors, employees and consultants, of which 250,000 options wereexercised, resulting in the issuance of 250,000 NFS common shares.  These transactions have resulted in thenominal ownership of BPZ being further reduced to 78.1% (65.1% on a fullydiluted basis) at March 31, 2005. To the extent that NFS conveys its shares or stock options to thirdparties for a per-share value less than the Company’s nominal basis in itsinvestment in NFS, the issuance of these shares or stock options by NFS willresult in a loss to the Company.  Theissuance of common shares and stock options by NFS resulted in a recorded lossto the Company of $72,447 during the three months ended March 31, 2005.

 

Additionally, pursuant to the Merger Agreement, NFSis entitled to the proceeds received from the exercise of pre-merger stockoptions which were assumed by the Company in the Merger.  During the three months ended March 31,2005, NFS received stock option proceeds of $579,142.  This amount is treated for accountingpurposes 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.  The Company recorded a loss of $201,851 forthe three months ended March 31, 2005 attributable to these stock optionexercises.

 

NFS recognized a net loss of $383,000 during thethree months ended March 31, 2005. Included in this loss were $87,000 in non-cash charges related tostock-based compensation.  Based on itsnominal ownership of 78.1% of NFS, the Company recognized a loss of $299,206for the three months ended March 31, 2005 from its investment in NFS.

 

The Company will not benefiteconomically from any positive operating results of NFS because it does nothave beneficial

 

13

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ownership of or access to the cashor other assets of NFS.  The Company isnot entitled to receive any distributions or dividends from NFS, nor could itcause NFS to declare a dividend because it does not control NFS.  Additionally, the Company is not directly orindirectly obligated for the liabilities, commitments or other obligations ofNFS.  However, the Company’s reportedfinancial results may be adversely affected should NFS continue to sufferoperating losses 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 March 31, 2005, stockholders’equity and the investment in NFS would have been reduced by $1,243,832 if thespin-off had been consummated on that date.

 

Thefollowing table presents the condensed statement of operations information forNFS for the three months ended March 31, 2005 and the condensed balancesheet information for NFS as of March 31, 2005 and December 31, 2004:

 

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

 

**Condensedincome statement information:**

 
| ** **                                     | ** ** | **Three Months Ended**  | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **March 31, 2005** | ** ** |
|                                           |       |                    |       |
| Net sales                                      |       | $                       | 343,000    |   |
|                                           |       |                    |       |
| Gross margin                                   |       | $                       | 316,000    |   |
|                                           |       |                    |       |
| Net loss                                       |       | $                       | (383,000   | ) |
|                                           |       |                    |       |
| Company’s equity in net loss of affiliate |       | $                       | (299,206   | ) |

 

**Condensedbalance sheet information:**

 
| ** **                                       | ** ** | **As of**               | ** ** | **As of**                  | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                                             |       |                    |       |                       |       |
| Current assets                                   |       | $                       | 703,000    |                       | $          | 550,000 |   |
| Investment in BPZ securities                     |       | 7,742,000               |       | 4,276,000                  |       |
| Goodwill                                         |       | 1,562,000               |       | 2,139,000                  |       |
| Other noncurrent assets                          |       | 100,000                 |       | 34,000                     |       |
| Total assets                                     |       | $                       | 10,107,000 |                       | $          | 6,999,000 |   |
|                                             |       |                    |       |                       |       |
| Current liabilities                              |       | $                       | 408,000    |                       | $          | 483,000 |   |
| Minority interest                                |       | 65,000                  |       | 64,000                     |       |
| Stockholders’ equity                        |       | 9,634,000               |       | 6,452,000                  |       |
| Total  liabilities and stockholders’ equity |       | $                       | 10,107,000 |                       | $          | 6,999,000 |   |

 

Asof March 31, 2005, the carrying amount of the Company’s investment in NFS,including the adjustment for BPZ common stock and warrants held by NFS, wasless than its proportionate fully diluted share of the stockholders’ equity ofNFS by approximately $2.3 million.  Themajority of this difference is attributable to (a) unrealized gains on BPZsecurities which were recorded by NFS, but eliminated from the consolidatedfinancial statements of the Company and (b) differences in the accounting forstock option proceeds received by NFS.

 

**Note 5 — Other Current Assets**

 

Othercurrent assets consist primarily of deferred financing costs related to the acquisitionof SMC Ecuador, Inc.  The Company isamortizing these costs to expense over the term of the financing.

 

14

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###### **Note6 — Restricted Cash and Performance Bonds**

###### ** **

Inconnection with its properties in Peru, the Company has obtained variousperformance bonds to guarantee its obligations and commitments.  As of March 31, 2005 and December 31,2004, BPZ had restricted cash deposits of $1,300,000 and $100,000,respectively, which collateralize performance bonds issued in those respectiveamounts.  BPZ also has additionalperformance bonds in the amount of $240,000 for which two individualshareholders of the Company provided guarantees or collateral to the financialinstitutions which issued such bonds to secure the Company’s performance.  All of the performance bonds were issuedby Peruvian banks and their terms are governed by the corresponding licensecontract or technical evaluation agreement.

 

**Note 7 — Investment in Ecuador Property and NotePayable**

 

The Company has an investment in anoil and gas property in Ecuador (the “Santa Elena Property”) totaling $947,860as of March 31, 2005.  The Companyhas elected to account for this investment under the cost method and recordsits share of cash received or paid as other income or expense.  Since the Company’s investment representsownership of an oil and gas property, which is a depleting asset, it isamortizing the investment on a straight-line basis over the remaining term ofthe license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense of $21,380 for the three months ended March 31, 2005.

 

In connection with the acquisition of SMC, theCompany had a note payable balance of $208,986 as of December 31,2004.  The note agreement requiresmonthly installment payments of $31,366, including imputed interest at 15%,through July 1, 2005.  The remainingnote payable balance as of March 31, 2005 was $121,641.

 

As part of the note agreement, the holder of the note payable holds a first lien on the common stock of SMC as collateral.  The holder also received beneficial ownership of a 4% net working interest in the Santa Elena Property.  Accordingly, the Company currently holds a 6% effective net working interest in the Santa Elena Property.

 

**Note 8 — Stockholders’ Equity**

 

The Company has 20,000,000 shares of common stock, no par value, authorized by its Amended and Restated Certificate of Incorporation.  For accounting purposes, the Company’s common shares held by NFS attributable to the Company’s equity interest in NFS are reflected as treasury shares.  The common shares issued and outstanding at each period are as follows:

 
| ** **                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Common shares issued                                   |       | 16,942,774         |       | 16,581,385            |       |
|                                                   |       |               |       |                  |       |
| Common shares owned by NFS                             |       | 557,903            |       | 557,903               |       |
| Company’s equity interest in NFS                  |       | 78.1               | %          | 81.2                  | %          |
| Net common  shares held by affiliate (treasury shares) |       | 435,843            |       | 452,931               |       |
|                                                   |       |               |       |                  |       |
| Common shares outstanding                              |       | 16,506,931         |       | 16,128,454            |       |

 

**Common Stock and Warrants Held by Affiliate**

 

As discussed in Note 3 to the Consolidated Financial Statements, NFS holds common stock and warrants in the Company.  For accounting purposes, these common shares and warrants are reflected as treasury securities and are recorded as a reduction of stockholders’ equity.  As of March 31, 2005, NFS held 557,903 shares of the BPZ common stock valued on the date of the Merger at $3.21 per share, 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 on the date of the Merger at $1.76 per share using the Black-Scholes model, or $1,724,800 in the aggregate.  The BPZ common stock and warrants held by NFS attributable to the Company’s 78.1% interest in NFS have an aggregate value of $2,746,497, excluding unrealized appreciation since the date of the Merger.

 

**Stock Subscription Receivable**

 

During 2004, the Company issued 236,528 shares to an individual investor for $119,175 of cash proceeds and a subscription

 

15

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receivable of $230,825.  The 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 the performance bond is no longer required.

 

**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.

 
| ** **                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Stock options outstanding                  |       | 1,693,652                |       | 2,055,041                   |       |
| Warrants outstanding                       |       | 2,629,000                |       | 2,629,000                   |       |
| Shares issuable to consultant for services |       | 15,000                   |       | —                      |       |
| Earn-out shares issuable                   |       | 9,000,000                |       | 9,000,000                   |       |
| Contingent earn-out shares                 |       | 9,000,000                |       | 9,000,000                   |       |
| Total  potentially dilutive securities     |       | 22,337,652               |       | 22,684,041                  |       |

 

**Stock Options Outstanding**

 

In connection with the Merger, BPZ, as the accounting acquirer, assumedall Navidec stock options outstanding, which were fully vested on the date ofthe Merger and expire on September 10, 2007.  Under the terms of the Merger agreement, NFSis entitled to receive the proceeds from the exercise of these options.  As of December 31, 2004, there were1,055,041 Navidec stock options outstanding, with exercise prices ranging from$1.30 to $1.93 per share.  During the threemonths ended March 31, 2005, 361,389 Navidec stock options were exercisedand 693,652 were outstanding as of the end of the period.

 

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 the date of grant.  Theunvested options were recorded at a fair value of $1.20 per share using theBlack-Scholes model and are being amortized over the 24-month vesting period atthe rate of $25,000 per month, unless the Company concludes that such optionsare no longer probable of vesting.

 

All of the above stock options were recorded at fairmarket value as of 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 Navidec, Inc. common stock.  Ofthis total, 564,500 warrants have an exercise price of $2.00 per share and564,500 warrants have an exercise price of $4.00 per share.  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.

 

**Shares Issuable to Consultant for Services**

 

As of March 31, 2005, the Company had anobligation to issue 15,000 shares to a consultant for services performed.  Such shares cannot be issued until the shareholdershave approved an increase in the number of authorized shares.  Accordingly, the value of such shares,$63,750, has been reflected as a liability in the accompanying financialstatements.

 

**Merger Earn-Out Shares**

 

Under the terms of the Merger agreement, the Companyis committed to issue an additional 18,000,000 shares to the formershareholders of BPZ-Texas on a contingent earn-out basis if BPZ is able toachieve certain reserve and production goals. The

 

16

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first earn-out target relating to reserves wasachieved in December 2004 and 9,000,000 of the earn-out shares areissuable at this time.  However, theearn-out shares can only be issued after the shareholders have approved anincrease in the number of authorized shares of the Company.  Accordingly, the 9,000,000 shares which havebeen earned are not recorded as outstanding on March 31, 2005.  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.

 

For accounting purposes, the earn-out arrangement is treated 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 outstanding, no accounting entrywill be required upon the issuance of the earn-out shares.

 

**Note 9 — Affiliate and Related Party Transactions**

 

Asof March 31, 2005 and December 31, 2004 there were no affiliate andrelated party balances.  However, duringthe first quarter of 2004, BPZ-Texas made cash payments to its then parent, BPZ &Associates, Inc., totaling $95,750. These payments were attributable to personnel and office expensesincurred by BPZ & Associates, Inc. on behalf of BPZ-Texas andwere recorded as part of the Company’s general and administrative expenses forthe three months ended March 31, 2004.

 

**Note 10 — 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 posted 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 current performanceobligation under of Block Z-1 license agreement, the Company must drill atleast one well or acquire a specified amount of seismic data prior to July 2006.  The Company intends to satisfy its obligationby drilling a well which is currently budgeted to cost approximately$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 11 — Legal Proceedings**

 

Navidec was advised in February 2004 that the SEC was conducting an informal inquiry to determine whether it 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 Navidec’s reported earnings for the first and second quarters of 2003.  This restatement was reported in Navidec’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.  The Company’s attorneys have discussed thismatter with the Commission and it is cooperating fully with the SEC.  Although the Company is endeavoring to bringthis matter to a prompt conclusion, there can be no assurance that theinvestigation will be resolved without adverse consequences for the Company orthat it will not have negative effects on our limited resources or our abilityto raise capital during the period of the investigation.

 

As of March 31, 2005, a total of approximately $19,000, primarilyin legal fees, had been incurred in connection with the SEC investigation.  Pursuant to the Merger agreement, the Companyhas been indemnified by NFS for the costs of the SEC investigation andNFS has borne the costs incurred to date.

 

17

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**Item 2. Management’s Discussion and Analysis and Plan of Operation**

 

**Business**

 

BPZ Energy, Inc., a Colorado corporation was incorporated in1993.  Based in Houston, Texas, we are adevelopment stage company with properties in northwest Peru and southwestEcuador. We are focused on the development and production of oil and naturalgas and the complementary development of gas-fired power generation.

 

On September 10, 2004, BPZ Energy, Inc., a Texas corporation(“BPZ-Texas”), consummated a Merger with Navidec, Inc. (“Navidec”) wherebyBPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).  For accounting purposes, the Merger wastreated as reverse acquisition of Navidec by BPZ-Texas.  Accordingly, all financial statements forperiods prior to the Merger represent the historical financial statements ofBPZ-Texas.  The details of the Merger arediscussed in Note 3 to the Consolidated Financial Statements.  On February 4, 2005, we changed ourchanged our name from Navidec, Inc. to BPZ Energy, Inc.  Although our name has been changed, thepre-merger company may be referred to as Navidec in this filing to avoidconfusion.

 

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.  Our license contracts cover 100% ownership ofboth Block Z-1, which was signed in November 2001 and Block XIX, which wassigned in December 2003. Our license contracts provide for an initialexploration period of seven to ten years and require that we conduct specifiedactivities on the properties during this period.  The total contract term can extend up to 30years for oil development and production and 40 years for gas development andproduction.  In December 2003, weentered into a Technical Evaluation Agreement for Area VI and a PromotionalTechnical Evaluation Agreement for Area XVI. These latter agreements give us the right to conduct technicalevaluations of those areas over a 24-month period and the exclusive right toenter into license contracts if the evaluations indicate the potential forprofitable operations.

 

The Merger Agreement required the transfer of all of the pre-mergerbusiness assets and liabilities of Navidec to its wholly owned subsidiary, NFS,and the spin-off of NFS to the shareholders of record of Navidec as of September 9,2004, the date prior to the Merger.  Uponconsummation of the Merger, we became contractually and irrevocably bound tothe spin-off of NFS to such pre-Merger shareholders.  All legal requirements for the spin-off ofNFS have been completed except for registration of the spin-off with theSecurities and Exchange Commission and the final distribution of NFS commonshares to the pre-merger shareholders of the Company.  Pending such final distribution of NFS commonshares, we remain the nominal owner of those shares, which are being held forthe benefit of the spin-off shareholders. We account for our nominal investment in NFS under the equity method, asdiscussed in Note 4 to the 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.

 

In June 2004, we acquired the capital stock of SMC Ecuador, Inc.,a Delaware corporation (“SMC”), which owns a minority non-operated workinginterest in an oil and gas producing property located in the southwest regionof Ecuador (the “Santa Elena Property”). SMC has had its interest in the Santa Elena Property for the past eightyears. The license agreement covering the property extends through May 2016.

 

We are in the development stage and to date our activities in Peru havebeen limited to analysis and evaluation of technical data on the properties andpreparation of the development plans for the properties. We have not drilledany wells or recognized any revenues from operations and we do not anticipate generatingsignificant revenues from our properties prior to mid-2006.

 

**Resultsof Operations**

 

Our operating andadministrative expenses to date have consisted principally of general andadministrative costs and geological, geophysical and engineering costs.  General and administrative costs haveincreased significantly from $198,195 during the first quarter of 2004 to$960,789 during the first quarter of 2005 as a result of our increased activitylevels, additional personnel and costs associated with being a publiccompany.  We incurred $138,065 ofgeological, geophysical

 

18

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and engineeringcosts in the first quarter of 2005 primarily related to our Block Z-1 project,compared to $238 in this category in same period of 2004.  Also during the first quarter of 2005, werecorded $75,000 of stock-based compensation expense related to 500,000unvested stock options issued in September 2004 to the former CEO ofNavidec.

 

Based on our 78.1%nominal ownership of NFS, we recorded an equity loss of $299,206 during thefirst quarter of 2005.  In addition, theissuance of equity securities by NFS during the first quarter of 2005 at aprice below the Company’s book value resulted in a loss to the Company of $274,298.  Both of these incomestatement charges were non-cash transactions, as the operations of NFS areautonomous and they are responsible for financing such operations independentlyof the Company.

 

We also incurredinterest expense of $5,662 and amortization of debt financing costs of $28,955in the first quarter of 2005, as compared to $15,800 and $ -0- for the sameperiod in 2004 respectively, principally from notes payable incurred to financethe acquisition of SMC Ecuador in June 2004.  Since our investment in the Ecuadorproperty represents ownership of an oil and gas property, which is a depletingasset, we are amortizing the investment on a straight-line basis over theremaining term of the license agreement, which expires in May 2016.  Accordingly, we recorded $21,380 of amortization expense inthe first quarter of 2005.  This propertygenerated net cash distributions of $109,174 during the first quarter of 2005.

 

The Companyrealized a net loss of $1,686,353, or $0.10 per share, for the quarter ended March 31,2005, as compared to a net loss of $214,233, or $0.05 per share for the sameperiod in 2004.

 

**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, inwhich we own a 100% working interest.  Toachieve our objectives, we must obtain significant financing from externalsources.  We are working to developexternal financing options, but we do not currently have sufficient capitalresources, nor do we currently have firm commitments from external sources toallow us to undertake all of the operations envisioned in this plan.

 

Our plan ofoperation envisions the installation of a 140 megawatt (‘‘MW’’) gas-firedelectric generation complex near the town of Caleta Cruz, in northwestPeru.  This power plant will initiallyuse gas from the Corvina Field in Block Z-1, which is located approximately 10miles offshore from the power plant site. The Corvina Field has an existing platform which will be refurbished tomake it 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 three 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 three wells isexpected to extend into 2006.  Furtherdevelopment drilling is planned for 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 grid managedby 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, though no assurance can be given that we canmeet this schedule.

 

The environmentalstudies for the operations needed to develop and transport natural gas from theCorvina Field to the power plant site and to construct the power plant wereinitiated during the first quarter of 2005. We also initiated engineering studies for the power plant, pipeline andother facilities during the first quarter of 2005.

 

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 significant upside gas potential of the Corvina and Piedra Redonda Fieldslocated in Block Z-1, as well as the potentially significant natural gasresources in the adjacent onshore Block XIX. These areas are within 30 miles of the Ecuadorian border and can bedeveloped for export sales of either raw gas or power generation via connectionto the transmission system of Ecuador. Our initial plan of operation calls for the Company to construct a 40-milepipeline from Caleta Cruz, the terminal point of our offshore pipeline from theCorvina Field, to

 

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Arenillas,Ecuador.  We intend to sell gas for thegeneration of electricity by third party power producers in the local market inEcuador.  We have negotiated threepreliminary agreements for delivery of gas. We are planning to have this pipeline completed for first sales by October 2006,though 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,the timing of seismic acquisition is dependent upon securing sufficientfinancial resources 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 geological studies andanalysis during calendar year 2005. While relatively inexpensive, these activities, 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 to $100 million, including import duties andcontingencies.  This estimate of capitalexpenditures does not include value added tax (referred to as “IGV” inPeru).  IGV is generally imposed on goodsand services at a rate of 19%.  Certainexpenditures are exempt from IGV or eligible for immediate refund.  In all cases, IGV paid on capitalexpenditures is recoverable from our future revenue billings within Peru and isnot considered part of the capitalized costs of the equipment to which itrelates.  We may also be able to obtainseparate financing for the IGV.

 
|                                  |   | **($ millions)** |   |
|---------------------------------------|--------|-----------------------|--------|
| Power plant  and related equipment    |   |                  | 43.0   |   |
| Platform and wells                    |   | 11.0                  |   |
| Pipeline to Arenillas                 |   | 20.0                  |   |
| Pipeline to Caleta Cruz               |   | 6.0                   |   |
| Processing facilities                 |   | 9.0                   |   |
| Environmental studies and engineering |   | 1.0                   |   |
| Contingencies                         |   | 10.0                  |   |
| Total  estimated capital budget       |   |                  | 100.0  |   |

 

**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.  Managementbelieves it has adequateresources to be able tocover the minimum required general and administrative overhead of the Companyand also permit limited expenditures for environmental and engineering studiesand other design activities to allow us to begin implementing the ongoinggas-power strategy during 2005.  However,full implementation of our plans will require significant additional financingfor which no firm commitments have been received.  We are seeking financing for the 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. We are in discussions with potential financing sources and we believewe will be successful in obtaining funding for this project; however, there canbe no assurance that we will be able to do so.

 

**Off-BalanceSheet Arrangements**

 

As of March 31,2005, we had no transactions, agreements or other contractual arrangements withunconsolidated entities or financial partnerships, often referred to as specialpurpose entities, 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.

 

20

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Those estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities.  Wehave identified the following as critical accounting policies directly relatedto our business and operations, and the understanding of our financialstatements.

 

***SuccessfulEfforts 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 firmly plannedto 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 described 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 new exploratory area in hopes of finding oiland gas reserves.  Seismic costs can besubstantial which will result in additional exploration expenses whenincurred.  The initial exploratory wellsmay be unsuccessful and the associated costs will then be expensed as dry holecosts and any associated leasehold costs may be impaired.

 

***Impairmentof Long-Lived Assets***

 

We periodicallyevaluate the recoverability of the carrying value of our 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 (a) asignificant decrease in the market value of an asset, (b) a significantchange in the extent or matter in which an asset is used or a significantphysical change in an asset, (c) a significant adverse change in legalfactors or in the business climate that could affect the value of an asset oran adverse action or assessment by a regulator, (d) an accumulation ofcosts significantly in excess of the amount originally expected to acquire orconstruct an asset, and/or (e) a current period operating or cash flow losscombined with a history of operating or cash flow losses or a projection orforecast that demonstrates continuing losses associated with an asset used forthe purpose of producing revenue.

 

We considerhistorical performance and anticipated future results in our evaluation ofpotential impairment.  Accordingly, whenindicators of impairment are present, we evaluate the carrying value of theseassets in relation 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 than itscarrying value.

 

***FutureDismantlement, 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

 

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reasonable estimateof fair value can be made.  Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset.  Theaccrual is based on estimates of these costs for each of our properties basedupon the type of production structure, reservoir characteristics, depth of thereservoir, market demand for equipment, currently available procedures andconsultations with construction and engineering consultants.  Because these costs typically extend manyyears into the future, estimating these costs is difficult and requiresmanagement to make estimates and judgments that are subject to future revisionsbased on numerous factors, including changing technology, the political andregulatory environment and estimates as to the proper discount rate to use andtiming of abandonment.

 

Our plan ofoperations includes 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.

 

***StockBased Compensation***

 

As permitted underSFAS No. 123, “Accounting for Stock-Based Compensation,” we follow theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). Under APB 25, compensation expense is recorded for stock options grantedto employees and directors only if the current market price of the underlyingstock exceeds the exercise price. Transactions in equity instruments with non-employees for goods orservices are accounted for under the fair value method.  For periods beginning after December 15,2005, we will be required to account for all transactions which result in theexchange of equity instruments for goods and services, including stock optionsgranted to employees and directors, under SFAS 123(R), “Share-Based Payment.”  SFAS 123(R) requires that all suchtransactions be measured at fair value and recorded as an expense over theservice period.

 

None of the equityinstruments that we issued in exchange for goods and services during theperiods covered by this report were eligible for treatment under the intrinsicvalue method in APB 25 and all of such issuances gave rise to stock-basedcompensation expense based on the fair value of the instruments at the date ofgrant or issuance.  Accordingly, ourresults of operations for the periods presented would not have been affectedhad we been subject to the provisions SFAS 123(R) for such periods.

 

**DisclosureRegarding Forward-Looking Statements**

 

BPZ cautions that this document containsforward-looking statements.  Allstatements, other than statements of historical facts, included in orincorporated by reference into this Form 10-QSB which address activities,events or developments which the Company expects, believes or anticipates will or may occur in the future areforward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts,” “plans” and similar expressions, or thenegative thereof, are also intended to identify forward-lookingstatements.  In particular, statements,expressed or implied, concerning future operating results, the ability toreplace or increase reserves, or to increase production, or the ability togenerate income or cash flows are by nature, forward-looking statements.  These statements are based on certainassumptions and analyses made by the management of BPZ in light of itsexperience and its perception of historical trends, current conditions andexpected future developments as well as other factors it believes areappropriate in the circumstances. However, forward-looking statements are not guarantees of performanceand no assurance can be given that these expectations will be achieved.

 

Important factors that could cause actualresults to differ materially from the expectations reflected in theforward-looking statements include, but are not limited to any of the followingeither domestically or internationally or in the jurisdictions in which BPZ orits subsidiaries are doing business:  thetiming and extent of changes in commodity prices for crude oil, natural gas andrelated products, currency exchange rates, interest rates, inflation, theavailability of goods and services, drilling and other operational risks,availability of capital resources, legislative or regulatory changes, politicaldevelopments, acts of war and terrorism. A more detailed discussion on risks relating to the oil and natural gasindustry and our Company is included in the Company’s Annual Report on Form 10-KSB/Afiled with the SEC.

 

In light of these risks, uncertainties andassumptions, BPZ cautions the reader that these forward-looking statements aresubject to risks and uncertainties, many of which are beyond BPZ’s control,which could cause actual events or results to differ materially from thoseexpressed or implied by the statements. All subsequent written and oral forward-looking statements attributableto the Company, or persons acting on its behalf, are expressly qualified intheir entirety by the cautionary statements. BPZ undertakes no obligations to update or revise its forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

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**Item 3.  Controls and Procedures**

 

**(a) Evaluation of Disclosure Controls and Procedures**

 

Asof March 31, 2005, Mr. Thomas E. Kelly was serving as the Chief ExecutiveOfficer and Chief Financial Officer of the Company.  Mr. Kelly, in conjunction with the Company’smanagement and its accounting and legal advisors, carried out an evaluation of theeffectiveness of our disclosure controls and procedures as defined in Rule13a-15(e) of the Exchange Act, as of the end of the period covered by thisreport.  Based on this evaluation, theCompany concluded that its disclosure controls and procedures were noteffective to ensure that (i) the information required to be disclosed inits SEC reports is consistently recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and(ii) the information required to be disclosed by the Company in its SECreports is accumulated and communicated to the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Thesignificant deficiency in the Company’s disclosure controls and procedures,which was first identified by management in connection with its evaluation ofsuch controls as of September 30, 2004, was the lack of qualified accountingand financial management personnel.  Mr.Kelly, who was serving as both the Company’s Chief Executive Officer and ChiefFinancial Officer on March 31, 2005, is not a Certified Public Accountant, nordid the Company have any full-time employees or officers who possess thetraining and experience typically expected of the Chief Accounting Officer orChief Financial Officer of a public company. Prior to the completion of the reverse merger with Navidec, Inc.,BPZ Energy, Inc. was a private company and did not have the need forpersonnel with those skills.

 

Basedprimarily on the conclusion that the Company’s disclosure controls andprocedures were not effective, the Company engaged various accounting andfinancial consultants to assist it in taking the necessary corrective actionsto improve the Company’s disclosure controls and procedures and to providereasonable assurance that information required to be disclosed by the Companyin the reports that the Company files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.  Further,in January 2005, the Company hired a Controller and in May 2005 hired a ChiefFinancial Officer, both of whom are Certified Public Accountants.  As of the original filing date of thisreport, the Company was unable to estimate when the necessary correctiveactions would be completed or when its disclosure controls and procedures wouldbe considered effective.

 

Subsequentto the original filing of this report, the Company, on November 17, 2005,concluded that it needed to restate its previously issued ConsolidatedFinancial Statements as of and for the year ended December 31, 2004 and for thethree months ended March 31, 2005, as described in Note 2 to the ConsolidatedFinancial Statements.  The Company alsorestated its financial statements for the quarterly period ended June 30,2005.  The primary purpose of therestatement was to reflect the previously unrecorded nominal ownership interestin Navidec Financial Services, Inc. (“NFS”) using the equity method ofaccounting and its effects on the accounting treatment of the Merger withNavidec, Inc.  Management of the Companyhad previously concluded that the spin-off of NFS had been legally consummatedas of the Merger date on September 10, 2004. The Company also restated certain reorganization and merger costsassociated with the Merger and presented the Company as a development stagecompany.  Management of the Companybelieves that the accounting and disclosure decisions related to therestatement are complex and require substantial judgment based oninterpretations of various

 

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accountingstandards.

 

TheCompany’s management and Audit Committee have discussed the restatement issueswith Johnson, Miller & Co., its independent registered public accountingfirm.  After reviewing the restatementissues, the Company’s management and Audit Committee believe that, while therestatement is considered a significant deficiency in the Company’s disclosurecontrols and procedures, the primary circumstances that resulted in therestatement are unique to the complex accounting issues and interpretationsmade in connection with the Merger and occurred at a time when the Company hadidentified a significant deficiency in its disclosure controls andprocedures.  Subsequent to that time, theCompany has hired a Controller and a Chief Financial Officer, both of whom areCertified Public Accountants.  TheCompany believes that the corrective actions it has taken since the end of theperiod covered by this report, as described above, adequately address thesignificant deficiency associated with the restatement.  Accordingly, management of the Company does notplan to implement any further changes to its disclosure controls and procedureswith respect to the restatement.

 

**(b) Changes in Internal Controls over Financial Reporting**

 

Therewere no changes in our internal controls that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

See Note 11 of the Notes to Unaudited Consolidated Financial Statements included in Item I, which is incorporated herein by reference.

 

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

 

None.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  Submission of Matters to a Vote of Securities Holders**

 

The Company held a special meetingof shareholders on February 4, 2005, the purpose of which was to amend theCompany’s Articles of Incorporation to change the name of the Company to BPZEnergy, Inc.  The matter passed with64.2% of the shares voting in favor of the name change as detailed in the tablebelow:

 
| ** **       | ** ** | **Outstanding**   | ** ** | ** ** | ** ** |
|------------------|------------|-------------------|------------|------------|------------|
| **Type of vote** | ** ** | **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      | %          |

 

**Item 5.  Other Information**

 

None.

 

**Item 6.  Exhibits**

 

(a) Exhibits

 

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.  (Filed herewith)

 

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.  (Filed herewith)

 

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.  (Filed herewith)

 

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.  (Filed herewith)

 

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**SIGNATURES**

 

In accordance with the requirements of the Securities Exchange Act, the registrant has 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 and Chief Executive Officer |
|                                  |
| Date: January 17, 2006           |

 

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