** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-QSB**

 

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

 

**For the quarterly period ended:**

 

**March 31, 2005**

 

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

 

**For the transition period from            to           **

 

**Commission File Number: 000-29098**

 

**BPZENERGY, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**11999 Katy Freeway, Suite 560****Houston, Texas 77079**(Address of principalexecutive office)

 

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

 

Check whether the issuer (1)filed all 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 to suchfiling requirements for the past 90 days. Yes ý No o

 

As of May 1, 2005, there were 16,911,237shares of common stock outstanding.  Suchtotal excludes 9,000,000 shares of common stock which are issuable pursuant tothe terms of the Merger agreement with Navidec, Inc., but which cannot beissued until the shareholders have approved an increase in the number ofauthorized shares of the Company.

 

Transitional Small BusinessDisclosure Format:  Yes o No ý

 

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**TABLE OF CONTENTS**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                            |   |
|-----------------------------------|-------------------------------------------------------------------------------------------------|--------|
|                              |                                                                                            |   |   |
| Item 1.                           | Financial Statements  (unaudited)                                                               |   |   |
|                              |                                                                                            |   |   |
|                              | 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  Statements 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**

 

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                       | ** ** | **March 31,**

**2005** | ** ** | **December 31,**

**2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **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:                                                                                                                                                          |       |                    |       |                       |       |
| Office equipment                                                                                                                                                                 |       | 13,884                  |       | 5,662                      |       |
| Less accumulated depreciation                                                                                                                                                    |       | (808                    | )          | (157                       | )          |
| Net property and equipment                                                                                                                                                       |       | 13,076                  |       | 5,505                      |       |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Restricted cash                                                                                                                                                                  |       | 1,300,000               |       | —                     |       |
| Investment in SMC Ecuador, net                                                                                                                                                   |       | 627,921                 |       | 642,000                    |       |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Total assets                                                                                                                                                                     |       | $                       | 3,766,538  |                       | $          | 4,833,855 |   |
|                                                                                                                                                                             |       |                    |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                   |       |                    |       |                       |       |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Current liabilities:                                                                                                                                                             |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                                 |       | $                       | 212,994    |                       | $          | 311,612 |   |
| Notes payable                                                                                                                                                                    |       | 121,641                 |       | 208,986                    |       |
| Accrued liabilities                                                                                                                                                              |       | 203,536                 |       | 54,342                     |       |
| Total current liabilities                                                                                                                                                        |       | 538,171                 |       | 574,940                    |       |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Stockholders’ equity:                                                                                                                                                       |       |                    |       |                       |       |
| Common stock, no par value, 20,000,000 authorized; 16,891,237 and  16,529,848 shares issued and outstanding at March 31, 2005 and  December 31, 2004, respectively (a) |       | 14,553,345              |       | 13,393,286                 |       |
| Additional paid in capital — warrants and stock options                                                                                                                     |       | 8,342,566               |       | 9,502,625                  |       |
| Stock subscription receivable                                                                                                                                                    |       | (230,825                | )          | (230,825                   | )          |
| Accumulated deficit                                                                                                                                                              |       | (19,436,719             | )          | (18,406,171                | )          |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Total stockholders’ equity                                                                                                                                                  |       | 3,228,367               |       | 4,258,915                  |       |
|                                                                                                                                                                             |       |                    |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                  |       | $                       | 3,766,538  |                       | $          | 4,833,855 |   |

----

(a)          As discussed in Note 5, such totalsexclude 9,000,000 shares of common stock which are issuable pursuant to the terms of theMerger agreement with Navidec, Inc., but which cannot be issued until theshareholders have approved an increase in the number of authorized shares ofthe Company.

 

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

 

 

3

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**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenue                                                 |       | $                                | —     |   | $ | — |   |
|                                                    |       |                             |       |   |   |
| Operating and administrative expenses:                  |       |                             |       |   |   |
| General and administrative                              |       | 960,789                          |       | 102,445 |   |
| Geological, geophysical and engineering                 |       | 138,065                          |       | 238 |   |
| Depreciation expense                                    |       | 650                              |       | — |   |
|                                                    |       |                             |       |   |   |
| Total operating expenses                                |       | 1,099,504                        |       | 102,683 |   |
|                                                    |       |                             |       |   |   |
| Operating loss                                          |       | (1,099,504                       | )          | (102,683 | ) |
|                                                    |       |                             |       |   |   |
| Other income (expense):                                 |       |                             |       |   |   |
| Investment income from SMC Ecuador, net of amortization |       | 95,095                           |       | — |   |
| Interest expense                                        |       | (5,662                           | )          | (15,800 | ) |
| Amortization of deferred financing costs                |       | (28,955                          | )          | — |   |
| Miscellaneous income                                    |       | 8,478                            |       | — |   |
|                                                    |       |                             |       |   |   |
| Total other income (expense)                            |       | 68,956                           |       | (15,800 | ) |
|                                                    |       |                             |       |   |   |
| Loss before income taxes                                |       | (1,030,548                       | )          | (118,483 | ) |
|                                                    |       |                             |       |   |   |
| Income taxes                                            |       | —                           |       | — |   |
|                                                    |       |                             |       |   |   |
| Net loss                                                |       | $                                | (1,030,548 | ) | $ | (118,483 | ) |
|                                                    |       |                             |       |   |   |
|                                                    |       |                             |       |   |   |
| Basic and diluted net loss per share                    |       | $                                | (0.06      | ) | $ | (0.03 | ) |
|                                                    |       |                             |       |   |   |
| Weighted average common shares outstanding              |       | 16,706,527                       |       | 4,103,454 |   |

 

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

 

4

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**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

# **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY****(DEFICIT)**

**(Unaudited)**

 

**ThreeMonths Ended March 31, 2005**

 

 
| ** **                                       | ** ** | ** ** | ** ** | **Additional Paid in Capital** | ** ** | **Stock Subscription Receivable** | ** ** | **Accumulated Deficit** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------------|------------|-------------------------|------------|------------|------------|
| **Common Stock**                                 |
| ** **                                       | ** ** | **Shares** | ** ** | **Amount**                     | ** ** |
| Balance, December 31, 2004                       |       | 16,529,848 |       | $                              | 13,393,286 |                              | $          | 9,502,625               |       | $          | (230,825   | ) | $ | (18,406,171 | ) | 4,258,915 |   |
| Exercise of stock options assumed at acquisition |       | 361,389    |       | 1,160,059                      |       | (1,160,059                        | )          |                    |       | —     |       | — |   |
| Net loss for the first quarter                   |       | —     |       | —                         |       | —                            |       |                    |       | (1,030,548 | )          | (1,030,548 | ) |
| Balance, March 31, 2005                          |       | 16,891,237 |       | $                              | 14,553,345 |                              | $          | 8,342,566               |       | $          | (230,825   | ) | $ | (19,436,719 | ) | $ | 3,228,367 |   |
|                                                  |            |            |            |                                |            |                                   |            |                         |            |            |            |  |  |  |  |  |  |  |  |

----

(a)   As discussed in Note 5, such totals exclude9,000,000 shares of common stock which are issuable pursuant to the terms ofthe Merger agreement with Navidec, Inc., but which cannot be issued until theshareholders have approved an increase in the number of authorized shares ofthe Company.

 

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

 

 

5

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**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

 

** (Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                        |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (1,030,548 | ) | $ | (118,483 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                             |       |   |   |
| Depreciation expense                                                         |       | 650                              |       | — |   |
| Amortization of investment in SMC Ecuador                                    |       | 14,079                           |       |   |   |
| Amortization of deferred financing fees                                      |       | 28,955                           |       | — |   |
| Other current assets                                                         |       | (11,036                          | )          | — |   |
| Accounts payable                                                             |       | (98,617                          | )          | 3,975 |   |
| Accrued liabilities                                                          |       | 149,193                          |       | 1,150 |   |
|                                                                         |       |                             |       |   |   |
| Net cash used in operating activities                                        |       | (947,324                         | )          | (113,358 | ) |
|                                                                         |       |                             |       |   |   |
| Cash flows from investing activities:                                        |       |                             |       |   |   |
| Property and equipment additions                                             |       | (8,222                           | )          | — |   |
| Increase in restricted cash                                                  |       | (1,200,000                       | )     | — |   |
|                                                                         |       |                             |       |   |   |
| Net cash used in investing activities                                        |       | (1,208,222                       | )          | — |   |
|                                                                         |       |                             |       |   |   |
| Cash flows from financing activities:                                        |       |                             |       |   |   |
| Borrowings                                                                   |       | —                           |       | 150,000 |   |
| Payments on borrowings                                                       |       | (87,344                          | )          | — |   |
| Advances to affiliates                                                       |       | —                           |       | (37,800 | ) |
|                                                                         |       |                             |       |   |   |
| Net cash (used in) provided by financing activities                          |       | (87,344                          | )          | 112,200 |   |
|                                                                         |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (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  |   | $ | 6,998 |   |

 

 

 
| **Supplemental cash flow information:** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash paid for:**                      |       |       |       |   |   |
|                                    |       |       |       |   |   |
| Interest                                |       | $          | 6,754      |   | $ | — |   |
|                                         |            |            |            |  |  |  |  |  |

 

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

 

6

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**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED****FINANCIAL STATEMENTS**

**(Unaudited)**

 

** **

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

 

**Interim Reporting**

 

Theunaudited consolidated financial statements of BPZ Energy, Inc. and itssubsidiaries (the “Company”) included herein have been prepared pursuant to the rules and regulations ofthe Securities and Exchange Commission as they pertain to Form 10-QSB.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted 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.  All such adjustments are ofa normal recurring nature.  Theconsolidated balance sheet at December 31, 2004 is derived from theDecember 31, 2004 audited consolidated financial statements.  These interim financial statements should beread in conjunction with the consolidated financial statements and notesthereto included in the Company’s annual report on Form 10-KSB for the yearended December 31, 2004.  The results ofoperations for interim periods are not necessarily indicative of the results tobe expected for the full year.

 

**Organization**

 

BPZEnergy, Inc. (“BPZ” or the “Company”), a Colorado corporation, was incorporatedin 1993. On September 10, 2004, the Company, at that time known asNavidec, Inc. (“Navidec”), consummated a reverse merger (the “Merger”) with BPZEnergy, Inc., a Texas corporation,(“BPZ-Texas”), an oil and gas exploration andproduction (E&P) company, whereby, BPZ-Texas became a wholly ownedsubsidiary of Navidec.  For accountingpurposes, the Merger was treated as an acquisition of Navidec by BPZ-Texas.  In connection with the Merger, we changed ourname to “BPZ Energy, Inc.” on February 4, 2005.  BPZ is headquartered in Houston, Texas andmaintains an office in Lima, Peru. Though its name has been changed, the pre-Merger company may be referred toas Navidec in this filing to avoid confusion.

 

The Merger agreement provided that all of the pre-Merger business operations, assets and liabilities of Navidec, Inc. be transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. (“NFS”), to be followed by the spin-off of NFS to the shareholders of record as of September 9, 2004.  This transaction was deemed effective on a pre-Merger basis under the terms of the merger agreement.

 

Ourcurrent business is the development and production of oil and natural gasreserves and the complementary development of gas-fired power generation inSouth America.  In 2001, BPZ registered abranch in Peru, officially designated “BPZ Energy, Inc. Sucursal Peru.”  Presently, the Company has exclusive rightsand licensing agreements for oil and gas exploration and production covering atotal of approximately 2.76 million acres in four blocks in northwestPeru; Block Z-1, Block XIX, Area VI and Area XVI.  In addition, in June 2004, BPZ acquiredall of the capital stock of SMC Ecuador, Inc., a Delaware corporationwhich owns a non-operated working interest in certain producing properties insouthwest Ecuador.

 

**NewAccounting Pronouncements**

 

InApril 2005, the Financial Accounting Standards Board (“FASB”) issued FASB StaffPosition (“FSP”) 19-1 (“FSP 19-1”) “Accounting for Suspended Well Costs.”  This FSP provides guidance on the accountingfor exploratory well costs to companies who use the successful efforts methodof accounting.  The FSP states thatexploratory well costs should continue to be capitalized if:  1) a sufficient quantity of reserves arediscovered in the well to justify its completion as a producing well and 2)sufficient progress is made in assessing the reserves and the well’s economicand operating feasibility.  If theexploratory well costs do not meet both to these criteria, these costs shouldbe 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 the period to period of capitalizedexploratory well costs for wells that are pending the determination of provedreserves, 2) the amount of exploratory well costs that have been capitalizedfor a period greater than one year after the completion of drilling and 3) anaging of exploratory well costs suspended for greater than one year with thenumber of wells it related to.  Further,the disclosures should describe the activities undertaken to evaluate thereserves and the projects, the information still required to classify theassociated reserves as proved and the estimated timing for completing theevaluation.  The guidance in the FSP isrequired to be applied to the 

 

7

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firstreporting period beginning after April 4, 2005 on a prospective basis toexisting and newly capitalized exploratory well costs.  The guidance provided in FSP 19-1 may affectthe treatment of costs capitalized in future operations, but it would not havehad a material effect on amounts recorded in our consolidated statements offinancial position, results of operations or cash flow.

 

InMarch 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations.” FIN 47 clarifies the definition and treatment of conditional assetretirement obligations as discussed in SFAS Statement No. 143 “Accounting forAsset Retirement Obligations.”  Aconditional asset retirement obligation is defined as an asset retirementactivity in which the timing and/or method of settlement are dependent onfuture 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 is reasonably estimable.  FIN 47 is intended to provide moreinformation about long-lived assets, more information about future cashoutflows for these obligations and more consistent recognition of theseliabilities.  FIN 47 is effective forfiscal years ending after December 15, 2005. The Company does not believe that its financial position, results ofoperations or cash flows will be impacted FIN 47.

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 123(R) “Share-Based Payment,” an amendment to SAFS No. 123 which supersedesSFAS No. 148 “Accounting for Stock-Based Compensation — Transition andDisclosure.”  SFAS 123(R) establishesstandards for transactions in which an entity exchanges its equity instrumentsfor goods or services.  This standardrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award.  This eliminates theexception to account for such awards using the intrinsic method previouslyallowable under APB 25.  SFAS No. 123(R)also requires a public entity to present its cash flows provided by taxbenefits from stock options exercised in the Financing Cash Flows section ofthe Statement of Cash Flows.  In April2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) which providesguidance on SFAS No. 123 (R).  SAB 107permits registrants to choose an appropriate valuation technique or model toestimate the fair value of share options, assuming consistent application, andprovides 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 June 15,2005.  As we intend to use stock-basedcompensation in the future as a component of employee compensation, and we havepreviously followed the intrinsic method, the implementation of thispronouncement will reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be estimated at this time.

 

**Note2 — Other Current Assets**

 

Other current assets consist primarily ofdeferred financing costs related to the acquisition of SMCEcuador, Inc.  The Company isamortizing these costs to expense over the term of the financing.

 

###### **Note3 — Restricted Cash and Performance Bonds**

 

In connection with its properties in Peru,the Company has obtained various performance bonds to guarantee its obligationsand commitments.  As of March 31, 2005and December 31, 2004, BPZ had restricted cash deposits of $1,300,000 and$100,000, respectively, which collateralize performance bonds issued in thoserespective amounts.

 

BPZ also has an additional $240,000 inperformance bonds in connection with its properties in Peru.  Two individual shareholders of the Companyprovided guarantees or collateral to the financial institutions which issuedsuch bonds to secure the Company’s performance.

 

All of the performance bonds were issued byPeruvian banks and their terms are dictated by the corresponding licensecontract or technical evaluation agreement.

 

**Note4 — Investment in SMC Ecuador and Notes Payable**

 

The Company has made an election toaccount for this investment under the cost method.  Since substantially all of the assets of SMCEcuador consist of producing oil and gas properties, we are amortizing this investmenton a straight-line basis over the remaining term of the license agreement whichexpires in May of 2016.  Accordingly, werecorded $14,079 of amortization expense in the first quarter of 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 requires monthlyinstallment payments of $31,366, including imputed interest at 15%, throughJuly 1, 2005.  The remaining note payablebalance as of March 31, 2005 was $121,641.

 

 

8

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**Note5 — Stockholders’ Equity**

 

The Company has 20,000,000 shares of common stock, no par value, authorized by its Amended and Restated Certificate of Incorporation, of which 16,891,237 and 16,529,848 were issued and outstanding as of March 31, 2005 and December 31, 2004, respectively.  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. The Company intends to seek shareholder approval to increase the number of authorized shares to 250,000,000 at its 2005 annual meeting.

 
| ** **                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Stock options outstanding                  |       | 1,808,763           |       | 2,170,152              |       |
| Warrants outstanding                       |       | 2,629,000           |       | 2,629,000              |       |
| Shares issuable to consultant for services |       | 15,000              |       | 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      |       | 22,452,763          |       | 22,814,152             |       |

 

**Stock Options Outstanding**

 

Inconnection with the Merger, BPZ, as the accounting acquirer, assumed 1,332,076Navidec, Inc. stock options outstanding. All stock options were fully vested on the date of the Merger andexpire on September 10, 2007.  Exercise priceson these stock options range from $1.30 to $2.00 per share.  Under the terms of the Merger agreement, theCompany does not receive any of the proceeds from the exercise of these stockoptions.  Pursuant to the Merger agreement,the Company’s former subsidiary, NFS, is entitled to receive all proceeds fromthe exercise of these options.  Duringthe quarter ended March 31, 2005, there were 361,389 stock options exercised. As of March 31, 2005 and December 31, 2004, there were 808,763 and1,170,152, respectively, of such stock options outstanding.

 

Additionally,in connection with the Merger, 1,000,000 stock options were issued to theformer CEO of Navidec, Inc. at an exercise price of $1.30 per share.  The Company is entitled to the proceeds fromthe exercise of these options.  There were nooptions granted, expired or forfeited during the period.

 

Allof the above stock options were recorded at fair market value as of the date ofthe Merger.  Accordingly, no disclosureof pro forma results of operations under SFAS No. 123 is required.

 

**WarrantsOutstanding**

 

Inconnection with the Merger, BPZ, as the accounting acquirer, assumedoutstanding warrants to purchase 1,129,000 shares of Navidec, Inc. commonstock.  Of this total, 564,500 warrantshave an exercise price of $2.00 per share and 564,500 warrants have an exerciseprice of $4.00 per share.  All of suchwarrants expire on August 31, 2005, unless there are certain delays inobtaining the effectiveness of a registration statement which includes thewarrants.  The warrants are callable ifthe stock trades at or above the exercise price for a period of 10 consecutivedays and there is an effective registration statement which includes thewarrants.

 

Alsoin connection with the Merger, BPZ issued warrants to purchase 1,500,000 sharesof common stock at an exercise price of $2.00 per share in connection with anagreement for investor relations, public relations and other financial advisoryservices.  Such warrants expire on July31, 2006.

 

9

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**SharesIssuable to Consultant for Services**

 

Asof March 31, 2005, the Company had an obligation to issue 15,000 shares to aconsultant for services performed.  Suchshares cannot be issued until the shareholders have approved an increase in thenumber of authorized shares. Accordingly, the value of such shares, $63,750, has been reflected as aliability in the accompanying financial statements.

 

**MergerEarn-Out Shares**

 

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

 

**Note6 — Affiliate and Related Party Transactions**

 

As of March 31, 2005 andDecember 31, 2004 there were no affiliate and related party balances.  However, during the first quarter of 2004(prior to the Merger), BPZ-Texas made cash advances to its parent, BPZ &Associates, Inc., totaling $37,800.

 

**Note7 — Commitments and Contingencies**

 

TheCompany has various obligations and commitments in connection with itsproperties in Peru.  At the current stageof operations, these obligations relate primarily to technical services andevaluations and are largely discretionary as to timing and amount.  The Company performs a significant amount ofthese technical services using its internal staff and systems.

 

Inconnection with its Block Z-1 property, the Company posted a $1,300,000performance bond in January 2005.  Inorder to obtain the performance bond, the Company deposited an equivalentamount in a restricted account in a Peruvian bank.  To satisfy its current performance obligationunder of Block Z-1 license agreement, the Company must drill at least one wellor 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.

 

TheCompany will continue to make commitments in the ordinary course of business asit pursues its development plans for the properties.

 

**Note 8 —Legal Proceedings**

 

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

 

OnDecember 22, 2004, the Company received notice that the SEC had issued an OrderDirecting a Private Investigation and Designating Officers to Take Testimony,and would be conducting a formal investigation. We are cooperating fully with the SEC and are in discussions with theCommission regarding this matter. Although we intend to work to bring this matter to a prompt conclusion,we cannot make any assurance that the investigation will be solved positivelyor that it will not have negative effects on our limited resources or ourability to raise capital during the period of the investigation.

 

Asof March 31, 2005, a total of approximately $19,000, primarily in 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.  Accordingly, BPZ did not record these costsas an expense.

** **

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

 

**Business**

 

BPZ Energy, Inc. (“BPZ”or the “Company”), a Colorado corporation, formerly known as Navidec, Inc. (“Navidec”),was 

 

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incorporated in1993.  On September 10, 2004, BPZEnergy, Inc., a Texas corporation (“BPZ-Texas”), consummated a reverse mergerwith Navidec whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the“Merger”).  For accounting purposes,BPZ-Texas was treated as the acquiring entity. On February 4, 2005, we changed our name to “BPZ Energy, Inc.”  Though its name has been changed, thepre-Merger company may be referred to as Navidec in this filing to avoidconfusion.

 

BPZ, based in Houston,Texas, is an international energy company with properties in South America,specifically northwest Peru and southwest Ecuador.  The Company is focused on the development andproduction of oil and natural gas reserves and the complementary development ofgas-fired power generation.

 

In 2001, BPZ established aregistered branch in Peru, officially designated as “BPZ Energy, Inc.Sucursal Peru.”  Currently, we haveexclusive rights and license agreements for oil and gas exploration andproduction covering a total of approximately 2.76 million acres in northwestPeru.  BPZ acquired a minority workinginterest in the license contract for Block Z-1 in November 2001 andsubsequently acquired 100% ownership of the block in November 2004.  In addition, BPZ acquired a 100% workinginterest in the license contract for Block XIX in December 2003.  Generally, license contracts in Peru containan initial seven year exploration period and a total term of 30 years for oil developmentand production and 40 years for gas development and production.  In December 2003 the Company alsoentered into a Technical Evaluation Agreement for Area VI and a PromotionalTechnical Evaluation Agreement for Area XVI. These latter two Agreements give BPZ 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.

 

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 drilled any wells or recognizedany revenues from our operations and do not anticipate generating significantrevenues from our properties prior to mid-2006.

 

In June 2004, BPZ acquired allof the capital stock of SMC Ecuador, Inc. (“SMC”), a Delaware corporation,which owns a non-operated working interest in certain oil and gas producingproperties located in the southwest region of the Republic of Ecuador (the “SantaElena Properties”).  SMC has had itsinterest in the Santa Elena Properties for the past eight years.  The license agreement covering the propertyexpires in May 2016.

 

**Results ofOperations**

 

We are in the early stage ofdeveloping our properties in Peru and we do not currently have any productionor revenues from these properties.  Todate, our operations have consisted primarily of technical evaluation of theproperties and the design of development plans to exploit the oil and gasresources on those properties.

 

Our operating and administrativeexpenses to date have consisted principally of general and administrative costsand geological, geophysical and engineering costs.  General and administrative costs haveincreased significantly from $102,445 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 public company.  We incurred $138,065 of geological,geophysical and engineering costs in the first quarter of 2005 primarilyrelated to our Block Z-1 project, compared to $238 in this category in sameperiod of 2004.

 

We also incurred interest expenseof $5,662 and amortization of debt financing costs of $28,955 in the firstquarter of 2005, principally from notes payable incurred to finance theacquisition of SMC in June 2004. Since substantially all of the assets of SMC consist of producing oiland gas properties, we are amortizing this investment on a straight-line basisover the remaining term of the license agreement covering the property.  Accordingly, we recorded $14,079 ofamortization expense in the first quarter of 2005.  This property generated net cashdistributions of $109,174 during the first quarter of 2005.

 

The Company realized a net loss of$1,030,548, or $0.06 per share, for the quarter ended March 31, 2005, ascompared to as net loss of $118,483, or $0.03 per share for the same period in2004.

 

**Plan ofOperation**

 

Our plan of operation for the nexttwelve months is focused primarily on exploiting the resource opportunities inthe offshore Block Z-1 in northwest Peru, in which we own a 100%working interest.  To achieve ourobjectives, we must obtain significant financing from external sources.  We are working to develop external financingoptions, but we do not currently have sufficient capital resources, nor do wecurrently have firm commitments from external sources to allow us to undertakeall of the operations envisioned in this plan.

 

 

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Our plan of operation envisions theinstallation of a 140 megawatt (‘‘MW’’) gas-fired electric generation complexnear the town of Caleta Cruz, in northwest Peru.  This power plant will initially use gas fromthe Corvina Field in Block Z-1, which is located approximately 10 milesoffshore from the power plant site.  TheCorvina Field has an existing platform which will be refurbished to make itsuitable for drilling operations.  Thereis also a shut-in gas well which we intend to recomplete and utilize for gasproduction.  Our initial plans call forthe drilling of three additional wells from the existing platform.  We are working to have the environmental anddrilling permits and platform refurbishment completed by October 2005 andwe 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 a 10 mile naturalgas pipeline to transport natural gas from the Corvina Field to the power plantsite at Caleta Cruz.  The power plantsite has an existing substation and power transmission lines that with certainupgrades 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 support our proposedelectric generation project, we recently commissioned an independent powermarket analysis for the region.  ThePeruvian electricity market is deregulated and power is transportable on aninterconnected national grid managed by the Committee for Economic Dispatchingof Electricity (known as “COES”).  Basedon this study, we are confident that we will be able to sell economicquantities of electricity from our initial 140 MW power plant at CaletaCruz.  We believe there may be anopportunity in the future to generate and profitably sell up to 600 MW of powerinto the Peruvian and Ecuadorian power markets. Our goal is to commence initial sales of electricity by July 2006.

 

The environmental studies for theoperations needed to develop and transport natural gas from the Corvina Fieldto the power plant site and to construct the power plant were initiated duringthe first quarter of 2005.  We alsoinitiated engineering studies for the power plant, pipeline and otherfacilities during the first quarter of 2005.

 

In addition to the local powermarket targeted by our project in Peru, we intend to simultaneously develop agas-power strategy in nearby Ecuador to capitalize on what we believe to besignificant 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 a40-mile pipeline from Caleta Cruz, the terminal point of our offshore pipelinefrom the Corvina Field, to Arenillas, Ecuador. We intend to sell gas for the generation of electricity by third partypower producers in the local market in Ecuador. We have negotiated three preliminary agreements for delivery ofgas.  We are planning to have thispipeline completed for first sales by October 2006, though no assurancecan be given that we can meet this schedule.

 

We have secured the environmentalpermits and other authorizations to shoot seismic in Block Z-1 and BlockXIX.  However, our primary goal isdevelopment of the gas production from Block Z-1 to supply the proposed powerplant at Caleta Cruz.  Accordingly, thetiming of seismic acquisition is dependent upon securing sufficient financialresources for that project.

 

Our other two exploration areas inPeru, Area VI and Area XVI, which are held by BPZ under exclusive TechnicalEvaluation Agreements, will undergo geological studies and analysis duringcalendar year 2005.  While relativelyinexpensive, these activities, when integrated with previously acquiredgeophysical and geological data, should provide us with an indication of theexploration and development potential of these areas.

 

We are currently developingengineering plans and designs for the various components of our plan ofoperation.  We have not obtained outsidebids for all of the major equipment components, shipping and installation andassociated services.  Such bids andestimates, when obtained, will be subject to change and contingencies.  Accordingly, we do not have a completeestimate of the total costs of the initial phases of the project.  However, based on our current estimates, weexpect that the initial phases of the project, including the cost of thenatural 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%.  Certain expendituresare 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.

 

| Power plant and related equipment     |   | $    | 43.0   |   | million |   |
|---------------------------------------|--------|------|--------|--------|---------|--------|
| 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  |   | million |   |

 

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**Liquidity,Capital Resources and Capital Expenditures**

 

Prior to the Merger, the Companyprimarily used debt financing to fund its operations. In connection with theMerger, the Company received total net proceeds of approximately$5.5 million from a private placement of its common stock.  Management believes it has adequate resources to be able to cover the minimum required general and administrativeoverhead of the Company and also permit limited expenditures for environmentaland engineering studies and other design activities to allow us to beginimplementing the ongoing gas-power strategy during 2005.  However, full implementation of our planswill require significant additional financing for which no firm commitmentshave been received.  We are seekingfinancing for the project through a combination of leasing, debt and/or equityfunding.  The timing of this project isdependent on a variety of factors, including technical design of facilities,permitting, availability of equipment, delivery lead times, execution bycontractors, and availability of financing, many of which are outside thecontrol of the Company. We are in discussions with potential financing sourcesand we believe we will be successful in obtaining funding for this project;however, there can be no assurance that we will be able to do so.

 

**Off-Balance Sheet Arrangements**

 

Asof March 31, 2005, we had no transactions, agreements or other contractualarrangements with unconsolidated entities or financial partnerships, oftenreferred to as special purpose entities, which generally are established forthe purpose of facilitating off-balance sheet arrangements.

 

**Critical Accounting Policies andRecent Accounting Pronouncements**

 

The discussion and analysis of ourfinancial condition and results of operations is based on our consolidatedfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles (“GAAP”).  Management uses estimates and assumptions inpreparing the consolidated financial statements in accordance with GAAP.  Those estimates and assumptions affect thereported amounts of assets, liabilities, revenues and expenses in theconsolidated financial statements, and the disclosure of contingent assets andliabilities.  We have identified thefollowing as critical accounting policies as directly related to our businessand its operations, and the understanding of our financial statements.

 

***Successful Efforts Methodof Accounting***

 

We follow the successful effortsmethod of accounting for our investments in oil and gas properties.  Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the discovery of proved reserves and costs associatedwith development drilling, whether or not successful, are capitalized whenincurred.  Certain costs of exploratorywells are capitalized pending determinations that proved reserves have beenfound.  If the determination is dependentupon the results of planned additional wells and required capital expendituresto produce the reserves found, the drilling costs will be capitalized as longas sufficient reserves have been found to justify completion of the exploratorywell and additional wells are underway or firmly planned to complete theevaluation of the well.  All costsrelated to unsuccessful exploratory wells are expensed when such wells aredetermined to be non-productive or at the one year anniversary of completion ofthe well if proved reserves have not been attributed and capital expendituresas describe in the preceding sentence are not required.  We assess our capitalized exploratory wellspending evaluation each quarter to determine whether costs should remaincapitalized or should be charged to earnings. Other exploration costs, including geological and geophysical costs, areexpensed as incurred.  We will recognizegains or losses on the sale of properties, should they occur, on afield-by-field basis.

 

The application of the successfulefforts method of accounting requires management’s judgment to determine theproper designation of wells as either developmental or exploratory, which willultimately determine the proper accounting treatment of the costsincurred.  The results from a drillingoperation can take considerable time to analyze, and the determination thatcommercial reserves have been discovered requires both judgment and applicationof industry experience.  Wells may becompleted that are assumed to be productive and actually deliver oil and gas inquantities insufficient to be economic, which may result in the abandonment ofthe wells at a later date.  Seismic costsincurred to select development locations within a productive oil and gas fieldare typically treated as development costs and capitalized.  Judgment is required to determine when theseismic programs are not within proved reserve areas and therefore would becharged to expense as exploratory.  

 

 

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The evaluations of oil and gasleasehold acquisition costs requires management’s judgment to estimate the fairvalue of exploratory costs related to drilling activity in a given area.

 

The successful efforts method ofaccounting can have a significant impact on the operational results reportedwhen we enter a new exploratory area in hopes of finding oil and gasreserves.  Seismic costs can be substantialwhich will result in additional exploration expenses when incurred.  The initial exploratory wells may beunsuccessful and the associated costs will then be expensed as dry hole costsand any associated leasehold costs may be impaired.

 

***Impairment of Long-LivedAssets***

 

We periodically evaluate therecoverability of the carrying value of its long-lived assets and identifiableintangibles by monitoring and evaluating changes in circumstances that mayindicate that the carrying amount of the asset may not be recoverable.  Examples of events or changes incircumstances that indicate that the recoverability of the carrying amount ofan asset should be assessed include but are not limited to (a) a significantdecrease in the market value of an asset, (b) a significant change in theextent or matter in which an asset is used or a significant physical change inan asset, (c) a significant adverse change in legal factors or in the businessclimate that could affect the value of an asset or an adverse action orassessment by a regulator, (d) an accumulation of costs significantly in excessof the amount originally expected to acquire or construct an asset, and/or (e)a current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.

 

We consider historical performanceand anticipated future results in its evaluation of potential impairment.  Accordingly, when indicators or impairmentare present, we evaluate the carrying value of these assets in reaction to theoperating performance of the business and future discounted and non-discountedcash flows expected to result from the use of these assets.  Impairment losses are recognized when theexpected future cash flows from an asset are less its carrying value.

 

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

 

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

 

Our plan of operations includes thedrilling of wells and the construction of an electric power generationplant.  We will be required to plug andabandon those wells and restore the well site and power generation site uponcompletion of their production.  However,due to the fact that we have not yet begun operations, we do not havesufficient information to determine the timing, nor calculate the presentvalue, of the obligation.  Therefore, nosuch provision is reflected in the accompanying consolidated financialstatements.

 

***Stock Based Compensation***

 

As permitted under SFAS No. 123, “Accountingfor Stock-Based Compensation,” the Company accounts for its stock-basedcompensation for options issued to employees in accordance with the provisionsof Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”).  As such, foroptions granted to employees and directors, compensation expense is recorded ona straight-line basis over the shorter of the period that the services areprovided or the vesting period, only if the current market price of theunderlying stock exceeds the exercise price. Transactions in equity instruments with non-employees for goods orservices are accounted for by the fair value method.

 

**Disclosure Regarding Forward-LookingStatements**

 

BPZ cautions that this document containsforward-looking statements within the meaning of Section 27A of theSecurities Act and Section 21E of the Exchange Act.  All statements, other than statements ofhistorical facts, included in or incorporated by reference into this Form10-QSB which address activities, events or developments which the Company 

 

 

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expects, believes or anticipates will or may occurin the future are forward-looking statements. The words “believes,” “intends,” “expects,”“anticipates,” “projects,” “estimates,” “predicts,” “plans” and similarexpressions, or the negative thereof, are also intended to identifyforward-looking statements.  Inparticular, statements, expressed or implied, concerning future operatingresults, the ability to replace or increase reserves, or to increaseproduction, or the ability to generate income or cash flows are by nature, forward-lookingstatements.  These statements are basedon certain assumptions and analyses made by the management of BPZ in light ofits experience 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 actual resultsto differ materially from the expectations reflected in the forward-lookingstatements include, but are not limited to any of the following eitherdomestically or internationally or in the jurisdictions in which BPZ or itssubsidiaries 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 Form10-KSB filed with the SEC on April 15, 2005.

 

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.

 

**Item 3****.  Controls and Procedures**

 

Priorto the completion of the reverse merger with Navidec, Inc., BPZ Energy, Inc.was a private company and lacked many of the accounting procedures anddisclosure controls necessary to operate effectively as a public company in thecurrent regulatory environment.  Prior toMay 16, 2005, the Chief Executive Officer of the Company, Thomas E. Kelly,served as the Chief Financial Officer of the Company.  Mr. Kelly is not a certified publicaccountant and does not possess the training and experience typically expectedof the Chief Accounting Officer or Chief Financial Officer of a public company.  On May 16, 2005, Mr. Manuel Pablo Zuniga- Pflucker, formerly our President, was named Chief Executive Officer of theCompany. Mr. Kelly will remain a member of our Board of Directors.

 

Beginningin the fourth quarter of 2004, Mr. Kelly, in conjunction with the Company’saccounting and legal advisors, reviewed the Company’s disclosure controls andprocedures and concluded that as of the end of the period covered by thisquarterly report on Form 10-QSB, the Company’s disclosure controls andprocedures were not adequate to ensure that (i) the information required to bedisclosed by the Company in its SEC reports is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure, and (ii) the information required to be disclosed in its SECreports is consistently recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

 

Inlight of the deficiencies and weaknesses identified in the Company’s disclosurecontrols and procedures as discussed above, the Company engaged variousconsultants to assist it in preparing the financial statements for the periodscontained in this report and Mr. Kelly and the Board of Directors haveconcluded, to the best of their knowledge and belief, that the financialinformation and disclosures contained in this report are complete and accurate.Further, subsequent to December 31, 2004, the Company took several actionsintended to improve the Company’s internal and disclosure controls, includingthe hiring of a Chief Financial Officer and Controller, both of whom areCertified Public Accountants, and engaged consultants to assist it in takingthe necessary corrective actions to establish and/or improve the Company’sdisclosure controls and procedures to ensure that material information relatingto the Company and its consolidated subsidiaries will be made known to it byindividuals within those entities, and that information required to bedisclosed in the Company’s SEC reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

 

**Changesin Internal Controls**

 

Duringthe first quarter of 2005, the Company installed additional internal anddisclosure control procedures in order to allow it to ensure that materialinformation relating to the Company and its consolidated subsidiaries will bemade known to it by individuals within those entities, and that informationrequired to be disclosed in the Company’s SEC reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.  Management of the Companybelieves it has made significant progress in establishing and improving itsinternal and disclosure controls, although such controls are not consideredfully adequate at this time.  Managementintends to continue to make the necessary improvements in its internal anddisclosure controls until such controls are adequate.

 

 

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**Limitationson the Effectiveness of Controls**

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.  Further, the design of acontrol system must reflect the fact that there are resources constraints, andthe benefits of controls must be considered relative to their costs.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement override of the control.

 

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

 

**Management’sReport on Internal Control over Financial Reporting**

 

OnMarch 2, 2005, the SEC announced that it has postponed, for one year, thecompliance date for reporting on internal control by non-accelerated filers andforeign private issuers regarding amendments to its rules under the SecuritiesExchange Act of 1934 that were adopted on June 5, 2003, pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  These registrants were scheduled to includein their annual report, a report by management on the company’s internalcontrol over financial reporting and an accompanying auditor’s report, forfiscal years ending on or after July 15, 2005. However, due to the SEC’s announced postponement, they must now begin tocomply in their annual reports for fiscal years ending on or before July 15,2006.  Nevertheless, the Company hascontracted with an external consultant to assist management in complying withthe internal control documentation, evaluation, and reporting provisions ofSarbanes-Oxley and plans to proceed with the project during the 2005 fiscalyear.

 

 

**PART II****- OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

See Note 8 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      | %          |

 

 

16

 

 

 

**Item 5****.  Other Information**

 

None.

 

**Item 6****.  Exhibits and Reports on Form 8-K**

 

(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)

 

(b) Reports on Form 8-K

 

None.

 

 

**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       |
| Chief Executive Officer              |
|                                 |
| Date: May 16, 2005              |

 

 

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