** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 
| **(Mark  One)**                     |
|-------------------------------------|
| ** **                          |
| **ý**                          | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                |
| **For the quarterly period ended:** |
|                                |
| **September 30, 2005**         |
|                                |
| **o**                               | **TRANSITION REPORT UNDER SECTION 13  or 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 bycheck mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o No ý

 

Asof December 31, 2005, there were 39,879,842 shares of common stockoutstanding.

 

Transitional Small BusinessDisclosure Format:  Yes o No ý

 

 

----

 

**TABLE OF CONTENTS**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                                     |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                     |   |
| Item 1.                                | Financial Statements  (unaudited as to September 30, 2005 and 2004)                                                 |   |
|                                   |                                                                                                                     |   |
|                                   | Consolidated Balance  Sheets as of September 30, 2005 and December 31, 2004                                    |   |
|                                   |                                                                                                                     |   |
|                                   | Consolidated  Statements of Operations for the Three Months and Nine Months Ended September 30, 2005 and  2004 |   |
|                                   |                                                                                                                     |   |
|                                   | Consolidated  Statement of Stockholders’ Equity for the Nine Months Ended September 30,  2005                  |   |
|                                   |                                                                                                                     |   |
|                                   | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 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                                                                                                                 |   |
|                                   |                                                                                                                     |   |
| **SIGNATURES**                         |                                                                                                                     |

 

2

----

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedBalance Sheets**

 
| ** **                                                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**              | ** ** | **(Restated)**              | ** ** |
| **ASSETS**                                                    |       |                         |       |                        |       |
|                                                          |       |                         |       |                        |       |
| Current assets:                                               |       |                         |       |                        |       |
| Cash and  cash equivalents                                    |       | $                            | 30,705,912 |                        | $          | 4,014,191 |   |
| Restricted  cash                                              |       | —                       |       | 100,000                     |       |
| Other                                                         |       | 508,887                      |       | 72,159                      |       |
| Total  current assets                                         |       | 31,214,799                   |       | 4,186,350                   |       |
|                                                          |       |                         |       |                        |       |
| Property, equipment and construction in  process, net         |       | 2,892,097                    |       | 5,505                       |       |
| Restricted cash                                               |       | 1,455,953                    |       | —                      |       |
| Investment in Ecuador property, net                           |       | 1,992,084                    |       | 969,240                     |       |
| Investment in Navidec Financial Services                      |       | 423,142                      |       | 1,130,511                   |       |
|                                                          |       |                         |       |                        |       |
| Total assets                                                  |       | $                            | 37,978,075 |                        | $          | 6,291,606 |   |
|                                                          |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                |       |                         |       |                        |       |
|                                                          |       |                         |       |                        |       |
| Current liabilities:                                          |       |                         |       |                        |       |
| Accounts  payable                                             |       | $                            | 246,020    |                        | $          | 311,613 |   |
| Accrued  liabilities                                          |       | 136,299                      |       | 54,342                      |       |
| Other  liabilities                                            |       | 22,324                       |       | —                      |       |
| Note payable                                                  |       | —                       |       | 208,986                     |       |
| Total  current liabilities                                    |       | 404,643                      |       | 574,941                     |       |
|                                                          |       |                         |       |                        |       |
| Stockholders’ equity:                                    |       |                         |       |                        |       |
| Preferred  stock, 25,000,000 authorized, none issued          |       | —                       |       | —                      |       |
| Common  stock, no par value, 250,000,000 authorized           |       | 58,680,464                   |       | 17,478,446                  |       |
| Additional  paid in capital — warrants and stock options |       | 2,415,663                    |       | 2,341,795                   |       |
| Deferred  stock-based compensation                            |       | (4,477,000                   | )          | —                      |       |
| Common stock  and warrants held by affiliate                  |       | (2,458,975                   | )          | (2,854,181                  | )          |
| Stock  subscription receivable                                |       | (230,825                     | )          | (230,825                    | )          |
| Deficit  accumulated during the development stage             |       | (16,355,895                  | )          | (11,018,570                 | )          |
|                                                          |       |                         |       |                        |       |
| Total  stockholders’ equity                              |       | 37,573,432                   |       | 5,716,665                   |       |
|                                                          |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity              |       | $                            | 37,978,075 |                        | $          | 6,291,606 |   |

 

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

 

3

----

 

**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Cumulative  Amounts from  Inception to  September 30,** | ** **  | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                                       | ** **  | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | ** **                                                     | ** **  | ** **                                | ** ** | **(Restated)**                           | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Revenue                                                                     |       | $                                                              | —      |                                      | $          | —                                   |       | $ | — |   | $ | — |   | $ | — |   |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Operating  and administrative expenses:                                     |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| General and  administrative                                                 |       | 4,910,555                                                      |        | 900,136                                   |       | 495,125                                  |       | 2,785,122 |   | 931,313 |   |
| Stock-based  compensation                                                   |       | 5,195,205                                                      |        | 526,000                                   |       | 4,339,935                                |       | 780,270 |   | 4,339,935 |   |
| Geological,  geophysical and engineering                                    |       | 889,010                                                        |        | 98,854                                    |       | 122,653                                  |       | 528,045 |   | 204,126 |   |
| Depreciation  expense                                                       |       | 5,450                                                          |        | 2,998                                     |       | —                                   |       | 5,293 |   | — |   |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Total  operating expenses                                                   |       | 11,000,220                                                     |        | 1,527,988                                 |       | 4,957,713                                |       | 4,098,730 |   | 5,475,374 |   |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Operating  loss                                                             |       | (11,000,220                                                    | )           | (1,527,988                                | )          | (4,957,713                               | )          | (4,098,730 | ) | (5,475,374 | ) |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Other income  (expense):                                                    |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Investment  income from Ecuador property, net of amortization               |       | 451,918                                                        |        | 141,628                                   |       | 141,373                                  |       | 304,057 |   | 141,373 |   |
| Equity in  loss of Navidec Financial Services                               |       | (3,697,820                                                     | )           | (762,823                                  | )          | (1,890,240                               | )          | (1,733,717 | ) | (1,890,240 | ) |
| (Loss) gain  on issuance of equity securities by Navidec Financial Services |       | (1,893,176                                                     | )           | 49,414                                    |       | (1,814,759                               | )          | — |   | (1,814,759 | ) |
| Interest  expense                                                           |       | (75,314                                                        | )           | (388                                      | )          | (26,461                                  | )          | (8,355 | ) | (58,061 | ) |
| Amortization  of deferred financing costs                                   |       | (428,000                                                       | )           | (9,652                                    | )          | (331,484                                 | )          | (67,562 | ) | (331,484 | ) |
| Interest  income                                                            |       | 212,073                                                        |        | 212,073                                   |       | —                                   |       | 212,073 |   | — |   |
| Miscellaneous  income                                                       |       | 74,644                                                         |        | 41,736                                    |       | 270                                      |       | 54,909 |   | 629 |   |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Total other  income (expense)                                               |       | (5,355,675                                                     | )           | (328,012                                  | )          | (3,921,301                               | )          | (1,238,595 | ) | (3,952,542 | ) |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Loss before  income taxes                                                   |       | (16,355,895                                                    | )           | (1,856,000                                | )          | (8,879,014                               | )          | (5,337,325 | ) | (9,427,916 | ) |
| Income taxes                                                                |       | —                                                         |        | —                                    |       | —                                   |       | — |   | — |   |
| Net loss                                                                    |       | $                                                              | (16,355,895 | )                                         | $          | (1,856,000                               | )          | $ | (8,879,014 | ) | $ | (5,337,325 | ) | $ | (9,427,916 | ) |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Basic and  diluted net loss per share                                       |       |                                                           |        | $                                         | (0.05      | )                                        | $          | (0.90 | ) | $ | (0.23 | ) | $ | (1.56 | ) |
|                                                                        |       |                                                           |        |                                      |       |                                     |       |   |   |   |   |
| Weighted  average common shares outstanding                                 |       |                                                           |        | 35,169,900                                |       | 9,882,153                                |       | 22,737,131 |   | 6,043,747 |   |

 

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

 

4

----

 

**BPZ Energy, Inc.and Subsidiaries**

**(ADevelopment Stage Company)**

# **Consolidated Statements of Stockholders’ Equity**

**NineMonths Ended September 30, 2005**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Common Stock Issued** | ** ** | **Additional  Paid-in** | ** ** | **Deferred  Stock-based** | ** ** | **Common  Stock and  Warrants  Held by** | ** ** | **Stock  Subscription** | ** ** | **Deficit  Accumulated  During the  Development** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|------------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Shares**              | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Compensation**                         | ** ** | **Affiliate**           | ** ** | **Receivable**                                    | ** ** | **Stage**  | ** ** | **Total** | ** ** |
|                                                       |       |                    |       |                    |       |                      |       |                                     |       |                    |       |                                              |       |       |       |   |   |
| Balances at December 31, 2004 (audited)  (restated)   |       | 16,581,385              |       | $                       | 17,478,446 |                      | $          | 2,341,795                                |       | $                       | —     |                                              | $          | (2,854,181 | )          | $ | (230,825 | ) | $ | (11,018,570 | ) | $ | 5,716,665 |   |
|                                                       |       |                    |       |                    |       |                      |       |                                     |       |                    |       |                                              |       |       |       |   |   |
| Stock-based compensation                                   |       | 15,000                  |       | 63,750                  |       | 225,000                   |       | —                                   |       | —                  |       | —                                            |       | —     |       | 288,750 |   |
| Exercise of stock options                                  |       | 401,389                 |       | 892,045                 |       | (260,902                  | )          | —                                   |       | —                  |       | —                                            |       | —     |       | 631,143 |   |
| Exercise of warrants                                       |       | 841,000                 |       | 2,613,510               |       | (215,230                  | )          | —                                   |       | —                  |       | —                                            |       | —     |       | 2,398,280 |   |
| Restricted stock awards                                    |       | 1,120,000               |       | 4,928,000               |       | —                    |       | (4,477,000                               | )          | —                  |       | —                                            |       | —     |       | 451,000 |   |
| Common stock issued to acquire property interest           |       | 250,000                 |       | 1,112,500               |       | —                    |       | —                                   |       | —                  |       | —                                            |       | —     |       | 1,112,500 |   |
| Common stock sold for cash, net of offering costs          |       | 11,466,000              |       | 31,917,213              |       | —                    |       | —                                   |       | —                  |       | —                                            |       | —     |       | 31,917,213 |   |
| Warrants issued in connection with sale of common  stock   |       | —                  |       | (325,000                | )          | 325,000                   |       | —                                   |       | —                  |       | —                                            |       | —     |       | — |   |
| Common stock issued pursuant to merger earn-out  agreement |       | 9,000,000               |       | —                  |       | —                    |       | —                                   |       | —                  |       | —                                            |       | —     |       | — |   |
| Net change in common stock and warrants held by  affiliate |       | —                  |       | —                  |       | —                    |       | —                                   |       | 395,206                 |       | —                                            |       | —     |       | 395,206 |   |
| Net loss for the period                                    |       | —                  |       | —                  |       | —                    |       | —                                   |       | —                  |       | —                                            |       | (5,337,325 | )          | (5,337,325 | ) |
|                                                       |       |                    |       |                    |       |                      |       |                                     |       |                    |       |                                              |       |       |       |   |   |
| Balances at September 30, 2005                        |       | 39,674,774              |       | $                       | 58,680,464 |                      | $          | 2,415,663                                |       | $                       | (4,477,000 | )                                                 | $          | (2,458,975 | )          | $ | (230,825 | ) | $ | (16,355,895 | ) | $ | 37,573,432 |   |

 

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 September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
| ** **                                                                   | ** ** | **2005**                                  | ** **  | **2005**                                 | ** ** | **2004**       | ** ** |
| ** **                                                                   | ** ** | ** **                                | ** **  | ** **                               | ** ** | **(Restated)** | ** ** |
| Cash flows from operating activities:                                        |       |                                      |        |                                     |       |           |       |
| Net loss                                                                     |       | $                                         | (16,355,895 | )                                        | $          | (5,337,325     | )          | $ | (9,427,916 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                      |        |                                     |       |           |       |
| Stock-based  compensation                                                    |       | 4,744,205                                 |        | 329,270                                  |       | 4,339,935      |       |
| Depreciation  expense                                                        |       | 5,450                                     |        | 5,293                                    |       | —         |       |
| Amortization  of investment in Ecuador property                              |       | 132,416                                   |        | 89,656                                   |       | 21,380         |       |
| Amortization  of deferred financing fees                                     |       | 428,000                                   |        | 67,561                                   |       | 331,484        |       |
| Amortization  of deferred compensation                                       |       | 451,000                                   |        | 451,000                                  |       | —         |       |
| Equity in  loss of Navidec Financial Services                                |       | 3,697,820                                 |        | 1,733,717                                |       | 1,800,240      |       |
| Loss on  issuance of equity securities by Navidec Financial Services         |       | 1,893,176                                 |        | —                                   |       | 1,814,759      |       |
| Changes in  operating assets and liabilities:                                |       |                                      |        |                                     |       |           |       |
| Increase in  other assets                                                    |       | (508,888                                  | )           | (504,289                                 | )          | 7,873          |       |
| Increase  (decrease) in accounts payable                                     |       | 246,021                                   |        | (65,592                                  | )          | 152,786        |       |
| Increase in  accrued liabilities                                             |       | 95,779                                    |        | 41,437                                   |       | 8,948          |       |
| Increase in  other liabilities                                               |       | 22,324                                    |        | 22,324                                   |       | —         |       |
| Net cash  used in operating activities                                       |       | (5,148,592                                | )           | (3,166,948                               | )          | (950,511       | )          |
|                                                                         |       |                                      |        |                                     |       |           |       |
| Cash flows from investing activities:                                        |       |                                      |        |                                     |       |           |       |
| Property and  equipment additions                                            |       | (2,897,547                                | )           | (2,891,885                               | )          | —         |       |
| Restricted  cash                                                             |       | (1,455,953                                | )           | (1,355,953                               | )          | (100,000       | )          |
| Acquisition  of Ecuador property                                             |       | (1,440,000                                | )           | —                                   |       | (1,440,000     | )          |
| Net cash  used in investing activities                                       |       | (5,793,500                                | )           | (4,247,838                               | )          | (1,540,000     | )          |
|                                                                         |       |                                      |        |                                     |       |           |       |
| Cash flows from financing activities:                                        |       |                                      |        |                                     |       |           |       |
| Borrowings                                                                   |       | 2,130,000                                 |        | —                                   |       | 1,895,000      |       |
| Repayments  of borrowings                                                    |       | (424,471                                  | )           | (208,986                                 | )          | (301,336       | )          |
| Proceeds  from exercise of warrants, net                                     |       | 2,398,280                                 |        | 2,398,280                                |       | —         |       |
| Proceeds  from sale of common stock, net                                     |       | 37,544,195                                |        | 31,917,213                               |       | 3,741,343      |       |
| Advances to  affiliates                                                      |       | —                                    |        | —                                   |       | 162,890        |       |
| Net cash  provided by financing activities                                   |       | 41,648,004                                |        | 34,106,507                               |       | 5,497,897      |       |
|                                                                         |       |                                      |        |                                     |       |           |       |
| Net increase in cash and cash equivalents                                    |       | 30,705,912                                |        | 26,691,721                               |       | 3,007,386      |       |
| Cash and cash equivalents at beginning of  period                            |       | —                                    |        | 4,014,191                                |       | 8,156          |       |
| Cash and cash equivalents at end of period                                   |       | $                                         | 30,705,912  |                                     | $          | 30,705,912     |       | $ | 3,015,542 |   |
|                                                                         |       |                                      |        |                                     |       |           |       |
| **Supplemental cash flow information:**                                      | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **     | ** ** |
| **Cash paid for:**                                                           | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **     | ** ** |
| Interest                                                                     |       | $                                         | 74,911      |                                     | $          | 10,968         |       | $ | — |   |
| **Non-cash items:**                                                          | ** ** | ** **                                | ** **  | ** **                               | ** ** | ** **     | ** ** |
| Common stock issued for property interest                                    |       | $                                         | 1,112,500   |                                     | $          | 1,112,500      |       | $ | — |   |
| Warrants issued to private placement agent                                   |       | 325,000                                   |        | 325,000                                  |       |           |       |
| Common stock issued in acquisition                                           |       | 5,713,565                                 |        | —                                   |       | 5,713,565      |       |
| Warrants and stock options assumed in  acquisition                           |       | 1,785,359                                 |        | —                                   |       | 1,785,359      |       |
| Common stock and warrants held by affiliate                                  |       | 2,458,975                                 |        | (395,206                                 | )          | 2,854,181      |       |
| Imputed financing costs                                                      |       | 428,000                                   |        | —                                   |       | 428,000        |       |
| Proceeds received by NFS from exercise of  stock options                     |       | 974,188                                   |        | 631,143                                  |       | 95,450         |       |
| Issuance of common stock for subscription  receivable                        |       | 230,825                                   |        | —                                   |       | 230,825        |       |
| Conversion of long-term debt to common  stock                                |       | 685,000                                   |        | —                                   |       | 685,000        |       |
| Conversion of notes payable to common stock                                  |       | $                                         | 1,020,529   |                                     | $          | —         |       | $ | 1,020,529 |   |

 

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

 

6

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**NotesTo Consolidated Financial Statements**

**September 30, 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 thedisclosures contained herein are adequate to make the information presented notmisleading.  The consolidated balancesheet at December 31, 2004 is derived from the December 31, 2004audited consolidated financial statements. These interim financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB/A for the year ended December 31,2004.  The results of operations forinterim periods are not necessarily indicative of the results to be expectedfor 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 2.7 million acres in northwest Peru. BPZ has license contractscovering 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.  If exploration efforts aresuccessful, the total contract term can extend up to 30 years for oildevelopment and production and 40 years for gas development andproduction.  In December 2003, theCompany entered into a Technical Evaluation Agreement for Area VI, which givesthe Company the right to conduct technical evaluations of the area over a 24-monthperiod and the exclusive right to enter into license contracts if the evaluationsindicate the potential for successful operations.  The Company recently initiated negotiationsto obtain a license contract for Area VI.

 

In June 2004, the Company acquired the capital stock of SMCEcuador, Inc., a Delaware corporation (“SMC”), which owns a 10%non-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 late2006 or early 2007.

 

7

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**New Accounting Pronouncements**

 

The following are recent accounting pronouncements affecting theCompany’s activities and operations:

 

In April 2005, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) 19-1, “Accounting for Suspended Well Costs.”  FSP 19-1 provides guidance on the accountingfor exploratory well costs to companies which 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 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 FSP 19-1 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 the consolidatedfinancial position, results of operations or cash flow for the periodspresented.

 

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,“Accounting for Conditional Asset Retirement Obligations.”  FIN 47 clarifies the definition and treatmentof conditional asset retirement obligations as discussed in Statement ofFinancial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement Obligations.”  A conditionalasset retirement obligation is defined as an asset retirement activity in whichthe timing and/or method of settlement are dependent on future events that maybe outside the control of the Company. FIN 47 states that a Company must record a liability when incurred forconditional asset retirement obligations if the fair value of the obligation isreasonably estimable.  FIN 47 is intendedto provide more information about long-lived assets, more information aboutfuture cash outflows for these obligations and more consistent recognition ofthese liabilities.  FIN 47 is effectivefor fiscal years ending after December 15, 2005.  The Company does not believe that itsfinancial position, results of operations or cash flows will be impacted by FIN47.

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-BasedPayment,” an amendment to SAFS No. 123 which supersedes SFAS No. 148,“Accounting for 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 the award.  This eliminates the exception to account forsuch awards using the intrinsic method previously allowable under AccountingPrinciples Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”.  SFAS 123(R) also requires a public entity topresent its cash flows provided by tax benefits from stock options exercised inthe cash flows from financing activities section of the Statementof Cash Flows.  In April 2005, theSEC issued Staff Accounting Bulletin (“SAB”) 107 which provides guidance onSFAS 123 (R).  SAB 107 permitsregistrants to choose an appropriate valuation technique or model to estimatethe fair value of share options, assuming consistent application, and providesguidance for the development of assumptions used in the valuation process.  Additionally, SAB 107 discusses additionaldisclosures to be made in registrants’ periodic reports.  Public companies that file as small businessissuers will be required to implement SFAS 123(R) in the first fiscal yearwhich begins after December 15, 2005. As the Company intends to use stock-based compensation as a component ofemployee compensation, and it has previously followed the intrinsic method, theimplementation of this pronouncement may adversely affect its future earningsor losses.  The amount of such effectsmay be significant, but cannot be estimated as of September 30, 2005.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets - an amendment of APB Opinion No. 29.”  APB 29 is based on the principle thatexchanges of nonmonetary assets should be measured based on fair value withexception for nonmonetary exchanges of similar productive assets.  SFAS 153 amends APB 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do not havea commercial substance, defined as transactions that are not expected to resultin significant changes in the cash flows of the reporting entity.  SFAS 153 is effective for exchanges ofnonmonetary assets occurring after June 15, 2005.  The financial position, results of operationsor cash flows contained in this filing are unaffected by implementation of thisnew standard.

 

In May 2004, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections.”  ThisStatement replaces APB

 

8

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Opinion 20 and SFAS No. 3 and changes the requirements for theaccounting for and reporting of a change in accounting principle.  This Statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  The provisions of thisStatement will be effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.

 

**Note 2 - Restatement of Financial Statements**

 

The previously issued consolidated financial statements of the Company asof December 31, 2004 and for the three-month and nine-month periods ended September 30,2004 have been restated for the issues described below:

 

**Accounting for Merger and for NavidecFinancial Services**

 

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 Navidec Financial Services (“NFS”).

 

Uponconsummation of the Merger, BPZ became contractually and irrevocably bound tospin-off NFS to the pre-merger shareholders of Navidec.  Subsequent to the Merger, the Company and NFShave operated their respective businesses autonomously and the Company does notcontrol NFS.  The Company, in consultationwith its independent accountants and legal counsel, had previously concludedthat the spin-off of NFS had been consummated in substance from a legalperspective prior to the Merger, and that the financial statements of theCompany should properly reflect the spin-off transaction as legally consummatedon the date of the Merger.  Accordingly,the previous consolidated financial statements of the Company excluded itsnominal ownership of NFS.  Based on thefact that NFS had not completed the final distribution of its shares to thepre-merger shareholders, the Company now concludes that its consolidatedfinancial statements should be restated to reflect the inclusion of NFS

 

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 equity transactions with third parties, the Company will recorda 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 now restated its financial statements to account forthe Merger with Navidec, Inc. under FASB 141.  The details of the accounting for thisbusiness combination are presented in Note 3 to the Consolidated FinancialStatements.

 

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

 

At December 31, 2003, the Company had a net receivable of $162,890due from BPZ & Associates, Inc., the parent of the Company priorto the Merger.  Additionally, BPZ Energy, Inc.made additional cash payments to BPZ & Associates, Inc. totaling$789,438 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 BPZ &Associates, Inc. in a corporate reorganization.  Additionally, all intercompany advancesreceivable from BPZ & Associates, Inc. were forgiven.  The Company initially recorded the forgivenessof these intercompany advances as if they were a dividend payment from BPZ-Texasto BPZ & Associates.  However,BPZ-Texas did not have sufficient capital to declare a dividend of thisamount.  Accordingly, the Companyre-analyzed the nature of these expenditures and concluded that essentially allof these costs should be characterized as expenditures which were incurred forthe benefit of BPZ-Texas.  Of suchpayments, $370,000 was determined to relate to the acquisition of SMC Ecuador, Inc.,of which $167,500 was paid to third parties and $202,500 was for the benefit ofBPZ & Associates, Inc.  Theremaining balance of $582,328 was attributable to personnel and office expensesincurred by BPZ & Associates, Inc. for the benefit of BPZ-Texasand has been recorded as part of the Company’s general and administrativeexpenses, of which $287,728 relates to the three-month period ended September 30,2004.

 

**Development Stage Company**

 

In connection with the accounting restatement, the Company alsoreviewed the current state of its operations to determine whether it should beclassified as a “development stage company.” With the June 2004 acquisition of SMC Ecuador, Inc., whichowns a direct interest in the Santa Elena Property, the Company expected torecord revenues from this property using the pro-rata method of consolidationas is customary in the oil and gas industry. However, difficulties in getting accurate and

 

9

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

 

**Amortization of Investment in EcuadorProperty**

 

The Company established an accounting policy in the first quarter of2005 to amortize the investment in its Ecuador property over the remaining termof the contract, since the investment consists primarily of an oil and gasproperty, which is a depleting asset. This change was made prospectively at the time.  In connection with the restatement, theCompany adjusted its results to commence this amortization on the date of theacquisition of the interest.  Thisadditional amortization totaled $21,380 for the three-month and nine-monthperiods ended September 30, 2004.

 

**Effects of Restatement**

 

The effects of the restatement on the statement of operations for thenine months ended September 30, 2004 are reflected in the table below:

 
| ** **                                                           | ** ** | **Nine Months Ended September 30,  2004** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                     | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Restated**                                   | ** ** | **Reported** | ** ** | **Difference** | ** ** |
|                                                                 |       |                                           |       |   |   |   |   |
| Revenue                                                              |       | $                                              | —     |   | $ | — |   | — |   |
| Operating and administrative expenses:                               |       |                                           |       |   |   |   |   |
| General and  administrative                                          |       | 931,313                                        |       | 348,985 |   | 582,328 |   |
| Stock-based  compensation                                            |       | 4,339,935                                      |       | — |   | 4,339,935 |   |
| Geological,  geophysical and engineering                             |       | 204,126                                        |       | 204,126 |   | — |   |
| Depreciation  expense                                                |       | —                                         |       | — |   | — |   |
| Total  operating expenses                                            |       | 5,475,374                                      |       | 553,111 |   | 4,922,263 |   |
| Operating  loss                                                      |       | (5,475,374                                     | )          | (553,111 | ) | (4,922,263 | ) |
|                                                                 |       |                                           |       |   |   |   |   |
| Other income (expense):                                              |       |                                           |       |   |   |   |   |
| Investment  income from Ecuador property, net                        |       | 141,373                                        |       | 162,753 |   | (21,380 | ) |
| Equity in  loss of Navidec Financial Services                        |       | (1,890,240                                     | )          | — |   | (1,890,240 | ) |
| Loss on  issuance of equity securities by Navidec Financial Services |       | (1,814,759                                     | )          | — |   | (1,814,759 | ) |
| Interest  expense                                                    |       | (58,061                                        | )          | (58,061 | ) | — |   |
| Amortization  of deferred financing costs                            |       | (331,484                                       | )          | (331,484 | ) | — |   |
| Merger costs                                                         |       | —                                         |       | (16,284,966 | ) | 16,284,966 |   |
| Miscellaneous  income                                                |       | 629                                            |       | 629 |   | — |   |
| Total other  income (expense)                                        |       | (3,952,542                                     | )          | (16,511,129 | ) | 12,558,587 |   |
| Net loss                                                             |       | $                                              | (9,427,916 | ) | $ | (17,064,240 | ) | $ | 7,636,324 |   |
|                                                                 |       |                                           |       |   |   |   |   |
| Basic and diluted net loss per share                                 |       | $                                              | (1.56      | ) | $ | (2.82 | ) | $ | 1.26 |   |
|                                                                 |       |                                           |       |   |   |   |   |
| Weighted average common shares outstanding                           |       | 6,043,747                                      |       | 6,055,314 |   | (11,567 | ) |

 

The effects of the restatement on the statement of operations for thethree months ended September 30, 2004 are reflected in the table below:

 

10

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| ** **                                                           | ** ** | **Three Months Ended September 30,  2004** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                      | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Restated**                                    | ** ** | **Reported** | ** ** | **Difference** | ** ** |
|                                                                 |       |                                            |       |   |   |   |   |
| Revenue                                                              |       | $                                               | —     |   | $ | — |   | — |   |
| Operating and administrative expenses:                               |       |                                            |       |   |   |   |   |
| General and  administrative                                          |       | 495,125                                         |       | 207,397 |   | 287,728 |   |
| Stock-based  compensation                                            |       | 4,339,935                                       |       | — |   | 4,339,935 |   |
| Geological,  geophysical and engineering                             |       | 122,653                                         |       | 122,653 |   | — |   |
| Depreciation  expense                                                |       | —                                          |       | — |   | — |   |
| Total  operating expenses                                            |       | 4,957,713                                       |       | 330,050 |   | 4,627,663 |   |
| Operating  loss                                                      |       | (4,957,713                                      | )          | (330,050 | ) | (4,627,663 | ) |
|                                                                 |       |                                            |       |   |   |   |   |
| Other income (expense):                                              |       |                                            |       |   |   |   |   |
| Investment  income from Ecuador property, net                        |       | 141,373                                         |       | 162,753 |   | (21,380 | ) |
| Equity in  loss of Navidec Financial Services                        |       | (1,890,240                                      | )          | — |   | (1,890,240 | ) |
| Loss on  issuance of equity securities by Navidec Financial Services |       | (1,814,759                                      | )          | — |   | (1,814,759 | ) |
| Interest expense                                                     |       | (26,461                                         | )          | (26,461 | ) | — |   |
| Amortization  of deferred financing costs                            |       | (331,484                                        | )          | (331,484 | ) | — |   |
| Merger costs                                                         |       | —                                          |       | (16,284,966 | ) | 16,284,966 |   |
| Miscellaneous  income                                                |       | 270                                             |       | 270 |   | — |   |
| Total other  income (expense)                                        |       | (3,921,301                                      | )          | (16,479,888 | ) | 12,558,587 |   |
| Net loss                                                             |       | $                                               | (8,879,014 | ) | $ | (16,809,938 | ) | $ | 7,930,924 |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Basic and diluted net loss per share                                 |       | $                                               | (0.90      | ) | $ | (1.69 | ) | $ | 0.79 |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding                           |       | 9,882,153                                       |       | 9,933,963 |   | (51,810 | ) |

 

The primary differences between the restated and originally reported operatingstatement amounts relate to the treatment of the Navidec Merger transaction asan acquisition pursuant to SFAS 141, compared with the original treatment ofthe majority of these amounts expensed as Merger costs, with a total charge of$16,284,966. Of this amount, $11,945,031 was eliminated in the restatement and$4,339,935 was reclassified to stock-based compensation expense.  In connection with the re-characterization ofthese Merger costs to acquisition accounting under SFAS 141, the Company alsoconcluded that it was most appropriate to value the equity instruments issuedor assumed in the Merger as of the date the Merger was announced, July 8,2004, in accordance with SFAS 141.  Theoriginal equity issuance was measured on the date of closing.

 

In addition to the above adjustments, the Company’s continuing nominalownership of NFS pending consummation of the spin-off caused the Company torecord its proportionate share of NFS losses, totaling $1,890,240.  Likewise, equity issuances by NFS at pricesbelow the Company’s basis per share caused additional charges to earningstotaling $1,814,759.

 

In summary, the modification to treat the Company’s nominal ownershipof NFS as an acquisition pursuant to SFAS 141 and the results from itscontinuing ownership resulted in an overall reduction to the previouslyreported net loss of $8,240,032 for each of the three-month and nine-monthperiods ended September 30, 2004. This amount was offset by increased expenses of $287,728 and $582,328 forthe three-month and nine-month periods ended September 30, 2004, respectively,related to the re-characterization of intercompany transactions with BPZ and Associates.and amortization of the investment in SMC Ecuador totaling $21,380 for each ofthe three-month and nine-month periods ended September 30, 2004.  The overall effect on the net loss was areduction of $7,930,924 and $7,636,324, for the three-month and nine-monthperiods ended September 30, 2004, respectively.

 

The differences to weighted average common shares outstanding resultprimarily from the treatment of common stock and warrants held by NFS astreasury securities for accounting purposes.

 

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**Note 3 – Acquisition of Navidec**

 

On July 8, 2004, Navidec and BPZ-Texas entered into a MergerAgreement which was consummated on September 10, 2004. The Merger wasstructured from a legal standpoint as the acquisition of BPZ-Texas byNavidec.  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 issued 3,198,368 shares ofits common stock in a one-for-one exchange for all of the outstanding commonshares of Navidec.  In addition,BPZ-Texas assumed options to purchase 1,332,076 shares of Navidec common stock,which had previously been issued to employees, directors and consultants ofNavidec 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 toNFS.  BPZ-Texas also assumed outstandingwarrants to 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 9 to the ConsolidatedFinancial Statements for details about the stock options and warrants assumedor granted in connection with the Merger.

 

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

 

The merger has been accounted for using thepurchase method of accounting, in accordance with SFAS 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 purchaseconsideration given for the acquisition of Navidec:

 

**Purchase Consideration**

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

 

BPZ allocated the purchase price to assets acquired and liabilitiesassumed at estimated fair values at the acquisition date.  The excess of purchase price over the fairvalue of the net assets acquired as of the acquisition date has been reflectedas goodwill in accordance with SFAS 141. The following summarizes the estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition:

 

**Purchase Price Allocation**

 
| ** **                                                                | ** ** | **Value**     | ** **      |
|---------------------------------------------------------------------------|------------|---------------|-----------------|
| **Description**                                                           | ** ** | **Allocated** | ** **      |
| Cash and marketable securities                                            |       | $             | 681,220         |   |
| Property, equipment and other                                             |       | 85,658        |            |
| BPZ common stock issued to NFS (662,149  shares)                          |       | 2,125,498     |            |
| Warrants to purchase BPZ common stock issued  to NFS (1,500,000 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 |   |

 

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Of the amounts shown above, $681,220 has been allocated to cash andmarketable securities instead of a reduction to the purchase price because thecash remained 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.

 

The following unaudited information presents the pro forma effects ofthe Merger as if it had occurred on January 1, 2004:

 

**Pro Forma Effects of the Merger**

 
| ** **                                 | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **September 30, 2004** | ** ** |
| Revenues                                   |       | $                           | —     |   |
| Net loss                                   |       | $                           | (9,966,916 | ) |
| Basic and diluted net loss per share       |       | $                           | (0.76      | ) |
| Weighted average common shares outstanding |       | 13,087,377                  |       |

 

**NFS Spin-off**

 

The Merger Agreement also required the transfer of all of thepre-merger business assets and liabilities of Navidec to its wholly ownedsubsidiary, NFS, and the spin-off of NFS to the shareholders of record ofNavidec as of September 9, 2004, the date prior to the Merger.  Uponconsummation of the Merger, BPZ 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 Navidec.  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 FinancialServices**

 

As discussed in Note 3 to the ConsolidatedFinancial Statements, 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. Prior to April 2005, the technology division wasinactive.  In April 2005, NFSacquired Aegis Business Group, Inc. (“Aegis”), a technology company whichdevelops and markets security solutions related to identity and computer accessmanagement.

 

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 an additional 1,200,000 NFS common shares at acost of $0.05 per share to the management of NFS.  This transaction resulted in the nominalownership of BPZ being reduced from 100% to 81.2% (68.3% on a fully dilutedbasis) at December 31, 2004. During the first nine months of 2005, NFSissued 1.1 million additional stock options to directors, employees,consultants and others for services provided, issued 250,000 common shares uponexercise of options and issued 1,332,500 common shares and warrants to purchase2,665,000 common shares in connection with a private placement.  In total, 1,582,500 shares of common stock havebeen issued and 4,140,000 potentially dilutive securities (options, warrants anda contingent issuance in connection with an acquisition) have been issued byNFS during the nine months ended September 30, 2005.  These issuances have resulted in the nominalownership of BPZ being further reduced to

 

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65.1% (38.9% on a fully diluted basis) at September 30,2005.  To the extent that NFS conveys itsshares or stock options to third parties for a per-share value less than theCompany’s nominal basis in its investment in NFS, the issuance of these sharesor stock options by NFS will result in a loss to the Company.  The issuance of common shares and stockoptions by NFS resulted in a recorded loss to the Company of $1,814,800 duringthe three-month and nine-month periods ended September 30, 2004.  The issuances in 2005, in the aggregate, havebeen at an amount in excess of BPZ’s basis per share.  The Company’s policy is not to recognize a netgain on equity issuances by NFS for amounts in excess of BPZ’s basis pershare.  However, such gains can beutilized to offset losses previously recorded in the current fiscal year.

 

Additionally, pursuant to the MergerAgreement, NFS is entitled to the proceeds received from the exercise ofpre-merger stock options which were assumed by the Company in the Merger.  During the period from the effective date ofthe Merger through September 30, 2004 and for the nine months ended September 30,2005, NFS received stock option proceeds of $95,500 and $631,100,respectively.  This amount is treated foraccounting purposes as an additional investment in NFS by the Company.  To the extent that the Company has less than100% nominal ownership of NFS, the receipt of stock option proceeds by NFSresults in a loss to the Company based on the minority interest in NFS.  The Company recorded a loss of $30,200 forthe nine months ended September 30, 2004 attributable to these stockoption exercises. A loss of $223,900 for the nine months ended September 30,2005 was offset by gains on other equity issuances by NFS as described aboveand was not recorded.

 

NFS recognized a net loss of $2,218,000during the period from the date of the Merger through September 30,2004.  The majority of this loss resultedfrom non-cash charges of $1,861,000 related to stock-based compensation and theconveyance of BPZ warrants held by NFS to third parties.  Additionally, there were cash bonuses of $250,000paid to the management of NFS during the period.  Based on its 81.2% nominal ownership interestin NFS, the Company recorded an equity loss of $1,890,240 for the nine monthsended September 30, 2004.

 

During the nine months ended September 30,2005, NFS recognized a net loss of $2,503,000. In addition to recurringoperating losses (an excess of general and administration and other operating expensesover revenues), NFS recorded non-cash expenses totaling $760,000 for stockoptions and warrants granted to officers, employees and consultants forservices rendered and recognized operating losses totaling $564,000 from theoperations of Aegis, a technology company acquired by NFS in April 2005.  Based on its nominal ownership interest inNFS (ranging from 78.1% to 65.1%), the Company recorded an equity loss of$1,733,716 for the nine months ended September 30, 2005.

 

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

 

NFS will continue to be reflectedas an equity investment in the financial statements of the Company until suchtime as the final distribution of NFS shares in the spin-off isconsummated.  This is expected to requirean effective registration statement with the SEC.  The Company is continuing to assist themanagement of NFS, as requested, in its efforts to consummate the spin-off ofNFS, but has no control over the registration process of NFS and cannot predictwhen the management of NFS will be able to complete the final distribution ofNFS common shares.  The Company’sstockholders’ equity will be reduced by the recorded amount of the investmentin NFS at such time as the spin-off is consummated.  As of September 30, 2005, stockholders’equity and the investment in NFS would have been reduced by $423,142 if thespin-off had been consummated on that date.

 

The following table presents NFS’ condensed operating statementinformation for the nine months ended September 30, 2005 and for theperiod from the effective date of the Merger through September 30, 2004,and condensed balance sheet information as of September 30, 2005 and December 31,2004:

 

**Navidec Financial Services, Inc.:**

 
| ** **                                  | ** ** | **Nine Months Ended**       | ** ** | **For the Month Ended**     | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| **Condensed income statement information:** |       |                        |       |                        |       |
|                                        |       |                        |       |                        |       |
| Net revenues                                |       | $                           | 1,972,000  |                        | $          | 164,000 |   |
|                                        |       |                        |       |                        |       |
| Gross margin                                |       | $                           | 1,692,000  |                        | $          | 138,000 |   |
|                                        |       |                        |       |                        |       |
| Net loss                                    |       | $                           | (2,503,000 | )                           | $          | (2,218,000 | ) |
|                                        |       |                        |       |                        |       |
| Company’s equity in net loss of NFS    |       | $                           | (1,733,716 | )                           | $          | (1,890,240 | ) |

 

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| ** **                                       | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Condensed balance sheet information:             |       |                        |       |                       |       |
|                                             |       |                        |       |                       |       |
| Current assets                                   |       | $                           | 935,000    |                       | $          | 550,000 |   |
| Investment in BPZ securities                     |       | 6,920,000                   |       | 4,276,000                  |       |
| Goodwill                                         |       | 2,125,000                   |       | 2,139,000                  |       |
| Other noncurrent assets                          |       | 191,000                     |       | 34,000                     |       |
| Total assets                                     |       | $                           | 10,171,000 |                       | $          | 6,999,000 |   |
|                                             |       |                        |       |                       |       |
| Current liabilities                              |       | $                           | 1,383,000  |                       | $          | 483,000 |   |
| Minority interest                                |       | 441,000                     |       | 64,000                     |       |
| Stockholders’ equity                        |       | 8,347,000                   |       | 6,452,000                  |       |
| Total  liabilities and stockholders’ equity |       | $                           | 10,171,000 |                       | $          | 6,999,000 |   |

 

As of September 30, 2005, the carrying amount of the Company’sinvestment in NFS, including the adjustment for BPZ common stock and warrantsheld by NFS, was less than its proportionate fully diluted share ofstockholders’ equity of NFS by approximately $1.7 million.  The majority of this difference isattributable to (a) unrealized gains on BPZ securities which were recordedby NFS, but eliminated from the consolidated financial statements of theCompany, (b) differences in the accounting for stock option proceedsreceived by NFS and (c) issuances of common shares of NFS for considerationin excess of the per-share value of the Company’s nominal investment in NFS,for which the Company has not recognized gains.

 

**Note 5 — Other Current Assets**

 

As of December 31, 2005, other currentassets consisted of deposits, prepaid rent and $214,727 related to value-addedtax paid in Peru.  As of December 31,2004, other current assets consisted primarily of deferred financing costsrelated to the acquisition of SMC Ecuador, Inc.

 

**Note 6 — Property, Equipment and Construction in Process**

 

Below is a summary of property, equipment and construction in process as of September 30, 2005 and December 31, 2004:

 
| ** **                                                                             | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
|                                                                                   |       |                        |       |                       |       |
| Construction in process – power plant  engineering costs                          |       | $                           | 1,634,245  |                       | $          | — |   |
| Construction  work in process – offshore platforms and facility engineering costs |       | 1,075,942                   |       | —                     |       |
| Office equipment, leasehold improvements,  and vehicles                                |       | 187,360                     |       | 5,662                      |       |
| Accumulated depreciation and amortization                                              |       | (5,450                      | )          | (157                       | )          |
| Net  property, equipment and construction in process                                   |       | $                           | 2,892,097  |                       | $          | 5,505 |   |

 

In the third quarter of 2005, the Company began to incur costsassociated with development and production of natural gas reserves andthe complementary development of gas-fired power generation for its own use inPeru.  The costs incurred primarilyrelate to initial design work for the power plant.  In addition, the Company began refurbishingone of its offshore platforms located in Block Z-1.  The costs incurred associated with theoffshore platforms include engineering studies and initial advances toconstruction firms for material and labor. Increases in other property and equipment in the third quarter relate tothe acquisition of vehicles at the Company’s office in Peru and officeequipment and leasehold improvements associated with the Company’s corporateoffice in Houston.

 

**Note 7 — Restricted Cash and Performance Bonds**

 

Inconnection with its properties in Peru, the Company has obtained various performancebonds to guarantee its obligations and commitments.  As of September 30, 2005 and December 31,2004, BPZ had restricted cash deposits of $1,455,953 and $100,000,respectively, which collateralize performance bonds issued in those respectiveamounts.  BPZ also has additional

 

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performance bonds inthe amount of $240,000 for which two individual shareholders of the Companyprovided guarantees or collateral to the financial institutions which issuedsuch bonds to secure the Company’s performance.  All of theperformance bonds were issued by Peruvian banks and their terms are governed bythe corresponding license contract or technical evaluation agreement.

 

**Note 8 — Investment in Ecuador Property and Note Payable**

 

The Company has aninvestment in an oil and gas property in Ecuador (the “Santa Elena Property”)totaling $1,992,084 as of September 30, 2005.  The Company has elected to account for thisinvestment under the cost method and records its share of cash received or paidas other income or expense.  Since theCompany’s investment represents ownership of an oil and gas property, which is adepleting asset, the cost of the investment is amortized on a straight-linebasis over the remaining term of the license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense of $89,656 for the nine months ended September 30,2005.

 

In connection with the acquisition of the SantaElena property, the Company had a note payable balance of $208,986 as of December 31,2004.  The note agreement requiredmonthly installment payments of $31,366, including imputed interest at 15%,through July 1, 2005 and was paid in full as of September 30, 2005.

 

As part of the note agreement, the holder of the note payable received beneficial ownership of a 4% net working interest in the Santa Elena Property.  In June 2005, the Company entered into an agreement to issue 250,000 shares of the Company’s common stock, valued at $1,112,500, to acquire the holder’s 4% net working interest in the property.  Accordingly, as of September 30, 2005, the Company owned the full 10% working interest in the Santa Elena Property.

 

**Note 9 — Stockholders’ Equity**

 

On July 1, 2005, the Company’s shareholders approved the Third Amended and Restated Certificate of Incorporation which increased the authorized number of shares of the Company’s common stock, no par value, from 20,000,000 to 250,000,000 shares and authorized 25,000,000 shares of preferred stock.  There are no preferred shares issued or outstanding as of September 30, 2005.  The common shares issued and outstanding at each period are set out below.  For accounting purposes, the common shares held by NFS attributable to the Company’s equity interest in NFS are reflected as treasury shares.

 
| ** **                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Common shares issued                                   |       | 39,674,774             |       | 16,581,385            |       |
|                                                   |       |                   |       |                  |       |
| Common shares owned by NFS                             |       | 707,903                |       | 557,903               |       |
| Company’s equity interest in NFS                  |       | 65.0                   | %          | 81.2                  | %          |
| Net common  shares held by affiliate (treasury shares) |       | 460,450                |       | 452,931               |       |
|                                                   |       |                   |       |                  |       |
| Common shares outstanding                              |       | 39,214,324             |       | 16,128,454            |       |

 

**Private Placement of Common Stock**

 

On July 19, 2005, the Company completed a private placement of 11,466,000 shares of common stock, no par value, pursuant to a Stock Purchase Agreement.  The common stock was priced at $3.00 per share, resulting in gross proceeds to the Company of $34,398,000.  Morgan Keegan & Company, Inc. served as agent for the private placement.  Net cash proceeds from the private placement were $31,917,214 after deducting a 7% placement agent fee of $2,407,860 and other cash expenses of $72,926.  Morgan Keegan & Company, Inc. also received warrants in connection with the private placement, as discussed below.

 

**Shares Issued for Additional Investment in Ecuador Property**

 

In June 2005, the Company entered into an agreement to issue 250,000 shares of the Company’s common stock to acquire a 4% net working interest in the Santa Elena Property in Ecuador which had been conveyed to the lender in connection with the acquisition of the property.  The issuance of these shares was dependent upon shareholder approval of an increase in the number of authorized common shares, which was obtained on July 1, 2005.  Accordingly, the shares were issued during the three-month period ended September 30, 2005.

 

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**Restricted Stock Awards**

 

On July 1, 2005, the Company’s Board of Directors awarded a totalof 970,000 shares of restricted common stock to three of the Company’sofficers.  Of such restricted stockawards, 335,000 shares will vest on May 16, 2006, 335,000 shares will veston May 16, 2007 and the balance of 300,000 shares will vest on May 16,2008.  The restricted stock awards werevalued at $4,268,000 based upon the Company’s share price on the date ofgrant.  The Company will recognizestock-based compensation expense on a straight-line basis over the vestingperiod.  The amortization for thethree-month period ended September 30, 2005 was $368,500.

 

On July 1, 2005, the Company appointed three new independent members to its Board of Directors, expanding the Board to seven members in accordance with its bylaws.  Each of the three new directors received a grant of 50,000 shares of restricted common stock, which vest on July 1, 2007.  The 150,000 shares of restricted stock were valued at $660,000 based upon the Company’s share price on the date of grant.  The Company will record stock-based compensation expense on a straight-line basis over the vesting period.  The amortization for the three-month period ended September 30, 2005 was $82,500.

 

**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 treated as treasury securities and are recorded as a reduction of stockholders’ equity at the initial recorded value.  As of September 30, 2005, NFS held 707,903 shares of the BPZ common stock and unexercised warrants to purchase 810,000 shares of BPZ common stock at an exercise price of $2.00 per share.  The BPZ common stock and warrants held by NFS attributable to the Company’s 65.1% interest in NFS have an aggregate recorded value of $2,458,975, 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 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.

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Stock options outstanding                  |       | 1,653,652              |       | 2,055,041             |       |
| Warrants outstanding                       |       | 1,888,000              |       | 2,629,000             |       |
| Shares issuable to consultant for services |       | 10,000                 |       | —                |       |
| Contingent incentive earn-out shares       |       | 485,000                |       | —                |       |
| Earn-out shares issued                     |       | —                 |       | 9,000,000             |       |
| Contingent Merger earn-out shares          |       | 9,000,000              |       | 9,000,000             |       |
| Total  potentially dilutive securities     |       | 13,036,652             |       | 22,684,041            |       |

 

**Stock Options Outstanding**

 

In connection with the Merger, BPZ, as the accounting acquirer, assumedall Navidec stock optionsoutstanding, which were fully vested on the date of the Mergerand expire on September 10, 2007.  Exercise prices onthese stock options range from $1.30 to $1.93 per share.  Under the terms of the Merger agreement, NFSis entitled to receive all proceeds from the exercise of these options.  As of December 31, 2004, there were1,055,041 Navidec stock options outstanding. During the nine-month period ended September 30, 2005, 401,389 Navidecstock options were exercised and 653,652 were outstanding as of the end of theperiod.

 

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

 

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such stock options, 500,000 were fully vested on thedate of the Merger.  The remaining 500,000stock options will vest upon the receipt of additional investment proceedstotaling $6 million, including proceeds from the exercise of outstandingwarrants, provided such funding is received no later than September 10,2006.  These stock options, when vested,expire 10 years from the date of grant. They were recorded at a fair value of $1.20 per share using theBlack-Scholes model.  The unvestedoptions will be amortized over the 24-month vesting period at the rate of$25,000 per month unless the Company concludes that such options are no longer probable of vesting.

 

All of the above stock options were recorded at fairmarket value on the date of the Merger. Accordingly, no disclosure of pro forma results of operations under SFAS123 is required.

 

**Warrants Outstanding**

 

In connection with the Merger, BPZ, as theaccounting acquirer, assumed outstanding warrants to purchase 1,129,000 sharesof the Company’s common stock.  Of thistotal, 564,500 Class A warrants have an exercise price of $2.00 per shareand 564,500 Class B warrants have an exercise price of $4.00 pershare.  All of such warrants wereoriginally scheduled to expire on August 31, 2005.  However, delays in obtaining theeffectiveness of a registration statement which includes the warrants extendedthe expiration date.  The warrants arecallable if the stock trades at or above the exercise price for a period of 10consecutive days and there is an effective registration statement whichincludes the warrants.  This registrationstatement was declared effective by the SEC. On August 4, 2005, the Company called the Class B warrantswith a final exercise date of October 14, 2005.  The Company later called the Class Awarrants with a final exercise date of December 30, 2005.   As of September 30, 2005, 185,000 Class Awarrants and 381,000 Class B warrants had been exercised, resulting in netproceeds to the Company of $1,848,280. As of September 30, 2005, there were 379,500 Class A warrantsand 183,500 Class B warrants outstanding.

 

In connection with the Merger, BPZ also issued warrants to purchase1,500,000 shares of common stock at an exercise price of $2.00 per share toNFS.  Such warrants expire on July 31,2006.  Subsequent to the Merger, NFSconveyed 540,000 of such warrants to third parties.  During the three months ended September 30,2005, 275,000 of these warrants were exercised. As of September 30, 2005 there were 1,225,000 of such warrantsoutstanding, of which 810,000 were held by NFS.

 

In connection with the private placement of 11,466,000 shares of common stock, Morgan Keegan & Company, Inc. also received warrants to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.00 per share.  Such warrants expire on July 19, 2010.  These warrants were valued at $325,000 using the Black-Scholes model, which amount was treated as additional non-cash stock offering costs.

 

**Shares Issued and Issuable for Services**

 

During the third quarter of 2005, the Company issued 15,000 shares to a consultant for services performed.  These shares were valued at $63,750 based on the Company’s stock price on the date such shares were issuable.  The Company has an obligation to issue an additional 10,000 shares to a consultant for services performed, but such shares have not yet been issued.  Accordingly, the value of these shares, $40,520, has been reflected as a liability in the accompanying financial statements as of September 30, 2005.

 

**Contingent Incentive Earn-Out Shares**

 

The Company’s Board of Directors awarded a total of 485,000 shares ofincentive stock awards to three of the Company’s officers.  Vesting of the incentive stock awards iscontingent on the Company achieving net production of 2,000 barrels of oil perday or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007, the same target as the Merger earn-out shares(see below).  The total stock-basedcompensation expense associated with these contingent incentive stock awards is$2,134,000.  As the Company has not yetobtained a firm financing commitment for its gas-to-power project, the Companydoes not consider the achievement of this target to be probable for accountingpurposes and is not currently accruing the associated stock-based compensationexpense.

 

**Merger Earn-Out Shares**

 

Underthe terms of the Merger Agreement, the Company is committed to issue 18,000,000shares to the former shareholders of BPZ-Texas on a contingent earn-out basisif the Company achieves certain reserve and production goals.  The first earn-out target relating to reserves wasachieved in December 2004 and 9,000,000 of the earn-out shares wereissuable at that time.  However, thecontingent earn-out shares could only be issued after the shareholders approvedan increase in the number of authorized common shares of the Company.  Theshareholders approved an increase in the number of authorized shares from20,000,000 to 250,000,000 at its 2005 Annual Meeting held on July 1, 2005and the 9,000,000 shares were issued at that

 

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time.  Theremaining 9,000,000 earn-out shares are contingent on the Company achievingproduction of 2,000 barrels of oil per day or its equivalent (approximately 12million cubic feet of gas per day) prior to December 28, 2007.

 

Foraccounting purposes, the earn-out arrangement is treated as a stock dividendbecause the earn-out is payable to the shareholders of the accounting acquirer,BPZ-Texas.  Accordingly, except for anincrease in the number of common shares outstanding, no accounting entry isrequired upon the issuance of the earn-out shares.

 

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

 

Asof September 30, 2005 and December 31, 2004, the Company had nooutstanding balances with affiliates or related parties.  As of December 31, 2003, the Company hada net receivable of $162,890 due from BPZ and Associates, the parent ofthe Company prior to the Merger.  During2004 prior to the Merger, BPZ-Texas made additional cash payments to BPZ andAssociates totaling $789,438.  Of suchpayments, $370,000 related to the acquisition of SMC Ecuador, Inc., with $167,500paid to third parties and $202,500 paid for the benefit of BPZ andAssociates.  The remaining amount of$582,328 was attributable to personnel and office expenses incurred byBPZ and Associates on behalf of BPZ-Texas and has been recorded as part ofthe Company’s general and administrative expenses for the nine months ended September 30,2004.

 

**Note 11 — Commitments and Contingencies**

 

The Company has various obligations and commitments in connection withits properties in Peru.  In connectionwith its Block Z-1 property, the Company posted a $1,300,000 performance bondin January 2005.  To satisfy itscurrent performance obligation under the second exploration phase of the BlockZ-1 license agreement, the Company must drill at least one well or acquire aspecified 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 $5,000,000.  In addition, in connection with its Block XIXproperty, the Company posted a $350,000 performance bond in August 2005.  To satisfy its current performance obligationunder the second exploration phase of the Block XIX license agreement whichbegan in August 2005 and will last for 24 months, the Company must acquireand process a specified amount of 2-D seismic data and prepare an integratedgeological, geochemical and reservoir engineering evaluation of hydrocarbonprospects.

 

TheCompany acquired four offshore platforms in connection with its Block Z-1property.  The Company is currently inthe process of refurbishing one of the offshore platforms and intends tomaintain all of such platforms for use throughout the life of the Block Z-1 contract.  These platforms revert back to the Governmentof Peru at the end of the contract, provided they are in good workingcondition, with no further obligation to the company to dismantle or removethem.  The Company and its legal advisorshave reviewed Peruvian law and existing regulations from the Peruvian Ministryof Energy and Mines in conjunction with the requirements of FAS 143 “Accountingfor Asset Retirement Obligations” (“ARO”) as it applies to tangible long livedassets and their future retirement and dismantlement.  The Company has concluded that there is nolegal obligation to dismantle the platforms, as defined in FAS 143, andtherefore recognition of an ARO is not required.  Accordingly, no such provision is reflected inthe accompanying consolidated financial statements.  If,however, current laws or regulations were changed or the platforms were nolonger in good working order, the Company could be obligated to dismantle andremove them.  The current estimated costto dismantle an offshore platform is estimated to be approximately $2 million,depending upon the condition of the platform and the depth of the water.

 

OnMay 27, 2005, BPZ signed a Mandate Letter with the International FinanceCorporation (“IFC”), a member of the World Bank Group based in Washington,D.C., to facilitate the financing of the Company’s initial capital expenditureprogram in Block Z-1 in northwest Peru. On November 1, 2005, an amendment was signed extending the originalterm of the Mandate Letter from December 31, 2005 to August 31, 2006.  The Mandate Letter specifies that IFC willappraise BPZ’s project in Peru to determine the feasibility and structure of apotential financing transaction.  Any IFCinvestment will depend on the project and the Company meeting IFC’s financingcriteria, the overall financing plan being acceptable to IFC, approval of theinvestment by management and the Board of IFC, and the execution of allappropriate documentation, in form and substance satisfactory to IFC.  As part of the Mandate, BPZ agreed to pay totalfees of $285,000 during the appraisal period and customary expenses.  As of September 30, 2005, $85,000 offees and approximately $8,200 of reimbursable out-of-pocket expenses had beenincurred.

 

Inconnection with the private placement of 11,466,000 common shares, the Companywas obligated to prepare and file with the SEC a Registration Statement on Form SB-2and to use its best efforts to cause the Registration Statement to be declaredeffective by the SEC no later than ninety days from July 19, 2005.  If the Registration Statement is not declaredeffective by November 16, 2005, the Company will be liable to theInvestors for liquidated damages in an amount equal to 1.0% of the purchaseprice of the shares for each thirty (30) day period until the RegistrationStatement is declared effective by the SEC.

 

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

 

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**Note 12 — Legal Proceedings**

 

Navidec was advised in February 2004 that the Securities and Exchange Commission (“SEC”) was conducting an informal inquiry to determine whether Navidec 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 is cooperating fully with the SECin this matter.  As of September 30,2005, a total of approximately $50,000, primarily in legal fees, had beenincurred 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. The Company is not aware of the future actions, if any, that the SECintends to pursue in this matter, but no assurance can be given that theinvestigation will be resolved without negative consequences to the Company.

 

**Note13 — Subsequent Events**

** **

Subsequent to September 30, 2005, the Company received net proceeds of $1,469,980 from the exercise of 379,000 Class A warrants and the 183,500 remaining Class B warrants.  As of December 31, 2005, 564,000 of the Class A warrants and all of the Class B warrants had been exercised for cumulative net proceeds of $3,318,260.  There were 500 Class A warrants which were unexercised at December 31, 2005 and have expired.

 

As of the November 16, 2005, the Company’s Registration Statement on Form SB-2 had not been declared effective.  Accordingly, the Company is subject to the payment of liquidated damages in the amount of $343,980 for each 30-day period from that date until the Registration Statement is declared effective.  Certain of the private placement investors, totaling 79% of the aggregate investment, have agreed to accept common stock in lieu of cash for a maximum period of 90 days.  On December 17, 2005, the Company made the first payment of liquidated damages totaling 92,705 shares of common stock valued at $271,960 and $72,020 cash.

 

In December 2005, the Company notified Perupetro that it has exercised its exclusive option to convert the current Technical Evaluation Agreement (“TEA”) in Area VI, which covers 1,444,175 acres and encompasses the entire Lancones Basin, to a License Contract for the exploration and development of hydrocarbons.  In addition, the Company announced that it will not apply for a license contract for Area XVI.  The technical work conducted by the Company over the past two years has not demonstrated the upside potential and economics to meet the Company’s objectives.  Area XVI is a relatively small block consisting of 109,612 acres in the Talara Basin.

 

In December 2005, the Company signed a drilling contract withPetrex S.A., a subsidiary of Saipem SpA of Italy. Under the contract, PetrexS.A. will provide a platform rig capable of drilling to 16,000 feet and upgradethe rig to meet the Company’s specifications. The Company intends to utilize the rig for the initial development ofthe Corvina gas field and may also utilize it for the expected development ofthe Albacora oil field, and potential appraisal wells in the Piedra Redonda gasfield.  The Company has agreed to pay a$5.5 million fee to mobilize and upgrade the rig.  In exchange, the Company will receive a competitivefixed day rate and exclusive rights to use the rig, at its option, during thetwo-year period commencing with delivery of the rig.

 

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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 our namefrom 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 2.7 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.  If our exploration activities are successful,the total contract term can extend up to 30 years for oil development andproduction and 40 years for gas development and production.  In December 2003, we entered into aTechnical Evaluation Agreement for Area VI. This agreement gives us the right to conduct technical evaluations of theareas over a 24-month period and the exclusive right to enter into license contractsif the evaluation indicates the potential for successful profitable operations.  We recently initiated negotiations to obtaina license contract for Area VI.

 

The Merger Agreement required the transfer of all of the pre-mergerbusiness assets and liabilities of Navidec to its wholly owned subsidiary,Navidec Financial Services, Inc. (“NFS”), and the spin-off of NFS to theshareholders of record of Navidec as of September 9, 2004, the date priorto the Merger.  Upon consummation of theMerger, we became contractually and irrevocably bound to the spin-off of NFS tosuch pre-Merger shareholders.  All legalrequirements for the spin-off of NFS have been completed except forregistration of the spin-off with the Securities and Exchange Commission andthe final distribution of NFS common shares to the pre-merger shareholders ofthe Company.  Pending such finaldistribution of NFS common shares, we remain the nominal owner of those shares,which are being held for the benefit of the spin-off shareholders.  We account for our nominal investment in NFSunder the equity method, as discussed in Note 4 to the Consolidated FinancialStatements.  We are continuing to assistthe management of NFS, as requested, in its efforts to consummate the spin-offof NFS, but have no control over the registration process of NFS and cannotpredict when the management of NFS will be able to complete the finaldistribution of NFS common shares.

 

In June 2004, we acquired the capital stock of SMC Ecuador, Inc.,a Delaware corporation (“SMC”), which owns a 10% non-operated working interestin an oil and gas producing property located in the southwest region of Ecuador(the “Santa Elena Property”).  SMC hashad its interest in the Santa Elena Property for the past eight years. Thelicense 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 anticipategenerating significant revenues from our properties prior to late 2006 or early2007.

 

**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 $495,125 during the third quarter of 2004 and $931,313during the nine months ended September 30, 2004 to $900,136 during thethird quarter of 2005 and $2,785,122 during the nine months ended September 30,2005 as a result of our increased activity levels, additional personnel andcosts associated with being a public company. We incurred $98,854 of geological, geophysical and engineering costs inthe third quarter of 2005 and $528,045 during the nine months ended September 30,2005 primarily related to our Block Z-1 gas-to-power project, compared to $122,653and $204,126 in the comparable periods of 2004.

 

Also, during thethree and nine month periods ended September 30, 2005, we incurred$526,000 and $780,270, respectively,

 

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in stock-basedcompensation as a result of amortizing the deferred compensation expenserelated to (i) a grant of 150,000 shares of restricted common stock to ourindependent directors; (ii) a grant of 970,000 shares of restricted commonstock to three of our officers; (iii) 500,000 stock options issued to theformer CEO of Navidec.  We recorded stock-basedcompensation expense of $4,339,935 during the three and nine month periodsended September 30, 2004, primarily as a result of shares issued forservices to employees and consultants of BPZ-Texas prior to the Merger.

 

During the three and nine month periods ended September 30, 2005we recorded a loss attributable to our equity ownership of NFS in the amountsof $762,823 and $1,733,717, respectively. In the prior year, during the period from the date of the Merger to September 30,2004, we recorded a loss attributable to our equity ownership of NFS in theamount of $1,890,240.  In addition, werecorded a gain of $49,414 during the third quarter of 2005 to offset previouslosses attributable to the issuance of equity securities by NFS at a pricebelow our book value per share.  In theprior year, during the period from the date of the Merger to September 30,2004, the issuance of equity securities by NFS at a price below our book valueper share resulted in a recorded loss of $1,814,759.  All of the gains and losses attributable toNFS are non-cash transactions to the Company.

 

We received netcash distributions from our Ecuador property of $188,524 and $393,713 duringthe three months and nine months ended September 30, 2005, respectively,compared to net cash distributions of $162,753 during the three months ended September 30,2004.  There were no cash distributionsprior to the third quarter of 2004, as we acquired the property in June 2004.  Since our investment consists of an interest ina producing oil and gas property, we are amortizing the investment on astraight-line basis over the remaining term of the license agreement coveringthe property.  Accordingly, we recorded$46,896 and $89,656 of amortization expense during the three months and ninemonths ended September 30, 2005, respectively, compared to $21,380 duringthe three months ended September 30, 2004.

 

We incurredinterest expense of $388 and amortization of deferred financing costs of $9,652in the third quarter of 2005 and interest expense of $8,355 and amortization ofdeferred financing costs of $67,562 for the nine months ended September 30,2005, principally from notes payable incurred to finance the acquisition of SMCin June 2004.  In the prior year weincurred interest expense related to other borrowings of $26,461 in the thirdquarter of 2004 and $58,061 for the nine months ended September 2004, aswell as amortization of deferred financing costs of $331,484 during the same periodsin 2004 primarily from notes payable incurred to finance the acquisition of SMCin June 2004.

 

As a result of ourincreased cash balance from the private placement of common stock, we receivedinterest income of $212,073 during the three months ended September 30,2005.

 

We realized a netloss of $1,856,000, or $0.05 per share, during the three months ended September 30,2005, compared to a net loss of $8,879,014, or $0.90 per share for the sameperiod in 2004.  For the nine monthsended September 30, 2005, we realized a net loss of $5,337,325, or $0.23per share, as compared to a net loss of $9,427,916, or $1.56 per share, for thesame period in 2004.

 

**Planof Operation**

 

Our current plan ofoperation is focused primarily on exploiting the resource opportunities in theoffshore Block Z-1 in northwest Peru, in which we own a 100% workinginterest.  Our initial project is thedevelopment of an integrated gas-to-power project which is more fully describedbelow.  The capital budget for our plantotals approximately $112.5 million. To achieve our objectives,we must obtain significant financing from external sources. We are attempting tosecure financing for the project, but we do not have firm commitments fromexternal sources to allow us to undertake all of the operations envisioned inthis plan. See “Liquidity, Capital Resources and CapitalExpenditures,” below, for further discussion.

 

Our first priorityis drilling the initial gas wells in the Corvina Field to develop reserves andestablish gas deliverability at expected levels.  In December 2005, wesigned a drilling contract with Petrex S.A., a subsidiary of Saipem SpA ofItaly. Under the contract, Petrex S.A. will provide a platform rig capable ofdrilling to 16,000 feet and upgrade the rig to meet our specifications.  We agreed to pay a $5.5 million fee tomobilize and upgrade the rig.  Inexchange, we will receive a competitive fixed day rate and exclusive rights touse the rig, at our option, during the two-year period commencing with deliveryof the rig which is expected in June 2006.

 

The Corvina Fieldhas an existing platform which we believe can be refurbished to make itsuitable for drilling operations.  Wehave hired a contractor to refurbish the platform and work on this project isongoing.  Our initial plans call for thedrilling of three new wells from the existing platform.  There is also a shut-in gas well which weintend to recomplete and utilize for gas production.  We are working to obtain the requiredenvironmental and drilling permits and complete the platform refurbishment inorder to commence drilling operations in June 2006.  Further development drilling from theexisting platform, encompassing three additional wells, is expected to befunded from project cash flows after the power plant is operational.

 

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Our plan ofoperation envisions the installation of a company-owned 160 megawatt (‘‘MW’’)gas-fired electric generation plant near the town of Caleta Cruz, in northwestPeru.  In August 2005 we awarded theturnkey contract for the engineering, procurement and construction (EPC) of thepower plant project to BTEC Turbines LP of Houston (“BTEC”).  The contract was awarded following acomprehensive six-month bidding process that included field visits by all ofthe bidders.  Under the EPC contract, thefinal terms of which are being negotiated, BTEC is expected to supply twoGeneral Electric Frame 7 simple-cycle gas-fired turbines.  BTEC will also act as the main contractor forthe design, transportation, construction, startup and commissioning of thepower plant.  Our plan is to own 100% ofthe power plant.  Accordingly, ourrevenues from the natural gas delivered to the power plant will be derived fromthe sale of electricity.

 

We intend to constructa 10-mile offshore 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 which,with certain upgrades, are expected to be capable of handling up to 300 MW ofpower.  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 transported through aninterconnected national grid managed by the Committee for Economic Dispatchingof Electricity (known as “COES”).  Basedon this study, we believe that we will be able to sell economic quantities of electricityfrom our initial 160 MW power plant at Caleta Cruz.  We believe there may be an opportunity in thefuture to generate and profitably sell significantly greater volumes of powerinto the Peruvian and Ecuadorian power markets.

 

Primarily as aresult of delays in obtaining a drilling rig, the projected goal for firstsales of power to the Peruvian power market is now late 2006 or early2007.  This timeline is subject to manyfactors, including securing necessary financing commitments, which are beyondour control.  Based on the revised timeline,we intend to focus our capital expenditures on critical drillingactivities.  Procurement activities onother phases of the project will be delayed or rescheduled accordingly.  We believe that we have sufficient capitalresources to fund our initial drilling program. See “Liquidity, CapitalResources and Capital Expenditures” below for further discussion.

 

In addition to thelocal power market targeted by our project in Peru, we intend to simultaneouslydevelop a gas sales 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 properties 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 us to construct a 40-milepipeline from Caleta Cruz, the terminal point of our offshore pipeline from theCorvina Field, to Arenillas, Ecuador.  Weintend to sell gas for the generation of electricity by third party powerproducers in the local market in Ecuador. We have negotiated three preliminary agreements for sales of gas.  We are planning to complete this pipeline forfirst sales of gas to Ecuador during the first half of 2007, though this schedule issubject to many factors outside our control and no assurance can be given thatwe can meet this schedule.

 

In addition to the initialCorvina Field development project, we have other fields within Block Z-1 andother properties which we intend to exploit in the future.  We recently completed a technical evaluationof Area VI and have initiated negotiations to obtain a license contract forexploration activities in that area. Area VI is a large onshore block in northwest Peru which encompasses theentire Lancones Basin.  Based on ourtechnical evaluation of Area XVI, we have informed Perupetro of our decision not topursue a license contract for that area. We have secured the environmental permits and other authorizations toshoot seismic in Block Z-1 and Block XIX. We are seeking to obtain additional funding for these projects fromindustry or capital market sources, but we are not currently planning to makesignificant capital expenditures for seismic acquisition or other explorationand development activities outside the Corvina Field until we have secured suchadditional financing.

 

We are currentlydeveloping engineering plans and designs for the various components of our initialplan of operation.  We have obtained costestimates for most of the major equipment components and the shipping,construction, installation and associated services.  However, the costs of these procurement andconstruction activities can be difficult to accurately predict and are subjectto change and contingencies.  Based onour current estimates, we expect that our initial project, including the costof the natural gas pipeline to Arenillas, Ecuador, will require total capitalexpenditures on the order of $112.5 million, including import duties andcontingencies.  Our budget has increasedas a result of higher projected drilling costs and the selection of larger capacityturbines.  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.  IGV paid on capital expenditures is generallyrecoverable from our future revenue billings within Peru and is not consideredpart of the capitalized costs of the equipment to which it relates.  We may also be able to defer payment ofcertain of these expenditures or obtain separate financing for the IGV.

 

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| **Project Capital Budget**          | ** ** | ** **            | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | ** **            | ** ** |
| ** **                          | ** ** | **($ millions)** | ** ** |
| Power plant and related equipment   |       | 49.6                  |       |
| Pipelines and processing facilities |       | 29.1                  |       |
| Platform and wells                  |       | 23.8                  |       |
| Contingencies                       |       | 10.0                  |       |
| Total  estimated capital budget     |       | 112.5                 |       |

 

**Liquidity,Capital Resources and Capital Expenditures**

 

Ourinitial projectin the offshore Block Z-1 in northwest Peru, totaling approximately $112.5million, includes the refurbishmentof the CX-11 platform, rehabilitation of an existing well and the drilling ofthree new wells, installation of a 10-mile gas pipeline from the platform toshore, construction of a 160 MW simple-cycle electric generating plant, and theconstruction of a 40-mile gas pipeline to supply gas to third party generatorsin Arenillas, Ecuador.

 

Inconnection with the Merger, we received net proceeds of approximately$5.5 million from a private placement of our common stock.  In July 2005, we completed a privateplacement of 11,466,000 shares of common stock for net proceeds ofapproximately $31.9 million.  MorganKeegan & Company, Inc. served as placement agent for theoffering.  We also received $2.4 millionfrom the exercise of warrants during the third quarter of 2005.  As of September 30, 2005, our cashbalance was approximately $30.7 million.

 

InJanuary 2005, we deposited $1.3 million as restricted cash to secureour performance obligations under the second exploration period of theBlock Z-1 license contract.  Weintend to satisfy this obligation by drilling a well, which is currentlyexpected to cost approximately $5.0 million and is included in the capitalbudget for the project.  During the ninemonths ended September 30, 2005, we incurred capital expenditures ofapproximately $2.9 million, primarily on refurbishment of the platform andpower plant design costs.  In addition,we have committed to pay $5.5 million, principally during the first quarter of2006, to mobilize and upgrade a platform drilling rig for use in the CorvinaField and potentially for our other projects.

 

InMay 2005, we signed a Mandate Letter with International FinanceCorporation (“IFC”), a member of the World Bank Group based in Washington,D.C.  The Mandate Letter specifies that theIFC will appraise our project in Peru to determine the feasibility andstructure of a potential financing of up to $70 million. The IFC’s appraisal ofthe project will include a review of the technical, economic, commercial,financial, environmental and legal aspects of the project. IFC’s financing, thestructure of which would be defined during the appraisal process, will dependon the project and the Company meeting the IFC’s financing criteria, theoverall financing plan being acceptable to IFC, approval of the investment bymanagement and the Board of IFC, and the execution of all appropriatedocumentation, in form and substance satisfactory to IFC.  As part of the Mandate, we have agreed to payfees of $285,000 and customary expenses during the appraisal period.  The IFC is continuing its due diligence on theproject.  In recognition of the reviseddrilling timeline, the IFC recently extended the Mandate period through August 2006and is reviewing an increase in the total amount of the financing based on theincreased capital budget for the project.

 

With our currentcash balance and proceeds from the expected IFC financing, we believe we willhave sufficient capital resources to execute the project as we currentlyenvision it.  However, the timing and execution of our project isdependent on a variety of factors, including technical design of facilities,permitting, availability of equipment, time and costs required for delivery andconstruction, performance by contractors and financing, many of which areoutside our control.

 

**Off-BalanceSheet Arrangements**

 

As of September 30,2005, 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.  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 directly related to our business andoperations, and the understanding of our financial statements.

 

***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

 

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proved reserves andcosts associated with development drilling, whether or not successful, arecapitalized when incurred.  Certain costsof exploratory wells are capitalized pending determinations that provedreserves have been found.  If thedetermination is dependent upon the results of planned additional wells andrequired capital expenditures to produce the reserves found, the drilling costswill be capitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as 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 reasonable estimate of fair value can bemade.  The associated asset retirementcosts are capitalized as part of the carrying amount of the long-livedasset.  The accrual is based on estimatesof these costs for each of our properties based upon the type of productionstructure, reservoir characteristics, depth of the reservoir, market demand forequipment, currently available procedures and consultations with construction andengineering consultants.  Because thesecosts typically extend many years into the future, estimating these costs isdifficult and requires management to make estimates and judgments that aresubject to future revisions based on numerous factors, including changingtechnology, the political and regulatory environment and estimates as to theproper discount rate to use and timing of abandonment.

 

Our plan ofoperations 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

 

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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**

 

We caution 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 we expect, believe or anticipate 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-looking statements.  Thesestatements are based on certain assumptions and analyses made by the managementof BPZ in light of its experience and its perception of historical trends,current conditions and expected future developments as well as other factors itbelieves are appropriate 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 the forward-lookingstatements include, but are not limited to any of the following in thejurisdictions in which BPZ or its subsidiaries are doing business:  the timing and extent of changes in commodityprices for crude oil, natural gas and related products, currency exchangerates, interest rates, inflation, the availability of goods and services,drilling and other operational risks, availability of capital resources,legislative or regulatory changes, political developments, acts of war andterrorism.  A more detailed discussion onrisks relating to the oil and natural gas industry and to us is included in theCompany’s Annual Report on Form 10-KSB/A for the year ended December 31,2004.

 

In light of these risks, uncertainties andassumptions, we caution the reader that these forward-looking statements aresubject to risks and uncertainties, many of which are beyond our control, whichcould cause actual events or results to differ materially from those expressedor implied by the statements.  Allsubsequent written and oral forward-looking statements attributable to us orpersons acting on our behalf, are expressly qualified in their entirety by thecautionary statements.  We undertake noobligations to update or revise its forward-looking statements, whether as aresult of new information, future events or otherwise.

 

**Item 3.  Controls and Procedures**

 

**(a) Evaluation of DisclosureControls and Procedures**

 

As of the end of the period covered by thisreport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as defined in Rule 13a-15(e) of the Exchange Act.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report to provide reasonable assurance that information required to bedisclosed by the Company in the reports that the Company files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, with the exception of therestatement issue discussed below.

 

On November 17, 2005, subsequent to the endof the period covered by this report, the Company concluded that it needed torestate its previously issued Consolidated Financial Statements as of and forthe year ended December 31, 2004 and for the three months and nine months endedSeptember 30, 2004, as described in Note 2 to the Consolidated FinancialStatements.  The Company also restatedits financial statements for the quarterly periods ended March 31, 2005 andJune 30, 2005.  The primary purpose ofthe restatement was to reflect the previously unrecorded nominal ownershipinterest in 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 accounting standards.

 

The Company’s management and Audit Committeehave discussed the restatement issues with Johnson, Miller & Co., itsindependent registered public accounting firm. After reviewing the restatement issues, the Company’s management and AuditCommittee believe that, while the restatement is considered a significantdeficiency in the Company’s disclosure controls and procedures, the primarycircumstances that resulted in the restatement are unique to the complexaccounting issues and interpretations made in connection with the Merger andoccurred at a time when the Company had identified a significant deficiency inits disclosure controls and procedures relating to the lack of qualifiedaccounting and financial management personnel. Subsequent to that time, the Company has hired a Controller and a ChiefFinancial Officer, both of whom have experience in accounting and financialreporting for public companies and are Certified Public Accountants.  The Company believes that the correctiveactions it has taken since the end of the period covered by this report,consisting of hiring qualified personnel, adequately address the significantdeficiency associated with the restatement. Accordingly, management of the Company does not plan to implement any furtherchanges to its disclosure controls and procedures with respect to therestatement.

 

**(b) Changes in Internal Controlover Financial Reporting**

 

There were no changes in our internal controlover financial reporting that occurred during the most recent fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

See Note 12 of the Notes to Consolidated Financial Statements included in Part I, Item I, which is incorporated herein by reference.

 

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

 

In July 2005, we issued 250,000 shares of our common stock to acquire a 4% net working interest in the Santa Elena Property in Ecuador which had been conveyed to the lender in connection with the acquisition of the property.  See Notes 8 and 9 to the Consolidated Financial Statements for further discussion of this transaction.

 

In July 2005, we issued 9,000,000 shares of our common stock to the former shareholders of BPZ-Texas under an earn-out arrangement in the Merger Agreement.  See Note 9 to the Consolidated Financial Statements for further discussion of this transaction.

 

In September 2005 we issued 15,000 shares of our common stock to an individual for financial management and consulting services.

 

The foregoing issuances of common stock were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering.  No underwriters were engaged in connection with the foregoing issuances of securities.  The sales were made without general solicitation or advertising.  Each purchaser was an “accredited investor” or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the sales were being acquired for investment.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.  Other Information**

 

None.

 

**Item 6.  Exhibits**

 
| 3.1    | Third Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on July 8, 2005)                               |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
| 10.1   | Stock Purchase Agreement dated as of July 19, 2005 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 22, 2005)                          |
|   |                                                                                                                                                                           |
| 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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