** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB/A**

**Amendment No. 1**

 

**(Mark One)**

** **

**ý****                                ****QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended:**

**June 30, 2005**

** **

**o****                                ****TRANSITION REPORT UNDERSECTION 13 or 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from               to              **

 

**Commission File Number: 000-29098**

 

**BPZENERGY, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

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

 

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

 

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

Yes o No ý

 

Asof August 10, 2005, there were 37,723,218 shares of common stockoutstanding.

 

Transitional Small BusinessDisclosure Format:  Yes o No ý

 

 

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**TABLE OF CONTENTS**

 

BPZ Energy, Inc. is filing this amended Quarterly Report on Form 10-QSB/Afor the quarterly period ended June 30, 2005 (the “Amended QuarterlyReport”), to amend its Quarterly Report on Form 10-QSB for the quarterly periodended June 30, 2005 (the “Original Quarterly Report”), which was filedwith the Securities and Exchange Commission on August 15, 2005.

 

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

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

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedBalance Sheets**

 
| ** **                                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(Restated)**          | ** ** | **(Restated)**              | ** ** |
| ** **                                                    | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                    |       |                    |       |                        |       |
| Current  assets:                                              |       |                    |       |                        |       |
| Cash and cash equivalents                                     |       | $                       | 358,370    |                        | $          | 4,014,191 |   |
| Restricted cash                                               |       | —                  |       | 100,000                     |       |
| Other                                                         |       | 76,282                  |       | 72,159                      |       |
| Total current assets                                          |       | 434,652                 |       | 4,186,350                   |       |
|                                                          |       |                    |       |                        |       |
| Property and  equipment, net                                  |       | 25,432                  |       | 5,505                       |       |
| Restricted  cash                                              |       | 1,300,000               |       | —                      |       |
| Investment  in Ecuador property, net                          |       | 2,038,980               |       | 969,240                     |       |
| Investment  in Navidec Financial Services                     |       | 1,076,896               |       | 1,130,511                   |       |
|                                                          |       |                    |       |                        |       |
| Total assets                                                  |       | $                       | 4,875,960  |                        | $          | 6,291,606 |   |
|                                                          |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                 |       |                    |       |                        |       |
|                                                          |       |                    |       |                        |       |
| Current  liabilities:                                         |       |                    |       |                        |       |
| Accounts payable                                              |       | $                       | 130,078    |                        | $          | 311,613 |   |
| Accrued liabilities                                           |       | 1,362,869               |       | 54,342                      |       |
| Note payable                                                  |       | 30,979                  |       | 208,986                     |       |
| Total current liabilities                                     |       | 1,523,926               |       | 574,941                     |       |
|                                                          |       |                    |       |                        |       |
| Stockholders’  equity:                                   |       |                    |       |                        |       |
| Common stock, no par value, 20,000,000  authorized            |       | 18,331,491              |       | 17,478,446                  |       |
| Additional paid in capital — warrants and  stock options |       | 2,243,892               |       | 2,341,795                   |       |
| Common stock and warrants held by affiliate                   |       | (2,492,629              | )          | (2,854,181                  | )          |
| Stock subscription receivable                                 |       | (230,825                | )          | (230,825                    | )          |
| Deficit accumulated during the development  stage             |       | (14,499,895             | )          | (11,018,570                 | )          |
|                                                          |       |                    |       |                        |       |
| Total stockholders’ equity                               |       | 3,352,034               |       | 5,716,665                   |       |
|                                                          |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity               |       | $                       | 4,875,960  |                        | $          | 6,291,606 |   |

 

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

 

3

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Cumulative  Amounts from Inception to** | ** **  | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|-------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **June 30, 2005**                    | ** **  | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | ** **                                | ** **  | **(Restated)**                       | ** ** | **(Restated)**                     | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Revenue                                                                     |       | $                                         | —      |                                 | $          | —                             |       | $ | — |   | $ | — |   | $ | — |   |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Operating  and administrative expenses:                                     |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| General and administrative                                                  |       | 4,010,419                                 |        | 924,197                              |       | 237,993                            |       | 1,884,986 |   | 436,188 |   |
| Stock-based compensation                                                    |       | 4,669,205                                 |        | 179,270                              |       | —                             |       | 254,270 |   | — |   |
| Geological, geophysical and engineering                                     |       | 790,156                                   |        | 291,126                              |       | 81,235                             |       | 429,191 |   | 81,473 |   |
| Depreciation expense                                                        |       | 2,452                                     |        | 1,645                                |       | —                             |       | 2,295 |   | — |   |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Total operating expenses                                                    |       | 9,472,232                                 |        | 1,396,238                            |       | 319,228                            |       | 2,570,742 |   | 517,661 |   |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Operating  loss                                                             |       | (9,472,232                                | )           | (1,396,238                           | )          | (319,228                           | )          | (2,570,742 | ) | (517,661 | ) |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Other income  (expense):                                                    |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Investment income from Ecuador property,  net of amortization               |       | 310,290                                   |        | 74,635                               |       | —                             |       | 162,429 |   | — |   |
| Equity in loss of Navidec Financial  Services                               |       | (2,934,997                                | )           | (671,688                             | )          | —                             |       | (970,894 | ) | — |   |
| (Loss) gain on issuance of equity  securities by Navidec Financial Services |       | (1,942,590                                | )           | 224,884                              |       | —                             |       | (49,414 | ) | — |   |
| Interest expense                                                            |       | (74,926                                   | )           | (2,305                               | )          | (15,800                            | )          | (7,967 | ) | (31,600 | ) |
| Amortization of deferred financing costs                                    |       | (418,349                                  | )           | (28,955                              | )          | —                             |       | (57,910 | ) | — |   |
| Miscellaneous income                                                        |       | 32,909                                    |        | 4,695                                |       | 359                                |       | 13,173 |   | 359 |   |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Total other income (expense)                                                |       | (5,027,663                                | )           | (398,734                             | )          | (15,441                            | )          | (910,583 | ) | (31,241 | ) |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Loss before income taxes                                                    |       | (14,499,895                               | )           | (1,794,972                           | )          | (334,669                           | )          | (3,481,325 | ) | (548,902 | ) |
| Income taxes                                                                |       | —                                    |        | —                               |       | —                             |       | — |   | — |   |
| Net loss                                                                    |       | $                                         | (14,499,895 | )                                    | $          | (1,794,972                         | )          | $ | (334,669 | ) | $ | (3,481,325 | ) | $ | (548,902 | ) |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted net loss per share                                       |       |                                      |        | $                                    | (0.11      | )                                  | $          | (0.08 | ) | $ | (0.21 | ) | $ | (0.13 | ) |
|                                                                        |       |                                      |        |                                 |       |                               |       |   |   |   |   |
| Weighted  average common shares outstanding                                 |       |                                      |        | 16,530,708                           |       | 4,103,454                          |       | 16,417,713 |   | 4,103,454 |   |

 

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

 

4

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

# **Consolidated Statements of Stockholders’ Equity**

**Six MonthsEnded June 30, 2005**

**(Unaudited)**

**(Restated)**

 
| ** **                                                 | ** ** | ** **               | ** ** | ** **  | ** ** | ** **     | ** ** | ** **            | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|-------------|------------|----------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **               | ** ** | ** **  | ** ** | ** **     | ** ** | **Common Stock** | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **               | ** ** | ** **  | ** ** | **Additional** | ** ** | **and Warrants**      | ** ** | **Stock**       | ** ** | **During  the** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Common  Stock Issued** | ** ** | **Paid-in** | ** ** | **Held by**    | ** ** | **Subscription**      | ** ** | **Development** | ** ** | ** **      | ** ** |
| ** **                                                 | ** ** | **Shares  (a)**          | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Affiliate**         | ** ** | **Receivable**  | ** ** | **Stage**       | ** ** | **Total**  | ** ** |
| ** **                                                 | ** ** | ** **               | ** ** | ** **  | ** ** | ** **     | ** ** | ** **            | ** ** | ** **      | ** ** | ** **      | ** ** | ** ** | ** ** |
|                                                       |       |                     |       |        |       |           |       |                  |       |            |       |            |       |       |       |
| Balances at  December 31, 2004 (audited)              |       | 16,581,385               |       | $           | 17,478,446 |           | $          | 2,341,795             |       | $               | (2,854,181 | )               | $          | (230,825   | )          | $ | (11,018,570 | ) | $ | 5,716,665 |   |
|                                                       |       |                     |       |        |       |           |       |                  |       |            |       |            |       |       |       |
| Stock-based  compensation                                  |       | —                   |       | —      |       | 150,000        |       | —                |       | —          |       | —          |       | 150,000    |       |
| Exercise of stock  options                                 |       | 381,389                  |       | 853,045     |       | (247,903       | )          | —                |       | —          |       | —          |       | 605,142    |       |
| Net change in  common stock and warrants held by affiliate |       | —                   |       | —      |       | —         |       | 361,552               |       | —          |       | —          |       | 361,552    |       |
| Net loss for the  period                                   |       | —                   |       | —      |       | —         |       | —                |       | —          |       | (3,481,325      | )          | (3,481,325 | )          |
| Balances at  June 30, 2005                            |       | 16,962,774               |       | $           | 18,331,491 |           | $          | 2,243,892             |       | $               | (2,492,629 | )               | $          | (230,825   | )          | $ | (14,499,895 | ) | $ | 3,352,034 |   |

 

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

 

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

 

5

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Cumulative Amounts  from Inception** | ** **  | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **To June 30, 2005**              | ** **  | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                             | ** **  | **(Restated)**                     | ** ** | **(Restated)** | ** ** |
| Cash flows  from operating activities:                                       |       |                                   |        |                               |       |   |   |
| Net loss                                                                     |       | $                                      | (14,499,895 | )                                  | $          | (3,481,325 | ) | $ | (548,902 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                   |        |                               |       |   |   |
| Stock-based compensation                                                     |       | 4,669,205                              |        | 254,270                            |       | — |   |
| Depreciation expense                                                         |       | 2,452                                  |        | 2,295                              |       | — |   |
| Amortization of investment in Ecuador  property                              |       | 85,520                                 |        | 42,760                             |       | — |   |
| Amortization of deferred financing fees                                      |       | 418,349                                |        | 57,910                             |       | — |   |
| Equity in loss of Navidec Financial  Services                                |       | 2,934,997                              |        | 970,894                            |       | — |   |
| Loss on issuance of equity securities by  Navidec Financial Services         |       | 1,942,590                              |        | 49,414                             |       | — |   |
| Net change in operating assets and  liabilities:                             |       |                                   |        |                               |       |   |   |
| Increase in other assets                                                     |       | (66,632                                | )           | (62,033                            | )          | (96,329 | ) |
| Increase (decrease) in accounts payable                                      |       | 130,078                                |        | (181,535                           | )          | — |   |
| Increase in accrued liabilities                                              |       | 146,100                                |        | 91,758                             |       | 25,701 |   |
| Net cash used in operating activities                                        |       | (4,237,236                             | )           | (2,255,592                         | )          | (619,530 | ) |
|                                                                         |       |                                   |        |                               |       |   |   |
| Cash flows  from investing activities:                                       |       |                                   |        |                               |       |   |   |
| Property and equipment additions                                             |       | (27,884                                | )           | (22,222                            | )          | — |   |
| Restricted cash                                                              |       | (1,300,000                             | )           | (1,200,000                         | )          | — |   |
| Investment in Ecuador property                                               |       | (1,440,000                             | )           | —                             |       | (1,070,000 | ) |
| Net cash used in investing activities                                        |       | (2,767,884                             | )           | (1,222,222                         | )          | (1,070,000 | ) |
|                                                                         |       |                                   |        |                               |       |   |   |
| Cash flows  from financing activities:                                       |       |                                   |        |                               |       |   |   |
| Borrowings                                                                   |       | 2,130,000                              |        | —                             |       | 1,889,174 |   |
| Repayments of borrowings                                                     |       | (393,492                               | )           | (178,007                           | )          | (200,000 | ) |
| Proceeds from sale of common stock, net                                      |       | 5,626,982                              |        | —                             |       | — |   |
| Net cash (used in) provided by financing  activities                         |       | 7,363,490                              |        | (178,007                           | )          | 1,689,174 |   |
|                                                                         |       |                                   |        |                               |       |   |   |
| Net increase  in cash and cash equivalents                                   |       | 358,370                                |        | (3,655,821                         | )          | (356 | ) |
| Cash and  cash equivalents at beginning of period                            |       | —                                 |        | 4,014,191                          |       | 8,156 |   |
| Cash and  cash equivalents at end of period                                  |       | $                                      | 358,370     |                               | $          | 358,370 |   | $ | 7,800 |   |
|                                                                         |       |                                   |        |                               |       |   |   |
| **Supplemental cash flow information:**                                      | ** ** | ** **                             | ** **  | ** **                         | ** ** | ** ** | ** ** |
| **Cash  paid for:**                                                          | ** ** | ** **                             | ** **  | ** **                         | ** ** | ** ** | ** ** |
| Interest                                                                     |       | $                                      | 74,135      |                               | $          | 10,192 |   | $ | — |   |
| **Non-cash  items:**                                                         | ** ** | ** **                             | ** **  | ** **                         | ** ** | ** ** | ** ** |
| Common stock  to be issued for property interest                             |       | $                                      | 1,112,500   |                               | $          | 1,112,500 |   | $ | — |   |
| Common stock  issued in acquisition                                          |       | 5,713,565                              |        | —                             |       | — |   |
| Warrants and  stock options assumed in acquisition                           |       | 1,785,359                              |        | —                             |       | — |   |
| Common stock  and warrants held by affiliate                                 |       | 2,492,629                              |        | (361,552                           | )          | — |   |
| Imputed  financing costs                                                     |       | 428,000                                |        | —                             |       | 428,000 |   |
| Proceeds  received by NFS from exercise of stock options                     |       | 948,188                                |        | 605,142                            |       | — |   |
| Issuance of  common stock for subscription receivable                        |       | 230,825                                |        | —                             |       | — |   |
| Conversion  of long-term debt to common stock                                |       | 685,000                                |        | —                             |       | — |   |
| Conversion  of notes payable to common stock                                 |       | 1,020,529                              |        | —                             |       | — |   |

 

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

 

6

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**BPZ Energy, Inc. and Subsidiaries**

**(A Development Stage Company)**

**NotesTo Consolidated Financial Statements**

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

 

In June 2004, the Company acquired the capital stock of SMCEcuador, Inc., a Delaware corporation (“SMC”), which owns a 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 mid-2006.

 

7

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**New Accounting Pronouncements**

 

In April 2005, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) 19-1, “Accounting for Suspended Well Costs.”  This FSP 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 the FSP is required to beapplied to the first reporting period beginning after April 4, 2005 on aprospective basis to existing and newly capitalized exploratory wellcosts.  The guidance provided in FSP 19-1may affect the treatment of costs capitalized in future operations, but itwould not have had a material effect on amounts recorded in our consolidatedstatements of financial position, results of operations or cash flow for theperiods presented.

 

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN47”), “Accounting for Conditional Asset Retirement Obligations.”  FIN 47 clarifies the definition and treatmentof conditional asset retirement obligations as discussed in 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 obligationcan be reasonably estimated.  FIN 47 isintended to provide more information about long-lived assets, more informationabout future cash outflows for these obligations and more consistentrecognition of these liabilities.  FIN 47is effective for fiscal years ending after December 15, 2005.  The Company does not believe that itsfinancial position, results of operations or cash flows will be impacted 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 No. 25 (“APB 25”). SFAS No. 123(R) also requires a public entity to present its cashflows provided by tax benefits from stock options exercised in the Financing Activitiessection of the Statement of Cash Flows. In April 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB107”) which provides guidance on SFAS No. 123 (R).  SAB 107 permits registrants to choose anappropriate valuation technique or model to estimate the fair value of shareoptions, assuming consistent application, and provides guidance for thedevelopment of assumptions used in the valuation process.  Additionally, SAB 107 discusses additionaldisclosures to be made in registrants’ periodic reports.  Public companies will be required toimplement SFAS 123(R) in the first fiscal year which begins after December 15,2005.  As we intend to use stock-basedcompensation in the future as a component of employee compensation, and we havepreviously followed the intrinsic method, the implementation of thispronouncement may reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be estimated at this time.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets—an amendment of APB Opinion No. 29.”  Opinion No. 29 is based on the principlethat exchanges of nonmonetary assets should be measured based on fair valuewith exception for nonmonetary exchanges of similar productive assets.  SFAS 153 amends Opinion No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have a commercial substance, defined as transactions that are notexpected to result in significant changes in the cash flows of the reportingentity.  This statement is effective forexchanges of nonmonetary assets occurring after June 15, 2005.  The financial position, results of operationsor cash flows contained in this filing are unaffected by the implementation ofthis new standard.

 

8

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In May 2004, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections.”  ThisStatement replaces APB Opinion 20 and SFAS No. 3 and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  This Statement applies to allvoluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement inthe unusual instance that the pronouncement does not include specifictransition provisions.  When apronouncement includes specific transition provisions, those provisions shouldbe followed.  The provisions ofSFAS 154 will be effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.

 

**Note 2 — Restatement of Financial Statements**

 

Thepreviously issued consolidated financial statements of the Company as of June30, 2005 and December 31, 2004 and for the periods ended June 30, 2005 and2004 have been restated for the issues described below:

 

**Accountingfor Navidec Financial Services (NFS)**

 

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

 

Upon consummationof the Merger, BPZ became contractually and irrevocably bound to spin-off NFSto the pre-merger shareholders of Navidec. Subsequent to the Merger, the Company and NFS have operated theirrespective businesses autonomously and the Company does not control NFS.  The Company, in consultation with itsindependent accountants and legal counsel, had previously concluded that thespin-off of NFS had been consummated in substance from a legal perspectiveprior to the Merger, and that the financial statements of the Company shouldproperly reflect the spin-off transaction as legally consummated on the date ofthe Merger.  Accordingly, the previousconsolidated financial statements of the Company excluded its nominal ownershipof NFS.  Based on the fact that NFS hadnot completed the final distribution of its shares to the pre-mergershareholders, the Company now concludes that its consolidated financialstatements 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 common stock transactions with third parties, the Company willrecord a loss to the extent that the consideration received by NFS from suchtransactions is less than the Company’s cost basis per share.

 

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

 

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

 

At December 31,2003, the Company had a net receivable of $162,890 due from BPZ &Associates, Inc., which was the parent of the Company prior to theMerger.  Additionally, BPZ Energy, Inc.made additional cash payments to BPZ & Associates, Inc. totaling$789,501 prior to the Merger.  Inconnection with the Merger, the shares of BPZ-Texas which were held by BPZ &Associates, Inc. were distributed to the shareholders of BPZ &Associates, Inc. in a corporate reorganization.  Additionally, all intercompany advancesreceivable from BPZ & Associates, Inc. were forgiven.  The Company initially recorded theforgiveness of these intercompany advances as if they were a dividend paymentfrom BPZ-Texas to BPZ & Associates, Inc.  However, BPZ-Texas did not have sufficientcapital to declare a dividend of this amount. Accordingly, the Company re-analyzed the nature of these expenditures andconcluded that essentially all of these costs should be characterized asexpenditures which were incurred for the benefit of BPZ-Texas.  Of such payments, $370,000 was determined torelate to the acquisition of SMC Ecuador, Inc., of which $167,500 was paidto third parties and $202,500 was for the benefit of BPZ & Associates, Inc.  The remaining balance of $582,391 wasattributable to personnel and office expenses incurred by BPZ &Associates, Inc. on behalf of BPZ-Texas and has been recorded as part of theCompany’s general and administrative expenses. The amount of such additional general and administrative expensesattributable to the three-month and six-month periods ended June 30, 2004was $198,850 and $294,600, respectively. Additionally, the increase in basis in the Ecuador property resulted inadditional amortization of $7,301 and $14,602 for the three-month and six-monthperiods ended June 30, 2005, respectively.

 

9

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**DevelopmentStage Company**

 

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

 

A development stagecompany is defined as one in which (a) planned principal operations havenot commenced, or (b) planned principal operations have commenced, butthere has been no significant revenue therefrom.  Based on this definition, the Companyconcluded that it is most appropriate to classify itself as a “developmentstage company” and now includes this description on its financial statements.The Company also reports cumulative amounts from inception in its financialstatements.

 

**Amortizationof Stock-based Compensation**

 

In connection withthe restatement, the Company realized that it had inadvertently failed tocontinue the amortization of the stock-based compensation attributable to the500,000 stock options granted to the former CEO of Navidec.  These shares vest when the Company receivesadditional investment proceeds totaling $6 million, including proceeds from theexercise of outstanding warrants, provided such funding is received no laterthan September 10, 2006.  Theadditional amortization was $75,000 and $150,000 for the three-month and six-monthperiods ended June 30, 2005, respectively.

 

**Effects ofRestatement**

 

Theeffects of the restatement on the balance sheets as of June 30, 2005 and2004 are reflected below:

 
| ** **                                        | ** ** | **Condensed Balance Sheet  June 30, 2005** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                      | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Restated**                                    | ** ** | **Reported** | ** ** | **Difference** | ** ** |
| **Assets**                                        |       |                                            |       |   |   |   |   |
| Total  current assets                             |       | $                                               | 434,652    |   | $ | 434,652 |   | $ | — |   |
| Property and  equipment                           |       | 25,432                                          |       | 25,432 |   | — |   |
| Restricted  cash                                  |       | 1,300,000                                       |       | 1,300,000 |   | — |   |
| Investment  in Navidec Financial Services         |       | 1,076,896                                       |       | — |   | 1,076,896 |   |
| Investment  in Ecuador property, net              |       | 2,038,980                                       |       | 1,726,342 |   | 312,638 |   |
| Total assets                                      |       | $                                               | 4,875,960  |   | $ | 3,486,426 |   | $ | 1,389,534 |   |
|                                              |       |                                            |       |   |   |   |   |
| **Liabilities And Stockholders’ Equity**     |       |                                            |       |   |   |   |   |
|                                              |       |                                            |       |   |   |   |   |
| Total  current liabilities                        |       | $                                               | 1,523,926  |   | $ | 1,523,926 |   | $ | — |   |
| Stockholders’  equity:                       |       |                                            |       |   |   |   |   |
| Common stock                                      |       | 18,331,491                                      |       | 14,782,979 |   | 3,548,512 |   |
| Additional paid-in capital                        |       | 2,243,892                                       |       | 8,112,932 |   | (5,869,040 | ) |
| Common stock and warrants held by affiliate       |       | (2,492,629                                      | )          | — |   | (2,492,629 | ) |
| Stock subscription receivable                     |       | (230,825                                        | )          | (230,825 | ) | — |   |
| Deficit accumulated during the development  stage |       | (14,499,895                                     | )          | (20,702,586 | ) | 6,202,691 |   |
| Total stockholders’ equity                   |       | 3,352,034                                       |       | 1,962,500 |   | 1,389,534 |   |
| Total liabilities and stockholders’ equity   |       | $                                               | 4,875,960  |   | $ | 3,486,426 |   | $ | 1,389,534 |   |

 

Thenet effect of the above adjustments on the June 30, 2005 balance sheet wasto increase total assets and stockholders’ equity by $1,389,534.  Of such amount, the effect of the decision toaccount for NFS as an acquisition under SFAS 141 resulted in an increase of $1,076,896and the net effect of adjustments to the investment in Ecuador property totaled$312,638.  The accumulated deficit wasreduced by $6,202,691 as a result of the reduction in accumulated lossesthrough June 30, 2005.

 

10

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| ** **                                      | ** ** | **Balance Sheet  June 30, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | ** **                            | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Restated**                          | ** ** | **Reported** | ** ** | **Difference** | ** ** |
| **Assets**                                      |       |                                  |       |   |   |   |   |
| Total  current assets                           |       | $                                     | 250,976    |   | $ | 250,976 |   | $ | — |   |
| Investment  in Ecuador property, net            |       | 642,000                               |       | 642,000 |   | — |   |
| Other  non-current assets                       |       | 648,223                               |       | 485,333 |   | 162,890 |   |
| Total assets                                    |       | $                                     | 1,541,199  |   | $ | 1,378,309 |   | $ | 162,890 |   |
|                                            |       |                                  |       |   |   |   |   |
| **Liabilities And Stockholders’ Equity**   |       |                                  |       |   |   |   |   |
|                                            |       |                                  |       |   |   |   |   |
| Total  current liabilities                      |       | $                                     | 1,471,950  |   | $ | 1,471,950 |   | $ | — |   |
| Long-term  debt                                 |       | 983,051                               |       | 983,051 |   | — |   |
| Stockholders’  equity                      |       | (913,802                              | )          | (1,076,692 | ) | 162,890 |   |
| Total liabilities and stockholders’ equity |       | $                                     | 1,541,199  |   | $ | 1,378,309 |   | $ | 162,890 |   |

 

Thenet effect of the above adjustments on the June 30, 2004 balance sheet wasto increase total assets and stockholders’ equity by $162,890 as a result ofthe re-characterization of intercompany transactions with BPZ &Associates, Inc. as discussed above. The Company had previously charged this amount to retained earnings aspart of the reorganization of the entities. There were no other changes to the June 30, 2004 balance sheet.

 

**BPZ Energy, Inc.and Subsidiaries**

**ConsolidatedStatement of Operations**

 
| ** **                                           | ** ** | **Three Months Ended June 30, 2005** | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | ** **                                | ** ** | **Originally**                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Restated**                              | ** ** | **Reported**                            | ** ** | **Difference** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Difference** | ** ** |
| ** **                                           | ** ** | ** **                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**                                          |       | $                                         | —     |                                    | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                 |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| **Operating and administrative expenses:**           |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| General and  administrative                          |       | 924,197                                   |       | 924,197                                 |       | — |   | 1,884,986 |   | 1,884,986 |   | — |   |
| Stock-based  compensation                            |       | 179,270                                   |       | 104,270                                 |       | 75,000 |   | 254,270 |   | 104,270 |   | 150,000 |   |
| Geological, geophysical and engineering              |       | 291,126                                   |       | 291,126                                 |       | — |   | 429,191 |   | 429,191 |   | — |   |
| Depreciation  expense                                |       | 1,645                                     |       | 1,645                                   |       | — |   | 2,295 |   | 2,295 |   | — |   |
| Total operating expenses                             |       | 1,396,238                                 |       | 1,321,238                               |       | 75,000 |   | 2,570,742 |   | 2,420,742 |   | 150,000 |   |
| Operating loss                                       |       | (1,396,238                                | )          | (1,321,238                              | )          | (75,000 | ) | (2,570,742 | ) | (2,420,742 | ) | (150,000 | ) |
|                                                 |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| **Other  income / (expense):**                       |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Investment income in Ecuador property                |       | 74,635                                    |       | 81,936                                  |       | (7,301 | ) | 162,429 |   | 177,031 |   | (14,602 | ) |
| Equity in loss of Navidec Financial  Services        |       | (671,688                                  | )          | —                                  |       | (671,688 | ) | (970,894 | ) | — |   | (970,894 | ) |
| (Loss) gain on issuance of equity  securities by NFS |       | 224,884                                   |       | —                                  |       | 224,884 |   | (49,414 | ) | — |   | (49,414 | ) |
| Interest  expense                                    |       | (2,305                                    | )          | (2,305                                  | )          | — |   | (7,967 | ) | (7,967 | ) | — |   |
| Amortization of deferred financing costs             |       | (28,955                                   | )          | (28,955                                 | )          | — |   | (57,910 | ) | (57,910 | ) | — |   |
| Miscellaneous  income                                |       | 4,695                                     |       | 4,695                                   |       | — |   | 13,173 |   | 13,173 |   | — |   |
| Total other income                                   |       | (398,734                                  | )          | 55,371                                  |       | (454,105 | ) | (910,583 | ) | 124,327 |   | (1,034,910 | ) |
| Loss before income taxes                             |       | (1,794,972                                | )          | (1,265,867                              | )          | (529,105 | ) | (3,481,325 | ) | (2,296,415 | ) | (1,184,910 | ) |
| Income taxes                                         |       | —                                    |       | —                                  |       | — |   | — |   | — |   | — |   |
| Net loss                                             |       | $                                         | (1,794,972 | )                                       | $          | (1,265,867 | ) | $ | (529,105 | ) | $ | (3,481,325 | ) | $ | (2,296,415 | ) | $ | (1,184,910 | ) |
|                                                 |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                 |       | $                                         | (0.11      | )                                       | $          | (0.07 | ) | $ | (0.04 | ) | $ | (0.21 | ) | $ | (0.14 | ) | $ | (0.07 | ) |
|                                                 |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding           |       | 16,530,708                                |       | 16,927,800                              |       | (397,092 | ) | 16,417,713 |   | 16,909,418 |   | (491,705 | ) |

 

11

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The differences between the restated and originally reported statementof operations amounts relate to the accounting for the results of NFS under theequity method.  The Company’s continuingnominal ownership of NFS pending consummation of the spin-off caused theCompany to record its proportionate share of NFS’s losses, totaling $671,688and $970,894 for the three-month and six-month periods ended June 30,2005, respectively.  Likewise, equityissuances by NFS at prices below the Company’s basis per share causedadditional charges to earnings totaling $49,414 during the same period.  Both of these amounts were non-cash chargesto the Company.  Other income from thegain on equity issuances by NFS of $224,884 for the three months ended June 30,2005 resulted from the reversal of previously recognized losses.

 

The differences to stock-based compensation and investment income fromthe Ecuador property are discussed above.

 

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.

** **

**BPZ Energy, Inc.and Subsidiaries**

**CondensedStatement of Operations Information**

 
| ** **                                 | ** ** | **Three Months ended June 30, 2004** | ** ** | **Six months ended June 30, 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | ** **                                | ** ** | **Originally**                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Originally** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Restated**                              | ** ** | **Reported**                            | ** ** | **Difference** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Difference** | ** ** |
| General and administrative expenses        |       | $                                         | 237,993    |                                    | $          | 39,143 |   | $ | 198,850 |   | $ | 436,188 |   | $ | 141,588 |   | $ | 294,600 |   |
|                                       |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Net loss                                   |       | $                                         | (334,669   | )                                       | $          | (135,819 | ) | $ | (198,850 | ) | $ | (548,902 | ) | $ | (254,302 | ) | $ | (294,600 | ) |
|                                       |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic and  diluted net loss per share      |       | $                                         | (0.08      | )                                       | $          | (0.03 | ) | $ | (0.05 | ) | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.07 | ) |
|                                       |       |                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding |       | 4,103,454                                 |       | 4,103,454                               |       | — |   | 4,103,454 |   | 4,103,454 |   | — |   |

 

The difference of $198,950 and $294,600 for the three-month andsix-month periods ended June 30, 2004, respectively, results fromadditional general and administrative expenses associated with there-characterization of intercompany transactions with BPZ & Associates, Inc.

 

**Note 3 – Acquisition of Navidec**

 

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

 

As consideration for the Merger, BPZ-Texas issued3,198,368 shares of its common stock in a one-for-one exchange for all of theoutstanding common shares of Navidec.  Inaddition, BPZ-Texas assumed options to purchase 1,332,076 shares of Navideccommon stock, which had previously been issued to employees, directors andconsultants of Navidec and were outstanding on the date of the Merger.  Under the terms of the Merger Agreement, theproceeds received from the exercise of

 

12

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these stock options are payable to NFS.  BPZ-Texas also assumed outstanding warrantsto purchase 1,129,000 shares of Navidec common stock.  In addition, BPZ-Texas granted to NFS fullyvested warrants to purchase 1,500,000 shares of common stock at an exerciseprice of $2.00 per share and issued 662,149 new shares of common stock toNFS.  See Note 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 forthe acquisition of Navidec was $7,498,924, consisting wholly of equitysecurities issued. The BPZ-Texas stock issued in connection with theacquisition was valued at $1.48 per share, which was the average closing price ofNavidec’s common stock quoted on the OTCBB market during a five-day tradingperiod beginning two trading days prior to the announcement of the MergerAgreement on July 8, 2004.  Navidecwas publicly traded and had a market for its equity while BPZ-Texas wasprivately owned.  The stock optionsassumed and warrants issued or assumed were valued using the Black-Scholesmodel.  Inputs into the Black–Scholesvaluation model for the valuation of the warrants and stock options includedthe exercise price and remaining term for the stock options and warrants, and avolatility factor based on historical stock prices of Navidec.

 

The merger has been accounted for using the purchasemethod of accounting, in accordance with SFAS No. 141.  The acquisition was recorded on September 10,2004, the date the Merger was consummated. The results of operations of Navidec have been included in the Company’sresults since September 1, 2004, for convenience purposes.

 

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

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

 

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

 

**Purchase Price Allocation**

 
| ** **                                                                | ** ** | **Value**     | ** ** |
|---------------------------------------------------------------------------|------------|---------------|------------|
| **Description**                                                           | ** ** | **Allocated** | ** ** |
| Cash and  marketable securities                                           |       | $             | 681,220    |   |
| Property,  equipment and other                                            |       | 85,658        |       |
| BPZ common  stock issued to NFS (662,149 shares)                          |       | 2,125,498     |       |
| Warrants to  purchase BPZ common stock issued to NFS (1,500,000 warrants) |       | 2,640,000     |       |
| Mortgage  business, net of minority interest                              |       | 240,000       |       |
| Goodwill                                                                  |       | 2,160,753     |       |
| Accounts  payable, accrued liabilities and note payable                   |       | (434,205      | )          |
| Total purchase price allocation                                           |       | $             | 7,498,924  |   |

 

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

 

13

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

 

ProForma Effects of the Merger

 
| ** **                                  | ** ** | **Six Months Ended**   | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 30, 2004** | ** ** |
| Revenues                                    |       | $                      | —     |   |
| Net loss                                    |       | $                      | (911,000   | ) |
| Basic and  diluted net loss per share       |       | $                      | (0.08      | ) |
| Weighted  average common shares outstanding |       | 12,104,198             |       |

 

**NFS Spin-off**

 

TheMerger Agreement also required the transfer of all of the pre-merger businessassets and liabilities of Navidec to its wholly owned subsidiary, NFS, and thespin-off of NFS to the shareholders of record of Navidec as of September 9,2004, the date prior to the Merger.  Upon consummation of the Merger, BPZbecame contractually and irrevocably bound to the spin-off of NFS to suchpre-Merger shareholders.  All legalrequirements for the spin-off of NFS have been completed except forregistration of the spin-off with the Securities and Exchange Commission andthe final distribution of NFS common shares to the pre-merger shareholders 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 the registrationprocess of NFS and cannot predict when the management of NFS will be able tocomplete the final distribution of NFS common shares.

 

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

 

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

 

NFS was formed in December 2002 and isorganized into three divisions: business development, mortgage services andtechnology.  The business developmentdivision focuses on identifying development stage companies and assisting intheir growth by providing capital, consulting, personnel and other services,both internally and through the use of subcontractors.  The mortgage division provides loanorigination and refinancing services in the residential and commercial mortgagemarket, primarily in the Phoenix, Arizona area. Prior to April 2005, the technology division was inactive.  In April 2005, NFS acquired AegisBusiness Group, Inc. (“Aegis”), a technology company which develops andmarkets security solutions related to identity and computer access management.

 

As of the date of the Merger, NFS had 5,177,548common shares outstanding, which shares are held by the Company for the benefitof the spin-off shareholders.  On September 21,2004, the Board of Directors of NFS awarded 1,200,000 fully vested NFS commonshares and options to purchase 1,200,000 NFS common shares at a cost of $0.05per share to the management of NFS.  Thistransaction resulted in the nominal ownership of BPZ being reduced from 100% to81.2% (68.3% on a fully diluted basis) at December 31, 2004.  During the six months ended June 30,2005, NFS issued 370,000 additional stock options to directors, employees andconsultants, of which 250,000 options were exercised, resulting in the issuanceof 250,000 NFS common shares.  NFS also received$675,000 from the sale of 675,000 shares of common stock and 1,350,000warrants.  Additionally, in connectionwith the acquisition of Aegis, NFS became obligated to issue up to 375,000shares.  These transactions have resultedin the nominal ownership of BPZ being further reduced to 70.9% (50.0% on afully diluted basis) as of June 30, 2005. To the extent that NFS conveys its shares or stock options to thirdparties for a per-share value less than the Company’s nominal basis in itsinvestment in NFS, the issuance of these shares or stock options by NFS willresult in a loss to the Company.  To the extent that NFS sells equitysecurities to third parties for a per share value greater than the Company’snominal basis in its investment in NFS, the Company will record a gain only tothe extent of previously recognized losses during the fiscal year.  As a result of such issuances, the Companyrecorded a net gain of $224,884 during the three months ended June 30,2005.

 

Additionally, pursuant to the Merger Agreement, NFSis entitled to the proceeds received from the exercise of pre-merger stockoptions which were assumed by the Company in the Merger.  During the six months ended June 30,2005, NFS received stock option proceeds of $605,142.  This amount is treated for accountingpurposes as an additional investment in NFS by the Company.  To the extent that the Company has less than100% nominal ownership of NFS, the receipt of stock option proceeds by NFS resultsin a loss to the Company based on the minority interest in NFS.  The Company recorded a 

 

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loss of $212,239 for the six months ended June 30,2005 attributable to these stock option exercises.  The loss for the six months ended June 30, 2005 was offset by$162,825 in gains on other equity issuances by NFS as described above,resulting in a net loss of $49,414 for the period.

 

NFS recognized a net loss of $1,330,000 during the sixmonths ended June 30, 2005.  Thisloss included $481,000 operating losses from Aegis and $87,000 in non-cashcharges related to stock-based compensation. Based on its nominal ownership of NFS, the Company recognized a non-cashequity loss of $970,894 for the six months ended June 30, 2005 from itsinvestment in NFS.

 

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

 

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 June 30, 2005, stockholders’equity and the investment in NFS would have been reduced by $1,076,896 if thespin-off had been consummated on that date.

 

Thefollowing table presents the condensed statement of operations information forNFS for the six months ended June 30, 2005 and the condensed balance sheetinformation for NFS as of June 30, 2005 and December 31, 2004:

 

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

 
| ** **                                      | ** ** | **Six Months Ended**   | ** ** | ** **                 | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Condensed income statement  information:**    | ** ** | **June 30, 2005** | ** ** | ** **                 | ** ** |
|                                            |       |                   |       |                       |       |
| Net sales                                       |       | $                      | 1,074,000  |                       |       |   |
|                                            |       |                   |       |                       |       |
| Gross margin                                    |       | $                      | 890,000    |                       |       |   |
|                                            |       |                   |       |                       |       |
| Net loss                                        |       | $                      | (1,330,000 | )                          |       |   |
|                                            |       |                   |       |                       |       |
| Company’s  equity in net loss of NFS       |       | $                      | (970,894   | )                          |       |   |
|                                            |       |                   |       |                       |       |
| ** **                                      | ** ** | **As of**              | ** ** | **As of**                  | ** ** |
| **Condensed balance sheet  information:**       | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|                                            |       |                   |       |                       |       |
| Current  assets                                 |       | $                      | 626,000    |                       | $          | 550,000 |   |
| Investment  in BPZ securities                   |       | 6,716,000              |       | 4,276,000                  |       |
| Goodwill                                        |       | 2,151,000              |       | 2,139,000                  |       |
| Other  noncurrent assets                        |       | 119,000                |       | 34,000                     |       |
| Total assets                                    |       | $                      | 9,612,000  |                       | $          | 6,999,000 |   |
|                                            |       |                   |       |                       |       |
| Current  liabilities                            |       | $                      | 850,000    |                       | $          | 483,000 |   |
| Minority  interest                              |       | 441,000                |       | 64,000                     |       |
| Stockholders’  equity                      |       | 8,321,000              |       | 6,452,000                  |       |
| Total liabilities and stockholders’ equity |       | $                      | 9,612,000  |                       | $          | 6,999,000 |   |

 

Asof June 30, 2005, the carrying amount of the Company’s investment in NFS,including the adjustment for BPZ common 

 

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stockand warrants held by NFS, was less than its proportionate fully diluted shareof the stockholders’ equity of NFS by approximately $1.4 million.  The majority of this difference isattributable to unrealized gains on BPZ securities which were recorded by NFS,but eliminated from the consolidated financial statements of the Company anddifferences in the accounting for stock option proceeds received by NFS.

 

**Note 5 — Other Current Assets**

 

Othercurrent assets consists of deposits, prepaid rent, deferred financing costs andalso includes $29,004 of value added tax paid in Peru.  As of December 31, 2004 the balance consisted primarilyof deferred financing costs related to the acquisition of SMC Ecuador, Inc.

 

**Note 6 — Restricted Cash and Performance Bonds**

 

Inconnection with its properties in Peru, the Company has obtained variousperformance bonds to guarantee its obligations and commitments.  As of June 30, 2005 and December 31,2004, BPZ had restricted cash deposits of $1,300,000 and $100,000,respectively, which collateralize performance bonds issued in those respectiveamounts.  BPZ also has additionalperformance bonds in the amount of $240,000 for which two individualshareholders of the Company provided guarantees or collateral to the financialinstitutions which issued such bonds to secure the Company’s performance.  All of the performance bonds were issuedby Peruvian banks and their terms are governed by the corresponding licensecontract or technical evaluation agreement.

 

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

 

The Company has aninvestment in an oil and gas property in Ecuador (the “Santa Elena Property”)totaling $2,038,980 as of June 30, 2005. The Company has made an election to account for this investment underthe cost method and records its share of cash received or paid as other incomeor expense.  Since the Company’sinvestment represents ownership of an oil and gas property, which is adepleting asset, it is amortizing this investment on a straight-line basis overthe remaining term of the license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense of $42,760 for the six months ended June 30, 2005.

 

In connection with the acquisition of SMC, theCompany had a note payable balance of $208,986 as of December 31,2004.  The note agreement requiresmonthly installment payments of $31,366, including imputed interest at 15%,through July 1, 2005.  Theremaining note payable principal balance as of June 30, 2005 was $30,979.

 

As part of the note agreement, the holder of the note payable held a first lien on the common stock of SMC as collateral.  The holder also received beneficial ownership of a 4% net working interest in the Santa Elena Property.  In June 2005, the Company entered into an agreement to acquire the holder’s 4% net working interest with the issuance of 250,000 shares of BPZ common stock.  Such shares can not be issued until the shareholders have approved an increase in the number of authorized shares.  Accordingly, the value of such shares, $1,112,500, has been reflected as an accrued liability in the accompanying financial statements as of June 30, 2005.  As of June 30, 2005, the Company owned the full 10% working interest in the Santa Elena Property.

 

**Note 8 — Accrued Liabilities**

 

Below is a summary of the balances in accrued liabilities as of June 30, 2005 and December 31, 2004.  Further detail about the shares issuable for consulting services and for the acquisition of property interest can be found below in Note 9.

 
| ** **                                           | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
|                                                 |       |                   |       |                       |       |
| Operating  and administrative accruals               |       | $                      | 146,099    |                       | $          | 54,342 |   |
| Liabilities expected to be settled in  common stock: |       |                   |       |                       |       |
| Consulting services                                  |       | 104,270                |       | —                     |       |
| Acquisition of property interest                     |       | 1,112,500              |       | —                     |       |
| Total accrued liabilities                            |       | $                      | 1,362,869  |                       | $          | 54,342 |   |

 

**Note 9 — Stockholders’ Equity**

 

As of June 30, 2005, the Company had 20,000,000 shares of common stock, no par value, authorized by its Amended and Restated Certificate of Incorporation.  For accounting purposes, the Company’s common shares held by NFS attributable to 

 

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the Company’s equity interest in NFS are reflected as treasury shares.  The common shares issued and outstanding at each period are as follows:

 
| ** **                                             | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Common  shares issued                                  |       | 16,962,774              |       | 16,581,385                  |       |
|                                                   |       |                    |       |                        |       |
| Common  shares owned by NFS                            |       | 557,903                 |       | 557,903                     |       |
| Company’s  equity interest in NFS                 |       | 70.9                    | %          | 81.2                        | %          |
| Net common shares held by affiliate  (treasury shares) |       | 395,556                 |       | 452,931                     |       |
|                                                   |       |                    |       |                        |       |
| Common  shares outstanding                             |       | 16,567,218              |       | 16,128,454                  |       |

 

**Common Stock and Warrants Held by Affiliate**

 

As discussed in Note 3 to the Consolidated Financial Statements, NFS holds common stock and warrants in the Company.  For accounting purposes, these common shares and warrants are reflected as treasury securities and are recorded as a reduction of stockholders’ equity.  As of June 30, 2005, NFS held 557,903 shares of the BPZ common stock valued on the date of the Merger at $3.21 per share, or $1,790,869 in the aggregate, and warrants to purchase 980,000 shares of BPZ common stock at an exercise price of $2.00 per share.  The warrants were valued on the date of the Merger at $1.76 per share using the Black-Scholes model, or $1,724,800 in the aggregate.  The BPZ common stock and warrants held by NFS attributable to the Company’s 70.9% interest in NFS have an aggregate value of $2,492,629, 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.

 
| ** **                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Stock  options outstanding                    |       | 1,673,652               |       | 2,055,041                   |       |
| Warrants  outstanding                         |       | 2,629,000               |       | 2,629,000                   |       |
| Shares  issuable to consultant for services   |       | 25,000                  |       | —                      |       |
| Shares  issuable to acquire property interest |       | 250,000                 |       | —                      |       |
| Earn-out  shares issuable                     |       | 9,000,000               |       | 9,000,000                   |       |
| Contingent  earn-out shares                   |       | 9,000,000               |       | 9,000,000                   |       |
| Total potentially dilutive securities         |       | 22,577,652              |       | 22,684,041                  |       |

 

**Stock Options Outstanding**

 

In connection with the Merger, BPZ, as the accounting acquirer, assumedall Navidec stock options outstanding, which were fully vested on the date ofthe Merger and expire on September 10, 2007.  Under the terms of the Merger agreement, NFSis entitled to receive the proceeds from the exercise of these options.  As of December 31, 2004, there were1,055,041 Navidec stock options outstanding, with exercise prices ranging from$1.30 to $1.93 per share.  During the sixmonths ended June 30, 2005, 381,389 Navidec stock options were exercisedand 673,652 were outstanding as of the end of the period.

 

Additionally, the Company granted options topurchase 1,000,000 shares of common stock at an exercise price of $1.30 pershare to the former CEO of Navidec in connection with his service as a directorand financial consultant to the Company. Of such stock options, 500,000 were fully vested on the date of theMerger.  The remaining 500,000 stockoptions will vest upon the receipt of additional investment proceeds totaling$6 million, including proceeds from the exercise of outstanding 

 

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warrants, provided such funding is received no laterthan September 10, 2006.  Thesestock options, when vested, expire 10 years from the date of grant.  The unvested options were recorded at a fairvalue of $1.20 per share using the Black-Scholes model and are being amortizedover the 24-month vesting period at the rate of $25,000 per month, unless theCompany concludes that such options are no longer probable of vesting.

 

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

 

**Warrants Outstanding**

 

In connection with the Merger, BPZ, as theaccounting acquirer, assumed outstanding warrants to purchase 1,129,000 sharesof 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 haveextended the expiration date.  Thewarrants are callable if the stock trades at or above the exercise price for aperiod of 10 consecutive days and there is an effective registration statementwhich includes the warrants.  Thisregistration statement has been declared effective by the SEC.  On August 4, 2005, the Company calledthe Class B warrants with a final exercise date of October 14,2005.  The Company has further agreed notto call the Class A warrants prior to December 30, 2005 and to acceptthe exercise of any Class A warrants prior to that date.

 

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

 

**Shares Issuable to Consultants for Services**

 

As of June 30, 2005, the Company had an obligation to issue 25,000 shares to two consultants for services performed.  Such shares can not be issued until the shareholders have approved an increase in the number of authorized shares.  Accordingly, the value of such shares, $104,270, has been reflected as stock-based compensation and an accrued liability in the accompanying financial statements as of June 30, 2005.

 

**Shares Issuable to Acquire Property Interest**

 

In June 2005, the Company entered into an agreement to exchange 250,000 shares of common stock for a 4% net working interest in the Santa Elena Property, the details of which are fully discussed in Note 7 to the Consolidated Financial Statements.  Such shares can not be issued until the shareholders have approved an increase in the number of authorized shares.  Accordingly, the value of such shares, $1,112,500, has been reflected as an accrued liability in the accompanying financial statements as of June 30, 2005.

 

**Merger Earn-Out Shares**

 

Under the terms of the Merger agreement, the Companyis committed to issue an additional 18,000,000 shares to the formershareholders of BPZ-Texas on a contingent earn-out basis if BPZ is able toachieve certain reserve and production goals. The first earn-out target relating to reserves was achieved in December 2004and 9,000,000 of the earn-out shares are issuable at this time.  However, the earn-out shares can only beissued after the shareholders have approved an increase in the number ofauthorized shares of the Company. Accordingly, the 9,000,000 shares which have been earned are not recordedas outstanding on June 30, 2005. The remaining 9,000,000 earn-out shares are contingent on the Companyachieving production of 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007.

 

For accounting purposes, the earn-out arrangement is treated as a stockdividend because the earn-out is payable to the shareholders of the accountingacquirer, BPZ-Texas.  Accordingly, exceptfor an increase in the number of common shares outstanding, no accounting entrywill be required upon the issuance of the earn-out shares.

 

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

 

Asof June 30, 2005 and December 31, 2004, there were no affiliate andrelated party balances.  However, duringthe first half of 2004, BPZ-Texas made cash payments to its then parent, BPZ &Associates, Inc. totaling $294,600.  These payments were attributable to personneland office expenses incurred by BPZ & Associates, Inc. on behalfof BPZ-Texas and were recorded as part of the Company’s general administrativeexpenses for the six months ended June 30, 2004.

 

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**Note 11 — Commitments and Contingencies**

 

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

 

In connection with its Block Z-1 property, the Company posted a$1,300,000 performance bond in January 2005.  In order to obtain the performance bond, theCompany deposited an equivalent amount in a restricted account in a Peruvianbank.  To satisfy its current performanceobligation under of Block Z-1 license agreement, the Company must drill atleast one well or acquire a specified amount of seismic data prior to July 2006.  The Company intends to satisfy its obligationby drilling a well which is currently budgeted to cost approximately$2,500,000.

 

OnMay 27, 2005, the Company signed a Mandate Letter with the InternationalFinance Corporation (“IFC”), a member of the World Bank Group based inWashington, D.C., to facilitate the financing of the Company’s initial capitalexpenditure program in Block Z-1 in northwest Peru.  The Mandate Letter specifies that IFC willappraise BPZ Energy’s project in Peru to determine the feasibility andstructure of a potential financing of up to $70 million.  Any IFC investment will depend on the projectand the Company meeting IFC’s financing criteria, the overall financing planbeing acceptable to IFC, approval of the investment by management and the Boardof IFC, and the execution of all appropriate documentation, in form andsubstance satisfactory to IFC.  As partof the Mandate, BPZ has agreed to pay total fees of $285,000 during theappraisal period and customary expenses. As of June 30, 2005, $85,000 of fees and approximately $8,200 ofreimbursable out-of-pocket expenses had been incurred.

 

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

 

**Note 12 — Legal Proceedings**

 

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

 

On December 22, 2004, the Company received notice that the SEC had issued an Order Directing a Private Investigation and Designating Officers to Take Testimony, and would be conducting a formal investigation.  The Company’s attorneys have discussed this matter with the Commission and it is cooperating fully with the SEC.  Although the Company is endeavoring to bring this matter to a prompt conclusion, there can be no assurance that the investigation will be resolved without adverse consequences for the Company or that it will not have negative effects on our limited resources or our ability to raise capital during the period of the investigation.

 

As of June 30, 2005, a total of approximately $36,000, primarily in legal fees, had been incurred in connection with the SEC investigation.  Pursuant to the Merger agreement, the Company has been indemnified by NFS for the costs of the SEC investigation and NFS has borne the costs incurred to date.

 

**Note13 — Subsequent Events**

 

On July 1, 2005, at the Company’s Annual Meeting, the shareholders approved the Third Amended and Restated Certificate of Incorporation, which authorized 25,000,000 shares of preferred stock and increased the authorized shares of the Company’s common stock, no par value, from 20,000,000 to 250,000,000 shares.

 

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 new directors received a grant of 50,000 shares of restricted common stock, which vest on July 1, 2007.

 

Subsequent to approval of the increase in the number of authorizedcommon shares of the Company and approval of the 2005 Long-Term IncentiveCompensation Plan at the Annual Meeting on July 1, 2005, the Companyawarded a total of 970,000 shares of restricted common stock and 485,000incentive stock awards to three of the Company’s officers.  The majority of the restricted stock awardswill vest in three equal annual installments beginning on the first anniversaryof the date of grant. 

 

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Vesting of the incentive stock awards is contingent on the Companyachieving net production of 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007, a target which coincides with the second earn-out target under the Mergeragreement.

 

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 dated as of July 19, 2005.  The common stock was priced at $3.00 per share resulting in gross proceeds to the Company of approximately $34.4 million.  Net cash proceeds from the private placement are estimated to be $31.8 million.

 

In the Stock Purchase Agreement, the Company agreed to prepare and file with the Securities and Exchange Commission (“SEC”), no later than 30 days after the closing date of the private placement, a registration statement covering the resale of the shares of common stock issued in the placement.  The Company also agreed to use its best efforts to cause the registration statement to be declared effective no later than 5 business days after the Company receives a notice that the SEC will not review the registration statement or 90 days after the closing date if the SEC reviews the registration statement.  If the Company fails to file the registration statement before the deadline for such filing, or the registration statement is not declared effective within 120 days after the closing date, the Company will be obligated to pay certain fees to the investors.

 

For its services as placement agent in connection with the transaction, Morgan Keegan & Company, Inc. received 7% of the gross proceeds delivered to the Company at the closing and 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.

 

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**Item2.  Management’s Discussion and Analysisand Plan of Operation**

 

**Business**

 

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

 

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

 

We maintain an office and a registered branch in Peru.  Currently, we have exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.76 million acres in northwest Peru.  Our license contracts cover 100% ownership ofboth Block Z-1, which was signed in November 2001 and Block XIX, which wassigned in December 2003. Our license contracts provide for an initialexploration period of seven to ten years and require that we conduct specifiedactivities on the properties during this period.  The total contract term can extend up to 30years for oil development and production and 40 years for gas development andproduction.  In December 2003, weentered into a Technical Evaluation Agreement for Area VI and a PromotionalTechnical Evaluation Agreement for Area XVI. These latter agreements give us the right to conduct technicalevaluations of those areas over a 24-month period and the exclusive right toenter into license contracts if the evaluations indicate the potential forprofitable operations.

 

The Merger Agreement required the transfer of all of the pre-mergerbusiness assets and liabilities of Navidec to its wholly owned subsidiary, NavidecFinancial 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 final distributionof NFS common shares, we remain the nominal owner of those shares, which arebeing 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.  The Company is continuing toassist the management of NFS, as requested, in its efforts to consummate thespin-off of NFS, but has no control over the registration process of NFS andcannot predict 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 mid-2006.

 

**Resultsof Operations**

 

Our operating andadministrative expenses to date have consisted principally of general andadministrative costs and geological, geophysical and engineering costs.  General and administrative costs haveincreased significantly from $237,993 during the second quarter of 2004 and$436,188 during the six months ended June 30, 2004 to $924,197 during thesecond quarter of 2005 and $1,884,986 during the six months ended June 30,2005 as a result of our increased activity levels, additional personnel andcosts associated with being a public company. We incurred $291,126 of geological, geophysical 

 

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and engineeringcosts in the second quarter of 2005 and $429,191 during the six months ended June 30,2005 primarily related to our Block Z-1 project, compared to $81,235 and$81,473 in the same periods of 2004. Also, we incurred $179,270 of stock-basedcompensation during the second quarter of 2005 and $254,270 during the sixmonths ended June 30, 2005 in connection with the amortization of deferredcompensation expense related to 500,000 share options issued to the former CEOof Navidec and commitments to issue stock-based compensation to consultants forservices performed.

 

During the secondquarter of 2005 and the six months ended June 30, 2005, we recorded a lossin equity of NFS in the amounts of $671,688 and $970,894 respectively.  In addition, the issuance of equitysecurities by NFS at a price above or below the Company’s book value, resultedin a gain to the Company of  $224,884during the second quarter of 2005 (to offset previously recorded losses) and anet loss of $49,414 for the six months ended June 30, 2005.

 

We also incurredinterest expense of $2,305 and amortization of deferred financing costs of$28,955 in the second quarter of 2005 and interest expense of $7,967 andamortization of debt financing costs of $57,910 for the six months ended June 30,2005, principally from notes payable incurred to finance the acquisition of SMCin June 2004.  Interest expense of$15,800 and $31,600 for the three and six month periods ended June 30,2004 related to other borrowings in 2004.

 

Since our Ecuadorproperty consists of an investment in a producing oil and gas property, we areamortizing this investment on a straight-line basis over the remaining term ofthe license agreement covering the property. Accordingly, we recorded $21,380 and $42,760 of amortization expense inthe second quarter and six months ended June 30, 2005, respectively.  This property generated cash distributions of$96,015 and $205,189 in the second quarter and six months ended June 30,2005, respectively, which were partially offset by non-cash amortizationexpense.

 

The Company realizeda net loss of $1,794,972, or $0.11 per share, for the quarter ended June 30,2005, as compared to a net loss of $334,669, or $0.08 per share for the sameperiod in 2004.  For the six months endedJune 30, 2005, the Company realized a net loss of $3,481,325 or $0.21 pershare, as compared to a net loss of $548,902, or $0.13 per share, for the sameperiod in 2004.

 

**Planof Operation**

 

Our plan ofoperation for the next twelve months is focused primarily on exploiting theresource opportunities in the offshore BlockZ-1 in northwest Peru, in which we own a 100% working interest.  The capital budget for our plans totalsapproximately $100 million. The achievement of our plan of operation isdependent on obtaining financing for our capital budget.  See “Liquidity,Capital Resources and Capital Expenditures” below for further discussion.

 

Our plan ofoperation envisions the installation of a company-owned 140 megawatt (‘‘MW’’)gas-fired electric generation plant near the town of Caleta Cruz, in northwestPeru.  This power plant will initiallyuse gas from the Corvina Field in Block Z-1, which is located approximately 10miles offshore from the power plant site. On August 3, 2005 the Company announced that it had awarded theturnkey contract for the engineering, procurement and construction (EPC) of itspower plant project to BTEC Turbines LP of Houston.  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 transportation of all equipment, construction, startup and commissioning ofthe power plant.

 

The Corvina Fieldhas an existing platform which we believe can be refurbished to make itsuitable for drilling operations.  Wehave hired a contractor to undertake the refurbishment of the platform andrecently initiated work on this project. There is also a shut-in gas well which we intend to recomplete andutilize for gas production.  Our initialplans call for the drilling of three new wells from the existing platform.  We are working to have the environmental anddrilling permits and platform refurbishment completed by November 2005 andwe expect to commence workover and drilling operations at that time.  The drilling of the three new wells isexpected to extend into 2006.  Furtherdevelopment drilling, encompassing three additional wells, is planned for laterin 2006.

 

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

 

In order to supportour proposed electric generation project, we recently commissioned anindependent power market analysis for the region.  The Peruvian electricity market isderegulated and power is transported through an interconnected national gridmanaged by the Committee for Economic Dispatching of Electricity (known as “COES”).  Based on this study, we are confident that wewill be able to sell economic quantities of electricity from our initial 140 MWpower plant at Caleta Cruz.  

 

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We believe theremay be an opportunity in the future to generate and profitably sellsignificantly greater volumes of power into the Peruvian and Ecuadorian powermarkets.  Our goal is to commence initialsales of electricity by July 2006.  However, this timeline is subject to many factorsoutside our control, which include securing binding financing commitments.

 

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

 

In addition to thelocal power market targeted by our project in Peru, we intend to simultaneouslydevelop a gas-power strategy in nearby Ecuador to capitalize on what we believeto be significant upside gas potential of the Corvina and Piedra Redonda Fieldslocated in Block Z-1, as well as the potentially significant natural gasresources in the adjacent onshore Block XIX. These 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 the Company 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 delivery ofgas.  We are planning to have this pipelinecompleted for first sales by October 2006, though no assurance can be giventhat we can meet this schedule.

 

We have secured theenvironmental permits and other authorizations to shoot seismic in Block Z-1and Block XIX.  However, our primary goalis development of the gas production from Block Z-1 to supply the proposedpower plant at Caleta Cruz.  Accordingly,the timing of seismic acquisition is dependent upon securing sufficientfinancial resources for that project.

 

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

 

We are currentlydeveloping engineering plans and designs for the various components of our planof operation.  We have not obtainedoutside bids for all of the major equipment components, shipping andinstallation and associated services. Such bids and estimates, when obtained, will be subject to change andcontingencies.  Accordingly, we do nothave a complete estimate of the total costs of the initial phases of theproject.  However, based on our currentestimates, we expect that the initial phases of the project, including the costof the natural gas pipeline to Arenillas, Ecuador, will require total capitalexpenditures on the order of $90 to $100 million, including import duties andcontingencies.  This estimate of capitalexpenditures does not include value added tax (referred to as “IGV” inPeru).  IGV is generally imposed on goodsand services at a rate of 19%.  Certainexpenditures are exempt from IGV or eligible for immediate refund.  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.

 
| ** **                           | ** ** | **($ millions)** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| Power plant  and related equipment   |       | 45.1                  |       |
| Pipelines  and processing facilities |       | 28.5                  |       |
| Platform and  wells                  |       | 16.4                  |       |
| Contingencies                        |       | 10.0                  |       |
| Total estimated capital budget       |       | 100.0                 |       |

 

**Liquidity,Capital Resources and Capital Expenditures**

 

BPZ’sinitial projectin the offshore Block Z-1 in northwest Peru, totaling approximately $100million, includes therefurbishment of the CX-11 platform, rehabilitation of an existing well and thedrilling of six new wells, installation of a 10-mile pipeline from the platformto shore, construction of a 140 MW simple-cycle electric generating plant, andthe construction of a 40-mile gas pipeline to supply gas to third partygenerators in Arenillas, Ecuador.

 

Priorto the Merger, the Company primarily used debt financing to fund itsoperations. In connection with the Merger, the Company received total netproceeds of approximately $5.5 million from a private placement of itscommon stock.  In January 2005, wedeposited $1.3 million of these funds as restricted cash to secure ourperformance obligations under 

 

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Block Z-1.  As of June 30, 2005, we had a cashbalance of approximately $358,000. We have committed funds as necessary tocontinue progress toward implementing our gas to power strategy by mid-2006.The timing of this project is dependent on a variety of factors, includingtechnical design of facilities, permitting, availability of equipment, deliverylead times, execution by contractors, and availability of financing, many ofwhich are outside the control of the Company.

 

InMay 2005 the Company signed a Mandate Letter with International FinanceCorporation (“IFC”), a member of the World Bank Group based in Washington,D.C.  The Mandate Letter specifies thatthe IFC will appraise BPZ Energy’s project in Peru to determine the feasibilityand structure of a potential financing of up to $70 million. The IFC’sappraisal of the project will include a review of the technical, economic,commercial, financial, environmental and legal aspects of the project. IFC’sfinancing, the structure of which would be defined during the appraisalprocess, is currently expected to include an equity/quasi-equity investment forIFC’s account of up to $8 million plus a long-term senior debt package of up to$62 million for the account of IFC and other potential lenders.  Any IFC investment will depend on the projectand the Company meeting IFC’s financing criteria, the overall financing planbeing acceptable to IFC, approval of the investment by management and the Boardof IFC, and the execution of all appropriate documentation, in form andsubstance satisfactory to IFC. As part of the Mandate, BPZ has agreed to paycustomary fees and expenses during the appraisal period.

 

Inaddition to the IFC potential financing, our project development plans requirethe Company to provide approximately $30 million of equity or other capital tocomplete our initial expenditures program. On July 19, 2005 the Company completed a private placement of 11,466,000shares of common stock to accredited investors at a price of $3.00 per share forgross proceeds of $34.4 million.  MorganKeegan & Company, Inc. served as placement agent for theoffering.  Net proceeds after placementfees and other expenses are estimated to be $31.8 million.  There were no warrants or otherdilutive securities issued to investors in connection with the offering.

 

We have madesignificant progress toward obtaining the capital resources necessary toexecute the project.  While we do not yethave a firm commitment from the IFC regarding the $70 million financingpackage, we have made progress on the IFC’s appraisal process during the pasttwo months and believe that the IFC financing will be completed by the end ofthe year.  The recently-completed equityfinancing will allow us sufficient resources to continue advancing the projectalong the timeline until we have the balance of the financing in place.

 

**Off-BalanceSheet Arrangements**

 

As of June 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 of facilitatingoff-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 proved reserves and costsassociated with development drilling, whether or not successful, arecapitalized when incurred.  Certain costsof exploratory wells are capitalized pending determinations that provedreserves have been found.  If thedetermination is dependent upon the results of planned additional wells andrequired capital expenditures to produce the reserves found, the drilling costswill be capitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as 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.

 

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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 ofoil and gas leasehold acquisition costs requires management’s judgment toestimate the fair value of exploratory costs related to drilling activity in agiven 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 flowloss combined with a history of operating or cash flow losses or a projectionor forecast that demonstrates continuing losses associated with an asset usedfor the 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 constructionand engineering consultants.  Becausethese costs typically extend many years into the future, estimating these costsis difficult 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 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 equity instruments that we issued in exchange for goods andservices during the periods covered by this report were eligible for treatmentunder the intrinsic value method in APB 25 and all of such issuances gave riseto stock-based compensation expense based on the fair value of the instrumentsat the date of grant or issuance. Accordingly, our results of operations for the periods presented wouldnot have been affected had we been subject to the provisions SFAS 123(R) forsuch periods.

 

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**DisclosureRegarding Forward-Looking Statements**

 

BPZ cautions that this document containsforward-looking statements.  Allstatements, other than statements of historical facts, included in orincorporated by reference into this Form 10-QSB which address activities,events or developments which the Company expects, believes or anticipates willor may occur in the future are forward-looking statements. The words “believes,”“intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” “plans”and similar expressions, 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 theforward-looking statements include, but are not limited to any of the followingin the jurisdictions 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 our Company is includedin the Company’s Annual Report on Form 10-KSB/A filed with the SEC.

 

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

 

**Item 3.  Controls and Procedures**

 

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

 

Asof September 30, 2004 and continuing through the quarterly period ended March 31,2005, the Company had concluded that its disclosure controls and procedureswere not effective, as a result of a significant deficiency relating to thelack of qualified accounting and financial management personnel.  Based primarily on the conclusion that theCompany’s disclosure controls and procedures were not effective, the Companyengaged various accounting and financial consultants to assist it in taking thenecessary corrective actions to improve the Company’s disclosure controls andprocedures and 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.  Further, in January 2005 the Companyhired a Controller and in May 2005 hired a Chief Financial Officer, bothof whom have experience in accounting and financial reporting for publiccompanies and are Certified Public Accountants.

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Exchange Act.  Based upon thatevaluation and in light of the corrective actions described above, 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 ofthe restatement issue discussed below.

 

OnNovember 17, 2005, subsequent to the original filing of this report, theCompany concluded that it needed to restate its previously issued ConsolidatedFinancial Statements as of and for the year ended December 31, 2004 andfor the three months and six months ended June 30, 2005 and 2004, asdescribed in Note 2 to the Consolidated Financial Statements.  The primary purpose of the restatement was toreflect the previously unrecorded nominal ownership interest in NavidecFinancial Services, Inc. (“NFS”) using the equity method of accounting andits effects on the accounting treatment of the Merger with Navidec, Inc.  Management of the Company had previouslyconcluded that the spin-off of NFS had been legally consummated as of theMerger 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.

 

TheCompany’s management and Audit Committee have discussed the restatement issueswith Johnson, Miller & Co., its independent registered publicaccounting firm.  After reviewing therestatement issues, the Company’s management and Audit Committee believe that,while the restatement is considered a significant deficiency in the Company’sdisclosure controls and procedures, the primary circumstances that resulted inthe restatement are unique to the complex accounting issues and interpretationsmade in connection with the Merger and occurred at a time when the Company hadidentified a significant deficiency in its disclosure controls and proceduresrelating to the lack of qualified accounting and financial managementpersonnel.  Subsequent to that time, theCompany has hired a Controller and a Chief Financial Officer, both of whom haveexperience in accounting and financial reporting for public companies and areCertified Public Accountants.  TheCompany believes that the corrective actions it has taken since the end of theperiod covered by this report, consisting of hiring qualified personnel,adequately address the significant deficiency associated with therestatement.  Accordingly, management ofthe Company does not plan to implement any further changes to its disclosurecontrols and procedures with respect to the restatement.

 

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

 

There were no changes in ourinternal control over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likely to materiallyaffect, 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 Unaudited 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**

 

None.

 

**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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