** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-QSB**

 
| **(Mark  One)**                     |
|-------------------------------------|
| ** **                          | ** ** | ** ** |
| **ý**                          | ** ** | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                |   |   |
| **For the quarterly period ended:** |
|                                |   |   |
| **June 30, 2005**              |
|                                |   |   |
| **o**                               | ** ** | **TRANSITION REPORT UNDER  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from              to              **

 

**Commission File Number: 000-29098**

 

**BPZENERGY, INC.**

(Exact name 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)filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Asof August 10 , 2005, there were 38,118,774 shares of common stockoutstanding.

 

Transitional Small BusinessDisclosure Format:  Yes o No ý

 

 

----

 

**TABLE OF CONTENTS**

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

----

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | **(Audited)**          | ** ** |
| **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:                                                                                                                                                         |       |               |       |                   |       |
| Office equipment                                                                                                                                                                |       | 27,884             |       | 5,662                  |       |
| Less accumulated depreciation                                                                                                                                                   |       | (2,452             | )          | (157                   | )          |
| Net property and equipment                                                                                                                                                      |       | 25,432             |       | 5,505                  |       |
|                                                                                                                                                                            |       |               |       |                   |       |
| Restricted cash                                                                                                                                                                 |       | 1,300,000          |       | —                 |       |
| Investment in SMC Ecuador, net                                                                                                                                                  |       | 1,726,342          |       | 642,000                |       |
|                                                                                                                                                                            |       |               |       |                   |       |
| Total assets                                                                                                                                                                    |       | $                  | 3,486,426  |                   | $          | 4,833,855 |   |
|                                                                                                                                                                            |       |               |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |       |               |       |                   |       |
|                                                                                                                                                                            |       |               |       |                   |       |
| Current liabilities:                                                                                                                                                            |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                |       | $                  | 130,078    |                   | $          | 311,612 |   |
| Note payable                                                                                                                                                                    |       | 30,979             |       | 208,986                |       |
| Accrued liabilities                                                                                                                                                             |       | 1,362,869          |       | 54,342                 |       |
| Total current liabilities                                                                                                                                                       |       | 1,523,926          |       | 574,940                |       |
|                                                                                                                                                                            |       |               |       |                   |       |
| Stockholders’ equity:                                                                                                                                                      |       |               |       |                   |       |
| Common stock, no par value, 20,000,000  authorized; 16,962,774 and 16,529,848 shares issued and outstanding at  June 30, 2005 and December 31, 2004, respectively (a) |       | 14,782,979         |       | 13,393,286             |       |
| Additional paid in capital — warrants and  stock options                                                                                                                   |       | 8,112,932          |       | 9,502,625              |       |
| Stock subscription receivable                                                                                                                                                   |       | (230,825           | )          | (230,825               | )          |
| Accumulated deficit                                                                                                                                                             |       | (20,702,586        | )          | (18,406,171            | )          |
|                                                                                                                                                                            |       |               |       |                   |       |
| Total stockholders’ equity                                                                                                                                                 |       | 1,962,500          |       | 4,258,915              |       |
|                                                                                                                                                                            |       |               |       |                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                 |       | $                  | 3,486,426  |                   | $          | 4,833,855 |   |

 

----

(a)           As discussed in Note 6, such totals exclude 9,000,000 shares of common stock which were issuable as of December 31, 2004 pursuant to the terms of the Merger agreement with Navidec, Inc., but which could not be issued until the shareholders approved an increase in the number of authorized shares of the Company.   The Company obtained shareholder approval to increase the number of authorized shares from 20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005, and the 9,000,000 shares were issued thereafter.

 

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

 

3

----

 

**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                               | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Revenue                                                  |       | $                               | —     |                          | $          | — |   | $ | — |   | $ | — |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Operating and administrative expenses:                   |       |                            |       |                          |       |   |   |   |   |
| General and administrative                               |       | 1,028,467                       |       | 39,143                        |       | 1,989,256 |   | 141,588 |   |
| Geological, geophysical and engineering                  |       | 291,126                         |       | 81,235                        |       | 429,191 |   | 81,473 |   |
| Depreciation expense                                     |       | 1,645                           |       | —                        |       | 2,295 |   | — |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Total operating expenses                                 |       | 1,321,238                       |       | 120,378                       |       | 2,420,742 |   | 223,061 |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Operating loss                                           |       | (1,321,238                      | )          | (120,378                      | )          | (2,420,742 | ) | (223,061 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Other income (expense):                                  |       |                            |       |                          |       |   |   |   |   |
| Investment income from SMC Ecuador, net of  amortization |       | 81,936                          |       | —                        |       | 177,031 |   | — |   |
| Interest expense                                         |       | (2,305                          | )          | (15,800                       | )          | (7,967 | ) | (31,600 | ) |
| Amortization of deferred financing costs                 |       | (28,955                         | )          | —                        |       | (57,910 | ) | — |   |
| Miscellaneous income                                     |       | 4,695                           |       | 359                           |       | 13,173 |   | 359 |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Total other income (expense)                             |       | 55,371                          |       | (15,441                       | )          | 124,327 |   | (31,241 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Loss before income taxes                                 |       | (1,265,867                      | )          | (135,819                      | )          | (2,296,415 | ) | (254,302 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Income taxes                                             |       | —                          |       | —                        |       | — |   | — |   |
| Net loss                                                 |       | $                               | (1,265,867 | )                             | $          | (135,819 | ) | $ | (2,296,415 | ) | $ | (254,302 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Basic and diluted net loss per share                     |       | $                               | (0.07      | )                             | $          | (0.03 | ) | $ | (0.14 | ) | $ | (0.06 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Weighted average common shares outstanding               |       | 16,927,800                      |       | 4,103,454                     |       | 16,909,418 |   | 4,103,454 |   |

 

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

 

4

----

 

**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

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

**(Unaudited)**

 

**Six Months Ended June 30, 2005**

 
| ** **                                        | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Stock  Subscription** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|---------------------------------------------------|------------|------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                        | ** ** | **Shares (a)**   | ** ** | **Amount**              | ** ** | **Capital**             | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                              |       |             |       |                    |       |                    |       |            |       |        |       |   |   |
| Balance, January 1, 2005                          |       | 16,529,848       |       | $                       | 13,393,286 |                    | $          | 9,502,625       |       | $           | (230,825   | ) | $ | (18,406,171 | ) | $ | 4,258,915 |   |
|                                              |       |             |       |                    |       |                    |       |            |       |        |       |   |   |
| Exercise of stock options assumed at  acquisition |       | 432,926          |       | 1,389,693               |       | (1,389,693              | )          | —          |       | —      |       | — |   |
| Net loss                                          |       | —           |       | —                  |       | —                  |       | —          |       | (2,296,415  | )          | (2,296,415 | ) |
| Balance, June 30, 2005                            |       | 16,962,774       |       | $                       | 14,782,979 |                    | $          | 8,112,932       |       | $           | (230,825   | ) | $ | (20,702,586 | ) | $ | 1,962,500 |   |

 

----

(a)           As discussed in Note 6, such totals exclude 9,000,000 shares of common stock which were issuable as of December 31, 2004 pursuant to the terms of the Merger agreement with Navidec, Inc., but which could not be issued until the shareholders approved an increase in the number of authorized shares of the Company.   The Company obtained shareholder approval to increase the number of authorized shares from 20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005, and the 9,000,000 shares were issued thereafter.

 

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

 

5

----

 

**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                        |       |                          |       |   |   |
| Net loss                                                                     |       | $                             | (2,296,415 | ) | $ | (254,302 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                          |       |   |   |
| Depreciation expense                                                         |       | 2,295                         |       | — |   |
| Amortization of investment in SMC Ecuador                                    |       | 28,158                        |       | — |   |
| Amortization of deferred financing fees                                      |       | 57,910                        |       | — |   |
| Stock-based compensation                                                     |       | 104,270                       |       | — |   |
| (Increase) decrease in other assets                                          |       | (62,033                       | )          | 4,180 |   |
| Increase (decrease) in accounts payable                                      |       | (181,534                      | )          | — |   |
| Increase (decrease) in accrued liabilities                                   |       | 91,757                        |       | 25,701 |   |
|                                                                         |       |                          |       |   |   |
| Net cash used in operating activities                                        |       | (2,255,592                    | )          | (224,421 | ) |
|                                                                         |       |                          |       |   |   |
| Cash flows from investing activities:                                        |       |                          |       |   |   |
| Property and equipment additions                                             |       | (22,222                       | )          | — |   |
| Investment in SMC Ecuador                                                    |       | —                        |       | (642,000 | ) |
| Restricted cash                                                              |       | (1,200,000                    | )          | — |   |
|                                                                         |       |                          |       |   |   |
| Net cash used in investing activities                                        |       | (1,222,222                    | )          | (642,000 | ) |
|                                                                         |       |                          |       |   |   |
| Cash flows from financing activities:                                        |       |                          |       |   |   |
| Borrowings                                                                   |       | —                        |       | 1,889,174 |   |
| Increase in other current assets                                             |       | —                        |       | (528,509 | ) |
| Payments on borrowings                                                       |       | (178,007                      | )          | (200,000 | ) |
| Advances to affiliates                                                       |       | —                        |       | (294,600 | ) |
|                                                                         |       |                          |       |   |   |
| Net cash (used in) provided by financing  activities                         |       | (178,007                      | )          | 866,065 |   |
|                                                                         |       |                          |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (3,655,821                    | )          | (356 | ) |
|                                                                         |       |                          |       |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 4,014,191                     |       | 8,155 |   |
|                                                                         |       |                          |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                             | 358,370    |   | $ | 7,799 |   |

 

 
| **Supplemental cash flow  information:**                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Non-cash items:**                                                                        |       |       |       |       |       |
| Forgiveness of advances to parent with  corporate reorganization                           |       | $          | —     |       | $          | 457,490 |   |
| Common stock issuable in connection with asset  exchange agreement (see Note 4 and Note 6) |       | 1,112,500  |       | —     |       |
| **Cash paid for:**                                                                         |       |       |       |       |       |
| Interest                                                                                   |       | $          | 10,192     |       | $          | — |   |

 

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

 

6

----

 

**BPZ ENERGY, INC. AND SUBSIDIARIES**

 

**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. andits subsidiaries (the “Company”) included herein have been preparedpursuant to the rules and regulations of the Securities and Exchange Commissionas 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 reflect all adjustments which are, inthe opinion of management, necessary for a fair presentation of the financialposition and results of operations for the interim periods on a basisconsistent with the annual audited financial statements.  All such adjustments are of a normalrecurring nature. The Company believes that the disclosures contained hereinare adequate to make the information presented not misleading.  The consolidated balance sheet atDecember 31, 2004 is derived from the December 31, 2004 auditedconsolidated financial statements.  Theseinterim financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-KSB for the year ended December 31, 2004.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the full year.

 

**Organization**

 

BPZ Energy, Inc. (“BPZ” or the “Company”), a Colorado corporation, wasincorporated in 1993. On September 10, 2004, the Company, at that timeknown as Navidec, Inc. (“Navidec”), consummated a reverse merger (the “Merger”)with BPZ Energy, Inc., a Texas corporation, (“BPZ-Texas”), an oil and gasexploration and production (E&P) company, whereby BPZ-Texas became a whollyowned subsidiary of Navidec.  Foraccounting purposes, the Merger was treated as an acquisition of Navidec byBPZ-Texas.  In connection with theMerger, we changed our name to “BPZ Energy, Inc.” on February 4,2005.  BPZ is headquartered in Houston,Texas and maintains an office in Lima, Peru. Though its name has been changed, the pre-Merger companymay be referred to as Navidec in this filing to avoid confusion.

 

The Merger agreement provided that all of the pre-Merger business operations, assets and liabilities of Navidec, Inc. would be transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. (“NFS”), followed by the spin-off of NFS to the shareholders of record as of September 9, 2004, prior to the Merger date.

 

Our current business is the development and production of oil andnatural gas reserves and the complementary development of gas-fired powergeneration in South America.  In 2001,BPZ registered a branch in Peru, officially designated “BPZ Energy, Inc.Sucursal Peru.”  Presently, the Companyhas exclusive rights and licensing agreements for oil and gas exploration andproduction covering a total of approximately 2.76 million acres in fourblocks in northwest Peru; Block Z-1, Block XIX, Area VI and Area XVI.  In addition, in June 2004, BPZ acquiredthe capital stock of SMC Ecuador, Inc., a Delaware corporation which ownsa non-operated minority working interest in certain oil and gas producingproperties in southwest Ecuador.

 

**New Accounting Pronouncements**

 

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

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 153 Exchanges of Nonmonetary Assets —an amendment of APBOpinion No. 29.  Opinon No. 29 is basedon the principle that exchanges of nonmonetary assets should be measured basedon fair value with exception for nonmonetary exchanges of similar productiveassets.  Statement 153 amends Opinon No.29 to eliminate the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have a commercial substance, defined as transactions thatare not expected to result in significant changes in the cash flows of thereporting entity.  This statement iseffective for exchanges 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.

 

7

----

 

In May 2004, the FASB issued SFAS No. 154, Accounting Changes and ErrorCorrections.  This Statement replaces APBOpinion 20 and FASB Statement No.3 and changes the requirements for theaccounting for and reporting of a change in accounting principle.  This Statement applies to all voluntarychanges in accounting principle.  It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions.  When a pronouncementincludes specific transition provisions, those provisions should befollowed.  The provisions of thisStatement shall be effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.

 

In April 2005, the Financial Accounting Standards Board (“FASB”) issuedFASB Staff Position (“FSP”) 19-1 (“FSP 19-1”) “Accounting for Suspended WellCosts.”  This FSP provides guidance onthe accounting for exploratory well costs to companies who use the successfulefforts method of accounting.  The FSPstates that exploratory 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 of these criteria, these costs shouldbe expensed, net of any salvage value. Additional annual disclosures are required to provide information aboutmanagement’s evaluation of capitalized exploratory well costs.  In addition, the FSP requires the annualdisclosure of: 1) net changes from the period to period of capitalizedexploratory well costs for wells that are pending the determination of provedreserves, 2) the amount of exploratory well costs that have been capitalizedfor a period greater than one year after the completion of drilling and 3) anaging of exploratory well costs suspended for greater than one year with thenumber of wells it related to.  Further,the disclosures should describe the activities undertaken to evaluate thereserves and the projects, the information still required to classify theassociated reserves as proved and the estimated timing for completing theevaluation.  The guidance in the FSP isrequired to be applied to the first reporting period beginning after April 4,2005 on a prospective basis to existing and newly capitalized exploratory wellcosts.  The guidance provided in FSP 19-1may affect the Company’s treatment of costs capitalized in future operations, butit would not have had a material effect on amounts recorded in our consolidatedstatements of financial position, results of operations or cash flow as of June30, 2005.

 

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

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123(R) “Share-Based Payment,” an amendment to SAFS No. 123which supersedes SFAS No. 148 “Accounting for Stock-Based Compensation —Transition and Disclosure.”  SFAS 123(R)establishes standards for transactions in which an entity exchanges its equityinstruments for goods or services.  Thisstandard requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award.  This eliminatesthe exception to account for such awards using the intrinsic method previouslyallowable under APB 25.  SFAS No. 123(R)also requires a public entity to present its cash flows provided by taxbenefits from stock options exercised in the Financing Cash Flows section ofthe Statement of Cash Flows.  In April2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) which providesguidance on SFAS No. 123 (R).  SAB 107permits registrants to choose an appropriate valuation technique or model toestimate the fair value of share options, assuming consistent application, andprovides guidance for the development of assumptions used in the valuationprocess.  Additionally, SAB 107 discussesadditional disclosures to be made in registrants’ periodic reports.  Public companies will be required toimplementSFAS 123(R) in the first fiscal year which begins after June 15,2005.  As we intend to use stock-basedcompensation in the future as a component of employee compensation, and we havepreviously followed the intrinsic method, the implementation of thispronouncement will reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be estimated as of June 30, 2005.

 

**Note 2 — Other Current Assets**

 

Other current assets consist of value addedtax paid in Peru, various deposits, prepaid rent and deferred financing costsrelated to the acquisition of SMC Ecuador, Inc.

 

8

----

 

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

 

The Company has obtained various performancebonds to guarantee its obligations and commitments under its license andtechnical evaluation agreements in Peru. As of June 30, 2005 and December 31, 2004, BPZ had restricted cashdeposits of $1,300,000 and $100,000, respectively, which collateralizeperformance bonds issued in those respective amounts.  BPZ also has additional performance bonds inthe amount of $240,000 for which two individual shareholders of the Companyprovided guarantees or collateral to the financial institutions which issuedsuch bonds to secure the Company’s performance.  All of the performance bonds were issued byPeruvian banks and their terms are dictated by the corresponding licensecontract or technical evaluation agreement.

 

**Note 4 — Investment in SMC Ecuador and Note Payable**

 

The Company hasmade an election to account for this investment under the cost method.  Since substantially all of the assets of SMCEcuador consist of producing oil and gas properties (the “Santa Elena Property”),we are amortizing this investment on a straight-line basis over the remainingterm of the license agreement which expires in May of 2016.  Accordingly, we recorded $14,079 ofamortization expense for the three months, and $28,158 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 requires monthlyinstallment payments of $31,366, including imputed interest at 15%, throughJuly 1, 2005.  The remaining note payablebalance as of June 30, 2005 was $30,979.

 

As part of the 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% derivative working interest in the Santa Elena Property.  In June 2005, the Company entered into an agreement to exchange the holder’s 4% derivative working interest in the Santa Elena Property for 250,000 shares of BPZ common stock.  Accordingly, as of June 30, 2005, BPZ owns the full 10% working interest in the Santa Elena Property.  Such shares could not be issued until the shareholders approved an increase in the number of authorized shares.  Accordingly, the value of such shares, $1,112,000, has been reflected as a liability in the accompanying financial statements as of June 30, 2005.  The Company obtained shareholder approval to increase the number of authorized shares from 20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005 and the 250,000 shares were issued thereafter.

 

**Note 5 — Accrued Liabilities**

 

Below is a summary of  the accrued liabilities balances as of June 30, 2005 and December 31, 2004.  A detailed discussion regarding the shares issuable to consultants for services and shares issuable under asset exchange agreement can be found below in Note 6.

 
| ** **                                          | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
|                                                |       |              |       |                  |       |
| Operating and administrative accruals               |       | $                 | 146,099    |                  | $          | 54,342 |   |
| Liabilties  expected to be settled in common stock: |       |              |       |                  |       |
| Consulting services                                 |       | 104,270           |       |                  |       |
| Asset exchange agreement                            |       | 1,112,500         |       |                  |       |
|                                                |       | $                 | 1,362,869  |                  | $          | 54,342 |   |
|                                                     |            |                   |            |                       |            |  |  |  |  |

 

**Note 6 — 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, of which 16,962,774 and 16,529,848 were issued and outstanding as of June 30, 2005 and December 31, 2004, respectively.  In addition to the shares issued and outstanding, the Company has the following potentially dilutive securities.  None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive. The Company obtained shareholder approval to increase the number of authorized shares from 20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005.

 

9

----

 
| ** **                                                               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Stock options outstanding                                                |       | 1,737,226          |       | 2,170,152              |       |
| Warrants outstanding                                                     |       | 2,629,000          |       | 2,629,000              |       |
| Shares issuable to consultant for services                               |       | 25,000             |       | 15,000                 |       |
| Shares issuable in connection with SMC  Ecuador asset exchange agreement |       | 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                                    |       | 22,641,226         |       | 22,814,152             |       |

 

**Stock Options Outstanding**

 

In connection with the Merger,BPZ, as the accounting acquirer, assumed 1,332,076 Navidec, Inc. stock options outstanding.  All stock options were fullyvested on the date of the Merger and expire on September 10, 2007.  Exercise prices on these stock options range from$1.30 to $2.00 per share.  Under theterms of the Merger agreement, the Company does not receive any of the proceedsfrom the exercise of these stock options. Pursuant to the Merger agreement, the Company’s former subsidiary, NFS,is entitled to receive all proceeds from the exercise of these options.  During the six months ended June 30, 2005,there were 432,926 stock options exercised. As of June 30, 2005 and December 31, 2004, there were 737,226 and1,170,152, respectively, of such stock options outstanding.

 

Additionally, in connection with the Merger,1,000,000 stock options were issued to the former CEO of Navidec, Inc. at anexercise price of $1.30 per share.  Ofsuch stock options, 500,000 were fully vested on the date of the Merger.  The remaining 500,000 stock options will vestupon the receipt of additional investment proceeds totaling $6 million,including proceeds from the exercise of outstanding warrants, provided suchfunding is received no later than September 10, 2006.  All stock options, when vested, expire 10years from date of grant.  The Company isentitled to the proceeds from the exercise of these options.

 

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 issuedwarrants to purchase 1,500,000 shares of common stock at an exercise price of$2.00 per share in connection with an agreement for investor relations, publicrelations and other financial advisory services.  Such warrants expire on 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 could not be issued until the shareholders approved an increase in the number of authorized shares.  Accordingly, the value of such shares, $104,270, has been reflected as a liability in the accompanying financial statements as of June 30, 2005.   The Company obtained shareholder approval to increase the number of authorized shares from 20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005.

 

10

----

 

**Shares Issuable Under Asset Exchange Agreement**

 

In June 2005, the Company entered into an agreement to exchange 250,000 shares of BPZ common stock  for the note holder’s 4% derivative working interest in the Santa Elena Property, the details of which are fully discussed in Note 4.

 

**Merger Earn-Out Shares**

 

Underthe terms of the Merger agreement, the Company is committed to issue anadditional 18,000,000 shares to the former shareholders of BPZ-Texas on acontingent earn-out basis if BPZ is able to achieve certain reserve andproduction goals.  The first earn-outtarget relating to reserves was achieved in December 2004 and 9,000,000 of theearn-out shares were issuable at that time. However, the earn-out shares could only be issued after the shareholdersapproved an increase in the number of authorized shares of the Company.  Accordingly, the 9,000,000 shares which hadbeen earned, but not issued, were not recorded as outstanding as of June 30,2005 and December 31, 2004.  The Companyobtained shareholder approval to increase the number of authorized shares from20,000,000 to 250,000,000 at its 2005 annual meeting held on July 1, 2005 andthe 9,000,000 shares were issued thereafter. Because the merger was considered a reverse acquisition, the earn-outarrangement will be treated for accounting purposes as a stock dividend becausethe earn-out is payable to the shareholders of the accounting acquirer,BPZ-Texas.  Accordingly, other thanincreasing the number of shares outstanding, no accounting entry will berequired. The remaining 9,000,000 earn-out shares are 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.

 

**Note 7 — Affiliate and Related Party Transactions**

 

Asof June 30, 2005 and December 31, 2004, there were no affiliate and relatedparty balances.  However, during thefirst half of 2004, BPZ-Texas made cash advances totaling $294,600 to BPZ &Associates, Inc., its parent company prior to the Merger.

 

**Note 8 — 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, the Company deposited anequivalent amount in a restricted account in a Peruvian bank.  To satisfy its current performance obligationunder of Block Z-1 license agreement, the Company must drill at least one wellor acquire a specified amount of seismic data prior to July 2006.  The Company intends to satisfy its obligationby drilling a well which is currently budgeted to cost approximately$2,500,000.

 

OnMay 31, 2005, BPZ Energy, Inc. announced that it had signed a Mandate Letterwith the International Finance Corporation (“IFC”), a member of the World BankGroup based in Washington, D.C., to facilitate the financing of the Company’sinitial capital expenditure 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 customary fees and expenses during theappraisal period which are estimated to be in the order of $285,000.   As of June 30, 2005, $85,000 of fees andapproximately $7,500 of reimbursable out-of-pocket expenses have been incurred.

 

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

 

**Note 9 — Legal Proceedings**

 

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

 

11

----

 

On December 22, 2004, the Company received notice that the SEC hadissued an Order Directing a Private Investigation and Designating Officers toTake Testimony, and would be conducting a formal investigation.  We are cooperating fully with the SEC and arein discussions with the Commission regarding this matter.  As of June 30, 2005, a total of approximately$36,000, primarily in legal fees, had been incurred in connection with the SECinvestigation.  Pursuant to the Mergeragreement, the Company has been indemnified by NFS for the costs of the SECinvestigation.  Accordingly, BPZ did notrecord these costs as an expense. Although we continue to work to bring this matter to a promptconclusion, we cannot make any assurance that the investigation will beresolved satisfactorily or that it will not have a negative effect on theCompany.

 

**Note10 — Subsequent Events**

 

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 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.

 

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.

 

The Company’s Board ofDirectors also awarded, on a contingent basis, a total of 970,000 shares ofrestricted common stock and incentive stock awards totaling 485,000 shares tothree of the Company’s officers.  Suchawards were contingent upon shareholder approval of an increase in the numberof authorized common shares of the Company and approval of the 2005 Long-TermIncentive Compensation Plan.  The Company’sshareholders approved both proposals at the 2005 Annual Meeting on July 1,2005 and the Company intends to issue these stock-based incentive awards duringthe third quarter of 2005.  The majorityof the restricted stock awards will vest in three equal annual installmentsbeginning on the first anniversary of the date of grant. Vesting of theincentive stock awards is contingent on the Company achieving net production of2,000 barrels of oil per day or its equivalent (approximately 12 million cubicfeet of gas per day) prior to December 28, 2007, a target which coincideswith the second earn-out target under the Merger agreement.

 

12

----

 

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

 

**Business**

 

BPZEnergy, Inc. (“BPZ” or the “Company”), a Colorado corporation, formerly knownas Navidec, Inc. (“Navidec”), was incorporated in 1993.  On September 10, 2004, BPZ Energy, Inc.,a Texas corporation (“BPZ-Texas”), consummated a reverse merger with Navidecwhereby BPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”).  For accounting purposes, BPZ-Texas wastreated as the acquiring entity.  OnFebruary 4, 2005, we changed our name to “BPZ Energy, Inc.”  Although its name has been changed, thepre-Merger company may be referred to as Navidec in this filing to avoidconfusion.

 

Basedin Houston, Texas, we are an international energy company with properties inSouth America, specifically northwest Peru and southwest Ecuador.  We are focused on the development andproduction of oil and natural gas reserves and the complementary development ofgas-fired power generation for our own account.

 

In 2001, weestablished a registered branch in Peru, officially designated as “BPZEnergy, Inc. Sucursal Peru.” Currently, we have exclusive rights and license agreements for oil andgas exploration and production covering a total of approximately 2.76 millionacres in northwest Peru.  We acquired aminority working interest in the license contract for Block Z-1 inNovember 2001 and subsequently acquired 100% ownership of the block inNovember 2004.  In addition, we acquireda 100% working interest in the license contract for Block XIX in December2003.  Generally, license contracts inPeru contain an initial seven year exploration period and a total term of 30years for oil development and production and 40 years for gas development andproduction.  In December 2003 wealso entered into a Technical Evaluation Agreement for Area VI and aPromotional Technical Evaluation Agreement for Area XVI.  These latter two Agreements give us the rightto conduct 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.

 

To date ouractivities in Peru have been limited to analysis and evaluation of a largevolume of legacy technical data on the properties and preparation of thedevelopment plans for the properties.  Wehave not yet drilled any wells or recognized any revenues from our operationsand do not anticipate generating significant revenues from our properties priorto mid-2006.

 

In June 2004,BPZ acquired the capital stock of SMC Ecuador, Inc. (“SMC”), a Delawarecorporation, which owns a non-operated working interest in certain oil and gasproducing properties located in the southwest region of the Republic of Ecuador(the “Santa Elena Properties”).  SMC hashad its interest in the Santa Elena Properties for the past eight years.  The license agreement covering the propertyexpires in May 2016.

 

**Resultsof Operations**

 

We are in the earlystage of developing our properties in Peru and we do not currently have anyproduction or revenues from these properties. To date, our operations have consisted primarily of technical evaluationof the properties and the design of development plans to exploit the oil andgas resources on those properties.

 

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 $39,143 during the second quarter of 2004 and$141,588 during the six months ended June 30, 2004 to $1,028,467 during thesecond quarter of 2005 and $1,989,256 during the six months ended June 30, 2005as a result of our increased activity levels, additional personnel and costsassociated with being a public company. We incurred $291,126 of geological, geophysical and engineering costs inthe 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.

 

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 June30, 2005, principally from notes payable incurred to finance the acquisition ofSMC in June 2004.  Interest expenseof $15,800 and $31,600 for the three and six month periods ended June 30, 2004related to other borrowings in 2004.  Sincesubstantially all of the assets of SMC consist of producing oil and gasproperties, we are amortizing this investment on a straight-line basis over theremaining term of the license agreement covering the property.  Accordingly, we recorded $14,079 and $28,158of amortization expense in the second quarter and six months ended June 30,2005, respectively.  This propertygenerated net cash distributions of $96,015 and $205,189 during the secondquarter of 2005 and six months ended June 30, 2005, respectively.

 

13

----

 

The Companyrealized a net loss of $1,265,867, or $0.07 per share, for the quarter endedJune 30, 2005, as compared to a net loss of $135,819, or $0.03 per sharefor the same period in 2004.  For the sixmonths ended June 30, 2005, the Company realized a net loss of $2,296,415 or$0.14 per share, as compared to a net loss of $254,302, or $0.06 per share, forthe same period in 2004.

 

**Planof Operation**

 

Our plan ofoperation for the next twelve months is focused primarily on exploiting theresource opportunities in the offshore Block Z-1 in northwest Peru, inwhich we own a 100% working interest.  Thecapital budget for our plans totals approximately $100 million. The achievementof our plan of operation is dependent on obtaining financing for our capitalbudget. See “Liquidity, CapitalResources and Capital Expenditures” below for further discussion.

 

Our plan of operationenvisions the installation of a company-owned 140 megawatt (‘‘MW’’) gas-firedelectric generation plant near the town of Caleta Cruz, in northwest Peru.  This power plant will initially use gas fromthe Corvina Field in Block Z-1, which is located approximately 10 milesoffshore from the power plant site.  OnAugust 3, 2005 the Company announced that it had awarded the turnkey contractfor the engineering, procurement and construction (EPC) of its power plant projectto BTEC Turbines LP of Houston.  Thecontract was awarded following a comprehensive six-month bidding process thatincluded field visits by all of the bidders. Under the EPC contract, the final terms of which are being negotiated,BTEC will supply two General Electric Frame 7 simple-cycle gas-firedturbines.  BTEC will also act as the maincontractor for the transportation of all equipment, contruction, startup andcommissioning of the 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 and weexpect 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 thatwith certain upgrades are capable of handling up to 300 MW of power.  Our plan is to own 100% of the powerplant.  Accordingly, our revenues fromthe natural gas delivered to the power plant will be derived from the sale ofelectricity.

 

In order to supportour proposed electric generation project, we recently commissioned anindependent power market analysis for the region.  The Peruvian electricity market isderegulated and power is 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.  We believethere may be an opportunity in the future to generate and profitably sell significantlygreater volumes of power into the Peruvian and Ecuadorian power markets.  Our goal is to commence initial sales ofelectricity by July 2006.  However,this timeline is subject to certain factors, which include securing bindingfinancing commitments, outside our control.

 

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 a40-mile pipeline from Caleta Cruz, the terminal point of our offshore pipelinefrom the Corvina Field, to Arenillas, Ecuador. We intend to sell gas for the generation of electricity by third partypower producers in the local market in Ecuador. We have negotiated three preliminary agreements for delivery ofgas.  We are planning to have thispipeline completed for first sales by October 2006, though no assurancecan be given that we can meet this schedule.

 

We have secured 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 sufficient financialresources for that project.

 

14

----

 

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.

 

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

 

**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 Block Z-1. As of June 30, 2005, we had a cash balance of approximately$358,000. We have committed funds as necessary to continue progress towardimplementing our gas to power strategy by mid-2006. The timing of this projectis dependent on a variety of factors, including technical design of facilities,permitting, availability of equipment, delivery lead times, execution bycontractors, and availability of financing, many of which are outside thecontrol of the Company.

 

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 require theCompany 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 commonstock to accredited investors for gross proceeds of $34.4 million.  Morgan Keegan & Company, Inc. served asplacement agent for the offering.  Netproceeds after placement fees and other expenses are estimated to be $31.8million.

 

15

----

 

The Company sold 11,466,000shares of common stock at a price of $3.00 per share.  There were no warrants or other dilutivesecurities 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 offacilitating off-balance sheet arrangements.

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (“GAAP”).  Management uses estimates and assumptions inpreparing the consolidated financial statements in accordance with GAAP.  Those estimates and assumptions affect thereported amounts of assets, liabilities, revenues and expenses in the consolidatedfinancial 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 proved reserveshave been found.  If the determination isdependent upon the results of planned additional wells and required capitalexpenditures to produce the reserves found, the drilling costs will becapitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as describe in the preceding sentence are notrequired.  We assess our capitalizedexploratory wells pending evaluation each quarter to determine whether costsshould remain capitalized or should be charged to earnings.  Other exploration costs, including geologicaland geophysical costs, are expensed as incurred.  We will recognize gains or losses on the saleof properties, should they occur, on a field-by-field basis.

 

The application ofthe successful efforts method of accounting requires management’s judgment todetermine the proper designation of wells as either developmental orexploratory, which will ultimately determine the proper accounting treatment ofthe costs incurred.  The results from adrilling operation can take considerable time to analyze, and the determinationthat commercial reserves have been discovered requires both judgment andapplication of industry experience.  Wellsmay be completed that are assumed to be productive and actually deliver oil andgas in quantities insufficient to be economic, which may result in theabandonment of the wells at a later date. Seismic costs incurred to select development locations within aproductive oil and gas field are typically treated as development costs andcapitalized.  Judgment is required todetermine when the seismic programs are not within proved reserve areas andtherefore would be charged to expense as exploratory.

 

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 when incurred.  The initial exploratory wells may be unsuccessfuland the associated costs will then be expensed as dry hole costs and anyassociated leasehold costs may be impaired.

 

***Impairmentof Long-Lived Assets***

 

We periodicallyevaluate the recoverability of the carrying value of our long-lived assets and identifiableintangibles by monitoring and evaluating changes in circumstances that mayindicate that the carrying amount of the asset may not be recoverable.  Examples of events or changes incircumstances that indicate that the recoverability of the carrying amount ofan asset should be assessed include but are not limited to (a) a significantdecrease in the market value of an asset, (b) a significant change in theextent or matter in which an asset is used or a significant physical change inan asset, (c) a significant adverse change in legal factors or in the businessclimate that could affect the value of an asset or an adverse

 

16

----

 

action orassessment by a regulator, (d) an accumulation of costs significantly in excessof the amount originally expected to acquire or construct an asset, and/or (e)a current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.

 

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

 

***FutureDismantlement, Restoration, and Abandonment Costs***

 

The accounting forfuture development and abandonment costs changed on January 1, 2003, with theissuance of Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accountingfor Asset Retirement Obligation” (“ARO”), which requires the fair value of aliability for an asset retirement obligation to be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The accrual is based on estimates of thesecosts for each of our properties based upon the type of production structure,reservoir characteristics, depth of the reservoir, market demand for equipment,currently available procedures and consultations with construction andengineering consultants.  Because thesecosts typically extend many years into the future, estimating these costs is difficultand requires management to make estimates and judgments that are subject tofuture revisions based on numerous factors, including changing technology, thepolitical and regulatory environment and estimates as to the proper discountrate 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,” the Company accountsfor its stock-based compensation for options issued to employees in accordancewith the provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”). As such, for options granted to employees and directors, compensationexpense is recorded on a straight-line basis over the shorter of the periodthat the services are provided or the vesting period, only if the currentmarket price of the underlying stock exceeds the exercise price.  Transactions in equity instruments withnon-employees for goods or services are accounted for by the fair value method.

 

**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 performance andno 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 filed with the SEC on April 15,2005.

 

17

----

 

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**

 

We carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Rule 13a-15(e) of the ExchangeAct, as of the end of the period covered by this quarterly report. Based uponthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that theCompany files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

 

BPZ Energy, Inc. became a public reportingentity in September 2004.  Prior to thattime, we were a small private company with limited accounting needs andresources.  Subsequent to the Merger andcontinuing during the quarter ended June 30, 2005, we have taken significantsteps to establish and improve our systems of internal and disclosure controlsand procedures to meet our requirements as a public company.  These actions have included the hiring of aChief Financial Officer and Corporate Controller, both of whom are certifiedpublic accountants and have experience with the internal and disclosure controland procedure requirements of public companies.  We also engaged the services of twoconsultants who are certified public accountants and have significantexperience in the establishment, documentation and verification of internalcontrol systems.  With the efforts ofthese individuals and other employees of the Company commencing after theMerger and continuing during the quarter ended June 30, 2005, we believe oursystem of internal and disclosure controls and procedures has improvedsignificantly and has allowed us to make the affirmative conclusion in theabove paragraph.

 

18

----

 

**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

See Note 9 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 by BPZ with the SEC 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 by BPZ with the SEC 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)

 

19

----

 

**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 & Chief Executive Officer |
|                                    |
| Date: August 15, 2005              |

 

20

----