UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K/A


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended: December 31,
2009


or


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from _______________ to _______________




Commission
file number:  333-138465




La
Cortez Energy, Inc.


(Exact
name of registrant as specified in its charter)





Nevada
              
              20-5157768(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (IRS
      Employer Identification No.)





Calle
      67 #7-35, Oficina 409
                        Bogotá,
      Colombia
                      
                      None(Address
      of principal executive offices)
                      
                      (Postal
      Code)




Registrant’s
telephone number, including area code:  (941) 870-5433




Securities
registered under Section 12(b) of the Act:  None




Securities
registered under Section 12(g) of the Act:  Common Stock, $0.001 par value per
share




Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ̈Nox





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act.  Yes ̈Nox




Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days.  YesxNo ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes  ̈  No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company.  See the
definitions of the “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.   (Check
one):




Large
      Accelerated Filer   ̈
            Accelerated
      Filer   ̈Non-Accelerated Filer ̈
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈  No x





On June
30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter,  16,995,224 shares of its Common Stock, $0.001
par value per share (its only class of voting or non-voting common equity) were
held by non-affiliates of the registrant.  The market value of those
shares was $33,990,448, based on the last sale price of $2.00 per share of the
Common Stock on that date.  For this purpose, shares of Common Stock
beneficially owned by each executive officer and director of the registrant, and
each person known to the registrant to be the beneficial owner of 10% or more of
the Common Stock then outstanding, have been excluded because such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.




As of
April 12, 2010, there were 40,000,349 shares of the registrant’s Common Stock,
par value $0.001 per share, issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE





None.












Explanatory
Note




This
Amendment No. 1 to the Annual Report on Form 10-K of La Cortez Energy, Inc. (the
“Company”), for the
fiscal year ended December 31, 2009, is being filed solely to include the
signature of the Company’s independent registered public accounting
firm, BDO Seidman, LLP, on their opinion with respect to the Company’s
consolidated financial statements for the fiscal years ended December 31,
2009 and 2008, appearing on page F-2, which signature was inadvertently
omitted from the Company’s Form 10-K filed on April 16, 2010.
  Except as
described above, this Form 10-K/A does not revise, update or in any way affect
any information or disclosure contained in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2009, as filed on April 16, 2010,
and we have not updated the disclosures contained therein to reflect any events
that have occurred after that date.









SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





LA
      CORTEZ ENERGY, INC.Dated:  April
      20, 2010
            
            By:
            /s/ Andrés Gutierrez
      RiveraAndrés
      Gutierrez RiveraPresident
      and Chief Executive OfficerBy:
            /s/ Nadine C. SmithNadine
      C. SmithInterim
      Chief Financial Officer




83




INDEX
TO FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm
                
                F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008
                
                F-4Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for the years
      ended December 31, 2009and
      2008
                
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
                
                F-6Notes
      to Consolidated Financial Statements
                
                F-7
  F-1
  Report
of Independent Registered Public Accounting Firm
 Board of
Directors
 La Cortez
Energy, Inc.
 Bogota,
Colombia
  We have
audited the consolidated balance sheets of La Cortez Energy, Inc. as of December
31, 2009 and 2008 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of La Cortez Energy, Inc at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
  As
discussed in Note 1 to the consolidated financial statements, during 2009 the
Company prepared and presented its reserve estimates and related disclosures as
a result of adopting new oil and gas reserve estimation and disclosure
requirements.
 As
discussed in Note 1 to the consolidated financial statements, effective
January 1, 2009, the Company changed the manner in which it accounts for certain
warrants pursuant to new authoritative guidance in FASB ASC topic 815-40,
“Contract in Entity's Own Equity.”
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has limited operating history, no historical
profitability, and has limited available funds that raise substantial doubt
about its ability to continue as a going concern. Management’s plan in regard to
these matters is also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
 Houston,
Texas
 April 16,
2010
  F-2
  LA
CORTEZ ENERGY, INC.
 Consolidated
Balance Sheets
 December
31, 2009 and 2008
  December
      31,2009
                  
                  
                  2008AssetsCash
      and cash equivalents
                  
                  $
                  2,376,585
                  
                  
                  $
                  6,733,381Accrued
      oil receivables
                  
                  
                  189,835
                  
                  
                  
                  -Employee
      advances
                  
                  
                  26,294
                  
                  
                  
                  -Prepaid
      expenses
                  
                  
                  19,519
                  
                  
                  
                  20,132Total
      current assets
                  
                  
                  2,612,233
                  
                  
                  
                  6,753,513Oil
      properties, at cost:Proved
      oil properties, using the full cost method of accounting
                  
                  
                  7,513,057
                  
                  
                  
                  -Unproved
      oil properties
                  
                  
                  1,599,951
                  
                  
                  
                  -Accumulated
      depletion and impairment
                  
                  
                  (6,706,603
                  )
                  
                  
                  -2,406,405
                  
                  
                  
                  -Other
      property and equipment, net of accumulated depreciation of $100,274 and
      $38,719, respectively
                  
                  
                  204,206
                  
                  
                  
                  231,604Restricted
      cash
                  
                  
                  2,672,500
                  
                  
                  
                  -Total
      assets
                  
                  $
                  7,895,344
                  
                  
                  $
                  6,985,117Liabilities
      and Shareholders' Equity (Deficit)Liabilities:Accounts
      payable
                  
                  $
                  2,518,565
                  
                  
                  $
                  29,685Accrued
      liabilities
                  
                  
                  267,155
                  
                  
                  
                  127,107Derivative
      warrant instruments
                  
                  
                  7,500,138
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  10,285,858
                  
                  
                  
                  156,792Asset
      retirement obligation
                  
                  
                  3,860
                  
                  
                  
                  -Total  liabilities
                  
                  
                  10,289,718
                  
                  
                  
                  156,792Commitments
      and contingencies (Note 10)Shareholders'
      equity:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $.001 par value;  300,000,000 shares authorized;
      25,428,815 and 18,935,244 shares issued and outstanding at December 31,
      2009 and 2008, respectively
                  
                  
                  25,429
                  
                  
                  
                  18,935Additional
      paid-in capital
                  
                  
                  11,396,506
                  
                  
                  
                  9,431,994Accumulated
      deficit
                  
                  
                  (13,816,309
                  )
                  
                  
                  (2,622,604
                  )Total
      shareholders' equity (deficit)
                  
                  
                  (2,394,374
                  )
                  
                  
                  6,828,325Total
      liabilities and shareholders' equity (deficit)
                  
                  $
                  7,895,344
                  
                  
                  $
                  6,985,117
 
 See
accompanying notes to consolidated financial statements.
  F-3
  LA
CORTEZ ENERGY, INC.
 Consolidated
Statements of Operations
 For
the years ended December 31, 2009 and 2008
 
 Years
      EndedDecember 31,2009
                    
                    
                    2008Oil
      revenues
                    
                    $
                    189,835
                    
                    
                    $
                    -Costs
      and Expenses:Operating
      costs
                    
                    
                    421,693
                    
                    
                    
                    -Depreciation,
      depletion and amortization
                    
                    
                    364,787
                    
                    
                    
                    38,719Impairment
      of oil and gas properties
                    
                    
                    6,403,544
                    
                    
                    
                    -Accretion
      expense
                    
                    
                    156
                    
                    
                    
                    -General
      and administrative
                    
                    
                    3,274,786
                    
                    
                    
                    2,610,593Total
      costs and expenses
                    
                    
                    10,464,966
                    
                    
                    
                    2,649,312Loss
      from operations
                    
                    
                    (10,275,131
                    )
                    
                    
                    (2,649,312
                    )Non-operating
      income (expense):Unrealized gain
      on fair value of derivative warrant instruments, net
                    
                    
                    83,997
                    
                    
                    
                    -Interest
      income
                    
                    
                    49,404
                    
                    
                    
                    69,005Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (222
                    )Loss
      before income taxes
                    
                    
                    (10,141,730
                    )
                    
                    
                    (2,580,529
                    )Income
      taxes
                    
                    
                    (656
                    )
                    
                    
                    -Net
      loss
                    
                    $
                    (10,142,386
                    )
                    
                    $
                    (2,580,529
                    )Basic
      and diluted loss per share
                    
                    $
                    (0.47
                    )
                    
                    $
                    (0.15
                    )Basic
      and diluted weighted averagecommon
      shares outstanding
                    
                    
                    21,625,442
                    
                    
                    
                    17,730,971
 
 See
accompanying notes to consolidated financial statements
  F-4
 
 LA
CORTEZ ENERGY, INC.
 Consolidated
Statements of Changes in Shareholders’ Equity (Deficit)
 For the years ended December 31, 2009
and 2008
 
 AdditionalCommon Stock
                      
                      
                      Paid-in
                      
                      
                      AccumulatedShares
                      
                      
                      Par
      Value
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      TotalBalance
      at December 31, 2007
                      
                      *
                      
                      
                      20,750,000
                      
                      
                      $
                      20,750
                      
                      
                      $
                      7,250
                      
                      
                      $
                      (42,075
                      )
                      
                      $
                      (14,075
                      )February
      2008, common stock sold to an officer at $.01 per share
                      
                      *
                      
                      
                      1,150,000
                      
                      
                      
                      1,150
                      
                      
                      
                      10,350
                      
                      
                      
                      —
                      
                      
                      
                      11,500February
      2008, common stock issued to a consultant in exchange for services at
      $1.00 per share
                      
                      *
                      
                      
                      1,000,000
                      
                      
                      
                      1,000
                      
                      
                      
                      999,000
                      
                      
                      
                      —
                      
                      
                      
                      1,000,000February
      2008, cancellation of former officer's shares
                      
                      
                      
                      
                      (9,000,000
                      )
                      
                      
                      (9,000
                      )
                      
                      
                      9,000
                      
                      
                      
                      —
                      
                      
                      
                      —February
      2008, common stock issued in exchange for extinguishment of debt and
      accrued interest at $.50 per share
                      
                      
                      
                      
                      100,444
                      
                      
                      
                      100
                      
                      
                      
                      50,122
                      
                      
                      
                      —
                      
                      
                      
                      50,222March
      2008, common stock sold in private placement offering at $1.00 per share,
      less offering costs totaling $85,105
                      
                      
                      
                      
                      2,400,000
                      
                      
                      
                      2,400
                      
                      
                      
                      2,312,495
                      
                      
                      
                      —
                      
                      
                      
                      2,314,895June
      2008, indebtedness forgiven by related party
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      14,700
                      
                      
                      
                      —
                      
                      
                      
                      14,700August
      2008, cancellation of former officer's shares
                      
                      
                      
                      
                      (2,250,000
                      )
                      
                      
                      (2,250
                      )
                      
                      
                      2,250
                      
                      
                      
                      —
                      
                      
                      
                      —September
      2008, common stock and warrants sold in private placement offering at
      $1.25 per share, less offering costs totaling $218,874
                      
                      
                      
                      
                      4,784,800
                      
                      
                      
                      4,785
                      
                      
                      
                      5,757,341
                      
                      
                      
                      —
                      
                      
                      
                      5,762,126Contributed
      services by interim CFO
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      23,333
                      
                      
                      
                      —
                      
                      
                      
                      23,333Stock
      based compensation
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      246,153
                      
                      
                      
                      —
                      
                      
                      
                      246,153Net
      loss, year ended December 31, 2008
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,580,529
                      )
                      
                      
                      (2,580,529
                      )Balance
      at December 31, 2008
                      
                      
                      
                      
                      18,935,244
                      
                      
                      
                      18,935
                      
                      
                      
                      9,431,994
                      
                      
                      
                      (2,622,604
                      )
                      
                      
                      6,828,325Cumulative
      effect of reclassification of warrants
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,253,242
                      )
                      
                      
                      (1,051,319
                      )
                      
                      
                      (2,304,561
                      )Balance
      at January 1, 2009, as adjusted
                      
                      
                      
                      
                      18,935,244
                      
                      
                      
                      18,935
                      
                      
                      
                      8,178,752
                      
                      
                      
                      (3,673,923
                      )
                      
                      
                      4,523,764June
      2009, common stock and warrants sold in private placement offering at
      $1.25 per share, less offering costs totaling $830,635
                      
                      
                      
                      
                      4,860,000
                      
                      
                      
                      4,860
                      
                      
                      
                      637,934
                      
                      
                      
                      —
                      
                      
                      
                      642,794July
      2009, common stock and warrants sold in private placement offering at
      $1.25 per share, less offering costs totaling $39,452
                      
                      
                      
                      
                      205,000
                      
                      
                      
                      205
                      
                      
                      
                      47,757
                      
                      
                      
                      —
                      
                      
                      
                      47,962December
      2009, common stock and warrants sold in private placement offering at
      $1.75 per share, less offering costs totaling $145,730
                      
                      
                      
                      
                      1,428,571
                      
                      
                      
                      1,429
                      
                      
                      
                      1,843,588
                      
                      
                      
                      —
                      
                      
                      
                      1,845,017Stock
      based compensation
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      688,475
                      
                      
                      
                      —
                      
                      
                      
                      688,475Net
      loss, year ended December 31, 2009
                      
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (10,142,386
                      )
                      
                      
                      (10,142,386
                      )Balance
      at December 31, 2009
                      
                      
                      
                      
                      25,428,815
                      
                      
                      $
                      25,429
                      
                      
                      $
                      11,396,506
                      
                      
                      $
                      (13,816,309
                      )
                      
                      $
                      (2,394,374
                      )
  *
Restated for 5:1 forward stock spliteffected on February 27,
2008.
 
 See
accompanying notes to consolidated financial statements.
  F-5
  LA
CORTEZ ENERGY, INC.
 Consolidated
Statements of Cash Flows
 For
the years ended December 31, 2009 and 2008
  Years Ended December 31,2009
                            
                            
                            2008Cash
      flows from operating activities:Net
      loss
                            
                            $
                            (10,142,386
                            )
                            
                            $
                            (2,580,529
                            )Adjustments
      to reconcile net loss to net cash used in operatingactivities:Depreciation,
      depletion and amortization and accretion
                            
                            
                            364,943
                            
                            
                            
                            -Impairment
      of oil properties
                            
                            
                            6,403,544
                            
                            
                            
                            38,719Stock-based
      compensation
                            
                            
                            688,475
                            
                            
                            
                            1,246,153Contributed
      services by interim CFO
                            
                            
                            -
                            
                            
                            
                            23,333Common
      stock issued in exchange for interest expense
                            
                            
                            -
                            
                            
                            
                            222Unrealized gain
      on fair value of derivative instruments, net
                            
                            
                            (83,997
                            )
                            
                            
                            -Income
      taxes
                            
                            
                            656
                            
                            
                            
                            -Changes
      in operating assets and liabilities:Accrued
      oil receivables
                            
                            
                            (189,835
                            )
                            
                            
                            -Employee
      advances and other receivables
                            
                            
                            (26,294
                            )
                            
                            
                            -Prepaid
      expenses
                            
                            
                            613
                            
                            
                            
                            (19,632
                            )Accounts
      payable
                            
                            
                            780,589
                            
                            
                            
                            29,685Accrued
      liabilities
                            
                            
                            139,392
                            
                            
                            
                            126,107Net
      cash used in operating activities
                            
                            
                            (2,064,300
                            )
                            
                            
                            (1,135,942
                            )Cash
      flows from investing activities:Investments
      in oil and natural gas properties
                            
                            
                            (7,401,013
                            )
                            
                            
                            -Performance
      guarantee deposit
                            
                            
                            (2,672,500
                            )
                            
                            
                            -Purchases
      of property and equipment
                            
                            
                            (34,330
                            )
                            
                            
                            (270,323
                            )Net
      cash used in investing activities
                            
                            
                            (10,107,843
                            )
                            
                            
                            (270,323
                            )Cash
      flows from financing activities:Proceeds
      from the sale of common stock and derivative warrantinstruments
                            
                            
                            8,831,164
                            
                            
                            
                            8,392,500Payments
      for offering costs
                            
                            
                            (1,015,817
                            )
                            
                            
                            (303,979
                            )Proceeds
      from issuance of note payable
                            
                            
                            -
                            
                            
                            
                            50,000Proceeds
      from related party debt
                            
                            
                            -
                            
                            
                            
                            100Net
      cash provided by financing activities
                            
                            
                            7,815,347
                            
                            
                            
                            8,138,621Net
      change in cash
                            
                            
                            (4,356,796
                            )
                            
                            
                            6,732,356Cash,
      beginning of year
                            
                            
                            6,733,381
                            
                            
                            
                            1,025Cash,
      end of year
                            
                            $
                            2,376,585
                            
                            
                            $
                            6,733,381Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Income
      taxes
                            
                            $
                            139
                            
                            
                            $
                            -Interest
                            
                            $
                            -
                            
                            
                            $
                            -Non-cash
      investing transactions:Accrued
      capital expenditures in accounts payable
                            
                            $
                            1,708,291
                            
                            
                            $
                            -Non-cash
      investing and financing transactions:Common
      stock issued in exchange for extinguishment of note payable and accrued
      interest
                            
                            $
                            -
                            
                            
                            $
                            (50,222
                            )Contributed
      capital associated with forgiveness of debt
      by  relatedparty
                            
                            $
                            -
                            
                            
                            $
                            14,700Asset
      retirement obligation costs and liabilities
                            
                            $
                            3,704
                            
                            
                            $
                            -Cumulative
      effect of reclassification of warrants
                            
                            $
                            2,304,561
                            
                            
                            $
                            -
 
 See
accompanying notes to consolidated financial statements.
  F-6
 
 LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 (1)
              Organization, Basis of
      Presentation and Summary of Significant Accounting
      Policies
 
 Organization
and Basis of Presentation
 
 La Cortez
Energy, Inc. (“LCE”, “La Cortez” or the “Company”), together with its 100% owned
subsidiaries, La Cortez Energy Colombia, Inc., a Cayman Islands corporation (“LA
Cortez Colombia”) and La Cortez Energy Colombia, E.U., a Colombia corporation
(“Colombia E.U.”), is an international,  oil and gas exploration and
production (“E&P”) company concentrating on opportunities in South
America.
 
 LCE had
established Colombia E.U. in Colombia to explore E&P opportunities in
Colombia and Peru.  On April 30, 2009, LCE elected to dissolve
Colombia E.U.  The operations of Colombia E.U. were transferred to La
Cortez Colombia.  The Colombian activities are being operated through
a branch of La Cortez Colombia which was established during the quarter ended
March 31, 2009.
 
 The
Company was incorporated under the name of La Cortez Enterprises, Inc. on June
9, 2006 in the State of Nevada. This entity was originally formed to create,
market and sell gourmet chocolates wholesale and retail throughout Mexico, as
more fully described in its registration statement on Form SB-2 as filed with
the SEC on November 7, 2006 (the “Legacy Business”). This business has been
discontinued. On February 7, 2008, the Company changed its name from La Cortez
Enterprises, Inc. to La Cortez Energy, Inc.
 
 Exploration
Stage
 
 The
Company was in the exploration stage until September 30, 2009.  During
October, 2009, the Company exited the exploration stage as a result of
management’s determination that the Company held proved reserves and was
receiving revenue from those reserves.
 
 Split-off
of Legacy Business
  In
connection with the discontinuation of the Company’s Legacy Business and the
redirecting of its business strategy to focus on oil and gas exploration and
production opportunities in South America, the Company split off and sold all of
the assets and liabilities of the Legacy Business (the “Split-Off”) to Maria de
la Luz, LCE’s founding stockholder. The Split Off closed on August 21, 2008. As
more fully described in a Form 8-K filed by the Company with the SEC on August
21, 2008, the Company contributed all of its assets and liabilities relating to
the Legacy Business, whether accrued, contingent or otherwise, and whether known
or unknown, to a newly organized, wholly owned subsidiary, De La Luz Gourmet
Chocolates, Inc., a Nevada corporation (“Split-Off Sub”), and immediately
thereafter sold all of the outstanding capital stock of Split-Off Sub to Ms. de
la Luz in exchange for 9,000,000 shares of the Company’s common stock, $0.001
par value per share (the “Common Stock”) previously surrendered by Ms. de la Luz
and all of the Company’s common stock that Ms. de la Luz then owned, 2,250,000
shares. The 11,250,000 shares surrendered by Ms. de la Luz have been
cancelled.
 
 Use
of Estimates
 
 The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.  Estimates which are
particularly significant to the consolidated financial statements include
estimates of oil reserves, future cash flows from oil properties, depreciation,
depletion, amortization, asset retirement obligations and accrued
revenues.
  F-7
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Reclassifications
 
 Certain
prior year information has been reclassified to conform with current year
presentation.
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid debt instruments with original maturities of
three months or less when acquired to be cash equivalents. The Company places
the majority of its cash and cash equivalents with financial institutions that
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000.  From time to time, the Company’s cash balances exceeded
FDIC insured limits. In October 2008, the Federal government temporarily
increased the FDIC insured limits up to a maximum of $250,000 per depositor
until January 1, 2014, after which time the insured limits will return to
$100,000.  The Company mitigates this concentration of credit risk by
monitoring the credit worthiness of financial institutions and its
customers.   The Company maintains any cash and cash equivalents in
excess of federally insured limits in prominent financial institutions
considered by the Company to be of high credit quality.
 
 The
Company had cash equivalents of $15,106 and $-0- at December 31, 2009 and 2008,
respectively.
 
 Accounts
receivable and allowance for doubtful accounts
  The
Company establishes provisions for losses on accounts receivable if it
determines that it will not collect all or part of the outstanding balance.
Accounts receivable are written down to reflect management's best estimate or
realizability based upon known specific analysis, historical experience, and
other currently available evidence of the net collectible amount. There is no
allowance for doubtful accounts as of December 31, 2009 or 2008.
 
 Property
and equipment, net
 
 Property
and equipment consists primarily of office furniture, software and equipment and
is stated at cost.  Depreciation is computed on a straight-line basis
over the estimated useful lives ranging from two to five
years.  Depreciation expense for the years ended December 31, 2009 and
2008 was $61,728 and $38,719, respectively.
 
 Oil
and natural gas properties
 
 The
Company follows the full cost method of accounting for its oil and natural gas
properties, whereby all costs incurred in connection with the acquisition,
exploration for and development of petroleum and natural gas reserves are
capitalized. Such costs include lease acquisition, geological and geophysical
activities, rentals on non-producing leases, drilling, completing and equipping
of oil and natural gas wells and administrative costs directly attributable to
those activities and asset retirement costs. Disposition of oil and gas
properties are accounted for as a reduction of capitalized costs, with no gain
or loss recognized unless such adjustment would significantly alter the
relationship between capital costs and proved reserves of oil and gas, in which
case the gain or loss is recognized in the statement of operations.
 
 Depletion
of capitalized oil and gas properties and estimated future development costs,
excluding unproved properties, are based on the unit-of-production method based
on proved reserves.  Net capitalized costs of oil and natural gas
properties, less related deferred taxes, are limited to the lower of unamortized
cost or the cost ceiling, defined as the sum of the present value of estimated
future net revenues from proved reserves based on unescalated prices discounted
at 10 percent, plus the cost of properties not being amortized, if any, plus the
lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes.  As of
December 31, 2009, the Company has properties in the amount of $1,599,951that are being excluded
from amortization because they have not been evaluated to determine whether
proved reserves are associated with those properties. Costs in excess of the
present value of estimated future net revenues, as discussed above, are charged
to impairment expense. We apply the full cost ceiling test on a quarterly basis
on the date of the latest balance sheet presented.
  F-8
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 For the
year ended December 31, 2009, the Company incurred an impairment of $6,403,544
on its oil and gas properties.  During the year ended December 31,
2009, the Company drilled its first exploratory well, Mirto-1.  As
discussed in Note 3, the Company paid 65 percent of the drilling costs of this
well and will receive a 20 percent working interest in the
well.  After the completion of the drilling in October 2009, the
Company is responsible for paying 20 percent of the operating costs of the well,
and the Company expects to pay 20 percent of drilling and operating costs of any
additional wells drilled in the Mirto prospect.  The Company paid the
additional costs for the drilling of the Mirto-1 well in order to be able to
participate in the prospect; however the additional costs paid have resulted in
the majority of the impairment recognized in 2009, since the proven reserves
from this well were determined to be insufficient to cover the cost
incurred.
 
 As
discussed in Note 5, asset retirement costs are recognized when the asset is
placed in service, and are included in the amortization base and amortized over
proved reserves using the units of production method. Asset retirement costs are
estimated by management using existing regulatory requirements and anticipated
future inflation rates.
 
 Oil
and Natural Gas Reserve Quantities
  The
Company’s estimate of proved reserves is based on the quantities of oil that
engineering and geological analyses demonstrate, with reasonable certainty, to
be recoverable from established reservoirs in the future under current operating
and economic parameters. A third party specialist prepares a reserve
and economic evaluation of all the Company’s properties utilizing information
provided to it by management and other information available, including
information from the operator of the property. As discussed in Note 13
below, the estimate of the Company’s proved reserves as of December
31, 2009 has been prepared and presented in accordance with new SEC rules
and accounting standards. These new rules are effective for fiscal years ending
on or after December 31, 2009, and require SEC reporting companies to prepare
their reserve estimates using revised reserve definitions and revised pricing
based on 12-month un-weighted first- day-of-the-month average pricing. The
previous rules required that reserve estimates be calculated using
last-day-of-the-year pricing.
  Reserves
and their relation to estimated future net cash flows impact the Company’s
depletion and impairment calculations. As a result, adjustments to depletion and
impairment are made concurrently with changes to reserve estimates. The Company
prepares its reserve estimates, and the projected cash flows derived from these
reserve estimates, in accordance with SEC guidelines. The independent
engineering firm described above adheres to the same guidelines when preparing
their reserve report. The accuracy of the Company’s reserve estimates is a
function of many factors including the quality and quantity of available data,
the interpretation of that data, the accuracy of various mandated economic
assumptions, and the judgments of the individuals preparing the
estimates.
  The
Company’s proved reserve estimates are a function of many assumptions, all of
which could deviate significantly from actual results. As such, reserve
estimates may materially vary from the ultimate quantities of oil, eventually
recovered.
 
 Revenue
Recognition
 
 Sales of
crude oil  are recognized when the delivery to the purchaser has
occurred and title has been transferred. This occurs when oil has been delivered
to a pipeline or a tank lifting has occurred. Crude oil is priced on the
delivery date based upon prevailing prices published by purchasers with certain
adjustments related to oil quality and physical location.
 
 Income
Taxes
 
 The
Company accounts for income taxes under the provisions of FASB ASC Topic No. 740
(formerly SFAS No. 109,Accounting for Income Taxes) which provides for an asset and liability
approach in accounting for income taxes.  Under this approach, deferred tax
assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts calculated for income tax
purposes.
  F-9
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 In
recording deferred income tax assets, the Company considers whether it is more
likely than not that some portion or all of the deferred income tax assets will
be realized. The ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in which those
deferred income tax assets would be realizable. The Company considers the
scheduled reversal of deferred income tax liabilities and projected future
taxable income for this determination. The Company established a full valuation
allowance and reduced its net deferred tax asset, principally related to the
Company’s net operating loss carryovers, to zero as of December 31, 2009 and
2008. The Company will continue to assess the valuation allowance against
deferred income tax assets considering all available information obtained in
future reporting periods.  If the Company achieves profitable operations in
the future, it may reverse a portion of the valuation allowance in an amount at
least sufficient to eliminate any tax provision in that period. The valuation
allowance has no impact on the Company’s net operating loss (“NOL”) position for
tax purposes, and if the Company generates taxable income in future periods
prior to expiration of such NOLs, it will be able to use its NOLs to offset
taxes due at that time.
 
 Loss
per Common Share
 
 The
Company accounts for earnings (loss) per share in accordance with FASB ASC Topic
No. 260 – 10 (formerly SFAS No. 128,Earnings per Share), which
establishes the requirements for presenting earnings per share (“EPS”). 
FASB ASC Topic No. 260 – 10 requires the presentation of “basic” and “diluted”
EPS on the face of the statement of operations.  Basic EPS amounts are
calculated using the weighted average number of common shares outstanding during
each period.  Diluted EPS assumes the exercise of all stock options,
warrants and convertible securities having exercise prices less than the average
market price of the common stock during the periods, using the treasury stock
method. When a loss from continuing operations exists, as in the periods
presented in these condensed consolidated financial statements, potential common
shares are excluded from the computation of diluted EPS because their inclusion
would result in an anti-dilutive effect on per share amounts.
 
 For the
year ended December 31, 2009, the Company had potentially dilutive shares
outstanding, including 2,451,667 options to purchase shares of common stock,
warrants to purchase 8,642,186 shares of common stock, and warrants to purchase
5,000 shares of common stock.  For the year ended December 31,
2008, the Company had potentially dilutive shares outstanding composed of
2,025,000 options to purchase shares of common stock.  There was no
difference between basic and diluted loss per share for the years December
31, 2009 and 2008 as the effect of these potential common shares were
anti-dilutive due to the net loss during both years.
 
 Fair
value of financial instruments
  The
carrying value of cash and cash equivalents, accrued oil and gas natural gas
receivables, accounts payable and accrued expenses and other liabilities
approximates fair value due to the short term nature of these
accounts.
  Foreign
Currency Translation
 
 The
Company conducts its operations in two primary functional currencies: the U.S.
dollar and the Colombian peso. Balance sheet accounts of the Company’s Colombian
subsidiary are translated from foreign currencies into U.S. dollars at
period-end exchange rates while income and expenses are translated at average
exchange rates during the period. Cumulative translation gains or losses related
to net assets located outside the U.S. are shown as a component of shareholders’
equity. Gains and losses resulting from foreign currency transactions, which are
denominated in a currency other than the entity’s functional currency, are
included in the consolidated statements of operations.  For the years
ended December 31, 2009 and 2008, cumulative translation gains (losses) and
foreign currency transaction gains (losses) were immaterial.
 
 Recently
Issued Accounting Standards and Developments
 
 In June 2009, the FASBissued SFAS No. 168,“The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). The FASBAccounting
Standards Codification TM,
(“Codification” or “ASC”) became the source of authoritative GAAP recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date of SFAS 168,
the Codification superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.
  F-10
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105,Generally Accepted Accounting
Principles.The Company adopted SFAS No. 168 in the third quarter of
2009, and the Company will provide reference to both the Codification topic
reference and the previously authoritative references related to Codification
topics and subtopics, as appropriate.
 
 Effective
January 1, 2009, the Company adopted FASB ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts
in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No.
07-5,Determining Whether an
Instrument or Embedded Feature is Indexed to an Entity’s Own Stock). The
adoption of FASB ASC Topic No. 815 – 40’s requirements can affect the accounting
for warrants and many convertible instruments with provisions that protect
holders from a decline in the stock price (or “down-round” provisions). For
example, warrants with such provisions will no longer be recorded in
equity.  Downward provisions reduce the exercise price of a warrant or
convertible instrument if a company either issues equity shares for a price that
is lower than the exercise price of those instruments or issues new warrants or
convertible instruments that have a lower exercise price. The Company evaluated
whether these warrants contained provisions that protect holders from declines
in the Company’s stock price or otherwise couldresult in modification
of the exercise price and/or shares to be issued under the respective warrant or
preferred stock agreements based on a variable that is not an input to the
fairvalue of a
“fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40. The
Company determined that warrants to purchase 2,392,400 shares of common stock,
issued in the September 2008 private placement, contained such provisions
thereby concluding they were not indexed tothe Company’s own
stock.
 
 In
accordance with FASB ASC Topic No. 815 – 40, the Company, beginning on January
1, 2009, recognized the September 2008 private placement warrants as liabilities
at their respective fair values on each reporting date. The cumulative effect of
the change in accounting for these instruments of $1,051,319 was recognized as
an adjustment to the opening balance of accumulated deficit at January 1, 2009
and the transfer of the fair value of derivative warrant instruments as of
January 1, 2009 from additional paid-in capital to derivative warrant
instruments liability of $1,253,242.  The cumulative effect adjustment
of $1,051,319 was the difference between the amounts representing the fair value
of warrants to purchase 2,392,400 shares of common stock recognized in the
consolidated balance sheet before initial adoption of FASB ASC Topic No. 815 –
40 and the amounts recognized in the consolidated balance sheet upon the initial
application of FASB ASC Topic No. 815 – 40. The amounts recognized in the
consolidated balance sheet as a result of the initial application of FASB ASC
Topic No. 815 – 40 on January 1, 2009 were determined based on the amounts that
would have been recognized if FASB ASC Topic No. 815 – 40 had been applied from
the issuance date of the instruments. FASB ASC Topic No. 815 – 40 also requires
that such instruments be measured at fair value at each reporting
period.  The Company measured the fair value of these instruments as
of December 31, 2009, and recorded $339,904 unrealized gain to the
statement of operations for the year ended December 31, 2009. The Company
determined the fair values of these securities using a lattice valuation
model.
 
 The
Company also determined that warrants to purchase a total of 6,249,786 shares of
common stock issued in the 2009 Unit Offerings (discussed below) contained
provisions that protect holders from declines in the Company’s stock price or
otherwise couldresult in modification
of the exercise price and/or shares to be issued under the respective warrant or
preferred stock agreements based on a variable that is not an input to the
fairvalue of a
“fixed-for-fixed” option as defined under FASB ASC Topic No. 815 –
40.  As a result, these warrants were not indexed tothe Company’s own
stock.  The fair value of these 2009 Unit Offerings warrants was
recognized as derivative warrant instruments and will be measured at fair value
at each reporting period.  The Company measured the fair value of
these instruments as of December 31, 2009, and recorded ($255,907) unrealized
loss to the statement of operations for the year ended December 31, 2009. The
Company determined the fair values of these securities using a lattice valuation
model.
  F-11
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that permit the
use of new technologies to determine proved reserves if those technologies have
been demonstrated empirically to lead to reliable conclusions about reserves
volumes. The new requirements also will allow companies to disclose their
probable and possible reserves to investors. In addition, the new disclosure
requirements require companies to: (a) report the independence and
qualifications of its reserves preparer or auditor; (b) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and (c) report oil and natural gas reserves using an average price based
upon the prior 12-month period rather than period-end prices. The use of average
prices affected our fourth quarter 2009 depletion and impairment calculations
and will affect future impairment and depletion calculations. In January 2010,
the FASB issued ASU 2010-03,Extractive Activities – Oil and Gas (Topic 932) Oil and Gas Reserve Estimation
and Disclosures (“ASU 2010-03”), which aligns the oil and natural gas
reserve estimation and disclosure requirements of ASC 932 with the
requirements in the SEC’s Final Rule,Modernization of the Oil and Gas
Reporting Requirements discussed above. The Company adopted the Final
Rule and ASU effective December 31, 2009.
 
 In April
2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 141(R)-1 “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies”. FSP FAS 141(R)-1, which is incorporated in FASB ASC Topic
No. 805,“Business
Combinations” addresses application issues raised by preparers, auditors,
and members of the legal profession on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. This FSP was effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company has not
made any acquisitions during the year ended December 31, 2009 that would require
such disclosures.  The Company is currently evaluating the extent of
disclosures which will be required for the Avante acquisition
which occurred subsequent to year end.
 
 In
April 2009, the FASB issued FASB Staff Position SFAS 157-4,“Determining the Fair Value of a
Financial Asset When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”). FSP 157-4, which is incorporated in FASB ASC
Topic No. 820,“Fair Value
Measurements and Disclosures”, clarified and provided additional guidance
for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
shall be effective for interim and annual reporting periods ending after
June 15, 2009, and shall be applied prospectively. Early adoption is
permitted for periods ending after March 15, 2009. Earlier adoption for
periods ending before March 15, 2009, is not permitted. If a reporting
entity elects to adopt early either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1
and APB 28-1,Interim
Disclosures about Fair Value of Financial Instruments, the reporting
entity also is required to adopt early this FSP. Additionally, if the reporting
entity elects to adopt early this FSP, FSP FAS 115-2 and FAS 124-2 also must be
adopted early. This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial
adoption, this FSP requires comparative disclosures only for periods ending
after initial adoption. Revisions resulting from a change in valuation technique
or its application shall be accounted for as a change in accounting estimate
(FASB ASC Topic No. 250 – 10 - 45,Accounting Changes and Error
Corrections). In the period of adoption, a reporting entity shall
disclose a change, if any, in valuation technique and related inputs resulting
from the application of this FSP, and quantify the total effect of the change in
valuation technique and related inputs, if practicable, by major
category. The adoption of this topic did not have a material impact
on the Company's results of operations or financial
position.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165, which is incorporated in FASB ASC Topic No. 855,“Subsequent Events”,
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, this Statement sets forth: (1) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (2) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements; and (3) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. In accordance with SFAS 165, an entity should apply the
requirements to interim or annual financial periods ending after June 15, 2009.
The Company adopted SFAS 165 effective June 30, 2009 and the adoption did not
have a material impact on its consolidated financial statements.
  F-12
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 In June
2009, the FASB issued guidance which amends the consolidation guidance
applicable to variable interest entities. This guidance is included in FASB ASC
810, Consolidation.The
amendments significantly reduce the previously required quantitative
consolidation analysis, and require ongoing reassessments of whether a company
is the primary beneficiary of a variable interest entity. This new guidance also
requires enhanced disclosures about an enterprise’s involvement with a variable
interest entity. This statement is effective for the beginning of the first
annual reporting period beginning after November 15, 2009. The Company does not
currently expect the adoption of the new guidance in FASB ASC 810 to impact its
consolidated financial statements.
 
 In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements, which enhances the usefulness of fair value measurements.
The amended guidance requires both the disaggregation of information in certain
existing disclosures, as well as the inclusion of more robust disclosures about
valuation techniques and inputs to recurring and nonrecurring fair value
measurements.  The amended guidance is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disaggregation requirement for the reconciliation disclosure of Level 3
measurements, which is effective for fiscal years beginning after December 15,
2010 and for interim periods within those years. The Company adopted ASU 2010-06
effective December 31, 2009, and the adoption did not have a significant impact
on the Company’s consolidated financial statements.
 
 (2)
                Going
      Concern
 
 At
December 31, 2009, the Company had cash and cash equivalents of $2,376,585 and
working capital deficit of $7,673,625. The Company believes that its existing
capital resources may not be adequate to enable it to execute its business
plan.  The Company estimates that it will require additional cash
resources during 2010 based upon its current operating plan and
condition.
 
 Through
December 31, 2009, the Company has been primarily engaged in locating viable
investment prospects and recruiting personnel. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through at least December 31, 2010.  The Company expects to finance
its operations primarily through its existing cash and any future financing.
However, there exists substantial doubt about the Company’s ability to continue
as a going concern because the Company will be required to obtain additional
capital in the future to continue its operations and there is no assurance that
it will be able to obtain such capital through equity or debt financing, or any
combination thereof, or on satisfactory terms or at all. Additionally, no
assurance can be given that any such financing, if obtained, will be adequate to
meet the Company’s ultimate capital needs and to support the Company’s growth.
If adequate capital cannot be obtained on a timely basis and on satisfactory
terms, the Company’s operations would be materially negatively
impacted.
 
 The
Company’s ability to complete additional offerings is dependent on the state of
the debt and/or equity markets at the time of any proposed offering, and such
market’s reception of the Company and the offering terms. In addition, the
Company’s ability to complete an offering may be dependent on the status of its
oil and gas exploration activities, which cannot be predicted. There is no
assurance that capital in any form would be available to the Company, and if
available, on terms and conditions that are acceptable.
 
 As a
result of the above discussed conditions, and in accordance with generally
accepted accounting principles in the United States of America, there exists
substantial doubt about the Company’s ability to continue as a going concern,
and the Company’s ability to continue as a going concern is contingent upon its
ability to secure additional adequate financing or capital during the coming
year. If the Company is unable to obtain additional sufficient funds during this
time, the Company might lose its interest in the Petronorte, Emerald and Avante
projects described in Note 3 below.  This action would have an adverse
effect on the Company’s future operations, the realization of its assets and the
timely satisfaction of its liabilities. The Company’s consolidated financial
statements are presented on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The consolidated financial statements do not include any adjustments
relating to the recoverability of the recorded assets or the classification of
liabilities that may be necessary should it be determined that the Company is
unable to continue as a going concern.
  F-13
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 (3)
                Oil and Gas
      Properties
 
 The
Company follows the full cost method of accounting for its oil and natural gas
properties, whereby all costs incurred in connection with the acquisition,
exploration for and development of petroleum and natural gas reserves are
capitalized. Such costs include lease acquisition, geological and geophysical
activities, rentals on non-producing leases, drilling, completing and equipping
of oil and gas wells and administrative costs directly attributable to those
activities and asset retirement costs. Disposition of oil and gas properties are
accounted for as a reduction of capitalized costs, with no gain or loss
recognized unless such adjustment would significantly alter the relationship
between capital costs and proved reserves of oil and gas, in which case the gain
or loss is recognized in the statement of operations.
 
 Depletion
of proved oil and gas properties will be calculated on the units-of-production
method based upon estimates of proved reserves. Such calculations include the
estimated future costs to develop proved reserves. Costs of unproved properties
are not included in the costs subject to depletion. These costs are assessed
periodically ceiling test for impairment.  As of December 31, 2009,
$1,599,951 of the Company’s oil and natural gas properties were unproved and
were not subject to depletion or ceiling test impairment.
 
 Agreement
with Petronorte
 
 On
December 22, 2008, the Company entered into a memorandum of understanding (the
“MOU”) with Petroleos del Norte S.A. (“Petronorte”), a Colombian subsidiary of
Petrolatina Energy Plc., that entitles it to a 50% net working interest in the
Putumayo 4 block located in the south of Colombia (the “Putumayo 4
Block”).  Petronorte was the successful bidder on the Putumayo 4 Block
in the Colombia Mini Round 2008 run by theAgencia Nacional de
Hidrocarburos  (the “ANH”), Colombia’s hydrocarbon regulatory
agency.  According to the MOU, the Company will have the exclusive
right to a fifty percent (50%) net participation interest in the Putumayo 4
Block and in the exploration and production contract (the “E&P Contract”)
after ANH production participation.   Petronorte signed an E&P
Contract with the ANH in February 2009.  Petronorte will be the
“operator” of the E&P Contract.
 
 On
October 14, 2009, La Cortez Energy Colombia, the Company’s1
wholly owned subsidiary, entered into a joint operating agreement (the “JOA”)
with Petronorte. The JOA was signed pursuant to the MOU.  The JOA
entitles the Company (through La Cortez Colombia) to a 50% net working interest
in the Putumayo 4 Block located in the south of Colombia (the “Putumayo
4 Block”) subject to approval by ANH.
 
 The
Putumayo 4 Block covers an area of 126,845 acres (51,333 hectares) located in
the Putumayo Basin in southern Colombia and has over 1000 km of pre-existing 2D
seismic through which we and Petronorte have identified promising leads. The
Company and Petronorte plan to reprocess any relevant seismic information before
conducting our own seismic campaign to better direct the positioning of our
seismic program within the block. During this initial stage, the Company and
Petronorte plan to begin environmental and community consultations to expedite
some of these timely processes.
 
 Under the
terms of the E&P Contract, Petronorte will shoot 103 km of 2D seismic and
will drill an exploratory well in the first three years of the Company’s work
program in the Block. The E&P Contract will consist of two three-year
exploration phases and a twenty-four year production phase.
 
 As
criteria for awarding blocks in the 2008 Mini Round, the ANH considered proposed
additional work commitments, comprised of capital expenditures and an additional
production revenue payment after royalties, called the“X Factor.”   The
Company and Petronorte offered to invest US $1.6 million in additional seismic
work in the Putumayo 4 Block and to pay ANH a 1% of net production revenuesX Factor.
 
 According
to the JOA, which is effective retroactively to February 23, 2009, the Company
is entitled to a fifty percent (50%) net participation interest in the Putumayo
4 Block and in the E&P Contract.  These percentages are calculated
after royalties and after an additional production participation of 1% payable
to the ANH. Under the MOU and the JOA, the Company was responsible for fifty
percent (50%) of the costs incurred under the E&P Contract, entitling the
Company to fifty percent (50%) of the revenues originated from the Putumayo 4
Block, net of royalty and production participation to the ANH (including but not
limited to any guarantees required by the ANH), except that the Company will be
responsible for paying two-thirds (2/3) of the costs of the first 103 kilometers
of 2D seismic to be performed in the Putumayo 4 Block, in accordance with the
Phase 1 minimum exploration program under the E&P Contract. The Company
expects that capital commitments to Petronorte will be approximately U.S. $2.8
million (which includes its portion of the US $1.6 million referenced in the
previous paragraph) in 2010 for Phase 1 seismic reprocessing and acquisition
activity costs.  If a prospective Phase 1 well in a prospect in the
Putumayo 4 Block proves productive, Petronorte will reimburse La Cortez for its
share of these seismic costs paid by La Cortez in excess of La Cortez’
agreed-upon 50% share of total costs, with production from the Putumayo 4
Block.  The JOA also governs other legal, technical and operational
rights and obligations of the parties with respect to development of the
Putumayo 4 Block.
  F-14
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 The
Company’s total Phase 1 commitment under the MOU over the 36 month Phase 1
period is currently projected to be approximately U.S. $5.8
million.  The Company’s total Phase 2 commitment under the contract
over the second 36 month project period is currently projected to be
approximately U.S. $6.0 million, fifty percent of the total U.S. $12 million
currently budgeted.  In November 2009, the Company
deposited  U.S. $2.67 million into a trust account as the Company’s
fifty percent portion of a Phase 1 performance guarantee required by the ANH
under Petronorte’s Putumayo 4 Block E&P contract.  The Company
expects that this guarantee deposit will remain in place for the 36 month Phase
1 period and the Company may be required to supplement the guarantee deposit in
Phase 2 to take into account its additional investment requirements of that
phase and accordingly, the deposit has been classified as long term in the
accompanying balance sheet.
  Provided
that the Company has satisfactorily complied with all ANH legal, financial and
technical requirements for being a partner in an E&P contract and with
payment requirements relating to its share of all costs incurred to the date of
its request, Petronorte will submit a request to the ANH to assign a 50%
interest in the E&P Contract to La Cortez and will assist it in obtaining
such assignment through reasonable means.
 
 Emerald
Farm-In Agreement
 
 On
February 6, 2009, the Company entered into a farm-in agreement (the “Farm-In
Agreement”) with Emerald Energy Plc Sucursal Colombia (“Emerald”), a Colombian
branch of Emerald Energy Plc. (“Emerald Energy”), a company existing under the
laws of the United Kingdom, for a 20% participating interest (the “Participating
Interest”) in the Maranta exploration and production block (“Maranta”) in the
Putumayo Basin in Southwest Colombia.
 
 Emerald
signed an E&P Contract for the Maranta block with the ANH on September 12,
2006.  The Company expects to execute a joint operating agreement with
Emerald with respect to the Maranta block once it has met its Phase 1 and Phase
2 (drilling and completion of the Mirto-1 exploratory well) payment obligations
described below and the ANH has approved Emerald’s assignment of the
participating interest to the Company.  Under the Farm-In Agreement
and the joint operating agreement, Emerald will remain the operator for the
block.  If the ANH does not approve the assignment of the
Participating Interest to the Company, Emerald and the Company have agreed that
they will use their best endeavors to seek in good faith a legal way to enter
into an agreement with terms equivalent to the Farm-In Agreement and the joint
operating agreement, that shall privately govern the relations between the
parties with respect to the Maranta Block and which will not require ANH
approval.
 
 The
Maranta block covers an area of 90,459 acres (36,608 hectares) in the foreland
of the Putumayo Basin in southwest Colombia. Emerald completed the first phase
exploratory program for the Maranta block by acquiring 71 square kilometers of
new 2D seismic and reprocessing 40 square kilometers of existing 2D seismic,
identifying several promising prospects and leads. Emerald has identified the
Mirto prospect, namely the Mirto 1 well, as the first exploratory well in the
Maranta block.  The Maranta block is adjacent to Gran Tierra’s Chaza
block and close to both the Orito and Santana crude oil receiving stations,
allowing transportation by truck directly to either station (depending on going
rates and capacity), and consequently tying into the pipeline to Colombia’s
Pacific Ocean port at Tumaco.
 
 As
consideration for its 20% participating interest, the Company reimbursed Emerald
$0.9 million of its Phase 1 sunk costs.  This amount was paid to
Emerald on February 12, 2009 and was capitalized as part of oil and natural gas
properties.  Additionally, the Company agreed to bear 65% of the
Maranta block Phase 2 costs, of which the Company’s portion of the exploratory
well drilling costs amounted to approximately U.S. $4.9 million, U.S. $2.4
million of which La Cortez paid to Emerald on February 18, 2009 and U.S. $2.4
million of which La Cortez paid to Emerald on May 15, 2009 (both capitalized as
part of oil and natural gas properties).
  F-15
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Emerald
reached the intended total depth of 11,578 feet on the Mirto-1 exploration well,
with oil and gas recorded across the target reservoirs.   On July
23, 2009, based on the preliminary results of the drilling of the Mirto-1 well,
the Company decided to participate with Emerald in the completion and evaluation
of Mirto-1.  In accordance with the terms of the Maranta Block Farm-In
Agreement, the Company agreed to bear 65% of the Maranta Block Phase 2 costs,
including 65% (U.S. $1.2 million) of the currently estimated U.S. $1.8 million
Mirto-1 completion costs.  The Company made this U.S. $1.2 million
payment to Emerald on July 27, 2009.  65% of any additional Phase 2
costs will be paid by the Company as needed, following cash calls by
Emerald.  If La Cortez Colombia fails to make required payments in a
timely way, it could be subject to a reduction in its 20% Participating
Interest, depending on the circumstances.  After the Phase 2 work is
completed, La Cortez Colombia will pay 20% of all subsequent costs related to
the Maranta block.
 
 Once the
Company has the final Mirto-1 evaluation results, the Company will ask Emerald
to file a request with the ANH to have the Participating Interest in the Maranta
Block officially assigned from Emerald to La Cortez Energy Colombia (the
“Assignment”). On August 4, 2009, La Cortez Colombia paid an additional
U.S. $243,300 to Emerald for overhead costs, representing 5% of total
expenditures, in accordance with the Farm-In Agreement. As of December 31, 2009,
the Company had accounts payable in the amount of $1,708,291 related to
capitalized costs for oil and natural gas properties.
  The
evaluation of the Mirto-1 exploratory well across all of the target reservoirs
has been completed.  Following the completion of operations in the
Mirto-1 well, the drilling rig has been released from the location. Currently, a
production test from the Villeta U sand interval is being
conducted.  Emerald, as operator of the Maranta block, has decided to
enter the Phase 3 exploration work commitment in the Maranta block, which would
entail the drilling of an additional exploratory/appraisal well and the
acquisition of 30 kilometers of 3D seismic.  The operator has already
acquired 31 kilometers of 3D seismic as part of this new phase of
work.
  On
February 4, 2010, the Company signed a joint operating agreement with Emerald
with respect to the Maranta Block and the Company has asked Emerald to submit a
request to the ANH to approve the assignment of the Company’s 20% participating
interest to us.  If the ANH does not approve this assignment, Emerald
and the Company have agreed to use its best endeavors to seek in good faith a
legal way to enter into an agreement with terms equivalent to the farm-in
agreement and the joint operating agreement, that shall privately govern the
relations between the parties with respect to the Maranta Block and which will
not require ANH approval.
 
 For the
year ended December 31, 2009, the Company incurred an impairment of $6,403,544
on its oil and gas properties.  During the year ended December 31,
2009, the Company drilled its first exploratory well, Mirto-1.  As
discussed above, the Company paid 65 percent of the drilling costs of this well
and will receive a 20 percent working interest in the well.  After the
completion of the drilling in October 2009, the Company is responsible for
paying 20 percent of the operating costs of the well, and the Company expects to
pay 20 percent of drilling and operating costs of any additional wells drilled
in the Mirto prospect.  The Company paid the additional costs for the
drilling of the Mirto-1 well in order to be able to participate in the prospect;
however the additional costs paid have resulted in the majority of the
impairment recognized in 2009, since the proven reserves from this well were
determined to be insufficient to cover the cost incurred.  Management
believes that mechanical problems with the well have resulted in lower oil
production and a higher water cut, resulting in lower quantities of estimated
proved reserves.  Management continues to believe that despite these
mechanical problems, there is sufficient accumulation of hydrocarbons in the
area to merit the drilling of at least two additional wells
 
 Effective
October 12, 2009, Emerald’s parent, Emerald Energy Plc, was acquired by Sinochem
Resources UK Limited, a United Kingdom subsidiary of Sinochem Group, a Chinese
state-owned energy and chemicals conglomerate.  At this time, the
Company does not know what impact this acquisition will have on the management
and corporate policies of Emerald in Colombia or on the future operation of the
Company’s joint relationship with Emerald.
 
 (4)
              Related Party
      Transactions
 
 Common
Stock sales
 
 On July
28, 2006, the Company sold 11,250,000 (after giving effect to the common stock
split referred to in Note 6 below) shares of its Common Stock to its then sole
officer and director for $9,000, or $.0008 (post-split) per
share.
  F-16
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 On
February 7, 2008, the Company sold 1,150,000 (after giving effect to the common
stock split referred to in Note 6 below) shares of its Common Stock to its newly
appointed, then sole officer and director for $11,500, or $.01 (post-split) per
share.
 
 On March
14, 2008, the Company closed our 2008 private placement in which we sold 500,000
shares of our restricted common stock to our Chairman, in consideration of cash
in the amount of $1.00 per share, for a total of $500,000.
 
 On
September 10, 2008, as part of its 2008 Unit Offering, the Company sold 400,000
Units (see Note 6), at a price of $1.25 per Unit, for a total of $500,000 to its
Chairman, and 50,000 Units for a total of $62,500 to its President and Chief
Executive Officer.  Also, as part of its 2008 Unit Offering, the
Company sold 200,000 Units to Jade & Adamo Associates, in consideration of
cash in the amount of $1.25 per Unit, for a total of $250,000.  One of
the Company’s directors owns sixty-five percent (65%) of Jade & Adamo
Associates and disclaims beneficial ownership of thirty-five percent (35%) of
the units held by Jade & Adamo Associates.
 
 On June
19, 2009, as part of the Initial Closing of its 2009 Mid-Year Unit Offering, the
Company sold 160,000 Units (see Note 6), at a price of $1.25 per Unit, for a
total of $200,000 to its Chairman and Vice President.
 
 Forgiveness
of indebtedness to related party
 
 During
2006 and 2007, the then sole officer and director of the Company advanced a
total of $14,700 to the Company for working capital. These advances bore no
interest and were payable on demand. On June 30, 2008, the former sole officer
and director forgave the total amount of the advances. Accordingly, the Company
eliminated the $14,700 payable and treated the debt forgiveness as a capital
contribution and recorded the amount as additional paid in capital
 
 (5)
              Asset
      Retirement Obligation
  ASC 41-20
(formerly FAS No. 143), requires that an asset retirement obligation (“ARO”)
associated with the retirement of a tangible long-lived asset be recognized as a
liability in the period in which it is incurred and becomes determinable. Under
this method, when liabilities for dismantlement and abandonment costs, excluding
salvagevalues, are initially
recorded, the carrying amount of the related oil and natural gas properties is
increased. The fair value of the ARO asset and liability is measured using
expected future cash outflows discounted at the Company’s credit-adjusted
risk-free interest rate. Accretion of the liability is recognized each period
using the interest method of allocation, and the capitalized cost is depleted
using the units of production method. Should either the estimated life or the
estimated abandonment costs of a property change materially upon the Company’s
quarterly review, a new calculation is performed using the same methodology of
taking the abandonment cost and inflating it forward to its abandonment date and
then discounting it back to the present using the Company’s
credit-adjusted-risk-free rate. The carrying value of the asset retirement
obligation is adjusted to the newly calculated value, with a corresponding
offsetting adjustment to the asset retirement cost related to oil and gas
property accounts.
  The
following table reflects the changes in the ARO during the year ended December
31, 2009.  There was no ARO liability recognized prior to 2009 as the
Company’s first well was drilled during 2009.
  AmountAsset
      retirement obligation — beginning of period
                      
                      $
                      -Liabilities
      incurred with properties drilled
                      
                      
                      3,704Current
      period accretion
                      
                      
                      156Asset
      retirement obligation — end of period
                      
                      $
                      3,860
 
 The
credit adjusted, risk free rate used in calculating the ARO was 18% at
December 31, 2009. These rates approximate the Company’s borrowing
rate.
  F-17
 LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 (6)
              Shareholders’
      Equity
 
 As of
December 31, 2009, there were 25,428,815 shares of common stock and no shares of
preferred stock issued and outstanding.
 
 Common
Stock split
 
 On
February 8, 2008, the articles of incorporation of LCE were amended to increase
the authorized capital stock of LCE to 310,000,000 shares, of which 300,000,000
are common stock with a par value of $0.001 per share and 10,000,000 shares are
preferred stock with a par value $0.001 per share.  The Board of
Directors is authorized to fix or alter the designation, powers, preferences and
rights of the preferred stock.  The Board of Directors has made no
such designation as of December 31, 2009.
 
 On
February 7, 2008, the Company’s Board of Directors approved a 5-for-1 forward
stock split on each share of its common stock issued and outstanding at the
close of business on February 21, 2008. Shares issued prior to February 21, 2008
have been retroactively restated to reflect the impact of the stock
split.
 
 Common
Stock issued for services
 
 On
February 7, 2008, the Company issued 1,000,000 (post-split) shares of its common
stock in exchange for consulting services, which included assisting the Chairman
in building the Board of Directors and senior management team for the Company.
The transaction was valued in accordance with EITF 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.”  Management determined
the fair value of the stock issued to the consultant at $1.00 (post-split) per
share based on the stock price received in the Offering (defined below) on March
14, 2008. Accordingly, stock-based compensation expense of $1,000,000 was
recognized in the accompanying consolidated statement of operations for the year
ended December 31, 2008.
 
 Common
Stock sales
 
 On July
28, 2006, the Company sold 11,250,000 (post-split) shares of Common Stock to its
then sole officer and director for $9,000, or $.0008 (post split) per
share.
 
 On
December 12, 2006, the Company sold 9,500,000 (post split) shares of Common
Stock at a price of $.002 (post split) per share for total proceeds of $19,000
($13,845 net after offering expenses). The offering was made pursuant to the
Company’s SB-2 registration statement that became effective on December 4,
2006.
 
 On
February 7, 2008, the Company sold 1,150,000 (post split) shares of Common Stock
to its then newly appointed sole officer and director for $11,500, or $.01
(post-split) per share.
 
 On
February 19, 2008 the Board of Directors authorized the Company to offer up to
2,000,000 shares of Common Stock to a limited number of accredited investors
and/or non-U.S persons at a price of $1.00 per share, in a private placement
offering (the “Offering”) pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act, Regulation S under the
Securities Act and/or Section 4(2) of the Securities Act. Because the offering
was oversubscribed, the Company’s Board of Directors further authorized to
increase the size of the Offering to up to 3,000,000 shares of Common Stock. On
March 14, 2008, the Company issued a total of 2,400,000 shares of Common Stock
for total proceeds to the Company of $2,400,000 ($2,314,895 net after offering
expenses).
 
 On July
23, 2008 the Board of Directors authorized the Company to offer up to a maximum
of 10,000,000 units (the “2008 Unit Offering”) at an offering price of $1.25 per
Unit. Each Unit consisted of one share of Common Stock and a common stock
purchase warrant to purchase one-half share of Common Stock, exercisable for a
period of five years at an exercise price of $2.25 per share. The Units were
offered to a limited number of accredited investors and non-U.S persons, in a
private placement offering pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”), Regulation S under the Securities Act and/or Section 4(2) of
the Securities Act. On September 10, 2008, the Company issued 4,784,800 shares
of Common Stock as the result of the sale of 4,784,800 Units, for total proceeds
to the Company of $5,981,000 ($5,762,126 net after offering expenses), and
warrants to purchase 2,392,400 shares of Common Stock.
 
 Investors
in the 2008 Unit Offering have “piggyback” registration rights for the shares of
Common Stock issued in the Unit Offering included in the Units and underlying
the Warrants included in the Units.
  F-18
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Additionally,
investors in the 2008 Unit Offering have “demand” registration rights with
respect to the shares of Common Stock included in the Units if the Company does
not file a registration statement with the SEC in which the investors can
exercise their ‘piggyback’ registration rights within six months of the Closing
of the 2008 Unit Offering (which the Company did not do).  Therefore,
at any time on or after the date that is six months after the Closing, one or
more of the investors that in the aggregate beneficially own at least 50% of the
Shares issued in the Unit Offering may make a demand that the Company effect the
registration of all or part of the investors’ Shares (a "Demand
Registration").  Investors have the right to one Demand Registration
pursuant to these provisions.
 
 The
Company would be required to prepare a Registration Statement following receipt
of the required investor demand, to be filed with the SEC and to become
effective within two hundred ten (210) days from the receipt of the demand
notice, registering for resale all shares of Common Stock issued in the 2008
Unit Offering included in the Units of those investors who choose to participate
in such Demand Registration.  The Company will pay monetary penalties
to these investors equal to one and one-quarter percent (1.25%) of the gross
proceeds of the 2008 Unit Offering for each full month that the registration
statement is late in being declared effective; provided, that in no event shall
the aggregate of any such penalties exceed fifteen percent (15%) of the gross
proceeds of the Unit Offering.  No penalties shall accrue with respect
to any shares of Common Stock removed from the registration statement in respect
to a comment from the SEC limiting the number of shares of Common Stock which
may be included in the registration statement.  The holders of any
Common Stock removed from the registration statement as a result of a comment
from the SEC shall continue to have “piggyback” registration rights with respect
to these shares.  There has been no request for a Demand Registration
as of December 31, 2009.
 
 On May
11, 2009 the Board of Directors authorized the Company to offer up to a maximum
of 12,000,000 units (the “2009 Mid-Year Unit Offering”) at an offering price of
$1.25 per Unit. Each Unit consisted of one share of Common Stock and a common
stock purchase warrant to purchase one share of Common Stock, exercisable for a
period of five years at an exercise price of $2.00 per share. The Units were
offered to a limited number of accredited investors and non-U.S persons, in a
private placement offering pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”), Regulation S under the Securities Act and/or Section 4(2) of
the Securities Act. On June 19, 2009 (“Initial Closing’), the Company issued
4,860,000 shares of Common Stock as the result of the sale of 4,860,000 Units,
for total proceeds to the Company of $6,074,914 ($5,244,279 net after offering
expenses), and warrants to purchase 4,860,000 shares of Common
Stock.  The Company offered the Units directly and through finders
(the “Finders”).  Also at the Initial Closing, the Company paid
Finders a commission in cash of ten percent (10%) of the principal amount of
each Unit sold by them in the Offering, for an aggregate amount of $562,500,
plus 450,000 five-year warrants exercisable at a price of $1.25 per
share.  On July 31, 2009, the Company completed its final closing (the
“Final Closing”) of the 2009 Mid-Year Unit Offering and closed on the sale of
205,000 Units.  At the Final Closing, the Company issued 205,000
shares of Common Stock, for total proceeds to the Company of $256,250 ($216,798
net after offering expenses), and warrants to purchase 205,000 shares of Common
Stock.  The Company also paid Finders a commission in cash of ten
percent (10%) of the principal amount of each Unit sold by them in the Offering,
for an aggregate amount of $25,625, plus 20,500 five-year warrants exercisable
at a price of $1.25 per share.  The 2009 Mid-Year Unit Offering was
terminated on July 31, 2009.
 
 On
December 29, 2009, the Company closed a private placement offering of 1,428,571
Units (the “December 2009 Unit Offering”) at an offering price of $1.75 per
Unit. Each Unit consisted of one share of Common Stock and a common stock
purchase warrant to purchase one-half of one share of Common Stock,
exercisable for a period of three years at an exercise price of $3.00 per share.
The Units were offered to a limited number of accredited investors and non-U.S
persons, in a private placement offering pursuant to the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act of
1933, as amended (the “Securities Act”), Regulation S under the Securities Act
and/or Section 4(2) of the Securities Act. The Company issued 1,428,571 shares
of Common Stock as the result of the sale of 1,428,571 Units, for total proceeds
to the Company of $2,500,000 ($2,354,270 net after offering expenses), and
warrants to purchase 714,286 shares of Common Stock.
  F-19
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 The
Company determined that warrants to purchase a total of 6,249,786 shares of
common stock issued in the 2009 Mid-Year Unit Offering and December 2009 Unit
Offering (collectively, the “2009 Unit Offerings”) contained provisions that
protect holders from declines in the Company’s stock price or otherwise
couldresult in
modification of the exercise price and/or shares to be issued under the
respective warrant or preferred stock agreements based on a variable that is not
an input to the fairvalue of a
“fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40 -
15.  As a result, these warrants were not indexed tothe Company’s own
stock.  At the Initial Closing of the 2009 Mid-Year Unit Offering, the
fair value of these warrants was determined to be approximately $4,601,485,
which was recorded as a derivative warrant instruments liability.  The
Company also recorded $4,860 as par value to common stock and $637,934 to
additional paid-in capital as part of the Initial Closing of the 2009 Unit
Offering transaction.  At the Final Closing, the fair value of these
warrants was approximately $168,776, which was recorded as a derivative warrant
instruments liability.  The Company also recorded $205 as par value to
common stock and $47,757 to additional paid in capital as part of the Final
Closing of the 2009 Unit Offering transaction.  At the December 2009
Closing, the fair value of these warrants was approximately $509,313, which was
recorded as a derivative warrant instruments liability.  The Company
also recorded $1,429 as par value to common stock and $1,843,588 to additional
paid in capital as part of the December 2009 Closing transaction.
 
 The table
below reflects the breakdown of the components of gross proceeds from the
Company’s 2009 Unit Offerings:
  Par
      value of common stock issued
                    
                    $
                    6,494Paid-in
      capital
                    
                    
                    2,529,279Derivative
      warrant instruments
                    
                    
                    5,279,574Offering
      expenses
                    
                    
                    1,015,817Total
      gross proceeds
                    
                    $
                    8,831,164
 
 The
Company entered into a registration rights agreement with the investors
purchasing Units in the 2009 Mid-Year Unit Offering.  The registration
rights agreement requires that the Company prepare and file with the SEC a
registration statement on Form S-1 covering the resale of all shares of Common
Stock issued in the Offering (the “Registrable Shares”). Shares of Common
Stock underlying the Warrants included in the Units carry “piggyback”
registration rights.  The registration rights agreement provides
certain deadlines for the filing and effectiveness of the registration
statement, including that the registration statement be declared effective by
the SEC within 240 days after the final closing of the Offering.  If
the Company is unable to comply with this deadline, the Company will be required
to pay as partial liquidated damages to the investors a cash sum equal to 1% of
any unregistered Registrable Shares for every month in which such registration
statement has not been declared effective, up to maximum liquidated damages of
10% of each investor’s aggregate investment amount.
 
 On
November 6, 2009, the Company filed a registration statement on Form S-1 with
the SEC to cover the resale from time to time by investors holding (i) 4,134,800
shares sold in the 2008 Unit Offering, (ii) 4,905,000 shares sold in the 2009
Mid-Year Unit Offering and (iii) and 2,067,400 shares that may be issued upon
exercise of warrants issued to the investors in the 2008 Unit
Offering.  On February 23, 2010, the Company filed an amended Form S-1
with the SEC to cover the resale of the same securities. The registration
statement has not yet been declared effective by the SEC.
 
 Common
Stock issued to extinguish debt
 
 On
February 8, 2008, the Corporation issued a $50,000 promissory note to Milestone
Enhanced Fund Ltd. (“Milestone”) in exchange for Milestone’s $50,000 working
capital loan to the Company. The note was due within one year of its date of
issuance and carried a 9% annual interest rate. On February 25, 2008, the
Company issued 100,444 shares of Common Stock in exchange for full payment of
the note and accrued interest. This transaction was valued by the Company’s
Board of Directors at the fair value of the Common Stock issued, or 100,000
shares at $.50/share for the principal and 444 shares at $.50/share for the
accrued interest which amounted to $222.
 
 Common
Stock cancelled
 
 On
February 26, 2008, 9,000,000 shares of LCE Common Stock owned by the founding
stockholder were surrendered to LCE and cancelled.
  F-20
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 On August
21, 2008, 2,250,000 shares of LCE common stock owned by the founding director,
were surrendered in exchange for her interest in a split-off subsidiary of LCE,
as more fully described in a Form 8-K of the same date filed by the Company with
the SEC.  The net assets of the Split-Off Subsidiary were $Nil as of
August 21, 2008.  Therefore, this transaction was valued at
$Nil.
 
 2008
Equity Incentive Plan
 
 The
Company’s 2008 Equity Incentive Plan (the “2008 Plan”) provides for the grant of
incentive stock options to employees of the Company and non-statutory stock
options, restricted stock and stock appreciation rights to employees, directors
and consultants of the Company and of an affiliate or subsidiary of the Company.
A maximum of 4,000,000 shares of common stock are available for issuance under
the 2008 Plan. The 2008 Plan, originally adopted and approved by the Company’s
Board of Directors and majority stockholders on February 7, 2008 to enable
grants to issue up to 2,000,000 shares of our Common Stock, was amended and
restated by approval of the Company’s Board of Directors on November 7, 2008 to,
among other things, increase the number of shares that may be issued under the
2008 Plan to 4,000,000.  On October 12, 2009, the Company’s
stockholders approved the increase in reserved shares under the 2008 Plan from
2,000,000 to 4,000,000.  As of December 31, 2009, options had been
granted under the 2008 Plan exercisable for an aggregate of 2,451,667 shares of
common stock.
 
 The
Company determines the fair value of stock option awards granted to employees in
accordance with FASB ASC Topic No. 718 – 10 (formerly SFAS No. 123(R),
Share-Based Payment) and to non-employees in accordance with FASB ASC Topic No.
505 – 50 (formerly EITF 96-18 “Accounting for Equity Instruments Issued to
Non-Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”).
 
 Stock
Option Awards
 
 On July
1, 2008, the Company granted options to purchase (i) 1,000,000 shares of its
Common Stock to the Company’s President and Chief Executive Officer, (ii)
175,000 shares of its Common Stock to the Company’s Chairman and Vice President,
(iii) 100,000 shares of its Common Stock to a newly appointed director, and (iv)
an additional 175,000 shares of its Common Stock to three employees of its
Colombian subsidiary. The options vest pro-rata in three annual installments
beginning on the first anniversary of the date of grant and have a 10 year term.
They were granted with an exercise price equal to $2.20.
 
 On July
23, 2008, the Company granted options to purchase (i) 100,000 shares of its
Common Stock to each of two newly appointed directors. These were granted with
an exercise price equal to $2.47.  An additional 75,000 options to
purchase shares of its Common Stock was granted on August 1, 2008 to one
employee of its Colombian subsidiary, with an exercise price equal to $2.57. The
options vest pro-rata in three annual installments beginning on the first
anniversary of the date of grant and have a 10 year term.
 
 Also on
July 23, 2008, the Company granted options to purchase 150,000 shares to a
consultant to the Company at an exercise price equal to $2.47.  These
options vest pro-rata in three annual installments beginning on the first
anniversary of the date of grant and have a 10 year term. The Company recognized
compensation expense of $47,390 for the year ended December 31, 2009. The fair
value of the unvested shares was $52,239 as of December 31, 2009.
 
 On
November 7, 2008, the Company granted options to purchase (i) 100,000 shares of
its common stock to a newly appointed director, and (ii) 50,000 shares to one
employee.  The options vest pro-rata in three annual installments
beginning on the first anniversary of the date of grant and have a 10 year term.
They were granted with an exercise price equal to $1.71.  The 50,000
options granted to the employee were forfeited during the three months ended
March 31, 2009.
 
 On
January 7, 2009, the Company granted options to purchase 200,000 shares of its
common stock to the Company’s new Production and Operations
Manager.  The options vest pro-rata in three annual installments
beginning on the first anniversary of the date of grant and have a 10 year term.
They were granted with an exercise price equal to $1.50.
 
 On May 1,
2009, the Company granted options to purchase 50,000 shares of its Common Stock
to its geologist. These options vest pro-rata in three annual installments
beginning on the first anniversary of the date of grant and have a 10 year term.
They were granted with an exercise price equal to $1.59.
  F-21
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 On June
16, 2009, the Company granted options to purchase 160,000 shares of its Common
Stock to a consultant to the Company. These were granted with an exercise price
equal to $2.00 per share, with one-third of the options vesting on grant date
and the remaining options to vest pro-rata over a period of twelve months. The
Company recognized compensation expense of $92,237 for the year ended December
31, 2009. The fair value of the unvested shares is $22,074 as of December 31,
2009.
 
 On July
1, 2009, the Company granted options to purchase 100,000 shares of its Common
Stock to its exploration manager. These options vest pro-rata in three annual
installments beginning on the first anniversary of the date of grant and have a
10 year term. They were granted with an exercise price equal to
$1.65.
 
 Stock
option activity summary covering options granted to the Company’s employees is
presented in the table below:
 
 Number of
                                      Shares
                                    
                                    
                                    Weighted-
                                      average
                                      Exercise
                                      Price
                                    
                                    
                                    Weighted-
                                      average
                                      Remaining
                                      Contractual
                                      Term (years)
                                    
                                    
                                    Aggregate
                                      Intrinsic
                                      ValueOutstanding
      at December 31, 2007
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Granted
                                    
                                    
                                    1,875,000
                                    
                                    
                                    $
                                    2.20Exercised
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Forfeited
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Expired
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Outstanding
      at December 31, 2008
                                    
                                    
                                    1,875,000
                                    
                                    
                                    $
                                    2.20
                                    
                                    
                                    
                                    8.79
                                    
                                    
                                    $
                                    —Granted
                                    
                                    
                                    350,000
                                    
                                    
                                    $
                                    1.56Exercised
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Forfeited
                                    
                                    
                                    (83,333
                                    )
                                    
                                    $
                                    1.91Expired
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Outstanding
      at December 31, 2009
                                    
                                    
                                    2,141,667
                                    
                                    
                                    $
                                    2.11
                                    
                                    
                                    
                                    8.64
                                    
                                    
                                    $
                                    —
 
 Of the
above employee options outstanding at December 31, 2009, 608,339 options are
vested or exercisable.   During the year ended December 31, 2009, the
Company recognized stock-based compensation expense of $682,783 related to stock
options, including $543,156 related to options granted to
employees.  As of December 31, 2009, there was approximately $969,558
of total unrecognized compensation cost related to non-vested stock options
($895,245 of which is related to employee options), which is expected to be
recognized over a weighted-average period of approximately 1.64 years and 2.02
years for employee and non-employee options, respectively.
 
 The fair
value of the options granted during 2008 and 2009 was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
  Estimated market value of stock
      on grant date(1)
                
                $
                0.86
      - $1.37Risk-free
      interest rate (2)
                
                
                2.02
      – 3.77
                %Dividend
      yield  (3)
                
                
                0.00
                %Volatility
      factor  (4)
                
                
                83.63% - 90.00
                %Expected
      life (5)
                
                6.5
      yearsExpected forfeiture rate
      (6)
                
                
                10
                %
  (1)
              The estimated market value of the
      stock on the date of grant was based on a calculation by management after
      consideration of price per share received in the private offerings and
      reported public market
prices.
 
 (2)
              The risk-free interest rate was
      determined by management using the U.S. Treasury zero-coupon yield over
      the contractual term of the option on date of
  grant.
 
 (3)
              Management determined the
      dividend yield to be 0% based upon its expectation that there will not be
      earnings available to pay dividends in the near
    term.
  F-22
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 (4)
              The volatility factor was
      estimated by management using the historical volatilities of comparable
      companies in the same industry and region, because the Company does not
      have adequate trading history to determine its historical
      volatility.
 
 (5)
              The expected life was estimated
      by management as the midpoint between the vesting date and the expiration
      date of the options.
 
 (6)
              Management estimated that the
      forfeiture rate at 10% based on its experience with companies in similar
      industries and regions.
 
 Warrants
for Services
 
 During
the year ended December 31, 2009, as compensation for services received, the
Company issued warrants to a third party to purchase 5,000 shares of common
stock at an exercise price of approximately $1.49.  The warrants are
exercisable at any time starting from the date of issuance and have a five year
term.  During the year ended December 31, 2009, the Company recognized
stock-based compensation expense of $5,692 related to these warrants based on
the Black-Scholes option pricing model.
 
 (7)
              Derivative
      Warrant Instruments (Liabilities)
 
 In the
2008 Unit Offering and 2009 Unit Offerings, the Company incurred liabilities for
the estimated fair value of derivative warrant instruments in the form of
warrants (see Note 1).  The estimated fair value of the derivative
warrant instruments was calculated using the lattice model as of December 31,
2009. Such estimates were revalued at each balance sheet date, with changes
in value recorded as unrealized gains or losses in non-operating income
(expense).
  During
the year ended December 31, 2009, a $83,997 decrease in the fair value of the
derivative liabilities was recorded as unrealized gain on fair value of
derivative warrant instruments in the accompanying consolidated statement of
operations.
  Activity
for derivative warrant instruments during the year ended December 31, 2009 was
as follows:
 
 December
                    31, 2008
                  
                  
                  Cumulative Effect
                    of Change in
                    Accounting
                    Principle
                  
                  
                  Activity
                    during the
                    year
                  
                  
                  Increase
                    (Decrease) in
                    Fair Value of
                    Derivative
                    Liability
                  
                  
                  December 31,
                    2009Derivative
      warrant instruments
                  
                  $
                  —
                  
                  
                  $
                  2,304,561
                  
                  
                  $
                  5,279,574
                  
                  
                  $
                  (83,997
                  )
                  
                  $
                  7,500,138$
                  —
                  
                  
                  $
                  2,304,561
                  
                  
                  $
                  5,279,574
                  
                  
                  $
                  (83,997
                  )
                  
                  $
                  7,500,138
  The fair
value of the derivative warrant instruments is estimated using the lattice
valuation model with the following assumptions as of December 31,
2009:
  Common
      stock issuable upon exercise of warrants
                
                
                8,642,186Estimated
      market value of common stock on measurement date (1)
                
                $
                1.43Exercise
      price
                
                $
                1.25
      - $3.00Risk
      free interest rate (2)
                
                
                1.70%
      - 2.93
                %Warrant
      lives in years
                
                
                3.00
      – 4.58Expected
      volatility (3)
                
                
                72
                %Expected
      dividend yields (4)
                
                None
  F-23
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 (1)
              The estimated market value of the
      stock is measured each period end and is based on a calculation by
      management after consideration of price per share received in private
      offerings and reported public market pricesand adjusted for the effect of
      previously issued warrants.
 
 (2)
              The risk-free interest rate was
      determined by management using the U.S. Treasury zero-coupon yield over
      the contractual term of the warrant on date of
    grant.
 
 (3)
              The volatility factor was
      estimated by management using the historical volatilities of comparable
      companies in the same industry and region, because the Company does not
      have adequate trading history to determine its historical
      volatility.
 
 (4)
              Management determined the
      dividend yield to be 0% based upon its expectation that there will not be
      earnings available to pay dividends in the near
    term.
 
 (8)
              Fair
      Value Measurements
 As
defined in FASB ASC Topic No. 820 – 10 (formerly SFAS 157), fair value is the
price that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. FASB ASC Topic No. 820 – 10 requires disclosure that
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. The statement requires fair value measurements be
classified and disclosed in one of the following categories:
 
 Level
      1:
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities. The Company
      considers active markets as those in which transactions for the assets or
      liabilities occur in sufficient frequency and volume to provide pricing
      information on an ongoing
basis.
 
 Level
      2:
              Quoted
      prices in markets that are not active, or inputs which are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability. This category includes those derivative instruments
      that La Cortez values using observable market data. Substantially all of
      these inputs are observable in the marketplace throughout the term of the
      derivative instruments, can be derived from observable data, or supported
      by observable levels at which transactions are executed in the
      marketplace.
 
 Level
      3:
              Measured
      based on prices or valuation models that require inputs that are both
      significant to the fair value measurement and less observable from
      objective sources (i.e. supported by little or no market activity). La
      Cortez’s valuation models are primarily industry standard
      models.  Level 3 instruments include derivative warrant
      instruments.  La Cortez does not have sufficient corroborating
      evidence to support classifying these assets and liabilities as Level 1 or
      Level 2.
 
 As
required by FASB ASC Topic No. 820 – 10 (formerly SFAS 157), financial assets
and liabilities are classified based on the lowest level of input that is
significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of the fair value of assets and
liabilities and their placement within the fair value hierarchy levels. The
estimated fair value of the derivative warrant instruments was calculated using
the lattice valuation model (see Note 7).
 
 Fair
Value on a Recurring Basis
  The
following table sets forth, by level within the fair value hierarchy, the
Company’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of December 31, 2009:
  F-24
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Fair Value Measurements at December 31, 2009Quoted
                        PricesIn Active
                      
                      
                      Significant
                      
                      
                      
                      
                      
                      TotalMarkets for
                      
                      
                      Other
                      
                      
                      Significant
                      
                      
                      CarryingIdentical
                      
                      
                      Observable
                      
                      
                      Unobservable
                      
                      
                      Value as ofAssets
                      
                      
                      Inputs
                      
                      
                      Inputs
                      
                      
                      DecemberDescription
                      
                      (Level 1)
                      
                      
                      (Level 2)
                      
                      
                      (Level 3)
                      
                      
                      
                      31, 2009Derivative
      warrant instruments
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      7,500,138
                      
                      
                      $
                      7,500,138Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      7,500,138
                      
                      
                      $
                      7,500,138
 
 The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy:
 
 Significant Unobservable Inputs (Level 3)Year EndedDecember 31,2009
                        
                        
                        2008Beginning
      balance
                        
                        $
                        -
                        
                        
                        $
                        -Total
      gains (losses)
                        
                        
                        (83,997
                        )
                        
                        
                        -Settlements
                        
                        
                        -
                        
                        
                        
                        -Additions
                        
                        
                        5,279,574
                        
                        
                        
                        -Transfers
      (1)
                        
                        
                        2,304,561
                        
                        
                        
                        -Ending
      balance
                        
                        $
                        7,500,138
                        
                        
                        $
                        -Change
      in unrealized gains (losses)included
      in earnings relating to derivativesstill
      held as of December 31, 2009 and 2008
                        
                        $
                        83,997
                        
                        
                        $
                        -
 
 (1)
              Represents the $2,304,561cumulative effect change in
      accounting principle as a result of the Company adopting FASB
      ASCTopic No. 815 –
      40 (formerlyEITF
      07-5) effective January 1,
2009.
  F-25
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 (9)
                Income
      Taxes
 
 La Cortez
Energy, Inc. files a U.S. Federal income tax return.  The Company’s
foreign subsidiaries file income tax returns in their respective jurisdictions.
The components of the consolidated net loss before income tax benefit are as
follows:
  2009
                          
                          
                          2008U.S.
                          
                          $
                          3,011,995
                          
                          
                          $
                          1,909,043Non-U.S.
                          
                          
                          7,130,391
                          
                          
                          
                          671,486Net
      Loss
                          
                          $
                          10,142,386
                          
                          
                          $
                          2,580,529
 The
components of the Company’s deferred tax assets at December 31, 2009 and 2008
are as follows:
 
 2009
                    
                    
                    2008Deferred
      tax assets and liabilities:Loss
      carry-forwards
                    
                    $
                    1,441,000
                    
                    
                    $
                    426,000Oil
      properties
                    
                    
                    2,347,000
                    
                    
                    
                    -Property
      and equipment
                    
                    
                    (18,000
                    )
                    
                    
                    (5,000
                    )Accounts
      receivable
                    
                    
                    (66,000
                    )
                    
                    
                    -Stock-based
      compensation
                    
                    
                    241,000
                    
                    
                    
                    83,000Net
      deferred tax asset
                    
                    
                    3,945,000
                    
                    
                    
                    504,000Valuation
      allowance
                    
                    
                    (3,945,000
                    )
                    
                    
                    (504,000
                    )$
                    -
                    
                    
                    $
                    -
 Income
tax benefit differs from the amount computed at the federal statutory rates
(approximately 34%) as follows:
 
 2009
                    
                    
                    2008Income
      tax benefit at statutory rate
                    
                    $
                    (3,550,000
                    )
                    
                    $
                    (877,000
                    )Stock
      issued to consultant
                    
                    
                    -
                    
                    
                    
                    337,000Other
      permanent differences
                    
                    
                    109,000
                    
                    
                    
                    31,000Increase
      in valuation allowance
                    
                    
                    3,441,000
                    
                    
                    
                    494,000Other
                    
                    
                    -
                    
                    
                    
                    15,000$
                    -
                    
                    
                    $
                    -
 
 As of
December 31, 2009, the Company had generated U.S. net operating loss
carry-forwards of approximately $755,000, which expire from 2027 to 2029 and net
loss carry-forwards in certain non-U.S. jurisdictions of approximately
$3,364,000, which do not expire.   As of December 31, 2008, the
Company had generated U.S. net operating loss carry-forwards of approximately
$555,000, which expire from 2027 to 2028 and net loss carry-forwards in certain
non-U.S. jurisdictions of approximately $671,486, which do not expire. These
net operating loss carry-forwards are available to reduce future taxable
income. However, a, change in ownership, as defined by federal income tax
regulations, could significantly limit the Company’s ability to utilize its U.S.
net operating loss carry-forwards. Additionally, because federal tax laws
limit the time during which the net operating loss carry-forwards may be applied
against future taxes, if the Company fails to generate taxable income prior
to the expiration dates it may not be able to fully utilize the net
operating loss carry-forwards to reduce future income taxes. As the Company
has had cumulative losses and there is no assurance of future taxable
income, valuation allowances have been recorded to fully offset the deferred tax
asset at December 31, 2009 and 2008. The valuation allowance increased
$3,507,000 and $494,000 due primarily to the Company’s 2009 and 2008 net
losses, respectively.
 
 (10)
              Commitments
      and Contingencies
 
 From time
to time the Company is a party to various legal proceedings arising in the
ordinary course of business. While the outcome of lawsuits cannot be predicted
with certainty, the Company is not currently a party to any proceeding that it
believes, if determined in a manner adverse to La Cortez, could have a potential
material adverse effect on its financial condition, results of operations or
cash flows.
  Additionally,
La Cortez is subject to numerous laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. To the extent laws are enacted or other governmental action is taken
that restricts drilling or imposes environmental protection requirements that
result in increased costs to the oil and natural gas industry in general, the
business and prospects of La Cortez could be adversely affected.
 
 Leases
 
 The
Company has signed a three year lease for approximately 3,000 square feet of
office space in Bogotá, Colombia. The rent for this office space is
approximately $8,100 per month during the first year. The rental contract
provides for a 2% increase per year in the base rent and an additional
adjustment for inflation in Colombia as reflected in the Colombian consumer
price index, or the “Indice de Precios al Consumidor” (the “IPC”). This lease
will expire on July 2, 2011.
  For the
years ended December 31 2009 and 2008, the Company paid rent of approximately
$103,936 and $42,714, respectively.
  F-26
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Based on
an estimated exchange rate of COP 2,250 per US dollar for each year (2010 and
2011), annual lease payment commitments for the remainder of the lease have been
calculated as follows:
  Year
                      
                      Total Lease Payment
                        Amount2010
                      
                      $
                      104,0002011
                      
                      $
                      63,000
 
 These US
dollar amounts for the remainder of the office lease could increase if the US
dollar to COP exchange rate deteriorates in favor of the COP.
 
 Employment
Agreement
 
 The
Company has entered into an employment agreement effective as of June 1, 2008
(the “Employment Agreement”) with Andres Gutierrez pursuant to which Mr.
Gutierrez was appointed as its President and Chief Executive Officer, Pursuant
to the Employment Agreement, Mr. Gutierrez’s base annual compensation has
been set at U.S. $250,000, which amount may be increased annually at the
discretion of the Board of Directors. This annual compensation is paid in
Colombian Pesos, which may result in foreign exchange rate fluctuations. The
Company expects that such exchange rate fluctuations to be
immaterial.
 
 In
addition, Mr. Gutierrez is eligible to receive an annual cash bonus of up to
fifty percent (50%) of his applicable base salary. Mr. Gutierrez’s annual bonus
(if any) shall be in such amount (up to the limit stated above) as the Board of
Directors may determine in its sole discretion, based upon Mr. Gutierrez’s
achievement of certain performance milestones to be established annually by the
Board of Directors in discussion with Mr. Gutierrez (the
“Milestones”).
 
 Under the
Employment Agreement, the Company agreed to grant Mr. Gutierrez an option to
purchase an aggregate of 1,000,000 shares of our common stock under our 2008
Equity Incentive Plan (the “2008 Plan”) as of June 1, 2008. The option was
granted on July 1, 2008. This option vests in three equal annual installments
beginning on July 1, 2009 and is exercisable at $2.20 per share.
 
 The
initial term of the Employment Agreement expired on June 1, 2009, and was
automatically extended by one year, until May 31, 2010. In the event of a
termination of employment “without cause” by the Company during the first 12
months following June 1, 2008, Mr. Gutierrez shall receive: (i) twelve
(12) months of his base salary; plus (ii) to the extent the Milestones
are achieved or, in the absence of Milestones, the Board of Directors has, in
its sole discretion, otherwise determined an amount for Mr. Gutierrez’s bonus
for the initial 12 months of his employment, a pro rata portion of his annual
bonus for the initial 12 months of his employment, to be paid to him on the date
such annual bonus would have been payable to him had he remained employed by the
Company; plus (iii) any other accrued compensation and Benefits, as defined
in the Employment Agreement. In the event of a termination of employment by Mr.
Gutierrez for “good reason”, as defined in the Employment Agreement, Mr.
Gutierrez shall receive: (i) twelve (12) months of his then in effect
base salary, subject to his compliance with the non-competition,
non-solicitation and confidentiality provisions of the Employment
Agreement.  As of December 31, 2009, the Company has accrued a bonus
payable to Mr. Gutierrez in the amount of $197,917 representing nineteen months
bonus accrual.
 
 (11)
              Subsequent
      Events
  On
January 29, 2010 and March 2, 2010, the Company completed a second closing
(“Second Closing”) and third closing (“Third Closing”), respectively, of the
December 2009 Unit Offering.  At the Second Closing, the Company
closed on the sale of 571,428 Units and received aggregate gross proceeds of
$999,999 from the sale of these Units.  At the Third Closing, the
Company closed on the sale of 857,144 Units and received aggregate gross
proceeds of $1,500,000 from the sale of these Units.Each of these Units
consisted of (i) one share of our common stock and (ii) a common stock purchase
warrant to purchase one-half (1/2) of one share of our common stock, exercisable
for a period of three years at an exercise price of $3.00 per
share.
  F-27
  LA
CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 On March
2, 2010 (the “Closing Date”), the Company entered into a Stock Purchase
Agreement (the “SPA”) with Avante Petroleum S.A., a Luxembourg public limited
liability company (“Avante”), which closed on the same date.  Pursuant
to the terms of the SPA, the Company acquired all of the outstanding capital
stock (the “Acquisition”) of Avante’s wholly owned subsidiary, Avante Colombia
S.à r.l., a Luxembourg private limited liability company (“Avante Colombia”), in
exchange for 10,285,819 newly issued shares of the Company’s common stock (the
“Purchase Price Shares”).
 
 In
connection with the Acquisition, on the Closing Date, the Company and Avante
entered into a Subscription Agreement (the “Avante Subscription Agreement”),
pursuant to which Avante purchased 2,857,143 shares of the Company’s common
stock (the “Avante Shares”) and three-year warrants to purchase 2,857,143 shares
of the Company’s common stock at an exercise price of $3.00 per share (the
“Avante Warrants”), for an aggregate purchase price of $5,000,000 (or $1.75 per
share of common stock purchased). This
acquisition will be accounted for as a purchase. Due to the timing of the
acquisition closing, the Company has not yet completed the analysis of the fair
value of the properties acquired as of the date of close. Therefore, the final
purchase price to be applied to the acquisition has not yet been
determined.
 (12)
              Costs
      Incurred in Oil and Natural Gas Property Acquisition and Development
      Activities
 
 Costs
incurred by La Cortez in oil and natural gas property acquisition,
exploration and development for the year ended December 31, 2009 are
presented below:
  AmountDevelopment
      costs
                    
                    $
                    -Exploration
      costs
                    
                    
                    9,109,304Total
      acquisition, development and exploration costs
                    
                    $
                    9,109,304
  Unevaluated
properties consist of seismic and other exploration costs. They are expected to
be subject to depletion and ceiling test impairment once they are evaluated
within the next twelve months.
 (13)
              Net
      Proved Oil and Natural Gas Reserves
(Unaudited)
  The
proved oil and natural gas reserves of La Cortez have been estimated by an
independent petroleum engineer, Ryder Scott Company (“Ryder Scott”), as of
December 31, 2009. La Cortez held no proved reserves prior to
2009.  These reserve estimates have been prepared in compliance with
the Securities and Exchange Commission rules and accounting standards based on
the 12-month un-weighted first-day-of-the-month average price for December 31,
2009. The estimate of the Company’s proved reserves as of December 31, 2009 has
been prepared and presented under new SEC rules and accounting standards. These
new rules and standards are effective for fiscal years ending on or after
December 31, 2009, and require SEC reporting companies to prepare their reserve
estimates using revised reserve definitions and revised pricing based on
12-month un-weighted first-day-of-the-month average pricing.  All of
the Company’s reserves are located in Colombia.
  An analysis of the change in estimated quantities
of oil and natural gas reserves is shown below:
  Oil(Bbls)Total
      Proved Reserves:Balance,
      December 31, 2008
                    
                    
                    -Discoveries
                    
                    
                    77,193Production
                    
                    
                    (2,963
                    )Balance,
      December 31, 2009
                    
                    
                    74,230Proved
      Developed Reserves:December
      31, 2008
                    
                    
                    -December
      31, 2009
                    
                    
                    74,230Proved
      Undeveloped Reserves:December
      31, 2008
                    
                    
                    -
 F-28
  LA CORTEZ ENERGY, INC.
 Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 (14)
              Standardized Measure of
      Discounted Future Net Cash Flows and Changes Therein Relating to Proved
      Reserves (Unaudited)
 
 Summarized
in the following table is information for La Cortez with respect to the
standardized measure of discounted future net cash flows relating to proved
reserves. Future cash inflows are computed by applying the 12-month un-weighted
first-day-of-the-month average price for the year ended December 31, 2009 as a
result of the adoption of ASU 2010-03 effective on December 31, 2009. Future
production, development, site restoration, and abandonment costs are derived
based on current costs assuming continuation of existing economic conditions.
Federal income taxes have not been deducted from future production revenues in
the calculation of standardized measure as the carryforward of prior year net
operating losses and future depletion are expected to result in no taxable
income over the life of the properties.
  AmountFuture
      production revenues
                    
                    $
                    4,133,131Future
      costs:Production
                    
                    
                    (1,634,044
                    )Development
                    
                    
                    (382,320
                    )Income
      taxes
                    
                    
                    -Future
      net cash flows after income taxes
                    
                    
                    2,116,76710%
      annual discount for estimated timing of cash flows
                    
                    
                    (1,310,312
                    )Standardized
      measure of discounted net cash flows
                    
                    $
                    806,455
 
 The
standardized measure is based on an oil price of $55.68 per barrel realized over
the life of the properties at the wellhead as of December 31, 2009.
  The
following table summarizes the principal sources of change in the standardized
measure of discounted future estimated net cash flows:
  AmountIncrease
      (decrease):Extensions
      and discoveries, net of future production anddevelopment
      costs
                            
                            $
                            996,290Production
                            
                            
                            (189,835
                            ))Net
      increase
                            
                            
                            806,455Standardized
      measure of discounted future net cash flows:Beginning
      of year
                            
                            
                            -End
      of year
                            
                            $
                            806,455
 
 The data
presented should not be viewed as representing the expected cash flow from or
current value of, existing proved reserves since the computations are based on a
large number of estimates and arbitrary assumptions. Reserve quantities cannot
be measured with precision and their estimation requires many judgmental
determinations and frequent revisions. Actual future prices and costs are likely
to be substantially different from the current prices and costs utilized in the
computation of reported amounts.
  F-29