UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K


(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.










TABLE
OF CONTENTS


Item Number and Caption
                                                                                  
                                                                                  PageForward-Looking
      Statements
                                                                                  
                                                                                  3PART
      I
                                                                                  
                                                                                  
                                                                                  41.
                                                                                  Business
                                                                                  
                                                                                  41A.
                                                                                  Risk
      Factors
                                                                                  
                                                                                  191B.
                                                                                  Unresolved
      Staff Comments
                                                                                  
                                                                                  362.
                                                                                  Properties
                                                                                  
                                                                                  363.
                                                                                  Legal
      Proceedings
                                                                                  
                                                                                  42PART
      II
                                                                                  
                                                                                  435.
                                                                                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                  
                                                                                  436.
                                                                                  Selected
      Financial Data
                                                                                  
                                                                                  467.
                                                                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                  
                                                                                  468.
                                                                                  Financial
      Statements and Supplemental Data
                                                                                  
                                                                                  609.
                                                                                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                                  
                                                                                  609A.[T]
                                                                                  Controls
      and Procedures
                                                                                  
                                                                                  609B.
                                                                                  Other
      InformationPART
      III
                                                                                  
                                                                                  6310.
                                                                                  Directors,
      Executive Officers, and Corporate Governance
                                                                                  
                                                                                  6311.
                                                                                  Executive
      Compensation
                                                                                  
                                                                                  6912.
                                                                                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
                                                                                  
                                                                                  7513.
                                                                                  Certain
      Relationships and Related Transactions and Director
      Independence
                                                                                  
                                                                                  7814.
                                                                                  Principal
      Accountant Fees and Services
                                                                                  
                                                                                  78PART
      IV
                                                                                  
                                                                                  7915.
                                                                                  Exhibits
      and Financial Statement Schedules
                                                                                  
                                                                                  79Financial
      Statements
                                                                                  
                                                                                  F-1Glossary
      of Oil and Gas Terms
                                                                                  
                                                                                  G-1




2


FORWARD-LOOKING
STATEMENTS





Some of the
statements contained in this Annual Report on Form 10-K that are not historical
facts are “forward-looking statements” which can be identified by the use of
terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,”
“anticipates,” “intends,” or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Annual Report, reflect our current beliefs with respect to future events
and involve known and unknown risks, uncertainties and other factors affecting
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, and although we
believe that the expectations
reflected in these forward-looking statements are based on reasonable
assumptions, actual results may differ materially as a result of the risks we
face, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events. Factors that may
cause actual results, performance or achievements, or industry results, to
differ materially from those contemplated by such forward-looking statements
include without limitation those discussed in the sections of
this Annual Report titled “Business” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and those set forth
below:





●
            Changes
      in the political and regulatory environment and in business and fiscal
      conditions in South America, and in Colombia and Peru in
      particular;




●
            Our
      ability to attract and retain management and field personnel with
      experience in oil and gas exploration and
  production;




●
            Our
      ability to identify corporate acquisition, farm-in and/or joint venture
      opportunities in the energy sector in Colombia and
  Peru;




●
            Our
      ability to successfully operate, or influence the operator of, exploration
      and production blocks where we have participation interests, in a cost
      effective and efficient way;




●
            Our
      ability to raise capital when needed and on acceptable terms and
      conditions;




●
            The
      intensity of competition;




●
            Changes
      and volatility in oil and gas pricing;
and




●
            General
      economic conditions.




You
should carefully review the risks described in this Annual Report and in other
documents we file from time to time with the Securities and Exchange Commission
(the “SEC”).  You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Annual
Report.





All
written and oral forward-looking statements made in connection with this Annual
Report that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.


3


All
references in this Form 10-K to “La Cortez Energy,” the “Company,” “we,” “us” or
“our” or similar terms are to La Cortez Energy, Inc., and its wholly owned
subsidiaries.





PART
I





ITEM 1.
            BUSINESS





For
definitions of certain oil and gas industry terms used in this annual report on
Form 10-K, please see the Glossary appearing on page G-1.





Overview
of Our Business





We are an international, early-stage oil and gas exploration and
production company focusing our business in South America. We have established
an operating branch in Colombia, and we have entered into two initial working
interest agreements, with Petroleos del Norte S.A. (“Petronorte”), a subsidiary
of Petrolatina Plc. (AIM: PELE), and with Emerald Energy Plc Sucursal Colombia
(“Emerald”), a branch of Emerald Energy Plc. (discussed below).  In
addition, in March 2010, we acquired all of the outstanding capital stock of
Avante Colombia S.à r.l. (“Avante Colombia”) from Avante Petroleum S.A.
(“Avante”); Avante Colombia currently has a 50% participation interest in, and
is the operator of, the Rio de Oro and Puerto Barco production contracts with
Ecopetrol S.A. in the Catatumbo region of northeastern Colombia, under an
operating joint venture with Vetra Exploración y Producción S.A. (“Vetra”). We
are currently evaluating additional investment prospects, companies and existing
exploration and production opportunities in Colombia, while keeping alert for
opportunities in other South American countries.





We expect
to explore investment opportunities in oil and gas exploration and development
as well as in associated infrastructure (e.g., storage tanks, processing
facilities and/or pipelines). The scope of our activities in this regard may
include, but not be limited to, the acquisition of or assignment of rights to
develop exploratory acreage under concessions with government authorities and
other private or public exploration and production (“E&P”) companies, the
purchase of oil and gas producing properties, farm-in and farm-out opportunities
(i.e., the assumption of or assignment of obligations to fund the cost of
drilling and development), and/or the purchase of debt or equity in, and/or
assets of, existing oil and gas exploration and development companies currently
conducting activities in Colombia.





We are
currently evaluating ways to optimize our business structure in each
jurisdiction where we conduct and where we intend to develop our business, in
order to comply with local regulations while optimizing our tax, legal and
operational flexibility. To this end, we have established an operating branch in
Bogotá, Colombia where we will engage in our initial business
ventures.





Industry
Introduction





The oil
and gas industry is a complex, multi-discipline sector that varies greatly
across geographies. As a heavily regulated industry, operating conditions are
subject to political regimes and changing legislation. Governments can either
induce or deter investment in exploration and production, depending on legal
requirements, fiscal and royalty structures, and regulation. Beyond the
political considerations, exploration and production for hydrocarbons is an
extremely risky business with countless perils, both endogenous and exogenous to
the core business. Exploration and production wells require substantial amounts
of investment and are long-term projects, sometimes exceeding twenty to thirty
years. Regardless of the efforts spent on an exploration or production prospect,
success is difficult to attain. Even though modern equipment including seismic
and advanced software has helped geologists find producing sands and map
reservoirs, they do not guarantee any particular outcome. Early oil & gas
explorers relied on surface indicators to find reservoirs. Drilling is the only
method to determine whether a prospect will be productive, and even then many
complications can arise during drilling (e.g., those relating to drilling
depths, pressure, porosity, weather conditions, permeability of the formation
and rock hardness). Typically, there is a significant probability that a
particular prospect will turn-up a dry-well, leaving investors with the cost of
seismic and a dry well which during current times can total in the millions of
dollars. Even if oil is produced from a particular well, there is always the
possibility that treatment, at additional cost, may be required to make
production commercially viable.Furthermore, most
production profiles decline over time, which hinders any cost-benefit analysis.
In sum, oil and gas is an industry with high risks and high entry barriers but
significant potential for success.


4


Oil and
gas prices determine the commercial feasibility of a project.  Certain
projects may become feasible with higher prices or, conversely, may falter with
lower prices. Volatility in the pricing of oil, gas, and other commodities has
increased during the last few years, and particularly in the last year,
complicating the practicability of a proper assessment of revenue
projections.  Most governments have enforced strict regulations to
uphold the highest standards of environmental awareness, thus, holding companies
to the highest degree of responsibility and sensibility vis à vis protecting the
environment. Aside from such environmental factors, oil and gas drilling is
often conducted in populated areas. For a company to be successful in its
drilling endeavors, working relationships with local communities are crucial, to
promote its business strategies and to avoid any repercussions of disputes that
might arise over local business operations.





Global
Recession, Volatility and Crude Oil Prices





Aside
from operational and regulatory issues that affect E&P companies, every
major market has been affected by the global recession during the past year. The
energy sector is no exception. West Texas Intermediate (“WTI”) crude prices, the
standard oil benchmark for the western hemisphere, tumbled from over $140 per
barrel in mid 2008 to less than $40 per barrel in early 2009, before rebounding
somewhat to approximately $85 now. The new price threshold makes many previously
economically viable opportunities less feasible.  We are
currently re-evaluating opportunities to reflect this new market environment.
Furthermore, the volatility in crude oil prices increases the risks involved. We
cannot be sure that the projections we use in evaluating investment
opportunities will be valid and in effect as conditions in the oil markets
rapidly change. We compensate for this uncertainty by increasing the range of
values for our assumptions and by working with numerous sensitivities that might
be in line with the situation in the marketplace.




5




One-Year
Daily Spot Price of WTI FOB Cushing, OK (U.S. Dollars per Barrel)*








6




Twenty-Year
Monthly Spot Price of WTI FOB Cushing, OK (U.S. Dollars per Barrel)*








*     Source:
U.S. Energy information Administration





Financing
activity in both the equity and debt capital markets, the most common financing
vehicles for E&P companies like ours, has increased from 2008 and 2009, when
it had virtually disappeared. Financing is now more accessible to companies that
have demonstrated sound managerial and technical capacity. Companies that are
able to secure financing from existing and financially sound investor bases are
in a position to take advantage of current business opportunities.





New
Opportunities for Smaller Companies





In
today’s energy market, there are significant opportunities for smaller
companies. The greatest opportunity exists in countries where small scale
resource opportunities have been overlooked or have been considered immaterial
or uneconomic by medium to larger companies, and/or where local governments are
promoting the development of small reservoirs to increase production to satisfy
internal demand as well as export needs.  To accomplish this
governmental purpose, certain of the regional governing bodies have modified
their oil and gas E&P contracting terms and conditions making them more
attractive for the oil industry in general, and in some cases, for smaller
companies as well.





Business
Plan and Strategic Outlook





We plan
to build a successful oil and gas exploration and production company focused in
select countries in South America.  We will concentrate our efforts
initially in Colombia, where, we believe, good E&P opportunities exist with
straight forward oil and gas contracting terms and conditions.  At a
later stage, we will turn to opportunities in other regional countries if we
deem the relevant considerations (see list of factors below) to merit our
investment. Within the spectrum of the oil and gas business, we plan to focus on
a blend between exploration and production of hydrocarbons through a variety of
transactions. Our initial plan is to acquire oil and gas production and to start
to build a reserves base.


7





An
integral part of our strategy is our focus on continuing to build a competent
and professional management and operations team to enable us to successfully
carry out our business plan. We have hired experienced personnel including
technical specialists (e.g., geologists, geophysicists and petroleum and
facilities engineers, as required by the scope of our operations),
administrators, financial experts and functional specialists in fields such as
environment and community relations, to encompass the different areas that are
critical to our business. Because the focus of our business is in South America,
the majority of our staff will be hired locally and will live in the
region.  This will provide us with a significant base of relevant oil
and gas business experience in the region.





We are
motivating our employees through a positive, team oriented work environment and
an incentive stock ownership plan. We believe that employee ownership, which is
encouraged through our Amended and Restated 2008 Equity Incentive Plan, is
essential for attracting, retaining and motivating qualified
personnel.





We have
established a time-line for our expansion into new geographies to avoid
overextending our reach and to focus on immediate prospects. We have initially
concentrated our efforts in Colombia and are looking at Peru as a potential next
target. Both countries have similar E&P contract terms and conditions as
well as business opportunities that are appropriate for a small, early stage
company such as La Cortez Energy. Our second and subsequent development phases
will focus on exploration and production opportunities in other South American
countries as we explore investment opportunities in these locales. We plan to
adhere to this time-line but reserve the option of being flexible if the right
investment presents itself.





Acquisition
Strategy





We intend
to acquire producing oil and gas properties (and/or fields) where we believe
significant value exists or where additional value can be created. Our senior
management is primarily interested in developmental properties where some
combination of the following factors exists:





(1)
            Opportunities
      for medium to long term production life with clear understandings of
      production mechanisms and output
levels;





(2)
            Geological
      formations with multiple producing
horizons;





(3)
            Substantial
      upside potential; and





(4)
            Relatively
      low capital investment and production
costs.





We will
continue to pursue joint ventures or farm-ins in exploration ventures with
limited risk, in areas where nearby oil discoveries have been
found.





Phased
Approach





●
            Phase 1 –
      We are concentrating our initial efforts in Colombia where opportunities
      as well as operating terms and conditions are perceived in the industry to
      be appropriate for small, early stage oil and gas E&P companies. In
      these markets are pursuing:


8





–
            Acquisitions
      of established oil and gas exploration and production fields and/or
      companies, which will enable us to establish base production with upside
      potential;


–
            Joint
      ventures and farm-ins on exploration projects with up to a 20% to 50%
      maximum participation interest; and


–
            Participation
      in bidding processes for property operator opportunities, in conjunction
      with established E&P companies or independently, if allowed under
      local regulations.





●
            Phase 2 –
      Once we have established our business in Colombia, we will turn our
      attention to new opportunities in other South American countries. We
      intend to take advantage of promising opportunities in these additional
      markets while we consolidate our E&P activities in our Phase 1
      countries. In these markets, we intend to search for the following market
      environments and types of projects:




–
            Frontier
      exploration areas (joint ventures with up to a 25% ownership
      participation) where limited competition
exists;


–
            Acquisitions
      with significant upside potential;


–
            Political
      stability; and


–
            Supportive
      local oil and gas industry regulatory
  environments.





The
following is a list of some of the factors we take into account when considering
potential investments in any country:





·
            Stable
      political regimes:


o
            Countries
      that exhibit a desire to uphold stability and progress in their
      legislation, striving towards open markets and a global approach to best
      business practices.





·
            Clear
      fiscal/taxation/royalty terms.





·
            Manageable
      security in and around production and exploration areas and
      facilities.





·
            Openness
      to foreign direct investment.





·
            Good
      oil and gas E&P prospects:


o
            Where
      despite the presence of large multi-national integrated oil companies,
      there are open acreage opportunities as well as farm-in, joint venture,
      and direct block negotiation opportunities, as well producing fields
      and/or company acquisition possibilities, with some access to local
      capital.





·
            Potential
      for underexploited hydrocarbon formations with promising upside
      potential:


o
            We
      are searching for investment opportunities in countries where there are
      regions with limited seismic coverage within hydrocarbon prospective
      areas.





La Cortez
Energy can engage in any of the following types of transactions to achieve our
strategic goals:





·
            Exploration
      and Production:


o
            Direct
      government concessions in blocks with specific exploration and development
      plans.





·
            Technical
      Evaluation Agreements.


9





·
            Farm-ins
      and Farm-outs:


o
            The
      assumption of or assignment of obligations to fund the cost of exploration
      and/or drilling and/or development for a participating interest in a
      particular block.





·
            Corporate
      Transactions:


o
            Acquisitions
      of producing fields;


o
            Acquisitions
      of exploration acreage;


o
            Corporate
      acquisitions; and


o
            Asset
      based acquisitions (e.g., blocks and concession
  rights).





·
            Joint
      Ventures:


o
            Partnering
      with other established oil and gas companies will allow us to access
      certain government concession rounds, benefit from technical and market
      expertise from our potential partners and provide liquidity to our
      partners.





Role
of Our Board of Directors





Our Board
of Directors is an essential component of our successful operation and growth,
serving in various support capacities. Because our Board of Directors is
comprised of senior industry executives and experienced capital market
professionals, we believe that our directors have the experience and skills
necessary to effectively assist our management in the execution of our
strategy.  We expect that our Board of Directors will be able to
provide an informed view as to the commercial, technical and financial viability
of our business prospects.





Through
the establishment of relevant committees (Audit and Evaluation and Reserves, to
date), the Board of Directors will provide an independent view into all of our
operations, providing feedback and guidance on the quality of the projects we
may invest in.  Additionally, our Board of Directors regularly confers
with senior management to help us ensure that all relevant and required controls
are in place and operating appropriately. Our Board of Directors serves as a
means of confirming the integrity of senior management’s estimates with respect
to valuations, reserve estimates and other crucial components of our
business.





Aside
from the functions enumerated above, we believe that our Board of Directors will
serve as an integral element of our business development efforts. We expect that
our Board of Directors will provide both invaluable insight and access to their
business relationships in the region, as well as augment the technical,
financial, accounting and other expertise of our management team.





Execution
of our Strategy and Recent Developments





In
February 2008, Nadine C. Smith became the Chairman of our Board of Directors
(sometimes referred to hereinafter as the “Board”). Ms. Smith also became our
Interim Chief Financial Officer and Vice President at that time.  Ms.
Smith most recently served as a director of another publicly traded oil and gas
exploration and production company, Gran Tierra Energy, Inc. (“Gran Tierra”),
which also operates in South America.





On March
14, 2008, we closed a private placement of our Common Stock at a price of $1.00
per share pursuant to which we raised $2,400,000, or $2,314,895 net of offering
expenses.





On
September 10, 2008, we closed a private placement of 4,784,800 units at a price
of $1.25 per unit, for an aggregate offering price of $5,981,000, or $5,762,126
after offering expenses. Each of these units consisted of (i) one share of our
common stock and (ii) a common stock purchase warrant to purchase one-half share
of our common stock, exercisable for a period of five years at an exercise price
of $2.25 per share.




10




On June
1, 2008, Andrés Gutierrez Rivera became our President and Chief Executive
Officer and a member of our Board of Directors. Mr. Gutierrez recently served as
the senior executive officer of Lewis Energy Colombia Inc. and a vice president
of Hocol, S.A.  Both of these companies operate in the oil and gas
sector in South America.





On June
19, 2009, we conducted an initial closing of a private placement of
units.  Each unit consisted of (i) one share of our common stock and
(ii) a common stock purchase warrant to purchase one share of our common stock,
exercisable for a period of five years at an exercise price of $2.00 per share.
We offered these units at a price of $1.25 per unit and we derived total
proceeds at the initial closing of $6,074,914 ($5,244,279 net after expenses)
from the sale of 4,860,000 units.  On July 31, 2009, we completed the
final closing of this unit offering.  At the final closing, we
received gross proceeds of $256,250 from the sale of 205,000
units.   In the aggregate, we received gross proceeds of
$6,331,164 in this unit offering on the sale of a total of 5,065,000
units.  This unit offering terminated on July 31, 2009.





On
December 29, 2009, we consummated the initial closing of a second 2009 private
placement of units of our securities, selling 1,428,571 units at a price of
$1.75 per unit, for aggregate gross proceeds of $2.5 million.  We
consummated a second closing of this offering on January 29, 2010, in which we
sold 571,428 units for an aggregate of $1 million, and a third closing on March
2, 2010, in which we sold 857,143 units for an aggregate of $1.5
million.





In
connection with the acquisition of Avante Colombia, on March 2, 2010, Avante
purchased (in addition to the shares of common stock issued to Avante in
consideration for the acquisition) 2,857,143 shares of our common stock and
three-year warrants to purchase 2,857,143 shares of our 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 unit.





We have
been using the funds raised in the private unit offerings (net of offering
expenses) to continue building of our administrative and operations
infrastructure and to invest in our initial oil and gas development projects in
South America and have taken the following steps in our ramping-up
process:





●
            Added
      the following independent directors to our Board of Directors: Jaime Ruiz
      Llano, a former Colombian senator and a member of the Board of Directors
      of the World Bank; Jaime Navas Gaona, an experienced oil industry
      executive; Richard G. Stevens, an “audit committee financial expert”; and
      José Fernando Montoya Carrillo, a 27-year veteran of the oil industry in
      South America and former President of Hocol,
  S.A.;




●
            Established
      a wholly owned subsidiary in the Cayman Islands, La Cortez Energy
      Colombia, Inc., to own our operating branch in
  Colombia;




●
            Established
      and organized a branch office in Colombia to conduct local operations and,
      to this end, opened and began staffing our headquarter offices in Bogotá,
      Colombia;




●
            Hired
      an Exploration Manager, Carlos Lombo, and a Production and Operations
      Manager, William Giron, as well as business development and administrative
      personnel;




●
            Signed
      a memorandum of understanding and joint operating agreement with one oil
      and gas exploration and production company in Colombia and a farm-in
      agreement with another, as further discussed
  below;




11




Acquired
      a privately-held company that is the operator of, and owner of a 50%
      participation interest in, two production contracts with Ecopetrol S.A. in
      Colombia, as further discussed below;
and




●
            Have
      begun identifying, investigating, evaluating and finalizing our
      participation in oil and gas investment opportunities in
      Colombia.




Additionally,
in the coming months, we expect to:





●
              Hire
      a Chief Financial Officer, additional geologists and a petroleum engineer,
      to form a strong technical team, as well as additional finance and
      administrative personnel; and
  ●
              Enter
      into one or more additional agreements to acquire oil and gas exploration
      and/or production rights in Colombia. (Although we have not yet finalized
      decisions to pursue any such particular opportunities, we have begun to
      identify and evaluate potential
prospects.)


Putumayo
4 Block





On
December 22, 2008, we entered into a memorandum of understanding with Petronorte
that entitles us to a 50% net working interest in the Putumayo 4 Block located
in the south of Colombia.  We executed a related joint operating
agreement with Petronorte on October 14, 2009, effective as of February 23,
2009.





Petronorte
was the successful bidder on the Putumayo 4 Block in the Colombia Mini Round
2008 conducted by theAgencia Nacional de
Hidrocarburos (the “ANH”), Colombia’s hydrocarbon regulatory agency, and signed
an E&P contract with the ANH on February 23, 2009.  According to
our memorandum of understanding and the joint operating agreement with
Petronorte, we are entitled to the exclusive right to a fifty percent (50%) net
participation interest in the Putumayo 4 Block and in the E&P contract
(subject to approval by the ANH), after ANH royalties and an ANH one percent
(1%) production participation.  Petronorte will be the “operator” of
the E&P contract.




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 1,000 km of pre-existing 2D
seismic through which we and Petronorte have identified promising leads. We and
Petronorte have reprocessed relevant seismic information that confirmed our
initial evaluation of seven potential leads. During this initial stage, we and
Petronorte are conducting activities related to identification of the number of
indigenous people and communities in the area.





We and
Petronorte plan to acquire about 103 km of 2D seismic during the course of this
year, as well as to drill an exploration well in early 2011.





Under the
terms of the E&P contract, Petronorte is required to shoot 103 km of 2D
seismic and to drill an exploratory well and to carry our certain additional
work in the first three years of our work program in the Block (which ends in
September 2012) at an estimated cost of $1.6 million.





The
E&P contract will consist of two three-year exploration phases and a
twenty-four year production phase.




12




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.”  We and
Petronorte offered to invest $1.6 million in additional seismic work in the
Putumayo 4 Block and to pay ANH a 1% of net production revenues X Factor.





Under the
memorandum of understanding and the joint operating agreement, we will be
responsible for fifty percent (50%) of the costs incurred under the E&P
contract, entitling us to fifty percent (50%) of the revenues originated from
the Putumayo 4 Block, net of royalty and production participation interest
payments to the ANH, except that we will be responsible for paying two-thirds
(2/3) of the costs originated from the first 103 kilometers of 2D seismic to be
performed in the Putumayo 4 Block, in accordance with the expected Phase 1
minimum exploration program under the E&P contract. If a prospective Phase 1
well in a prospect in the Putumayo 4 Block proves productive, Petronorte will
reimburse us for its share of these seismic costs paid by us (one-sixth (1/6))
with their revenues from production from the Putumayo 4 Block.  We
expect that our capital commitments to Petronorte will be approximately $2.8
million in 2010 for Phase 1 seismic reprocessing, seismic acquisition and
permitting activities.





Provided
that we have satisfactorily complied with all ANH legal, financial and technical
requirements for being a partner in an E&P contract (which we expect to be
the case shortly) and we have made the required payment relating to our share of
all costs incurred to the date of our request, Petronorte will submit a request
to the ANH to have our 50% interest in the E&P contract officially assigned
to us and will assist us in obtaining such assignment through reasonable
means.


.





Maranta
Block





On
February 6, 2009, La Cortez Energy Colombia, Inc., our wholly owned Cayman
Islands operating subsidiary (“La Cortez Colombia”), entered into a farm-in
agreement with Emerald for a 20% participating interest in the Maranta E&P
block in the Putumayo Basin in Southwest Colombia.





Emerald
signed an E&P contract for the Maranta Block with the ANH on September 12,
2006.  La Cortez Colombia executed a joint operating agreement with
Emerald with respect to the Maranta Block on February 4, 2010, having met its
Phase 1 and Phase 2 (drilling and completion of the Mirto-1 exploratory well)
payment obligations described below.  We have asked Emerald to submit
a request to the ANH to approve Emerald’s assignment of the 20% participating
interest to us.  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 this participating interest to us, Emerald
and we have agreed to use our 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.




13




As
consideration for its 20% participating interest, we reimbursed Emerald $0.948
million of its Phase 1 sunk costs.  This amount was paid to Emerald in
February 2009.  Additionally, we have borne 65% of the Maranta Block
Phase 2 costs, of which the “dry hole” costs1 were $4.875 million,
$2.433 million of which we paid to Emerald in February 2009.  We made
additional Phase 2 payments to Emerald in the amount of $2.433 million and
$1.2285 million in May 2009 and July 2009, respectively.  We also paid
Emerald a cash call of $0.2433 million in August 2009 for overhead
costs.  On January 7, 2010, we paid an additional $1.41 million to
Emerald, to cover exploration costs associated with the Mirto-1 well, as well as
certain 3d seismic and facilities costs.  On February 5, 2010, we paid
an additional $234,553 to Emerald for our share of the final exploration costs
of the Mirto-1 well.





Emerald
reached the intended total depth of 11,578 feet on the Mirto-1 exploration well
in July 2009, with oil and gas recorded across the four target
reservoirs.  On July 23, 2009, based on the preliminary results of the
drilling of the Mirto-1 well, we decided to participate with Emerald in the
completion and evaluation of Mirto-1.  In accordance with the terms of
the farm-in agreement, we have borne 65% ($1.2285 million) of the currently
estimated $1.8 million Mirto-1 completion costs.  We made this $1.2285
million payment to Emerald on July 27, 2009.  65% of any additional
Phase 2 costs will be paid by us as needed, following cash calls by
Emerald.





Now that
the Phase 2 work is completed, we will pay 20% of all subsequent costs related
to the Maranta Block.





Evaluation
of the Mirto-1 exploratory well across all of the target reservoirs has been
completed2.  Following the
completion of operations in the Mirto-1 well, the drilling rig was released from
the location. After an unsuccessful workover attempting to isolate the water
production, the Mirto-1 well is producing at an average rate of 145 bopd with a
water cut close to 80%.





Emerald
and La Cortez continue to believe that despite the mechanical problems
encountered in the Mirto-1 well, there is sufficient accumulation of
hydrocarbons in the area to merit the drilling of at least two additional
wells.  Emerald, as operator of the Maranta Block, has determined to
enter the exploration commitment in the Maranta Block, which will entail the
drilling of an additional exploratory/appraisal well. We have acquired about 25
km2
of 3D seismic, and we are in the process of mobilizing the rig to start drilling
the new appraisal well in early May 2010.  It is planned that after
the Mirto-2 appraisal well has been drilled and completed, a new intervention in
Mirto-1 well will be executed to increase perforation density of the producing
"U" sand to increase total production capacity of the well. Now that the Company
has the final Mirto-1 evaluation results, La Cortez Colombia has asked Emerald
to file a request with the ANH to have the participating interest in the Maranta
Block officially assigned from Emerald to La Cortez Colombia.





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.




1.Costs
of getting to the abandon or complete decision point.
 2. For a
discussion of the Mirto-1 evaluation results, see “Description of Properties –
Maranta Block” below.




14


Rio
de Oro and Puerto Barco Fields





On March
2, 2010, we acquired all of the outstanding capital stock of Avante Colombia,
which became our wholly owned subsidiary.  As consideration for the
acquisition, we issued an aggregate of 10,285,819 shares of our common stock to
Avante.





Avante
Colombia currently has a 50% participation interest (acquired in late 2005) in,
and is the operator of, the Rio de Oro and Puerto Barco production contracts
with Ecopetrol S.A. in the Department of North Santander in the Catatumbo region
of northeastern Colombia, under an operating joint venture with
Vetra.  The Rio de Oro field covers 5,590 acres (2,262 hectares), and
the Puerto Barco field covers 5,945 acres (2,406 hectares).  Both
production contracts are for a ten-year term expiring at the end of
2013.





The
Catatumbo basin is the southern-most extension of the Maracaibo basin of
Venezuela, the second most petroliferous basin in the world according to the US
Department of Energy and Petroleos de Venezuela. This sub-basin has produced
over 800 million barrels of oil to-date from numerous fields.





Under the
Puerto Barco production contract, Ecopetrol has a 6% participation on
production, Vetra a 47% participation on production and a 50% working interest
and Avante Colombia a 47% participation on production and a 50% working
interest, in each case after royalties.  Royalties payable are 20% of
audited production. The operator is Avante Colombia.  Production on
the field began in 1958 and was stopped in July 2008, as a result of insurgent
activity.  Total historical production was 811,000 barrels of
oil.





Under the
Rio de Oro production contract, Ecopetrol has a 12% production participation,
Vetra a 44% production participation and a 50% working interest and Avante
Colombia a 44% production participation and a 50% working interest, in each case
after royalties.  Royalties payable are 20% of audited production. The
operator is Avante Colombia.  Production on the field began in 1950
and was stopped in June 1999, as a result of insurgent
activity.  Total historical production was 11.3 million barrels of oil
and 27,041 million cubic feet of gas.





In the
Rio de Oro field, the remediation of certain historical environmental conditions
generated prior to the Acquisition will be the responsibility of previous
operators.  In addition to the contractual responsibility of previous
operators for these liabilities, Avante has agreed in the SPA to indemnify us
for 50% of any environmental losses we incur, up to a maximum of $2.5
million.





Under the
terms of the stock purchase agreement, we and Avante have also agreed to pursue
certain opportunities in the Catatumbo area on a joint venture
basis.  If we enter into such a joint venture with Avante, then we
would own 70% of the joint venture and commit to pay 70% of the geological and
geophysical costs, and Avante would own 30% of the joint venture and commit to
pay 30% of the geological and geophysical costs, up to a maximum commitment by
Avante of $1,500,000.  If the total costs of the venture exceed
$5,000,000, then Avante may elect either (a) not to pay any additional costs of
the venture and incur dilution of its ownership percent from
future payments by us, (b) to continue to pay additional costs of the
venture at 30% or (c) to pay a larger proportion of the costs of the venture, in
which case Avante’s ownership percent would be increased in proportion to the
percentage of total venture costs paid by each party, up to a maximum ownership
interest for Avante of 50%.




15


Plan
of Operation





We plan
to use our currently available cash for work programs in our Maranta Block,
Putumayo 4 Blockand ourRio de Oro / Puerto Barco Fields, and for corporate transactions and/or
acquisitions, as well as for general working capital purposes. The current work
program for our Putumayo 4 Block is comprised of the acquisition of an
additional 103 kilometers of new 2D seismic in 2010 and, subsequently, the
drilling of an exploratory well in the first quarter of 2011. We have evaluated
the reprocessed seismic information, which validated the existence of the seven
initial leads we have identified to date, and will redirect our new seismic
campaign of 103 km of 2D or equivalent 3D seismic in a more efficient manner.
Under Petronorte’s contractual obligations with the ANH, we have until August
23, 2012, to complete Phase 1 commitments comprised of seismic acquisition and
the drilling of an exploratory well. A complete evaluation of the project’s
impact on the indigenous peoples in the area of the Putumayo 4 Block is also
being conducted at this time.




In our
Maranta Block, we have completed funding our share of the costs of the Mirto-1
exploratory well. We have acquired 25 km of 3D seismic over the field to better
determine the extent of the reservoir and to determine the position of the two
or three appraisal wells that we plan to drill in 2010.





In
Catatumbo, we plan to reinitiate production in Puerto Barco during this year and
have presented a work program to Ecopetrol.  Our plans with respect to
Avante Colombia’s business depend, among other things, on obtaining an extension
of the term of existing contracts between Avante Colombia and Ecopetrol, which
expire in December 2013.  We believe that, in order to negotiate a
term extension, we will have to commit to additional investment in the area,
such as additional seismic acquisition as well the drilling of exploration
wells.





During
2010, we expect to require the following amounts of capital in order to bear our
share of expenses with respect to the Putumayo 4 Block, the Maranta Block and
Avante Colombia’s projects:





●
            Approximately
      $2.8 million in the Putumayo 4 Block, related to Phase 1 seismic
      acquisition and permitting
activities;





●
            Approximately
      $5.4 million in the Maranta Block, related to Phase 3 processing of the
      recently acquired 25 km of 3D seismic, conducting a workover on the
      Mirto-1 well, the drilling of two or three appraisal wells and the
      construction of the production facilities at the field;
  and





●
            Up
      to $3.4 million on Rio de Oro and Puerto Barco, related to additional
      seismic in the area and either deepening an existing well or drilling an
      additional well.





Additionally,
we are actively pursuing strategic and acquisition opportunities with the goal
of adding production and proven reserves to our current project
portfolio.  While we have no definitive agreements or binding letters
of intent in place with respect to any acquisition or strategic transactions, we
may enter into one or more definitive agreement by the end of
2010.  We believe that current market conditions, (e.g., current WTI crude
prices) are optimal for entering into corporate transactions and/or acquisitions
and we plan to aggressively execute this strategy during 2010, provided that our
assessment of market conditions remains favorable.





Governmental
Regulation





The oil
and gas industry in Colombia is broadly regulated. Rights and obligations with
regard to exploration, development and production activities are explicit for
each project; economics are governed by a royalty/tax regime. Various government
approvals are required for acquisitions and transfers of exploration and
exploitation rights, including, meeting financial, operational, legal and
technical qualification criteria.  Oil and gas concessions are
typically granted for fixed terms with opportunity for extension.




16




Colombia





In
Colombia, state owned Ecopetrol was formerly responsible for all activities
related to the exploration, production, refining, transportation and marketing
of oil for export. Historically, all oil and gas exploration and production was
governed by agreements granted to local and foreign operators, under Association
or Shared Risk Contracts with companies and joint ventures which generally
provided Ecopetrol with back-in rights that allowed for Ecopetrol to acquire a
working interest share in any commercial discovery by paying its share of the
costs for that discovery.  Alternatively, exploration and production
of certain areas and of those areas relinquished by operators, were operated
directly by Ecopetrol.





Effective
January 1, 2004, the regulatory regime in Colombia underwent a significant
change with the formation of the Agencia Nacional de Hidrocarburos - ANH. The
ANH is now exclusively responsible for regulating the Colombian oil industry,
including managing all exploration areas not subject to a previously existing
Association contract and collecting royalty payments on behalf of the Colombian
government. The former state oil company, Ecopetrol, maintains title to
agreements executed before January 1, 2004 and its own operated exploration,
production, refining and transportation activities across the
country.  It also continues to internationally market its oil related
products and has become a direct competitor of private operators in E&P
projects.





Ecopetrol
is a Mixed Economy Company (private and public equity), established as a stock
corporation, with a commercial orientation.





In
conjunction with this change, the ANH developed a new exploration risk contract
that took effect during the first quarter of 2005. This exploration and
production contract has significantly changed the way the industry views
Colombia. In place of the earlier Association contracts in which Ecopetrol had a
direct co-management of the contract together with the associate and an
immediate back-in to production, the new ANH agreement provides full risk/reward
benefits for the contractor. Under the terms of the contract, the E&P
operator retains the rights to all reserves, production and income from any new
exploration block, subject to an existing royalty (variable royalty from 8% to
25% depending upon daily production rates) and an additional royalty for the
ANH, payable beginning when total production reaches 5 MBBLS.





E&P
companies have to comply with certain minimum requirements (legal, operational,
financial, and technical) to become eligible to be granted an ANH Exploration
and Production contract. Companies can also apply for Technical Evaluation
Agreements (TEA).  Domiciled and non domiciled oil companies may
participate in the various bidding rounds for E&P contracts on and offshore
in Colombia. In a bidding round, the companies that offer greater investment
programs in the initial exploration phase (Phase 1) and, in some cases, that
provide ANH with a higher participation in production will be the ones to be
awarded E&P contracts.





Colombia,
in the last few years has become very attractive to foreign oil, gas and mining
investors as a result of political and regulation stability, perceived good
contract terms and conditions and improved security. It is, therefore, a
competitive environment for us, with good business opportunities
available.





See “Risk
Factors” for information regarding the regulatory risks that we
face.




17




Environmental
Regulation – Community Relations





Our
activities will be subject to existing laws and regulations governing
environmental quality and pollution control in the foreign countries where we
expect to maintain operations. Our activities with respect to exploration,
drilling and production from wells, facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing crude oil and other products, will be subject to
stringent environmental regulation by regional, provincial and federal
authorities in Colombia. Such regulations relate to, for example, environmental
impact studies, permissible levels of air and water emissions, control of
hazardous wastes, construction of facilities, recycling requirements and
reclamation standards. Risks are inherent in oil and gas exploration,
development and production operations, and we can give no assurance that
significant costs and liabilities will not be incurred in connection with
environmental compliance issues. There can be no assurance that all licenses and
permits which may be required to carry out exploration and production activities
will be obtainable on reasonable terms or on a timely basis, or that such laws
and regulations would not have an adverse effect on any project that we may wish
to undertake.





In some
countries in South America, it is usually required for oil and gas E&P
companies to present their operational plans to local communities or indigenous
populations living in the area of a proposed project before project activities
can be initiated. Usually, E&P companies try to benefit the community in
which they are operating by hiring local, unskilled labor or contracting locally
for services such as workers’ transportation. For La Cortez Energy, working with
local communities will be an essential part of our work program for the
development of any of our E&P projects in the region.





Competition





The oil
and gas industry is highly competitive. We face competition from both local and
international companies in matters such as acquiring properties, contracting for
drilling equipment and securing trained personnel. Many of these competitors
have financial and technical resources that exceed ours, and we believe that
these companies have a competitive advantage in these areas. Others are smaller,
and we believe our technical and managerial capabilities give us a competitive
advantage over these companies.





Research
and Development





We have
not spent any amounts on research and development activities during either of
the last two fiscal years.





Employees





We
currently have 12 full time employees, all of whom, including our Chief
Executive Officer, Andrés Gutierrez, our Exploration Manager, Mr. Carlos Lombo,
and our Production and Operations Manager, William Giron, are based in our
executive offices in Bogotá, Colombia.





We intend
to continue to build an experienced leadership team of energy industry veterans
with direct exploration and production experience in the region combined with an
efficient managerial and administrative staff, to enable us to achieve our
strategic and operational goals.





Additionally,
we expect to maintain a highly competitive assembly of experienced and
technically proficient employees, motivating them through a positive, team
oriented work environment and our incentive stock ownership plan. We believe
that employee ownership, which is encouraged through our 2008 Equity Incentive
Plan, is essential for attracting, retaining and motivating qualified
personnel.




18


Legacy
Business Formation and Split-Off





The
Company was incorporated in the State of Nevada on June 9, 2006, under the name
La Cortez Enterprises, Inc. to pursue certain business opportunities in Mexico.
La Cortez Enterprises, Inc. was originally formed to create, market and sell
gourmet chocolates wholesale and retail throughout Mexico, as more fully
described in our registration statement on Form SB-2 as filed with the
Securities and Exchange Commission (the “SEC”) on November 7, 2006 (the “Legacy
Business”). In early 2008 after the Legacy Business terminated, our new Board of
Directors decided to redirect the Company’s efforts towards identifying and
pursuing business in the oil and gas sector in South America. As a reflection of
this change in our strategic direction, we changed our name to La Cortez Energy,
Inc.





In
connection with the discontinuation of our Legacy Business, we decided to sell
all of the assets and liabilities of the Legacy Business (the “Split-Off”) to
Maria de la Luz, our founding stockholder.





As of
August 15, 2008, we assigned all of our assets and property and all of our
liabilities relating to the Legacy Business, accrued, contingent or otherwise to
our newly organized, wholly owned subsidiary, de la Luz Gourmet Chocolates,
Inc., a Nevada corporation (“Split-Off Sub”). Additionally, we sold all the
outstanding capital stock of Split-Off Sub to Ms. de la Luz in exchange for
9,000,000 shares of our common stock previously surrendered by Ms. de la Luz and
all of our common stock that Ms. de la Luz then owned, an additional 2,250,000
shares.





Pursuant
to the terms of the Split-Off, Ms. de la Luz agreed to indemnify us and our
officers and directors against any third party claims relating to the Legacy
Business.





As of
August 15, 2008, Ms. de la Luz is no longer a stockholder in the
Company.





In
conjunction with the Split-Off Agreement and effective as of August 15, 2008, we
entered into a General Release Agreement with Split-Off Sub and Ms. de la Luz,
whereby Split-Off Sub and Ms. de la Luz pledged not to sue us from any and all
claims, actions, obligations, liabilities and the like, incurred by Split-Off
Sub or Ms. de la Luz arising from any fact, event, transaction, action or
omission that occurred or failed to occur on or prior to August 15, 2008 and
related to the Legacy Business.





ITEM 1A.
            RISK
      FACTORS





THIS
ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN STATEMENTS RELATING TO FUTURE EVENTS
OR THE FUTURE FINANCIAL PERFORMANCE OF OUR COMPANY. YOU ARE CAUTIONED THAT SUCH
STATEMENTS ARE ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
YOU SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS ANNUAL
REPORT ON FORM 10-K, INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS.





RISKS
RELATED TO OUR BUSINESS AND FINANCIAL CONDITION





We
are an early stage oil and gas exploration and production company with very
limited operating history for you to evaluate our business. We may never attain
profitability.





We are an
early stage oil and gas exploration and production company and very limited oil
and no natural gas operations. We do not have a full management team in
place.  As an early stage oil and gas exploration and development
company with very limited operating history, it is difficult for potential
investors to evaluate our business. Our proposed operations are therefore
subject to all of the risks inherent in light of the expenses, difficulties,
complications and delays frequently encountered in connection with the formation
of any new business, as well as those risks that are specific to the oil and gas
industry and to that industry in South America, in particular. Investors should
evaluate us in light of the delays, expenses, problems and uncertainties
frequently encountered by companies developing markets for new products,
services and technologies. We may never overcome these obstacles.




19


Our
senior management team is relatively new to our company and may not be able to
develop and execute a successful business strategy.





Although
our Chief Executive Officer is experienced in the oil and gas industry in South
America, he is relatively new to our Company which itself is new to this
business.  Our Chief Executive Officer is in the process of developing
and executing a business strategy for the Company including, for example, the
possible acquisition of oil and gas resources or the participation in joint
exploration and production ventures. If our Chief Executive Officer is not able
to develop a business strategy that is appropriate for our Company and which we
can execute in a successful manner, our business could fail and we could lose
all of our money.





We
may be unable to obtain development rights that we need to build our business,
and our financial condition and results of operations may
deteriorate.





Our
business plan focuses on international exploration and production opportunities
in South America, initially in Colombia. Thus far, we have signed two
participation interest agreements with partners in Colombia, only one of which
(Maranta) is operational, and have acquired one non-producing company (Avante
Colombia). In the event that these two initial projects do not proceed
successfully or we do not succeed in negotiating any other property
acquisitions, our future prospects will likely be substantially limited, and our
financial condition and results of operations may deteriorate.





Our
business is speculative and dependent upon the implementation of our business
plan and our ability to enter into agreements with third parties for the rights
to exploit potential oil and gas reserves on terms that will be commercially
viable for us.





We
may not be able to renegotiate Avante Colombia’s agreements with Ecopetrol in a
manner that would permit us to successfully execute our plans with respect to
the affected projects.





Our plans
with respect to Avante Colombia’s business depend, among other things, on
obtaining an extension of the term of existing contracts between Avante Colombia
and Ecopetrol, which expire in December 2013.  We believe that, in
order to negotiate a term extension, we will have to commit to additional
investment in the area.  There can be no assurance that we will be
able to negotiate a term extension with Ecopetrol or to do so on favorable
terms.  If we fail to obtain a sufficient extension, or to do so on
sufficiently favorable terms, it would have a material adverse effect on our
planned operations for Avante Colombia.





Our
lack of diversification will increase the risk of an investment in our common
stock.





Our
business will focus on the oil and gas industry in a limited number of
properties, initially in Colombia, with the intention of expanding elsewhere in
South America. Larger companies have the ability to manage their risk by
diversification. However, we will lack diversification, in terms of both the
nature and geographic scope of our business. As a result, factors affecting our
industry or the regions in which we operate will likely impact us more acutely
than if our business were more diversified.




20




Strategic
relationships upon which we may rely are subject to change, which may diminish
our ability to conduct our operations.




Our ability
to successfully bid on and acquire properties, to discover reserves, to
participate in drilling opportunities and to identify and enter into commercial
arrangements with customers will depend on developing and maintaining close
working relationships with industry participants and on our ability to select
and evaluate suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and may impair La
Cortez Energy’s ability to grow.




To
develop our business, we will endeavor to use the business relationships of our
management and our Board of Directors to enter into strategic relationships,
which may take the form of joint ventures with other private parties or with
local government bodies, or contractual arrangements with other oil and gas
companies, including those that supply equipment and other resources that we
will use in our business. We may not be able to establish these strategic
relationships, or if established, we may not be able to maintain them. In
addition, the dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise be inclined
to in order to fulfill our obligations to these partners or maintain our
relationships. If our strategic relationships are not established or maintained,
our business prospects may be limited, which could diminish our ability to
conduct our operations.




Our
strategic partners may change ownership or senior management, and this may
negatively affect our business relationships with these partners and our results
of operations.





Our
strategic partners may change ownership or senior management, and this may
negatively affect our business relationships with these partners and our results
of operations.  It is possible that the change of ownership of any of
our current or future strategic partners could have a negative impact on our
relationship with them and we could lose our investment and suffer considerable
losses if any of them should choose to discontinue our relationship or their
involvement in a particular project or their operations in
Colombia.





Competition
in obtaining rights to explore and develop oil and gas reserves and to market
our production may impair our business.




The oil
and gas industry is extremely competitive. Present levels of competition for oil
and gas resources in South America, and particularly in Colombia, are
high.  Significant amounts of capital are being raised world-wide and
directed towards the South American markets and more and more companies are
pursuing the same opportunities.  Other oil and gas companies with
greater resources than ours will compete with us by bidding for exploration and
production licenses and other properties and services we will need to operate
our business in the countries in which we expect to
operate.  Additionally, other companies engaged in our line of
business may compete with us from time to time in obtaining capital from
investors. Competitors include larger, foreign owned companies, which, in
particular, may have access to greater financial resources than us, may be more
successful in the recruitment and retention of qualified employees and may
conduct their own refining and petroleum marketing operations, which may give
them a competitive advantage. In addition, actual or potential competitors may
be strengthened through the acquisition of additional assets and
interests.  Because of some or all of these factors, we may not be
able to compete.




21




We
may be unable to obtain additional capital that we will require to implement our
business plan, which could restrict our ability to grow.




Our
current capital and our other existing financial resources may not be sufficient
to enable us to execute our business plan.  We may not have funds
sufficient for any initial investments we might want to
undertake.  Currently, we are generating only limited revenues. We
will require additional capital to continue to operate our business beyond the
initial phase, and we may need additional capital to develop and expand our
exploration and development programs. We may be unable to obtain the additional
capital required. Furthermore, inability to obtain capital may damage our
reputation and credibility with industry participants in the event we cannot
close previously announced transactions.




We expect
to require approximately $2.8 million for our share of costs related to Phase 1
seismic acquisition and permitting activities in the Putumayo 4 Block during
2010.  We expect to require an additional approximately $5.4 million
for our share of Phase 3 costs with respect to the Maranta Block in 2010,
related to processing of the recently acquired 25 km of 3d seismic, conducting a
workover on the Mirto-1 well, the drilling of two appraisal wells and the
construction of the production facilities at the field.  If our
negotiations with Ecopetrol regarding extending the contract terms for Rio de
Oro and Puerto Barco are successful, then we expect to require up to $15 million
of additional funds to pay for our share of costs with respect to additional
seismic in the area and, depending upon seismic results, drilling an additional
well during the next two years.





If we are
not able to raise the required funds, we will not be able to meet our funding
commitments on the Putumayo 4 Block, the Maranta Block and the Rio de Oro and
Puerto Barco fields.  As a result, we may lose our interests in these
projects and all previously invested capital.





Because
we are an early stage exploration and development company with limited
resources, we may not be able to compete in the capital markets with much
larger, established companies that have ready access to large sums of
capital.





Future
acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries,
insurance expenses and general overhead expenses, as well as legal compliance
costs and accounting expenses) will require a substantial amount of additional
capital and cash flow.




We will
require such additional capital in the near term and we plan to pursue sources
of such capital through various financing transactions or arrangements,
including joint venturing of projects, debt financing, equity financing or other
means. We may not be successful in locating suitable financing transactions in
the time period required or at all, and we may not obtain the capital we require
by other means. If we do succeed in raising additional capital, the capital
received may not be sufficient to fund our operations going forward without
obtaining further, additional capital financing. Furthermore, future financings
are likely to be dilutive to our stockholders, as we will most likely issue
additional shares of our common stock or other equity to investors in future
financing transactions. In addition, debt and other mezzanine financing may
involve a pledge of assets and may be senior to interests of equity
holders.




Our
ability to obtain needed financing may be impaired by such factors as conditions
in the capital markets (both generally and in the oil and gas industry in
particular), our status as a new enterprise without a demonstrated operating
history, the location of our prospective oil and natural gas properties in
developing countries and prices of oil and natural gas on the commodities
markets (which will impact the amount of asset-based financing available to us)
and/or the loss of key management. Further, if oil and/or natural gas prices on
the commodities markets decrease, then our potential revenues will likely
decrease, and such decreased future revenues may increase our requirements for
capital. Some of the contractual arrangements governing our operations may
require us to maintain minimum capital, and we may lose our contract rights
(including exploration, development and production rights) if we do not have the
required minimum capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs (even to the extent that we reduce our
operations), we may be required to cease our operations.




22




There
is substantial doubt as to the Company’s ability to continue as a going
concern.





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 for a period longer than the next twelve
months, 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. Our independent auditors have
included an explanatory paragraph in their report on our consolidated financial
statements included in this report that raises substantial doubt about our
ability to continue as a going concern.  Our audited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which implies we will
continue to meet our obligations and continue our operations for the next twelve
months.  Realization values may be substantially different from
carrying values as shown, and our consolidated financial statements do not
include any adjustments relating to the recoverability or classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary as a result of the going concern uncertainty.




We
may be unable to meet our capital requirements in the future, causing us to
curtail future growth plans or cut back existing operations.





We will
need additional capital in the future, which may not be available to us on
reasonable terms or at all. The raising of additional capital may dilute our
stockholders’ interests. We may need to raise additional funds through public or
private debt or equity financings in order to meet various objectives, including
but not limited to:





·
            complying
      with funding obligations under our existing contractual
      commitments;


·
            pursuing
      growth opportunities, including more rapid
  expansion;


·
            acquiring
      complementary businesses;


·
            making
      capital improvements to improve our
  infrastructure;


·
            hiring
      qualified management and key
employees;


·
            responding
      to competitive pressures;


·
            complying
      with licensing, registration and other requirements;
  and


·
            maintaining
      compliance with applicable laws.





Any
additional capital raised through the sale of equity may dilute stockholders’
ownership percentage in us. This could also result in a decrease in the fair
market value of our equity securities because our assets would be owned by a
larger pool of outstanding equity. The terms of securities we issue in future
capital transactions may be more favorable to our new investors, and may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and issuances of incentive awards under equity employee
incentive plans, which may have a further dilutive effect.





Furthermore,
any additional financing we may need may not be available on terms favorable to
us, or at all. If we are unable to obtain required additional financing, we may
be forced to curtail our growth plans or cut back our existing
operations.




23




We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which will adversely impact
our financial condition.





We
may not be able to effectively manage our growth, which may harm our
profitability.





Our
strategy envisions building and expanding our business. If we fail to
effectively manage our growth, our financial results could be adversely
affected. Growth may place a strain on our management systems and resources. We
must continue to refine and expand our business development capabilities, our
systems and processes and our access to financing sources. As we grow, we must
continue to hire, train, supervise and manage new employees. We cannot assure
you that we will be able to:





·
            expand
      our systems effectively or efficiently or in a timely
    manner;


·
            optimally
      allocate our human resources;


·
            identify
      and hire qualified employees or retain valued employees;
  or


·
            incorporate
      effectively the components of any business that we may acquire in our
      effort to achieve growth.





If we are
unable to manage our growth and our operations, our financial results could be
adversely affected by inefficiency, which could diminish our
profitability.





Our
business may suffer if we do not attract and retain talented
personnel.




Our
success will depend in large measure on the abilities, expertise, judgment,
discretion, integrity and good faith of our management and other personnel in
conducting the business of La Cortez Energy. We are in the process of building
our management team which currently consists of Andrés Gutierrez, our President
and Chief Executive Officer, Nadine C. Smith, our Chairman, Vice President,
Interim Chief Financial Officer and Interim Treasurer, Carlos Lombo, our
Exploration Manager, and William Giron, our Production and Operations Manager,
as well as a controller, an accountant, a geologist, an administrative/HR
analyst and an administrative assistant. We need to hire a Chief Financial
Officer.  The loss of any of these individuals or our inability to
hire a qualified Chief Financial Officer or attract suitably qualified staff
could materially adversely impact our business. We may also experience
difficulties in certain jurisdictions in our efforts to obtain suitably
qualified staff and retaining staff who are willing to work in that
jurisdiction. We do not currently carry “key man” life insurance on our key
employees.




Our
success depends on the ability of our management and employees to interpret
market and geological data correctly and to interpret and respond to economic
market and other conditions in order to locate and adopt appropriate investment
opportunities, monitor such investments and ultimately, if required,
successfully divest such investments. Further, our key personnel may not
continue their association or employment with La Cortez Energy and we may not be
able to find replacement personnel with comparable skills. We have sought to and
will continue to ensure that management and any key employees are appropriately
compensated; however, their services cannot be guaranteed. If we are unable to
attract and retain key personnel, our business may be adversely
affected.




24




If
we are unable to hire a chief financial officer with public company experience,
our ability to adequately manage the company’s finance function may be
compromised.





Nadine C.
Smith is currently serving as our interim Chief Financial
Officer.  Although Ms. Smith has experience as a private company chief
financial officer and qualifies as an “audit committee financial expert,” she
needs to dedicate a considerable portion of her time and energy to her functions
as Chairman of our Board of Directors.  We intend to hire a new Chief
Financial Officer as soon as possible but if we are not able to do so, the
Company may not be able to comply with ongoing regulatory internal financial
control and reporting requirements.  Additionally, without an
experienced public company Chief Financial Officer, the Company may not be able
to adequately manage its finance function with respect to capital management,
cost control and cash flow and as a result, its financial performance may
suffer.





Our
management team does not have extensive experience in U.S. public company
matters, which could impair our ability to comply with U.S. legal and regulatory
requirements.





Although
our management team has senior management experience with companies based in
Colombia, which were subsidiaries of large, foreign public reporting E&P
entities, it has had limited U.S. public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements in the U.S., such as the Sarbanes-Oxley Act of 2002 and
applicable federal securities laws, including filing required reports and other
information required on a timely basis. Our management may not be able to
implement and affect programs and policies in an effective and timely manner
that adequately respond to increased legal, regulatory compliance and reporting
requirements imposed by such laws and regulations. Our failure to comply with
such laws and regulations could lead to the imposition of fines and penalties
and further result in the deterioration of our business.





The
potential profitability of oil and gas ventures in South America depends upon
factors beyond our control.





The
potential profitability of oil and gas properties in South America is dependent
upon many factors beyond our control. For instance, world prices and markets for
oil and gas are unpredictable, highly volatile, potentially subject to
governmental fixing, pegging, controls, or any combination of these and other
factors, and respond to changes in domestic, international, political, social,
and economic environments. Additionally, due to worldwide economic uncertainty
and greater competition among unprecedented numbers of market participants, the
availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. These changes and events
may materially affect our financial performance.





Oil
and gas operations are subject to comprehensive regulation which may cause
substantial delays or require capital outlays in excess of those anticipated,
causing an adverse effect on our company.





Oil and
gas operations are subject to national and local laws in South America relating
to the protection of the environment, including laws regulating removal of
natural resources from the ground and the discharge of materials into the
environment. Oil and gas operations are also subject to national and local laws
and regulations in South America which seek to maintain health and safety
standards by regulating the design and use of drilling methods and equipment.
Environmental standards imposed by national or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date, because we have had very
limited operations, we have not been required to spend any amounts on compliance
with environmental regulations. However, we may be required to expend
substantial sums in the future and this may affect our ability to develop,
expand or maintain our operations.




25







Any
change to government regulation/administrative practices may have a negative
impact on our ability to operate and profitability.





The laws,
regulations, policies or current administrative practices of any government
body, organization or regulatory agency in Colombia or any other jurisdiction
where we might conduct our business activities, may be changed, applied or
interpreted in a manner which will fundamentally alter the ability of our
company to carry on our business.





The
actions, policies or regulations, or changes thereto, of any government body or
regulatory agency, or other special interest groups, may have a detrimental
effect on us. Any or all of these situations may have a negative impact on our
ability to operate profitably.





We
may not be able to repatriate our earnings.





We will
be conducting all of our operations in South America through branches or
subsidiaries of one or more wholly owned, offshore subsidiaries established for
this purpose.  Therefore, we will be dependent on the cash flows of
our South American branches (or subsidiaries, as the case may be) and our
offshore subsidiaries to meet our obligations.  Our ability to receive
such cash flows may be constrained by taxation levels in the jurisdictions where
our branches (or subsidiaries) operate and by the introduction of exchange
controls and/or repatriation restrictions in the jurisdictions where we intend
to operate.  Currently there are no such restrictions in Colombia on
local earnings of foreign entities, but we cannot assure you that exchange or
repatriation restrictions will not be imposed in the future.





Risks
Related to Our Industry and Regional Focus




Current
volatile market conditions and significant fluctuations, generally downward, in
energy prices may continue indefinitely, negatively affecting our business
prospects and viability.





Commodities
and capital markets have been under great stress and volatility during the past
year in part due to the credit crisis affecting lenders and borrowers on a
worldwide basis. As a result of this crisis, crude oil prices tumbled from over
one hundred forty dollars ($140) per barrel in mid 2008 to less than forty
dollars ($40) per barrel in early 2009, causing companies to re-think existing
strategies and new business ventures. We are vigilant of the situation unfolding
and are adjusting our strategy to reflect these new market conditions.
Nonetheless, we will not be immune to lower commodities prices and significantly
more restrictive credit market conditions.  Our ability to enter into
exploration and production projects may be compromised, and in a continuing
environment of lower crude oil and natural gas prices, our future results of
operations and market value could be affected negatively.





Difficult
conditions in the global capital markets may significantly affect our ability
and that of our strategic partners to raise additional capital.





The
ongoing worldwide financial and credit crisis may continue
indefinitely.  Because of severely reduced market liquidity, we may
not be able to raise additional capital when we need it.  Because the
future of our business will depend on the completion of one or more investment
transactions for which, most likely, we will need additional capital, we may not
be able to complete such transactions or acquire revenue producing
assets.  As a result, we may not be able to generate income and, to
conserve capital, we may be forced to curtail our current business activities or
cease operations entirely.




26


Our
exploration for oil and natural gas is risky and may not be commercially
successful, impairing our ability to generate revenues from our
operations.




Oil and
natural gas exploration involves a high degree of risk. These risks are more
acute in the early stages of exploration. Our expenditures on exploration may
not result in new discoveries of oil or natural gas in commercially viable
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions,
such as over pressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof. If exploration costs exceed our estimates, or
if our exploration efforts do not produce results which meet our expectations,
our exploration efforts may not be commercially successful, which could
adversely impact our ability to generate revenues from our
operations.





We
may not be able to develop oil and gas reserves on an economically viable
basis.




To the
extent that we succeed in discovering or acquiring oil and/or natural gas
reserves, we cannot assure that these reserves will be capable of production
levels we project or in sufficient quantities to be commercially viable. On a
long-term basis, our viability depends on our ability to find or acquire,
develop and commercially produce oil and gas reserves. Our future reserves will
depend not only on our ability to develop then-existing properties, but also on
our ability to identify and acquire additional suitable producing properties or
prospects, to find markets for the oil and natural gas we develop and to
effectively distribute our production into our markets.




Future
oil and gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-downs of connected wells resulting from extreme weather
conditions, problems in storage and distribution and adverse geological and
mechanical conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be able
to eliminate them completely in any case. Therefore, these conditions could
diminish our future revenue and cash flow levels and result in the impairment of
our oil and natural gas interests.





We
incurred a significant increase in expenses for the year ended December 31,
2009, as compared to 2008, due to impairment expenses and depletion expense on
proved oil properties recognized for the year ended December 31, 2009,
amounting to $6,403,544 and $303,059, respectively.  No such amounts
were recorded during the year ended December 31, 2008, as there were no proved
oil and gas reserves and no production in 2008.  Under our full cost
method of accounting for our oil and natural gas properties, costs in excess of
the present value of estimated future net revenues are charged to proved
property impairment expense.  See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Critical Accounting
Policies—Oil and Gas Properties” below and Notes 1 and 13 to our consolidated
financial statements included in this report for more information regarding the
full cost method of accounting for our oil and natural gas properties and
recognition of impairment expenses and depletion expense, and regarding our
proved oil and natural gas reserves.





Estimates
of oil and natural gas reserves that we make may be inaccurate and our future
actual revenues may be lower than our financial projections.




With
respect to any oil and gas properties that we may acquire, we will make
estimates of oil and natural gas reserves, upon which we will base our financial
projections. We will make these reserve estimates using various assumptions,
including assumptions as to oil and natural gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. Some of these
assumptions are inherently subjective, and the accuracy of our reserve estimates
relies in part on the ability of our management team, engineers and other
advisors to make accurate assumptions. Economic factors beyond our control, such
as interest rates and exchange rates, will also impact the value of our
reserves. The process of estimating oil and gas reserves is complex, and will
require us to use significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
property. As a result, our reserve estimates will be inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially from those we estimate. If actual
production results vary substantially from our reserve estimates, this could
materially reduce our revenues and result in the impairment of our oil and
natural gas interests.




27


A
shortage of drilling rigs and other equipment and geophysical service crews
could hamper our ability to exploit any oil and gas resources we may
acquire.





Because
of the increased oil and gas exploration activities in South America and in
Colombia in particular, competition for available drilling rigs and related
services and equipment has increased significantly and these rigs and related
items have become substantially more expensive and harder to
obtain.  If we do acquire properties and related rights to drill
wells, we may not be able to procure the necessary drill rigs and related
services and equipment, or the cost of such items may be
prohibitive.  Our ability to comply with future license obligations or
otherwise generate revenues from the production of operating oil and gas wells
could be hampered as a result of this, and our business could
suffer.  Additionally, a shortage of crews available to shoot and
process seismic activity could cause us to breach our obligations to Petronorte
with respect to the Putumayo 4 Block.





Drilling
wells could result in liabilities, which could endanger our interests in our
prospective properties and assets.




There are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, craterings, sour gas releases, fires and spills. The
occurrence of any of these events could significantly reduce our future revenues
or cause substantial losses, impairing our future operating results. We may
become subject to liability for pollution, blow-outs or other hazards. We will
obtain insurance with respect to these hazards as appropriate to our activities,
but such insurance has limitations on liability that may not be sufficient to
cover the full extent of such liabilities. The payment of such liabilities could
reduce the funds available to us or could, in an extreme case, result in a total
loss of our properties and assets. Moreover, we may not be able to maintain
adequate insurance in the future at rates that are considered reasonable. Oil
and natural gas production operations are also subject to all the risks
typically associated with such operations, including premature decline of
reservoirs and the invasion of water into producing formations.




Decommissioning
costs are unknown and may be substantial; unplanned costs could divert resources
from other projects.




We may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we may use for production of oil and gas
reserves. Abandonment and reclamation of these facilities and the costs
associated therewith is often referred to as “decommissioning.” We have not yet
established a cash reserve account for these potential costs because currently
we do not own any properties or facilities.  We may establish such an
account, however, for properties in which we have a participation interest. If
decommissioning is required before economic depletion of our future properties
or if our estimates of the costs of decommissioning exceed the value of the
reserves remaining at any particular time to cover such decommissioning costs,
we may have to draw on funds from other sources to satisfy such costs. The use
of other funds to satisfy such decommissioning costs could impair our ability to
focus capital investment in other areas of our business.




28


Our
inability to obtain necessary facilities could hamper our
operations.




Oil and
natural gas exploration and development activities are dependent on the
availability of drilling and related equipment, transportation, power and
technical support in the particular areas where these activities will be
conducted, and our access to these facilities may be limited. To the extent that
we conduct our activities in remote areas, needed facilities may not be
proximate to our operations, which will increase our expenses. Demand for such
limited equipment and other facilities or access restrictions may affect the
availability of such equipment to us and may delay exploration and development
activities. The quality and reliability of necessary facilities may also be
unpredictable and we may be required to make efforts to standardize our
facilities, which may entail unanticipated costs and delays. Shortages and/or
the unavailability of necessary equipment or other facilities will impair our
activities, either by delaying our activities, increasing our costs or
otherwise.




We
may have difficulty distributing our production, which could harm our financial
condition.




In order
to sell the oil and natural gas that we may produce in the future, we would have
to make arrangements for storage and distribution to the market. We will rely on
local infrastructure and the availability of transportation for storage and
shipment of our products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This could be
particularly problematic to the extent that our operations are conducted in
remote areas that are difficult to access, such as areas that are distant from
shipping and/or pipeline facilities. These factors may affect our ability to
explore and develop properties and to store and transport our oil and gas
production and may increase our expenses.




Furthermore,
future instability in one or more of the countries in which we will operate,
weather conditions or natural disasters, actions by companies doing business in
those countries, labor disputes or actions taken by the international community
may impair the distribution of oil and/or natural gas and in turn diminish our
financial condition or ability to maintain our operations.




Prices
and markets for oil and natural gas are unpredictable and tend to fluctuate
significantly, which could reduce profitability, growth and the value of our
company.




Oil and
natural gas are commodities whose prices are determined based on world demand,
supply and other factors, all of which are beyond our control. World prices for
oil and natural gas have fluctuated widely in recent years. The average price
for West Texas Intermediate crude, the standard oil benchmark for the western
hemisphere, in 1999 was $22 per barrel. In 2002 it was $27 per barrel. In 2005,
it was $57 per barrel, and as of December 31, 2009 it was approximately $79 per
barrel. In less than one year it tumbled from over one hundred forty dollars
($140) per barrel in mid 2008 to less than forty dollars ($40) per barrel in
early 2009.  We expect that prices will fluctuate in the future. Price
fluctuations will have a significant impact upon our revenue, the return from
our reserves and on our financial condition generally. Price fluctuations for
oil and natural gas commodities may also impact the investment market for
companies engaged in the oil and gas industry. Future decreases in the prices of
oil and natural gas may have a material adverse effect on our financial
condition, the future results of our operations and quantities of reserves
recoverable on an economic basis.




29


Increases
in our operating expenses will impact our operating results and financial
condition.




Exploration,
development, production, marketing (including distribution costs) and regulatory
compliance costs (including taxes) will substantially impact the net revenues we
derive from the oil and gas that we may produce. These costs are subject to
fluctuations and variation in different locales in which we will operate, and we
may not be able to predict or control these costs. If these costs exceed our
expectations, this may adversely affect our results of operations. In addition,
we may not be able to earn net revenue at our predicted levels, which may impact
our ability to satisfy our obligations.




Penalties
we may incur could impair our business.





Failure
to comply with government regulations could subject us to civil and criminal
penalties, could require us to forfeit property rights, and may affect the value
of our assets. We may also be required to take corrective actions, such as
installing additional equipmentor taking other actions,
each of which could require us to make substantial capital expenditures. We
could also be required to indemnify our employees in connection with any
expenses or liabilities that they may incur individually in connection with
regulatory action against them. As a result, our future business prospects could
deteriorate due to regulatory constraints, and our profitability could be
impaired by our obligation to provide such indemnification to our
employees.





Environmental
risks may adversely affect our business.




All
phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and federal, provincial and municipal laws and
regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases or emissions of various
substances produced in association with oil and gas operations. The legislation
also requires that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with such legislation can require significant expenditures and a
breach may result in the imposition of fines and penalties, some of which may be
material. Environmental legislation is evolving in a manner we expect may result
in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. The discharge of
oil, natural gas or other pollutants into the air, soil or water may give rise
to liabilities to foreign governments and third parties and may require us to
incur costs to remedy such discharge. The application of environmental laws to
our business may cause us to curtail our production or increase the costs of our
production, development or exploration activities.




Managing
local community relations where we and our partners operate could be
problematic.





We or our
operating partners may be required to present our operational plans to local
communities or indigenous populations living in the area of a proposed project
before project activities can be initiated. Additionally, working with local
communities will be an essential part of our work program for the development of
any of our E&P projects in the region.  If we or our partners fail
to manage any of these community relationships appropriately, our operations
could be delayed or interrupted and we or our partners could lose rights to
operate in these areas, resulting in a negative impact on our business, our
reputation and, possibly, our share price.





Our
insurance may be inadequate to cover liabilities we may incur.




Our
involvement in the exploration for and development of oil and natural gas
properties may result in our becoming subject to liability for pollution,
blow-outs, property damage, personal injury or other hazards. Although we will
obtain insurance in accordance with industry standards to address such risks,
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. In addition, such risks may not, in all
circumstances be insurable or, in certain circumstances, we may choose not to
obtain insurance to protect against specific risks due to the high premiums
associated with such insurance or for other reasons. The payment of such
uninsured liabilities would reduce the funds available to us. If we suffer a
significant event or occurrence that is not fully insured, or if the insurer of
such event is not solvent, we could be required to divert funds from capital
investment or other uses towards covering our liability for such
events.




30


Civil
liabilities may not be able to be enforced against us.





Substantially
all of our assets and certain of our officers and directors will be located
outside of the United States.  As a result of this, it may be
difficult or impossible to enforce judgments awarded by a court in the United
States against our assets or those of our officers and directors.




Our
business is subject to local legal, political and economic factors which are
beyond our control, which could impair our ability to build and expand our
operations or operate profitably.




We expect
to operate our business in Colombia and other South American
countries.  There are risks that economic and political conditions
will change in a manner adverse to our interests. These risks include, but are
not limited to, terrorism, military repression, interference with private
contract rights (such as privatization), extreme fluctuations in currency
exchange rates, high rates of inflation, exchange controls and other laws or
policies affecting environmental issues (including land use and water use),
workplace safety, foreign investment, foreign trade, investment or taxation, as
well as restrictions imposed on the oil and natural gas industry, such as
restrictions on production, price controls and export controls. Any changes in
oil and gas or investment and tax regulations and policies or a shift in
political attitudes in Colombia or other countries in which we intend to operate
are beyond our control and may significantly hamper our ability to build and
expand our operations or operate our business at a profit.




For
instance, changes in laws in the jurisdiction in which we operate or expand into
with the effect of favoring local enterprises, changes in political views
regarding the exploitation of natural resources and economic pressures may make
it more difficult for us to negotiate agreements on favorable terms, obtain
required licenses, comply with regulations or effectively adapt to adverse
economic changes, such as increased taxes, higher costs, inflationary pressure
and currency fluctuations.





Insurgent
and criminal activities in the territories in which we operate, or the
perception that such activities are likely, may disrupt our operations, hamper
our ability to hire and keep qualified personnel and impair our access to
sources of capital.





Colombia
has been the site of South America’s largest and longest political and military
insurgency and has experienced uncontrolled criminal activity relating to drug
trafficking. While the situation has improved dramatically in recent years,
there can be no guarantee that the situation will improve further or that it
will not deteriorate in Colombia or any other territories in which we may
operate.  Insurgent or criminal activities (including kidnapping and
terrorism) in any of the territories in which we operate, or the perception that
such activities are likely, may disrupt our operations in that country, hamper
our ability to hire and keep qualified personnel and hinder or shut off our
access to sources of capital.  Any such changes are beyond our control
and may adversely affect our business.




31


The
Rio de Oro and Puerto Barco E&P projects operated by Avante Colombia were
attacked and the facilities destroyed by insurgents in July 2008, and the field
has been shut in since then.  Failure to successfully repair these
facilities and avoid similar attacks in the future would materially impair
Avante Colombia’s business.




In July
2008, the Revolutionary Armed Forces of Colombia (known by their Spanish acronym
“FARC”) attacked the Rio de Oro and Puerto Barco E&P projects that Avante
Colombia operates in the Catatumbo area of eastern Colombia.  As a
result of such attack, Avante Colombia’s facilities were destroyed, and the
fields have been shut in ever since then.  There can be no assurance
that we will be able to successfully repair these facilities and re-open the
fields.  Even if we do repair these facilities, there can be no
assurance that future attacks by FARC or others will not damage or destroy these
properties and have a material adverse effect on our
business.  Moreover, even if our properties are not subject to actual
attacks in the future, the perception that such attacks may occur could impair
our ability to retain personnel, rent equipment or conduct other activities
necessary or desirable to carry out our business plan.





Local
legal and regulatory systems in which we operate may create uncertainty
regarding our rights and operating activities, which may harm our ability to do
business.




We are a
company organized under the laws of the State of Nevada and are subject to
United States laws and regulations. The jurisdictions in which we intend to
operate our exploration, development and production activities may have
different or less developed legal systems than the United States, which may
result in risks such as:




·
            effective
      legal redress in the courts of such jurisdictions, whether in respect of a
      breach of law or regulation, or, in an ownership dispute, being more
      difficult to obtain;


·
            a
      higher degree of discretion on the part of governmental
      authorities;


·
            the
      lack of judicial or administrative guidance on interpreting applicable
      rules and regulations;


·
            inconsistencies
      or conflicts between and within various laws, regulations, decrees, orders
      and resolutions; and


·
            relative
      inexperience of the judiciary and courts in such
  matters.




In
certain jurisdictions the commitment of local business people, government
officials and agencies and the judicial system to abide by legal requirements
and negotiated agreements may be more uncertain, creating particular concerns
with respect to licenses and agreements for business. These licenses and
agreements may be susceptible to revision or cancellation and legal redress may
be uncertain or delayed. Property right transfers, joint ventures, licenses,
license applications or other legal arrangements pursuant to which we operate
may be adversely affected by the actions of government authorities and the
effectiveness of and enforcement of our rights under such arrangements in these
jurisdictions may be impaired.




Our
business will suffer if we or our strategic partners cannot obtain or maintain
necessary licenses.




Our
operations will require licenses, permits and in some cases renewals of licenses
and permits from various governmental authorities. Our ability to obtain,
sustain or renew such licenses and permits on acceptable terms is subject to
change in regulations and policies and to the discretion of the applicable
governments, among other factors. Our inability to obtain, or our loss of or
denial of extension to any of these licenses or permits could hamper our ability
to produce revenues from our operations.





The
ANH may not approve the assignment of rights to us in the E&P properties in
which we have invested and are continuing to invest, and, as a result, we may
not be able to legally protect our rights under our agreements with the
operators of the applicable properties.





Our
operating subsidiary, La Cortez Colombia, has completed paying all of its Phase
2 commitments on the Maranta Block and Emerald is ready to assign and transfer
to La Cortez Colombia the agreed upon 20% participating interest in the Maranta
Block, subject to approval by Colombia’s hydrocarbon regulatory agency, the
ANH.  We have submitted to Emerald the required written request for
Emerald to apply to the ANH for approval of the assignment.  If the
ANH does not approve this assignment, Emerald and we have agreed to use our best
endeavors to seek in good faith a legal way to enter into an agreement with
terms equivalent to their farm-in agreement and joint operating agreement, that
shall privately govern the relations between the parties and which will not
require ANH approval.  If Emerald and we are not able to do this, then
we may not be able to legally protect or enforce our rights under the farm-in
agreement, resulting, possibly, in capital and income losses to us.




32


Once we
have completed paying all of our Phase 2 commitments on the Putumayo 4 Block,
Petronorte will assign and transfer to us the agreed upon 50% participating
interest in the Putumayo 4 Block, subject to ANH approval.  Similarly,
the ANH must approve any assignment of participating interests in Colombian
E&P properties to us by the applicable operator.  If the ANH does
not approve any of these assignments and we are not able to work out a favorable
alternative arrangement with the applicable operator, then we may not be able to
legally protect or enforce our rights to the affected E&P property and our
business may be materially adversely affected.




Foreign
currency exchange rate fluctuations may affect our financial
results.




We expect
to sell any future oil and natural gas production under agreements that will be
denominated in United States dollars and foreign currencies. Many of the
operational and other expenses we incur will be paid in the local currency of
the country where we perform our operations. As a result, fluctuations in the
United States dollar against the local currencies in jurisdictions where we
operate could result in unanticipated and material fluctuations in our financial
results.




Local
operations may require funding that exceeds operating cash flow and there may be
restrictions on expatriating proceeds and/or adverse tax consequences associated
with such funding.




We
will rely on technology to conduct our business and our technology could become
ineffective or obsolete.





We will
rely on technology, including geographic and seismic analysis techniques and
economic models, to develop reserve estimates and to guide our planned
exploration and development and production activities. We will be required to
continually enhance and update our technology to maintain its efficacy and to
avoid obsolescence. The costs of doing so may be substantial, and may be higher
than the costs that we anticipate for technology maintenance and development. If
we are unable to maintain the efficacy of our technology, our ability to manage
our business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient.





RISKS
RELATED TO OUR SECURITIES





There
is not now, and there may not ever be, an active market for our common
stock.


There
currently is a limited public market for our common stock.  Further,
although our common stock is currently quoted on the OTC Bulletin Board (the
“OTCBB”), trading of our common stock may be extremely sporadic.  For
example, several days may pass before any shares are traded.  As a
result, an investor may find it difficult to dispose of, or to obtain accurate
quotations of the price of, our common stock.  Accordingly, investors
must assume they may have to bear the economic risk of an investment in our
common stock for an indefinite period of time.  There can be no
assurance that a more active market for our common stock will develop, or if one
should develop, there is no assurance that it will be sustained.  This
severely limits the liquidity of our common stock, and would likely have a
material adverse effect on the market price of our common stock and on our
ability to raise additional capital.




33


We
cannot assure you that our common stock will become liquid or that it will be
listed on a securities exchange.


Until our
common stock is listed on a national securities exchange such as the New York
Stock Exchange or the Nasdaq National Market, we expect our common stock to
remain eligible for quotation on the OTCBB, or on another over-the-counter
quotation system, or in the “pink sheets.” In those venues, however, an investor
may find it difficult to obtain accurate quotations as to the market value of
our common stock.  In addition, if we fail to meet the criteria set
forth in SEC regulations, various requirements would be imposed by law on
broker-dealers who sell our securities to persons other than established
customers and accredited investors.  Consequently, such regulations
may deter broker-dealers from recommending or selling our common stock, which
may further affect the liquidity of our common stock.  This would also
make it more difficult for us to raise capital.





Our
common stock is subject to the “penny stock” rules of the SEC and the trading
market in our common stock is limited, which makes transactions in our common
stock cumbersome and may reduce the value of an investment in the
stock.





The SEC
has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:





●
              that
      a broker or dealer approve a person’s account for transactions in penny
      stocks; and


●
            the
      broker or dealer receive from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.





In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:





●
              obtain
      financial information and investment experience objectives of the person;
      and


●
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.





The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form sets forth:





●
              the
      basis on which the broker or dealer made the suitability determination;
      and


●
            that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.





Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
common stock and cause a decline in the market value of stock.





Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.




34


The
price of our common stock may become volatile, which could lead to losses by
investors and costly securities litigation.





The
trading price of our common stock is likely to be highly volatile and could
fluctuate in response to factors such as:





·
            actual
      or anticipated variations in our operating
  results;


·
            announcements
      of developments by us, our strategic partners or our
      competitors;


·
            announcements
      by us or our competitors of significant acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;


·
            adoption
      of new accounting standards affecting our Company’s
    industry;


·
            additions
      or departures of key personnel;


·
            sales
      of our common stock or other securities in the open market;
      and


·
            other
      events or factors, many of which are beyond our
  control.





The stock
market is subject to significant price and volume fluctuations. In the past,
following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been initiated against the company.
Litigation initiated against us, whether or not successful, could result in
substantial costs and diversion of our management’s attention and resources,
which could harm our business and financial condition.





We
do not anticipate dividends to be paid on our common stock, and investors may
lose the entire amount of their investment.


Cash
dividends have never been declared or paid on our common stock, and we do not
anticipate such a declaration or payment for the foreseeable future. We expect
to use future earnings, if any, to fund business growth. Therefore, stockholders
will not receive any funds absent a sale of their shares. We cannot assure
stockholders of a positive return on their investment when they sell their
shares, nor can we assure that stockholders will not lose the entire amount of
their investment.





If
securities analysts do not initiate coverage or continue to cover our common
stock or publish unfavorable research or reports about our business, this may
have a negative impact on the market price of our common stock.





The
trading market for our common stock may be affected by, among other things, the
research and reports that securities analysts publish about our business and the
Company. We do not have any control over these analysts. There is no guarantee
that securities analysts will cover our common stock. If securities analysts do
not cover our common stock, the lack of research coverage may adversely affect
its market price. If we are covered by securities analysts, and our stock is the
subject of an unfavorable report, our stock price and trading volume would
likely decline. If one or more of these analysts ceases to cover the Company or
fails to publish regular reports on the Company, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to
decline.





You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock.





In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present stockholders
and the purchasers of our common stock offered hereby.  We are
currently authorized to issue an aggregate of 310,000,000shares of capital stock
consisting of300,000,000 shares of
common stock and 10,000,000 shares of preferred stock with preferences and
rights to be determined by the our  Board of Directors.  As
of April 12, 2010, there were40,000,349 shares of our
common stock and no shares of our preferred stock outstanding.  There
are4,000,000
shares of our common stock reserved for issuance under our Amended and Restated
2008 Equity Incentive Plan.  These numbers do not include 12,218,636
shares of our common stock issuable upon the exercise of outstanding
warrants.  We may also issue additional shares of our common stock or
other securities that are convertible into or exercisable for our common stock
in connection with hiring or retaining employees, future acquisitions, future
sales of its securities for capital raising purposes, or for other business
purposes.  The future issuance of any such additional shares of our
common stock may create downward pressure on the trading price of the common
stock.  We will need to raise additional capital in the near future to
meet our working capital needs and there can be no assurance that we will not be
required to issue additional shares, warrants or other convertible securities in
the future in conjunction with these capital raising efforts, including at a
price (or exercise prices) below the price at which shares of our common stock
are currently traded on the OTCBB.




35


ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





Not
applicable.




ITEM
      2.
            PROPERTIES





Executive
Offices





Our
executive offices are located at Calle 67 #7-35, Oficina 409, Bogota,
Colombia.  At this location we rent approximately 3,000 square feet of
office space under a three year lease.  We do not rent or own any
other property.





Description
of Properties





Colombia


36





Source:  Google
Earth




37


Maranta
and Putumayo 4 Blocks





Source:
La Cortez Energy, Inc.





Putumayo
4





On
December 22, 2008, we entered into the MOU with Petronorte that entitles us to a
50% net working interest in the Putumayo 4 Block.  We executed the
joint operating agreement with Petronorte relating to the Putumayo 4 Block on
October 14, 2009, effective retroactively to February 23,
2009.





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 400 km of pre-existing 2D
seismic through which Petronorte has identified promising leads.





There are
four existing wells in the Putumayo 4 Block that date back to the 1970’s. Even
though information is scarce, these wells intended to reach the Caballos
formation and in doing so, oil shows were recorded from the Villeta formation,
our primary objective. Furthermore, neighboring and close fields, including
Nancy-Burdine-Maxine, Costayaco and Orito, have been prolific hydrocarbon
producers, partially affirming our reserve expectations in the
block.





Infrastructure
in the Putumayo region has been rapidly improving. Several important
discoveries, including one competitor’s discovery in Costayaco, have resulted in
an influx of companies into the region, resulting in a reduction in oil services
fees and improving security in the area. Specifically, the Putumayo 4 Block is
located near the Orito field, run by Ecopetrol, which is a receiving station for
a pipeline to the port Tumaco on the Colombian Pacific. Transportation of
potential crude production from the Putumayo 4 Block could be trucked easily to
Orito through the paved roads in the area.


38





The
Putumayo 4 Block





Source:  La
Cortez Energy, Inc.





Maranta





On
February 6, 2009, La Cortez Colombia entered into the Farm-In Agreement with
Emerald for a 20% Participating Interest in the Maranta Block in the Putumayo
Basin in Southwest Colombia.  We executed the joint operating
agreement with Emerald relating to the Maranta Block on February 4,
2010.  The Maranta Block covers an area of 90,459 acres (36,608
hectares) in the foreland of the Putumayo Basin.  The Maranta Block is
adjacent to the recent 20 million barrel proven discovery of the Costayaco field
made by Gran Tierra Energy, Inc. (AMEX: GTE).





Emerald
was awarded the Maranta Block E&P contract by the ANH on September 12,
2006.  The E&P contract granted Emerald a 100% working interest in
the Maranta Block for an exploration period of up to six years with an initial
production period of up to 24 years.





The first
phase of the Emerald’s exploration period lasted 18 months with a minimum work
program that was comprised of the acquisition of 30 square kilometers of new 2D
seismic data and the re-processing of 40 square kilometers of existing 2D
seismic data. Emerald extended its work program and shot an additional 41 square
kilometers of 2D seismic to better map out the geological structures in the
block.





The
Maranta Block is adjacent to nearby producing oil fields and close to recent
discoveries that have tested oil up to 7,000 barrels per day. Emerald identified
a number of prospects and leads at an estimated depth of some 11,000 ft from the
existing seismic data, each with an unrisked prospective resource potential
estimated to be between 5 and 15 million barrels.





The
Umbria #1 well was drilled in the Maranta Block in 1967 and encountered oil in
the Villeta formation.  There may also be potential to re-enter this well
to further test the formation productivity3.







3.  Source:  Emerald
Energy Plc


39


The
Maranta Block








Source:
Emerald Energy Plc., La Cortez Energy, Inc.





A 2D
seismic program was acquired by Emerald in 2007 with the aim of maturing the
identified prospects and leads to a drill-ready status. In March 2008, Emerald
elected to enter the second phase of the exploration period, with a duration of
12 months and a minimum work program comprising the drilling of one well,
planned to commence by the second quarter of 2009.





Emerald
reached the intended total depth of 11,578 ft on the Mirto-1 exploration well on
July 21, 2009, with oil and gas shows recorded across the four target
reservoirs. All of the four potentially hydrocarbon bearing intervals have been
flow tested with the Villeta U and N sand intervals flowing at an initial oil
rate of 731 BOPD and 247 BOPD, respectively.  The well was completed
with an Electric Submersible Pump (ESP) at 7,043 feet. The drilling rig was
released on October 4, 2009.




The
Caballos formation interval was flow tested with only formation water recovered
at an average rate of 112 barrels per day. The Villeta T sand interval was also
flow tested with an average oil rate of 8 barrels per day with a very high water
production (water cut of 97%).




The
Villeta U sand interval (encountered at a depth of 11,030 feet) produced an
average oil rate of 731 barrels per day of 32.5 API crudeover a 48 hour period
with a low average water production (water cut of 26%). An interval of 20 feet
at the top of the sand was flow tested through a 128/64 inch choke, under
artificial lift using a jet pump.




Flow
testing operations have been completed in the Cretaceous aged Villeta N sands,
the shallowest of four sands flow tested in this well. The 7 feet interval at
10,410 feet produced 15 degrees API oil at an average rate of 247 barrels per
day over a 48 hour period, under artificial lift using a jet pump and through a
128/64 inch choke, with an average water cut of 64%.




40


Currently,
the Villeta U sand interval is being production tested at an average rate of 145
BOPD (gross) of good quality oil, 31.5 degrees API, with an average BS&W
(basic sediment and water) of 80%. Emerald, as operator of the Maranta Block,
determined to enter the Phase 3 exploration commitment in the Maranta Block,
which entails the drilling of an additional exploratory/appraisal well plan for
early May and the acquisition of 31 km2 of 3D
seismic that have been acquired.





A
workover job on the Mirto-1 well was completed on March 6, 2010, which attempted
to isolate a water production formation. It is believed that water is coming
into the well through poor cement bonding behind casing as observed in the
“cement bond log.” After a technical meeting held with the operator on March 25
to evaluate the workover results, La Cortez has concluded that the attempt to
isolate the water production formation was not successful; therefore, both the
operator and La Cortez have decided to continue producing from the well with a
high water cut. It is planned that after the Mirto-2 appraisal well has been
drilled and completed, a new intervention in Mirto-1 well will be executed to
increase perforation density of the producing “U” sand to increase total
production capacity of the well.





Emerald
and La Cortez continue to believe that despite the mechanical problems
encountered in the Mirto-1 well, there is sufficient accumulation of
hydrocarbons in the area to merit the drilling of at least two additional wells.
The location for Mirto-2 appraisal well is completed. The drilling rig has been
contracted out and rig mobilization is underway. Mobilization is expected to
take at least three weeks; therefore, the estimated spud date of the Mirto-2
appraisal well is expected by late April or early May.





Rio
de Oro and Puerto Barco




The Rio
de Oro and Puerto Barco exploration and production contracts are located in the
Catatumbo basin in eastern Columbia. These fields initiated production about 50
years ago and produced good quality oil mainly from the Uribante group
(Tibu, Aguardiente and Mercedes cretaceous formations). Main production was
obtained from the Rio de Oro field. The contracts cover an area of 2,262
hectares in Rio de Oro and 12,646 hectares in Puerto Barco. The contract started
in December 2003 and will expire in December 2013.




After
completion of the acquisition of Avante Colombia  on March 4, 2010, we have
continued to conduct social activities in the area and have defined a potential
long term activity program/investment in conjunction with our joint venture
partner Vetra.  In addition, preliminary discussions with Ecopetrol seeking
an extension of the exploration and production contract have been initiated. La
Cortez is in the process of defining the activities to have an early production
from Puerto Barco field by the end of this year by reopening one or more
existing wells.


41











ITEM
      3.
            LEGAL
      PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. We are currently not aware of
any such legal proceedings or claims that we believe will have, individually or
in the aggregate, a material adverse affect on business, financial condition or
operating results.




42


PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market
Information and Holders




As of
April 12, 2010, there were 40,000,349 shares of our common stock issued and
outstanding, 12,218,636 shares issuable upon exercise of outstanding warrants
and 2,535,000 shares issuable upon exercise of outstanding
options.  On that date, there were 59 holders of record of shares of
our common stock.





Our
common stock is listed on the OTCBB under the symbol “LCTZ.OB.”





The
following table sets forth the high and low closing bid prices for our common
stock for the fiscal quarters indicated as reported on the OTCBB. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions. Our common stock is thinly traded and,
thus, pricing of our common stock on the OTCBB does not necessarily represent
its fair market value.





Period
                  
                  High(1)
                  
                  
                  Low(1)Fiscal Year Ended December 31,
      2008:First
      Quarter
                  
                  $
                  2.00
                  
                  
                  $
                  0.06Second
      Quarter
                  
                  
                  2.50
                  (2)
                  
                  
                  2.00Third
      Quarter
                  
                  
                  2.90
                  (2)
                  
                  
                  1.01Fourth
      Quarter
                  
                  
                  1.50
                  (2)
                  
                  
                  1.01Fiscal
      Year Ending December 31, 2009:First
      Quarter
                  
                  $
                  1.75
                  
                  
                  $
                  1.50Second
      Quarter
                  
                  
                  1.95
                  
                  
                  
                  1.75Third
      Quarter
                  
                  
                  2.10
                  
                  
                  
                  1.50Fourth
      Quarter
                  
                  
                  2.70
                  
                  
                  
                  2.10




(1)
            All
      prices give retroactive effect to a 5:1 forward stock split that was
      effected on February 27, 2008.




(2)
            During
      this period, our common stock traded on the OTCBB above this closing bid
      price. Our common stock is thinly traded and, thus, pricing of our common
      stock on the OTCBB does not necessarily represent its fair market
      value.





Dividends




We have
never declared any cash dividends with respect to our common
stock.  Future payment of dividends is within the discretion of our
Board of Directors and will depend on our earnings, capital requirements,
financial condition and other relevant factors.  Although there are no
material restrictions limiting, or that are likely to limit, our ability to pay
dividends on our common stock, we presently intend to retain future earnings, if
any, for use in our business and have no present intention to pay cash dividends
on our common stock.




43


Recent
Sales of Unregistered Securities





On March
14, 2008, we closed a private placement of our common stock, $0.001 par value
per share.  In this private placement, we offered our shares of common
stock at a price of $1.00 per share and we derived total proceeds of $2,314,895,
net after expenses, from the sale of 2,400,000 shares of our common stock.Investors in this offering
included our Chairman, Nadine C. Smith, who purchased 500,000 shares, for an
aggregate purchase price of $500,000, on the same terms as the other
investors.





On
September 10, 2008, we closed a private placement of units.  Each unit
consisted of (i) one share of our common stock and (ii) 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. We offered these units at a
price of $1.25 per unit and we derived total proceeds of $5,981,000 ($5,762,126
net after expenses) from the sale of 4,784,800 units. Investors in this offering
included our Chairman, Nadine C. Smith, who purchased 400,000 units, for an
aggregate purchase price of $500,000, and our Chief Executive Officer, Andres
Gutierrez Rivera, who purchased 50,000 units, for an aggregate purchase price of
$62,500, on the same terms as the other investors.





On June
19, 2009, we conducted an initial closing of a private placement of
units.  Each unit consisted of (i) one share of our common stock and
(ii) 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.
We offered these units at a price of $1.25 per unit and we derived total
proceeds at the initial closing of $6,074,914 ($5,244,279 net after expenses)
from the sale of 4,860,000 units.  On July 31, 2009, we completed the
final closing of our 2009 unit offering.  At the final closing, we
received gross proceeds of $256,250 from the sale of 205,000
units.   In the aggregate, we received gross proceeds of
$6,331,164 in the 2009 unit offering on the sale of a total of 5,065,000
units.  The 2009 unit offering terminated on July 31, 2009.Investors in this offering
included our Chairman, Nadine C. Smith, who purchased 160,000 units on June 19,
2009, for an aggregate purchase price of $200,000, on the same terms as the
other investors.





On
December 29, 2009, we conducted an initial closing of our second 2009 private
placement of units, selling 1,428,571 units at a price of $1.75 per unit, for
aggregate gross proceeds to us of $2.5 million.  We conducted a second
closing of this offering on January 29, 2010, in which we sold 571,428 units for
aggregate gross proceeds of $1 million, and a third closing on March 2,
2010,in which we
sold 857,144 units for aggregate gross proceeds of $1.5 million.  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
whole share.  Investors in this offering included our Chairman, Nadine
C. Smith, who purchased 58,000 units on March 2, 2010, for an aggregate purchase
price of $101,500, on the same terms as the other investors.





The sales
of securities in the above private placements were exempt from registration
under the Securities Act in reliance upon Regulation D and Regulation S
promulgated by the SEC thereunder and were sold only to “accredited investors,”
as defined in Regulation D, and non-“U.S. persons” as defined in Regulation
S.





On March
2, 2010, in exchange for all of the outstanding capital stock of Avante
Colombia, we issued to Avante an aggregate of 10,285,819 shares of our common
stock, and Avante purchased 2,857,143 additional shares of our common stock and
three-year warrants to purchase 2,857,143 shares of our common stock at an
exercise price of $3.00 per share, for an aggregate purchase price of $5,000,000
(or $1.75 per share of common stock purchased).





Our
issuance of the shares to Avante in connection with the acquisition and the
purchase by Avante of the shares and warrants were not registered under the
Securities Act in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act, which exempts transactions by an issuer not
involving any public offering, and Regulation D and Regulation
S.




44


The
Avante warrants are initially exercisable until three years after the closing
date; provided, that,
in the event that we consummate any Covered Offering in which the securities
sold include warrants to purchase our common stock (“Other Warrants”) and the
expiration date of such Other Warrants is more than three years after the
Closing Date, then the expiration date of the Avante warrants shall be extended
to the latest expiration date of any such Other
Warrants.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





During
the fourth quarter of the fiscal year covered by this report, no purchases were
made by or on behalf of the Company or any “affiliated purchaser,” as defined in
Rule 10b-18(a)(3) under the Exchange Act, of shares or other units of any class
of the Company’s equity securities.





Securities
Authorized for Issuance under Equity Compensation Plans




We
adopted our 2008 Equity Incentive Plan on February 7, 2008, and amended and
restated the 2008 Equity Incentive Plan as of November 7, 2008. The Amended and
Restated 2008 Equity Incentive Plan was approved by our Board and a majority of
the outstanding shares of our common stock4 and allows for awards of
up to an aggregate of 4,000,000 shares of our common stock, subject to
adjustment under certain circumstances. If an incentive award granted under the
2008 Equity Incentive Plan expires, terminates, is unexercised or is forfeited,
or if any shares are surrendered to us in connection with an incentive award,
the shares subject to such award and the surrendered shares will become
available for further awards under the 2008 Equity Incentive Plan. As of
December 31, 2009, we have granted option awards under the 2008 Equity Incentive
Plan exercisable for a net aggregate of 2,451,667 shares of our common stock. We
have not maintained any other equity compensation plans since our
inception.





See
“Executive Compensation” for information regarding individual equity
compensation arrangements received by our executive officers pursuant to their
employment agreements with us.





4.
              Our
      November 7, 2008, amendment to increase the size of our equity incentive
      plan from 2,000,000 shares to 4,000,000 shares was approved by our
      majority stockholders as of October 12,
2009.


45


The
following table sets forth information about the Company’s equity compensation
plans as of December 31, 2009:





Plan Category
                  
                  Number of securities
                    to be issued upon
                    exercise of
                    outstanding options,
                    warrants and rights
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding
                    options, warrants
                    and rights
                  
                  
                  Number of securities
                    remaining available
                    for future issuance
                    under equity
                    compensation plansEquity
      compensation plans approved by security holders
                  
                  
                  2,435,000
                  (1)
                  
                  $
                  2.12
                  
                  
                  
                  1,465,000
                  (1)Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  2,435,000
                  
                  
                  $
                  2.12
                  
                  
                  
                  1,465,000





(1)  2008
Equity Incentive Plan.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





Not
applicable.





ITEM 7.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. This discussion
contains forward-looking statements that involve risks, uncertainties and
assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors discussed in “Risk Factors” and elsewhere in this
report.





The
following discussion and analysis of the Company’s financial condition and
results of operations are based on our audited consolidated financial
statements, which have been prepared on the accrual basis of accounting whereby
revenues are recognized when earned, and expenses are recognized when
incurred.





Overview
and Going Concern





We are an
international, early stage oil and gas exploration and production company
focusing our business in South America. We have established an operating branch
in Colombia.  We have entered into two initial working interest
agreements, with Petronorte and with Emerald.  We have also acquired
Avante Colombia. We are currently evaluating additional investment prospects,
companies and existing exploration and production opportunities in Colombia,
while keeping alert for opportunities in other South American
countries.




46


We were
incorporated in the State of Nevada on June 9, 2006 under the name La Cortez
Enterprises, Inc. to pursue certain business opportunities in Mexico5. During 2008, our Board
of Directors decided to redirect the Company’s efforts towards identifying and
pursuing business in the oil and gas sector in South America. As a reflection of
this change in our strategic direction, we changed our name to La Cortez Energy,
Inc.




Going
Concern





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.   Therefore, there is
substantial doubt as to the Company’s ability to continue as a going concern for
a period longer than the next twelve months. Additionally, our independent
auditors included an explanatory paragraph in their report on our consolidated
financial statements included in this report that raises substantial doubt about
our ability to continue as a going concern.  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.




Our
audited consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
implies we will continue to meet our obligations and continue our operations for
the next twelve months. Realization values may be substantially different from
carrying values as shown, and our consolidated financial statements do not
include any adjustments relating to the recoverability or classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary as a result of the going concern uncertainty.





Recent
Developments





The
Maranta Block





Emerald,
the operator of the Maranta Block reached the intended total depth of 11,578
feet on the Mirto-1 exploration well on July 21, 2009, with oil and gas recorded
across three of the four target reservoirs.  Flow testing operations
were completed in the  Villeta U sand interval (encountered at a depth of
11,030 feet) produced an average oil rate of 731 barrels of oil per day (bopd)
of 32.5o API crude over a 48 hour period with a low average water production
(water cut of 26%).  An interval of 20 feet at the top of the sand was
flow tested through a 128/64 inch choke, under artificial lift using a jet pump.
The Villeta N sand, the upper most of the sands tested in this well, produced
oil of 15 o API (American Petroleum Institute) at an average rate of 247 bopd
over a 48 hour period, under artificial lift using a jet pump and through a
128/64 inch choke, with an average water cut of 64%.  The drilling rig
was released and the well was completed with an Electric Submersible Pump (ESP)
at 7,043 feet on October 4, 2009.  Since then, the well has been on a
production test of the Villeta U sand interval at a current stabilized average
rate of 145 bopd gross of good quality oil (31.5 o API) with an average BS&W
(basic sediment and water) of 82%, mainly due to the unsolved poor cement
bonding problem.  We will hold a 20% participating interest in the
Maranta Block through our Cayman Islands operating subsidiary, La Cortez
Colombia.





5.
              We
      were originally formed to create, market and sell gourmet chocolates
      wholesale and retail throughout Mexico, as more fully described in our
      registration statement on Form SB-2 as filed with the SEC on November 7,
      2006.


47


On July
23, 2009, based on the preliminary results of the drilling of the Mirto-1 well,
we 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, we have borne 65% of the Maranta Block Phase 2 exploration costs,
including 65% ($1.2285 million) of the $1.8 million Mirto-1 completion
costs.  We made this $1.2285 million payment to Emerald on July 27,
2009.  65% of any additional Phase 2 costs were paid by us as needed,
following cash calls by Emerald.  On August 4, 2009, we paid an
additional $243,300 to Emerald for overhead costs, representing 5% of total
expenditures, in accordance with the farm-in agreement.  As of December 31,
2009, we accrued costs amounting to $1,585,795 which were capitalized to oil and
natural gas properties representing additional costs equivalent to 65% of Mirto
well costs as of that date, in accordance with the farm-in
agreement.  On January 7, 2010, we paid an additional $1.41 million to
Emerald, consisting of exploration costs associated with the Mirto-1 well, as
well as certain 3d seismic and facilities costs.  On February 5, 2010,
we paid an additional $234,553 to Emerald for our portion of the cost of
production facilities, 3D seismic acquisition and final exploration costs of the
Mirto-1 well.





Now that
the Phase 2 work is completed (drilling and completion of the Mirto-1
exploratory well), we will pay 20% of all subsequent costs related to the
Maranta Block. The Company has the final Mirto-1 evaluation results, and on
January 12, 2010, La Cortez Colombia asked Emerald to file a request with the
ANH, to have its agreed to 20% participating interest in the Maranta Block
officially assigned from Emerald to La Cortez Colombia.





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 was released from the well location. On March 6,
2010, Emerald completed a workover job on the Mirto-1 well, which attempted to
isolate a water production formation. It is believed that water is coming into
the well through poor cement bonding behind casing as observed in the “cement
bond log”. After a technical meeting held with the operator on March 25, 2010 to
evaluate the workover results obtained in the last two weeks, La Cortez has
concluded that the attempt to isolate the water production formation was not
successful; therefore, both the operator and La Cortez have decided to continue
producing from the well with a high water cut. It is planned that after the
Mirto-2 appraisal well has been drilled and completed, a new intervention in
Mirto-1 well will be executed to increase perforation density of the producing
“U” sand to increase total production capacity of the well.





Ryder
Scott Company (“Ryder Scott”), an independent petroleum engineer, has estimated
our proved developed oil and natural gas reserves in the Mirto field as 74,230
barrels as of December 31, 2009.  We 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.   We incurred a significant increase in expenses for the
year ended December 31, 2009, as compared to 2008, due to impairment expenses
and depletion expense on our proved oil reserves in Maranta recognized for the
year ended December 31, 2009, amounting to $6,403,544 and $303,059,
respectively.  No such amounts were recorded during the year ended
December 31, 2008, as there were no proved oil and gas reserves and no
production in 2008.  Under our full cost method of accounting for our
oil and natural gas properties, costs in excess of the present value of
estimated future net revenues are charged to proved property impairment
expense.  Total production from the well in 2009 was 2,963 barrels.
See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies—Oil and Gas Properties” below and Notes
1 and 13 to our consolidated financial statements included in this report for
more information regarding the full cost method of accounting for our oil and
natural gas properties and recognition of impairment expenses and depletion
expense, and regarding our proved oil and natural gas reserves.




48


Emerald
and La Cortez continue to believe that despite the mechanical problems
encountered in the Mirto-1 well, there is sufficient accumulation of
hydrocarbons in the area to merit the drilling of at least two additional wells.
Consequently, civil works (access roads and rig locations) for the two appraisal
wells planned for this year are underway. The location for Mirto-2 was completed
at the end of first week of April.  The drilling rig has been
contracted out, and the contractor initiated mobilization during the second week
of April.  Mobilization is expected to take at least three weeks;
therefore, the estimated spud date of the Mirto-2 appraisal well is expected by
late April or early May 2010.





Emerald,
as operator of the Maranta Block, has determined to enter the Phase 3
exploration work commitment in the Maranta Block, which will entail the drilling
of an additional exploration/appraisal well, the workover of the Mirto-1 well
Approximately 25 km of 3D seismic has already been acquired as part of this new
phase of work.





On
February 4, 2010, La Cortez Colombia signed a joint operating agreement with
Emerald with respect to the Maranta Block and, we have asked Emerald to submit a
request to the ANH to approve the assignment of our 20% participating interest
to us.  If the ANH does not approve this assignment, Emerald and we
have agreed to use our 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.





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.




49


The
Putumayo 4 Block




On
October 14, 2009, we executed our joint operating agreement with Petronorte for
joint development of the Putumayo 4 Block in Colombia.  This joint
operating agreement governs our working relationship with Petronorte with
respect to the Putumayo 4 Block, based on the terms of our agreement with
Petronorte set forth in our memorandum of understanding with Petronorte dated
December 4, 2008.  Under this memorandum of understanding, we are
entitled to a fifty percent (50%) participation in the costs and revenues
originated from the Putumayo 4 Block E&P contract signed by Petronorte and
the ANH, Colombia’s hydrocarbon regulatory agency, including but not limited to
any guarantees required by the ANH.   We expect that our capital
commitments to Petronorte will be approximately $2.8 million in 2010 for Phase 1
seismic reprocessing, seismic acquisition and permitting.  Our total
Phase 1 commitment under the memorandum of understanding over the 36 month Phase
1 period is currently projected to be approximately $8.1 million.  Our
total Phase 2 commitment under the memorandum of understanding over the second
36 month project period is currently projected to be approximately $6.0 million,
fifty percent of the total $12 million currently budgeted.  Pursuant
to the joint operating agreement, in November 2009 we deposited $2.67 million
into a trust account as our fifty percent portion of a Phase 1 performance
guarantee required by the ANH under Petronorte’s Putumayo 4 Block E&P
contract.  We expect that this guarantee deposit will remain in place
for the 36 month Phase 1 period and that we may be required to supplement the
guarantee deposit in Phase 2 to take into account our additional investment
requirements of that phase.  If and when Phase 2 work is completed on
the Putumayo 4 Block, we will ask Petronorte to file a request with the ANH to
have our agreed to 50% participating interest in the Putumayo 4 Block officially
assigned from Petronorte to us.





After
reprocessing 1300 km of old seismic, which confirmed the potential of at least 7
leads in the block, both Petronorte and La Cortez have continued working on
determining the number and location of indigenous people and communities in the
area along with representatives from the Ministry of the Interior. This
information is being used to define the layout of the 103 km of 2d seismic
acquisition expected to take place by 2nd half of this year, as well as for
obtaining the environmental permit for the drilling of the exploratory
well.





Under the
terms of the contract signed with the ANH,   the acquisition of 103 km
of seismic, the drilling of an exploratory well and additional work for a value
of $1.6 million have to be conducted before September 2012, when the 3-year term
of Phase I ends.




Avante
Colombia/Rio de Oro and Puerto Barco Fields




On March
2, 2010, we acquired Avante’s subsidiary, Avante Colombia, in exchange for
shares of our common stock. The purchase included Avante Colombia’s Colombian
branch, Avante Colombia Ltd Sucursal.





Avante
Colombia currently has a 50% participation interest and is the operator of the
Rio de Oro and Puerto Barco exploration and production contracts with Ecopetrol
in the Catatumbo area in eastern Colombia.  Under the terms of the
letter of intent, we and Avante may also enter into a joint venture to develop
other exploration opportunities in Colombia.





The main
terms of the transaction were:





l
            We
      acquired 100% of the outstanding stock of Avante Colombia in exchange for
      10,285,819 restricted shares of our common
  stock.


50


l
            In
      addition, Avante invested $5 million in units of our securities at a price
      of $1.75 per unit, with each unit consisting of one share of our common
      stock and a three-year warrant to purchase one share of our common stock
      exercisable at $3.00 per share.





l
            Avante
      will have the right to nominate one member to our Board of Directors as
      long as Avante and/or its affiliates own voting shares representing 10% or
      more of the votes entitled to be cast in at a meeting of stockholders of
      La Cortez  to elect directors. Avante has nominated Alexander F.
      D. Berger, who joined our Board of Directors on March 2,
    2010.





After
completion of the acquisition of Avante Colombia, La Cortez through Avante
Colombia has continued to conduct social activities in the area, and it has
defined a potential long term activity program / investment in conjunction with
its joint venture partner Vetra Exploración y Producción S.A.





Initial
Closings of Our 2009/2010 Private Placement





On
December 29, 2009, we effected the initial closing of a private placement of
units of our securities, selling 1,428,571 units at a price of $1.75 per unit,
for aggregate gross proceeds to us of $2.5 million.  We conducted a
second closing of this offering on January 29, 2010, in which we sold 571,428
units for an aggregate of $999,999, and a third closing on March 2, 2010, in
which we sold 857,143 units for an aggregate of $1.5 million.  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
whole share.





Results
of Operations





We are an
early stage exploration and development company and have generated very limited
operating revenues to date.




Year
Ended December 31, 2009, Compared with Year Ended December 31, 2008





A summary
of year-end results is as follows:





Year Ended December 31
                    
                    
                    PercentageIncrease /2009
                    
                    
                    2008
                    
                    
                    (Decrease)Revenues
                    
                    $
                    189,835
                    
                    
                    $
                    -
                    
                    
                    
                    n/aCosts
      and expenses
                    
                    
                    (10,464,966
                    )
                    
                    
                    (2,649,312
                    )
                    
                    
                    295.0
                    %Non-operating
      income
                    
                    
                    133,401
                    
                    
                    
                    68,783
                    
                    
                    
                    93.9
                    %Income
      tax expense
                    
                    
                    (656
                    )
                    
                    
                    -
                    
                    
                    
                    n/aNet
      Loss
                    
                    $
                    (10,142,386
                    )
                    
                    $
                    (2,580,529
                    )
                    
                    
                    293.0
                    %





Revenues





We earned
oil and gas revenues of $189,835 for the year ended December 31, 2009, compared
to $-0- for the year ended December 31, 2008.  These revenues were
derived from the commencement of our production operations in the Mirto-1 well
which started during the 4th quarter
of 2009.





Costs and Expenses





Our
operating costs and expenses for the years ended December 31, 2009 and 2008,
consisted of the following:


51





Year Ended December 31,
                        
                        
                        Percentage

                            Increase /2009
                        
                        
                        2008
                        
                        
                        (Decrease)Operating
      costs
                        
                        $
                        421,693
                        
                        
                        $
                        -
                        
                        
                        
                        n/aDepreciation,
      depletion, and amortization
                        
                        
                        364,787
                        
                        
                        
                        38,719
                        
                        
                        
                        842.1
                        %Impairment
      of oil properties
                        
                        
                        6,403,544
                        
                        
                        
                        -
                        
                        
                        
                        n/aAccretion
      expense
                        
                        
                        156
                        
                        
                        
                        -
                        
                        
                        
                        n/aGeneral
      and administrative
                        
                        
                        3,274,786
                        
                        
                        
                        2,610,593
                        
                        
                        
                        25.4
                        %Total
                        
                        $
                        10,464,966
                        
                        
                        $
                        2,649,312
                        
                        
                        
                        301.9
                        %





Operating
costs





Our
operating costs for the year ended December 31, 2009, which pertain to our costs
incurred in production activities for the Mirto-1 well, which began producing
during the fourth quarter of 2009, amounted to $421,693.  No such
costs were incurred during the year ended December 31, 2008.





Depreciation,
depletion, and amortization, Impairment and Accretion expenses





The
significant increase in the above expenses for the year ended December 31, 2009
as compared to 2008 was mainly due to the impairment expenses and depletion
expense on proved oil properties recognized for the year ended
December 31, 2009, amounting to $6,403,544 and $364,787,
respectively.





Our
proved oil reserves of La Cortez have been estimated by an independent petroleum
engineer, Ryder Scott Company (“Ryder Scott”), as of December 31,
2009.  We held no proved reserves prior to 2009.  These
reserve estimates have been prepared in compliance with SEC rules and accounting
standards based on the 12-month un-weighted first-day-of-the-month average price
for December 31, 2009.  The new SEC rules and accounting standards
effective for fiscal years ending on or after December 31, 2009, require us to
prepare our reserve estimates using revised reserve definitions and revised
pricing based on 12-month un-weighted first-day-of-the-month average
pricing.   Under our full cost method of accounting for our oil
properties, costs in excess of the present value of estimated future net
revenues are charged to proved property impairment expense.  During 2009,
we drilled our first exploratory well, Mirto-1.  We paid 65% of the
drilling costs of this well and will receive a 20% working interest in the
well.  After the completion of the drilling in October 2009, we are
responsible for paying 20% of the operating costs of the well, and we expect to
pay 20% of drilling and operating costs of any additional wells drilled in the
Mirto prospect.  We agreed to pay the additional 45% of the 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. No such amounts were recorded during the year
ended December 31, 2008, as there were no proved oil and gas reserves and no
production in 2008. See “Critical Accounting Policies—Oil and Gas Properties”
below and Notes 1 and 13 to our consolidated financial statements included
in this report for more information regarding the full cost method of accounting
for our oil properties and recognition of impairment expenses and depletion
expense, and regarding our proved oil reserves.




52


General
and Administrative Expenses





We
incurred total general and administrative expenses of $3,274,786 for the year
ended December 31, 2009 compared to $2,610,593 for the year ended December 31,
2008. Our payroll expenses decreased to $1,589,047 for the year ended December
31, 2009 from $505,783 for the year ended December 31, 2008; professional fees
increased to $1,114,423 for the year ended December 31, 2009 from $441,683 for
the year ended December 31, 2008; travel expenses increased to $191,320 for the
year ended December 31, 2009 from $168,812 for the year ended December 31, 2008;
rent expense increased to $103,936 for the year ended December 31, 2009 from
$56,012 for the year ended December 31, 2008; and other expenses increased to
$276,060 for the year ended December 31, 2009 from $230,869 for the year ended
December 31, 2008. The increase in expenses for the year ended December 31, 2009
as compared to the year ended December 31, 2008 is attributable primarily to
increased general, administrative and legal expenses incurred in connection with
our new business activities in South America and related administrative
costs.  In particular, excluding the effects of non-cash compensation
expenses of $1,000,000 during the year ended December 31, 2008, the increase in
our payroll expenses is due to the Company not having employees during the first
quarter of 2008 and for the most part of the second quarter of 2008, and the
increase in professional fees and other operating expenses during the year ended
December 31, 2009 as compared to the year ended December 31, 2008 is primarily
due to increased audit, accounting, legal and consultancy expenses arising from
our administrative exploration activities and growth in our operations during
the current year 2009.  Also, the increase in our rent expense during
the year ended December 31, 2009 is due to us entering into a long-term office
lease in Bogotá, Colombia, commencing on August 2008 at approximately $7,400 a
month.  Prior to entering into this lease, we were only leasing
commercial space for approximately $200 per month.




Non-operating
Income (Expense), Net





Net
non-operating expense for the year ended December 31, 2009, was $133,401
compared to net non-operating income of $68,783 for the year ended December 31,
2008. Interest income in the amount of $49,404 was earned in the year ended
December 31, 2009, on our cash deposits resulting from our private placement
offerings.  Also, during the year ended December 31, 2009, we
recognized an unrealized gain from the decrease in the fair value of derivative
warrant instruments liability of $83,997.





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.  As described below under
“Critical Accounting Policies,” we are required to evaluate our equity-linked
financial instruments to determine whether they are not indexed to our common
stock and therefore should be treated as derivatives.  The common
stock warrants that we have issued in our private placement offerings have
typical anti-dilution adjustment mechanisms on the exercise price and therefore
are not considered to be indexed to our common stock price.  As a
result, we recognize our warrants as derivative liabilities on our balance sheet
at their respective fair values on each reporting date, and we recognize a gain
or loss on the fair value of the warrants on our statement of
operations.  These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using a lattice valuation model.





Net
Loss





Our net
loss for the year ended December 31, 2009 was $10,142,386 compared to $2,580,529
for the year ended December 31, 2008.  The increase is mainly due to
the impairment expense on proved oil and natural gas properties and the increase
in our general and administrative expenses.


53





Adjusted
EBITDA





In
evaluating our business, we consider earnings before interest, taxes,
depreciation, impairment expenses on proved oil properties, depletion,
amortization, unrealized gains and loss on investments, stock-based compensation
expense, accretion of abandonment liability and the impact of derivative
valuations (“Adjusted EBITDA”) as a key indicator of financial operating
performance and as a measure of the ability to generate cash for operational
activities and future capital expenditures.  We believe Adjusted EBITDA
presents a more realistic picture of our performance than income from operations
or cash flow from operations as presented in our financial statements and a more
meaningful measure of our current liquidity. We believe that this measure may
also be useful to investors for the same purpose and as an indication of our
ability to generate cash flow at a level that can sustain or support our
operations and capital investment program. Investors should not consider this
measure in isolation or as a substitute for income from operations, or cash flow
from operations determined under U.S. generally accepted accounting practices
(“GAAP”), or any other measure for determining operating performance that is
calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not
a GAAP measure, it may not necessarily be comparable to similarly titled
measures employed by other companies.





Adjusted
EBITDA is calculated as follows:





Year ended December 31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (10,142,386
                  )
                  
                  $
                  (2,580,529
                  )Adjustments:Depreciation,
      depletion and amortization
                  
                  
                  364,787
                  
                  
                  
                  38,719Impairment
                  
                  
                  6,403,544
                  
                  
                  
                  -Accretion
                  
                  
                  156
                  
                  
                  
                  -Unrealized
      gain on fair value of derivative warrant instruments, net
                  
                  
                  (83,997
                  )
                  
                  
                  -Interest
      income
                  
                  
                  (49,404
                  )
                  
                  
                  (69,005
                  )Adjusted
      EBITDA
                  
                  $
                  (3,507,300
                  )
                  
                  $
                  (2,610,815
                  )





Adjusted
EBITDA for fiscal 2009 was $3.51 million, compared to $2.61 million for
fiscal 2008.  Approximately 97% of the difference between Adjusted EBITDA
for 2009 and our $10.14 million net loss for 2009 is composed of the
impairment of oil and gas properties discussed elsewhere in this report. 
We believe that this impairment was driven by the additional costs incurred by
the Company in drilling the first well.  Going forward, the Company
will bear 20 percent of the costs and will receive 20 percent of the
revenue.  Accordingly, management believes that that the reader should view
our financial results for December 31, 2009, in this context.




Liquidity
and Capital Resources





Our cash
and cash equivalents balance as of December 31, 2009, was $2,376,585 compared to
$6,733,381 as of December 31, 2008.  This decrease was due to
$7,401,013 in payments for oil and gas properties and the deposit of $2,672,500
into a restricted cash account as a performance guarantee during the year ended
December 31, 2009 offset by the receipt of $8,831,164 of capital from the
closings of our 2009 unit offerings discussed below.





Subsequent
to the end of 2009, we have raised $2.5 million in gross proceeds from the
second and third closings of our private unit offering that began in December
2009, and $5 million from an investment by Avante as described
above.





We
presently do not have any available credit, bank financing or other external
sources of liquidity.  Due to our brief history and historical
operating losses, our operations have not been a source of
liquidity.


54


We have
entered into a memorandum of understanding and joint operating agreement with
Petronorte and a farm-in agreement and joint operating agreement with
Emerald.  We expect that our capital commitments to Petronorte will be
approximately $2.8 million in 2010 for Phase 1 seismic reprocessing, seismic
acquisition and permitting activities.  In November 2009, we deposited
$2.67 million into a trust account as our portion of the ANH required
performance guarantee under Petronorte’s E&P contract, which funds we will
not be able to use for other corporate purposes during the life of the
guarantee.





In
accordance with the terms of the Emerald farm-in agreement, we paid Emerald
$0.948 million on February 12, 2009, as a reimbursement of Emerald’s Phase 1
sunk costs6,
$2.433 million on February 18, 2009, as the first installment on Emerald’s Phase
2 exploratory well costs, an additional $2.433 million on May 15, 2009, as the
second installment on Emerald’s Phase 2 exploratory well costs (when the drill
rig was mobilized to begin drilling on the Maranta Block Mirto-1 exploratory
well), and $1.2285 million on July 27, 2009, as our share of Emerald’s Phase 2
Mirto-1 exploratory well completion costs.  On August 4, 2009, we paid
an additional $243,300 to Emerald for overhead costs, representing 5% of total
expenditures, in accordance with the farm-in agreement.  As of
December 31, 2009, we accrued costs amounting to $1,585,795 which were
capitalized to oil and natural gas properties representing additional costs
equivalent to 65% of Mirto well costs as of that date, in accordance with the
farm-in agreement.  On January 7, 2010, we paid an additional $1.41
million to Emerald, consisting of exploration costs associated with the Mirto-1
well, as well as certain 3d seismic and facilities costs.  On February
5, 2010, we paid an additional $234,553 to Emerald for a portion of the final
exploration costs of the Mirto-1 well. We expect
to require an additional approximately $5.4 million for our share of Phase 3
costs with respect to the Maranta Block in 2010, related to processing of the
recently acquired 25km of 3d seismic, conducting a workover on the Mirto-1 well,
the drilling of the appraisal wells and the construction of the production
facilities at the field.We believe that we have sufficient funds to
cover our operational overhead for the next few months, but not to make all of
the remaining Emerald and expected Petronorte payments.





While the
purchase price for Avante Colombia consisted solely of shares of our common
stock, Avante Colombia currently has a 50% participation interest and is the
operator of the Rio de Oro and Puerto Barco exploration and production contracts
with Ecopetrol in the Catatumbo area in eastern Colombia.  We will
incur operating expenses in connection with Avante Colombia’s projects going
forward.  Moreover, our agreement with Avante also provides that we
and Avante will enter into a joint venture to develop another exploration
opportunity in Colombia, which will require further commitment of our capital if
it goes forward.





We are
currently utilizing cash of approximately $170,000 per month in the day-to-day
operations of our business, including payroll, professional fees and office
expenses.  We expect this rate of cash utilization to increase over
the next twelve months.





During
2010, we expect to require the following amounts of capital in order to bear our
share of expenses with respect to the Putumayo 4 Block, the Maranta Block and
Avante Colombia’s projects:





●
            Approximately
      $2.8 million in the Putumayo 4 Block, related to Phase 1 seismic
      acquisition and permitting
activities;





●
            Approximately
      $5.4 million in the Maranta Block, related to Phase 3 processing of the
      recently acquired 25 km of 3D seismic, conducting a workover on the
      Mirto-1 well, the drilling of two or three appraisal wells and the
      construction of the production facilities at the field;
  and





●
            Up
      to $3.4 million on Rio de Oro and Puerto Barco, related to additional
      seismic in the area and either deepening an existing well or drilling an
      additional well.







6
                All
      costs on this project are calculated in Colombian pesos and paid in US
      dollars.  Because of changes in exchange rates, our capital
      commitments in US dollars may be more or less than originally calculated
      and budgeted.


55





We will
need to obtain additional capital in order to meet our working capital needs and
our commitments on the Maranta Block, the Putumayo 4 Block, the Rio de Oro and
Puerto Barco fields and the Avante joint venture, and to continue to execute our
business plan, build our operations and become profitable. In order to obtain
capital, we may need to sell additional shares of our Common Stock or debt
securities, or borrow funds from private or institutional lenders. Because of
the recent problems in the credit markets, steep stock market declines,
financial institution failures, government bail-outs, the sharp decline in oil
and natural gas prices and our status as an early stage company, there can be no
assurance that we will be successful in obtaining additional funding in amounts
or on terms acceptable to us, if at all.  If we are unable to raise
additional funding as necessary, which the Company is actively seeking, we may
have to suspend our operations temporarily or cease operations
entirely.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.




Critical Accounting Policies





We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States ("U.S.
GAAP").  U.S. GAAP represents a comprehensive set of accounting and
disclosure rules and requirements.  The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.  Actual results may differ
from these estimates under different assumptions or conditions, however, in the
past the estimates and assumptions have been materially accurate and have not
required any significant changes.   Should we experience significant
changes in the estimates or assumptions which would cause a material change to
the amounts used in the preparation of our financial statements, material
quantitative information will be made available to investors as soon as it is
reasonably available.





The
Company believes the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:





Consolidation. The accompanying
financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries, including La Cortez Energy Colombia, Inc., a Cayman
Islands corporation, and La Cortez Energy Colombia, E.U., a Colombia
corporation, an international, early stage oil and gas E&P company
concentrating on opportunities in South America.  All significant
inter-company transactions and balances are eliminated in
consolidation.





Cash and Cash
Equivalents. We consider all highly liquid debt instruments with
original maturities of three months or less when acquired to be cash
equivalents.





Oil and Gas
Properties.We follow the full cost method of accounting for our 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.


56





Depreciation,
depletion, and amortization 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 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.  Costs in excess of the present value of estimated future net
revenues as discussed above are charged to proved property impairment expense.
We apply the full cost ceiling test on a quarterly basis on the date of the
latest balance sheet presented.




Impairment of
Long-Lived Assets.  We periodically review the carrying amounts
of our non-oil and gas property and equipment and its finite-lived intangible
assets to determine whether current events or circumstances indicate that such
carrying amounts may not be recoverable. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. If it is
determined that an impairment loss has occurred, the loss is measured as the
amount by which the carrying amount of the long-lived asset exceeds its fair
value.





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. These market indices
are determined on a monthly basis. As a result, our revenues from the sale of
oil will suffer if market prices decline and benefit if they
increase.





Stock-Based
Compensation.  We account for stock-based compensation issued
to employees and non-employees by recording stock-based compensation expense
ratably over the requisite service period based on the fair value of the awards
determined at the grant date (net of estimated forfeitures) utilizing the
Black-Scholes-Merton pricing model for options and warrants.  Key
assumptions include (1) expected volatility (2) expected term (3) discount
rate and (4) expected dividend yield.





Derivative
Liabilities.We evaluate our equity-linked financial instruments to determine whether
these financial instruments are not indexed to our common stock and therefore
should be treated as derivatives.  As a result, beginning on January
1, 2009, we recognized our September 2008 private placement warrants as
derivative liabilities at their respective fair values on each reporting
date.   We also determined that warrants to purchase shares of common
stock issued in the our 2009 unit offerings were not indexed to our own stock and were
recognized as derivative warrant instruments and measured at fair value at the
date of each offering and at each reporting period.  These common
stock purchase warrants do not trade in an active securities market, and as
such, we estimate the fair value of these warrants using a lattice valuation
model.





Foreign Currency
Translation.We conduct our operations in two primary
functional currencies: the U.S. dollar and the Colombian peso. Balance sheet
accounts of our 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.


57





New
Accounting Pronouncements





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 FASB Accounting 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.





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.We adopted SFAS No. 168 in the third quarter of 2009,
and we 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, we 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.  Down-round 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.





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 impairment and depletion 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. We adopted the Final Rule and ASU
effective December 31, 2009.


58


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. We have not made any
acquisitions during the year ended December 31, 2009 that would require such
disclosures.





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.
We adopted SFAS 165 effective June 30, 2009 and the adoption did not have a
material impact on our consolidated financial statements.





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. We do not currently
expect the adoption of the new guidance in FASB ASC 810 to impact our
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. We adopted ASU 2010-06
effective December 31, 2009, and the adoption did not have a significant impact
on our consolidated financial statements.


59





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA





Our
audited consolidated financial statements as of, and for the years ended,
December 31, 2009 and 2008, are included beginning on Page F-1 immediately
following the signature page to this report.  See Item 15 for a list
of the financial statements included herein.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      9A.[T]
            CONTROLS
      AND PROCEDURES





We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
December 31, 2009. Based upon that evaluation, our principal executive officer
and principal financial officer concluded that, as of the end of the period
covered in this report, our disclosure controls and procedures were not
effective to ensure that information required to be disclosed in reports filed
by us under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the required time periods and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.  In particular, we concluded that internal
control weaknesses in our accounting policies and procedures relating to our
equity transactions and segregation of duties were material
weaknesses.





Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors or fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Due to
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. To address the material weaknesses, we performed
additional analysis and other post-closing procedures in an effort to ensure our
consolidated financial statements included in this annual report have been
prepared in accordance with generally accepted accounting principles in the
United States of America. In addition, we engaged third party consultants to
assist us with our accounting functions and in performing the additional
analyses referred to above.  Accordingly, management believes that the
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.


60





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework in Internal
Control—Integrated Framework and the Internal Control over Financial Reporting –
Guidance for Smaller Public Companies both issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. We have identified the following
material weaknesses.


1.
            As
      of December 31, 2009, we did not adequately segregate, or mitigate the
      risks associated with, incompatible functions among personnel to reduce
      the risk that a potential material misstatement of the financial
      statements would occur without being prevented or detected. Accordingly,
      management concluded that this control deficiency constituted a material
      weakness. We have recently come out of the exploration stage.  We
      have focused on hiring individuals to assist in identifying and acquiring
      oil and gas properties.  We have hired qualified individuals to carry
      out our day-to-day accounting and financial reporting obligations;
      however, we have not reached the point at which we have an adequate number
      of staff to provide the required segregation of duties.  We will
      continue to seek qualified individuals to add to our staff; however, we
      may not be fully staffed until we have sufficient cash flow from
      operations to support the related salary requirements.  The third
      party consultants have mitigated some segregation of duties issues as they
      perform reviews of certain financial accounting and reporting
      areas.





2.
            During
      the audit of our financial statements for the year ended December 31,
      2009, some errors were detected in the valuation of warrants derivative
      liabilities associated with the 2009 private placements and subsequent
      revaluation of such warrants.   The errors in valuing these
      derivative liabilities totaled approximately $2.2 million.  These
      errors were identified by our independent registered public accounting
      firm during the performance of audit procedures.  The errors were
      related to the improper valuation model used for the initial valuation of
      the warrants issued in those private placements with stock and subsequent
      revaluations and the improper application of the appropriate valuation
      model, which included incorrect assumptions used and computations made
      within the model.  The errors were identified and corrected prior to
      the release of the financial statements.  We have implemented
      procedures to correct these errors, including taking action in providing
      technical training on valuation models and processes and more detailed
      management review of the valuations prior to the release of the financial
      statements, in order to remediate this
  weakness.




Because
of these material weaknesses, management has concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2009, based on the criteria established in "Internal Control-Integrated
Framework" issued by the COSO.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
 
 This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
 
 During
the fourth quarter of 2009, we continued to increase our workforce as increased
operational activity is experienced. We were also able to remediate our material
weakness related to financial statement disclosures and also intend to hire an
experienced Chief Financial Officer with an oil and gas industry
background.  We believe that these combined actions will remedy the
material weaknesses in our current system of internal control over financial
reporting.


61





Officers’
Certifications





Appearing
as exhibits to this Annual Report are “Certifications” of our Chief Executive
Officer and Chief Financial Officer.  The Certifications are required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302
Certifications”).  This section of the Annual Report contains
information concerning the Controls Evaluation referred to in the Section 302
Certification.  This information should be read in conjunction with
the Section 302 Certifications for a more complete understanding of the topics
presented.





Changes
in Internal Control over Financial Reporting





We have
engaged third party consultants and have increased and formalize internal review
procedures in an effort to ensure that our consolidated financial statements
accurately reflect our financial condition and results of
operations.


62


PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





Executive
Officers and Directors





Below are
the names and certain information regarding the Company’s current executive
officers and directors:




Name
                              
                              Age
                              
                              Title
                              
                              DateFirstAppointedNadine
      C. Smith
                              
                              52
                              
                              Director
      and Chairman of the Board, Vice President and Interim Chief Financial
      Officer
                              
                              February
      7, 2008Andrés
      Gutierrez Rivera
                              
                              51
                              
                              President,
      Chief Executive Officer and Director
                              
                              June
      1, 2008Alexander
      F. D. Berger
                              
                              44
                              
                              Director
                              
                              March
      2, 2010José
      Fernando Montoya Carrillo
                              
                              56
                              
                              Director
                              
                              October
      15, 2008Jaime
      Navas Gaona
                              
                              71
                              
                              Director
                              
                              July
      23, 2008Jaime
      Ruiz Llano
                              
                              55
                              
                              Director
                              
                              July
      1, 2008Richard
      G. Stevens
                              
                              63
                              
                              Director
                              
                              July
      23, 2008




Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified.  Officers are elected by
the Board of Directors and serve until their successors are appointed by the
Board of Directors.




Biographical
resumes of each officer and director of the Company are set forth
below.





Nadine C. Smith became a
director and our Chairman of the Board of Directors on February 7, 2008. On
February 19, 2008, Ms. Smith was appointed our Vice President and on June 1,
2008 she assumed the positions of Interim Chief Financial Officer and Interim
Treasurer.  Ms. Smith serves as a director of WaferGen Bio-systems,
Inc., a publicly held company engaged in the development, manufacture and sales
of systems for gene expression, genotyping and stem cell research, headquartered
in Fremont, California.  She also serves as Chairman of the Board of
Loreto Resources Corporation, a publicly held, early stage independent company
that plans to be involved in the mining sector in South America.  Ms.
Smith has previously served as a director of Gran Tierra Energy, Inc., an oil
and gas exploration and production company operating in South America,
Patterson-UTI Energy Inc. and American Retirement Corporation, all public
companies. Ms. Smith has been a private investor and business consultant since
1990.





Andrés Gutierrez Rivera was
appointed our President and Chief Executive Officer on June 1,
2008.  Mr. Gutierrez was most recently (from January 2007 to June
2008) the senior executive of Lewis Energy Colombia Inc.  In this role
he was responsible for all aspects of Lewis Energy’s operational management and
its business development initiatives in Colombia.  Prior to joining
Lewis Energy, Mr. Gutierrez was briefly a consultant with Upside Energy &
Mining Services, in charge of the execution of various consulting projects
related to the oil and gas divisions of several multinational
companies.


63


From 2001
to 2006, Mr. Gutierrez was employed with Hocol, S.A., an oil and gas E&P
company based in Bogotá, Colombia with operations in Colombia and
Venezuela.  From 2004, Mr. Gutierrez served as one of three Vice
Presidents reporting directly to the President of Hocol, S.A..  As
Vice President Finance Administration, Human Talent and Operations, Mr.
Gutierrez participated in defining Hocol’s long term strategy and company
direction.  In 2005, Mr. Gutierrez participated in the development and
execution of the divestiture of Hocol to Maurel & Prom for approximately
$460 million.





Mr.
Gutierrez obtained a bachelor degree in Civil Engineering from the Escuela
Colombia de Ingenieria in 1982 in Bogotá, Colombia and a MSCE from Georgia
Institute of Technology in March 1985 in Atlanta, Georgia.





Alexander F. D. Bergerhas
been CEO of Oranje-Nassau Energie BV, a private Dutch exploration and production
company, since 2009.  Mr. Berger worked for Shell International from 1993
to 2000, holding several technical and commercial positions in the United
Kingdom and the Netherlands.  From 2000 to 2009, he worked for SHV Holdings
NV as the Commercial Manager of its E&P subsidiary Dyas, an active North Sea
investor in non-operated oil and gas assets, and in 2007 was appointed Managing
Director of Dyas. While working for Dyas, Mr. Berger was instrumental in
doubling the oil and gas portfolio through numerous successful North Sea
and overseas acquisitions, plus he held several non-executive directorships
on behalf of the company: Capricorn Energy, Delta Hydrocarbons and Ithaca
Energy.





Mr.
Berger holds an MSc degree in Petroleum Engineering from Delft University and an
MBA degree from the Rotterdam School of Management.





JoséFernando Montoya Carrillo
began his career in the oil and gas industry 27 years ago at Shell and held
various management positions over 19 years with the company and its Latin
American subsidiaries. During this time, Mr. Montoya’s positions included
Corporate Planning and Business Development Manager, Operations Manager, Oil
Marketing Director and General Manager of Shell Downstream
Paraguay.





In 1997,
Mr. Montoya joined Hocol S.A. (a Colombian company previously owned by Shell)
where he held various executive management positions, including Business
Development Manager, Chief Financial Officer, Chief Operating Officer, President
and Chief Executive Officer until September 2007. Mr. Montoya continued to be a
board member and consultant to the management of Hocol S.A., a subsidiary of the
French group Maurel & Prom (M&P) until September 2008. Mr. Montoya is
currently a partner-owner of the energy consultant firm Upside - Energy and
Marketing Services and a founding partner of The Leadership and Management
Center. Both of these companies are located in Bogotá, Columbia.





Mr.
Montoya holds a Bachelors Degree in Chemistry Engineering from the National
University of Colombia.





Jaime Navas Gaonabegan his
career as a geologist with Exxon in Colombia, where he was employed for 27
years, serving in a number of capacities including Exploration
Manager.  Mr. Navas retired from Exxon as Production Geology Manager
in 1992.  From 1993 to 1996, Mr. Navas worked as Senior Exploration
Advisor with Maxus Energy in Bolivia.





From 1998
to 2002, Mr. Navas was a member of the Strategic Team and Mentor of the
Exploration and New Ventures teams for Hocol, S.A.  Mr. Navas was one
of five members of Hocol’s Management Team, accountable for the overall business
results of the company. His responsibilities at Hocol included the development
and implementation of strategies for the achievement of Hocol’s exploration
goals and objectives, collaboration in managing government relations and
securing approvals for the company’s exploration activities.


64





In 2002,
Mr. Navas co-founded AGN-Exploration, an exploration consulting firm based in
Bogotá, Colombia, where he currently acts as the company’s
President.  In 2005, Mr. Navas was appointed as one of the five
members of the Investment Committee of LAEFM (Latin America Enterprise Fund
Manager), the first hydrocarbon investment fund established in
Colombia.





Mr. Navas
holds a Masters in Science of Petroleum Geology from the Colorado School of
Mines and a degree in Geology and Geophysics from Universidad Nacional, Bogotá,
Colombia.





Jaime Ruiz Llano became our
director on July 1, 2008.  Mr. Ruiz has been involved in government
affairs in Colombia for the past 20 years.  Mr. Ruiz has held various
high level government positions throughout his career.  In 1991, Mr.
Ruiz was elected as a Senator in the Colombian Congress. He served in that
capacity until 1994.  From 1998 to 1999, Mr. Ruiz held the position of
Director for the Colombian National Planning Department, the government entity
controlling the national budgeting and government planning strategies; in 1999
he served as Special Presidential Advisor for Government Affairs to the
President of Colombia.





From 2000
to 2002, Mr. Ruiz served as Executive Director - Member of the Board of
Directors of the World Bank.  The Executive Directors oversee the
World Bank’s business, including approval of loans and guarantees, new policies,
the administrative budget, country assistance strategies and borrowing and
financial decisions.





In 2006,
Mr. Ruiz served as Deputy Chief of Mission in the Colombian embassy in
Washington, D.C. During the periods when he was not serving in the Colombian
government, Mr. Ruiz held the position of President of his family-owned
construction business.  Additionally, Mr. Ruiz has served on the Board
of Directors of Ecopetrol, Colombia’s state-run oil company.





Mr. Ruiz
received a Masters in Civil Engineering from the University of Kansas and a
Masters in Development Studies from the Institute of Social Studies, The Hague,
The Netherlands.





Richard G. Stevens is the
founder and managing director of Hunter Stevens, a professional services firm
that Mr. Stevens organized in 1995.  Prior to forming Hunter Stevens,
Mr. Stevens served as a partner with Ernst & Young LLP and Coopers &
Lybrand LLP (now known as PricewaterhouseCoopers, LLP), both of which are public
accounting firms.





Since
2006, Mr. Stevens has been a director of Chordiant Software, Inc. and currently
is their lead independent director.  Mr. Stevens previously served as
Chairman of the Audit Committee of Verity, Inc., a software firm based in
Sunnyvale, CA and at Pain Therapeutics, Inc., a bioscience company in South San
Francisco.





Mr.
Stevens holds a Bachelor of Science Degree with honors from the University of
San Francisco, and is a licensed Certified Public Accountant in the States of
California and New York, and a Certified Fraud Examiner.


65





Non-Executive Senior Management





The
following sets forth information regarding certain of our senior
managers:





Exploration Manager - Mr. Carlos
Lombo:Carlos Lombo has more than 23 years of oil and gas
industry experience. Mr. Lombo was most recently an external geological
consultant (from 2003 to 2008) with numerous oil and gas companies and
government entities including: Occidental Petroleum Colombia (OXY), Nexen
Petroleum, Ecopetrol, ANH, and Solana Resources Ltd amongst many others. As a
consultant, Mr. Lombo was responsible for all aspects of seismic interpretation,
prospect and geological evaluations, assessment of exploration opportunities and
other tasks. Prior to this period, Mr. Lombo was an Exploration Geologist
Project Manager with Ecopetrol, the Colombia, state-owned oil and gas company,
from 1986 to 2003. Mr. Lombo served over 17 years in this capacity, working
extensively throughout every basin of the Colombian topography across numerous
exploration projects. Mr. Lombo earned a Bachelor of Arts degree in Mathematics
from the District University in Bogotá and a Masters degree in Geology from the
National University of Colombia.





Production and Operations Manager–William Giron:  Mr.
Girón brings over 26 years of oil and gas experience to La Cortez. Most
recently, from 2007 to date, Mr. Girón was the Production Manager for Hocol’s
Magdalena Valley assets where he was responsible for production in excess of
18,000 BOED (Barrels of Oil Equivalent per day), a capital expenditure budget
exceeding $130 million, and relationships with Ecopetrol, the Colombian
state-controlled oil company, the Colombian Ministry of Mines, local government
officials and third party private partners. Mr. Girón also performed in other
capacities at Hocol as field asset manager for the heavy crude oil of La Hocha
field, as a reservoir engineer and a field development manager.





Prior to
joining Hocol, Mr. Girón was employed by Texas Petroleum Company (Texaco) from
1982 to 1995. He was an independent consultant from 1996 to 1997. At Texaco, Mr.
Girón held various posts as a production and reservoir engineer and as an
assistant superintendent. He was involved in activities including budgeting and
planning, reservoir management, production enhancement and pipeline operations
management. Mr. Girón has a B.S. in Petroleum Engineering from the Universidad
de America in Bogotá.





Business and Technical
Advisors





We expect
to recruit a number of experienced and highly regarded professionals to provide
advice to us in their areas of specialization or expertise. These advisors will
enter into agreements with us to serve for fixed terms ranging from one to three
years. We will generally grant these advisors options to purchase our Common
Stock as partial payment for their services. In addition, these advisors will
receive cash compensation in connection with services rendered and will be
reimbursed for their reasonable out-of-pocket expenses.





Director
Independence





We are
not currently subject to listing requirements of any national securities
exchange or inter-dealer quotation system which has requirements that a majority
of the board of directors be “independent” and, as a result, we are not at this
time required to have our Board of Directors comprised of a majority of
“Independent Directors.”  Nevertheless, our Board of Directors has
determined that four of our six directors, Messrs. Ruiz Llano, Navas Gaona,
Stevens and Montoya Carrillo, including all of our audit committee members (see
below), are “independent” within the definition of independence provided in the
Marketplace Rules of The Nasdaq Stock Market.


66





Board
Meetings and Attendance





Our Board
held eight meetings (including regularly scheduled and special meetings) during
the year ended December 31, 2009.  There was a quorum present for each
of our Board meetings held during the fiscal year ended December 31,
2009.





Board
Committees




Our Board
currently maintains a standing audit committee and an evaluation and reserves
committee.




Audit
Committee




Our Board
of Directors, by unanimous consent, established an audit committee (the “Audit
Committee”) in October 2008.  The initial members of this committee
are Messrs. Montoya, Ruiz and Stevens.  Our Board of Directors has
determined that Mr. Stevens is an “audit committee financial expert”, as defined
in Item 407 of Regulation S-K, and is the Chairman of the Audit
Committee.  Although the Audit Committee has not yet adopted a formal
charter, the Board resolution establishing the Audit Committee authorized the
Audit Committee to operate with the customary responsibilities and authority
typically granted to a public company audit committee.  During the
fiscal year ended December 31, 2009, the Audit Committee held five meetings.
There was a quorum present for each of our Audit Committee meetings held during
the fiscal year ended December 31, 2009.





Evaluation
and Reserves Committee





In
October 2008, our Board of Directors, by unanimous consent, also established an
evaluation and reserves committee.  The initial members of this
committee are Messrs. Gutierrez, Montoya and Navas.  This committee
was established to, among other things, fulfill the Board’s oversight
responsibilities with respect to evaluating and reporting on our oil and gas
reserves and reviewing and approving non-binding proposals, indications of
interest, bids, memoranda of understanding and the like with respect to
potential business prospects of and investments and acquisitions by
us.  The evaluation and reserves committee currently does not operate
under a charter although its authority and powers have been enumerated by the
Board.





Other
Committees





The
Company currently has not established an executive committee, a compensation
committee or a nominating committee.  We are not a “listed company”
under SEC rules and are therefore not required to have a compensation committee
or a nominating committee.





Compensation
Committee





Our Board
of Directors believes that it is not necessary to have a standing compensation
committee at this time.  Because of the early stage of our development
and our limited operations, the functions of such committee are adequately
performed by the Board of Directors.  Currently, the non-management
members of our Board of Directors administer and approve all elements of
compensation and awards for our executive officers. These independent members of
our Board have the responsibility to review and approve the business goals and
objectives relevant to each executive officer’s compensation, evaluate
individual performance of each executive in light of those goals and objectives,
and determine and approve each executive’s compensation based on this
evaluation.


67





Shareholder
Communications




Currently,
we do not have a policy with regard to the consideration of any director
candidates recommended by security holders.  To date, no security
holders have made any such recommendations.




Code
of Ethics




We have
adopted a written code of ethics (the “Code of Ethics”) that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, and persons performing similar functions. We believe that
the Code of Ethics is reasonably designed to deter wrongdoing and promote honest
and ethical conduct; provide full, fair, accurate, timely and understandable
disclosure in public reports; comply with applicable laws; ensure prompt
internal reporting of code violations; and provide accountability for adherence
to the code.  To request a copy of the Code of Ethics, please make
written request to our President, c/o La Cortez Energy, Inc. at Calle 67 #7-35,
Oficina 409, Bogotá, Colombia.




Compliance
with Section 16(a) of the Exchange Act





Prior to
January 15, 2010, our common stock was not registered pursuant to Section 12 of
the Exchange Act.  Accordingly, our officers, directors and principal
shareholders were not subject to the beneficial ownership reporting requirements
of Section 16(a) of the Exchange Act during the year ended December 31, 2009, or
prior years.


68


ITEM
11.       EXECUTIVE COMPENSATION





The
following table sets forth information concerning the total compensation paid or
accrued by us during the last two fiscal years ended December 31, 2009 to (i)
all individuals that served as our principal executive officer or acted in a
similar capacity for us at any time during the fiscal year ended December 31,
2009; (ii) all individuals that served as our principal financial officer or
acted in a similar capacity for us at any time during the fiscal year ended
December 31, 2009; and (iii) all individuals that served as executive officers
of ours at any time during the fiscal year ended December 31, 2009 that received
annual compensation during the fiscal year ended December 31, 2009 in excess of
$100,000.





Summary
Compensation Table




Name and
                                  Principal Position
                                
                                Year
                                
                                Salary
                                  ($)
                                
                                
                                Bonus
                                  ($)
                                
                                
                                Stock
                                  Awards
                                  ($)
                                
                                
                                Option
                                  Awards
                                  (1) ($)
                                
                                
                                Non-Equity
                                  Incentive
                                  Plan
                                  Compen-
                                  sation ($)
                                
                                
                                Change in
                                  Pension Value
                                  and Non-
                                  qualified
                                  Deferred
                                  Compen-sation
                                  Earnings ($)
                                
                                
                                All Other
                                  Compen-
                                  sation ($)
                                
                                
                                Total
                                  ($)Andrés
      Gutierrez Rivera,
                                
                                2009
                                
                                
                                250,000
                                
                                
                                
                                125,000
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                375,000Chief
      Executive Officer (2)
                                
                                2008
                                
                                
                                145,833
                                
                                
                                
                                72,915
                                
                                
                                
                                0
                                
                                
                                
                                870,738
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                1,089,486Nadine
      C. Smith, Vice
                                
                                2009
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0President
      and Interim
                                
                                2008
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                152,379
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                152,379Chief
      Financial Officer (3)







(1)
            Option
      Awards expense as reported here and in our financial statements has been
      recorded in accordance with the FASB ASC Topic
  718.


(2)
            Effective
      June 1, 2008, Mr. Gutierrez was appointed our President and Chief
      Executive Officer.  No cash bonuses have yet been paid to Mr.
      Gutierrez for 2008 or 2009, however, we have accrued bonus payables for
      each such year in the indicated
amounts.


(3)
            Ms.
      Smith was appointed Interim Chief Financial Officer on June 1,
      2008.  Ms. Smith receives no compensation in her capacities as
      Vice President and Interim Chief Financial Officer.  However,
      for accounting purposes, we imputed compensation of $0 and $23,333 for her
      contributed services for the years ended December 31, 2009 and
      2008.  The Option Awards value reflects option grants made to
      Ms. Smith in her capacity as director and
  Chairman.




We have
not issued any stock options or maintained any stock option or other incentive
plans other than our 2008 Equity Incentive Plan. (See “Stock Option Plans”
below.) We have no plans in place and have never maintained any plans that
provide for the payment of retirement benefits or benefits that will be paid
primarily following retirement including, but not limited to, tax qualified
deferred benefit plans, supplemental executive retirement plans, tax-qualified
deferred contribution plans and nonqualified deferred contribution
plans.




We are
paying Mr. Gutierrez Rivera for his services to us as President and Chief
Executive Officer according to his employment agreement with us.  We
have no other contracts, agreements, plans or arrangements, whether written or
unwritten, that provide for payments to the named executive officers listed
above, other that our Board approved director compensation plan which includes
the reimbursement to all directors of reasonable out-of-pocket expenses incurred
in attending Board of Directors and committee meetings.


69


Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth information regarding stock options held by the
Company’s Named Executive Officers at December 31, 2009.





Option AwardsName and
                  Principal Position
                
                Number of
                  securities
                  underlying
                  unexercised
                  options
                  exercisable
                  (#)
                
                
                Number of
                  securities
                  underlying
                  unexercised
                  options
                  unexercisable
                  (#)
                
                
                Equity
                  incentive
                  plan
                  awards:
                  Number of
                  securities
                  underlying
                  unexercised
                  unearned
                  options
                  (#)
                
                
                Option
                  plan
                  exercise
                  price
                  ($)
                
                
                Option
                  expiration dateAndrés
      Gutierrez Rivera, Chief Executive Officer
                
                
                333,334
                
                
                
                -
                
                
                
                666,666
                
                
                $
                2.20
                
                
                
                July
      1, 2018Nadine
      Smith, Vice President and Interim Chief Financial Officer
    (1)
                
                
                58,334
                
                
                
                -
                
                
                
                116,666
                
                
                $
                2.20
                
                
                July
      1, 2018





(1)
            Ms.
      Smith receives no compensation in her capacities as Vice President and
      Interim Chief Financial Officer.  The Option Awards value
      reflects option grants made to Ms. Smith in her capacity as director and
      Chairman.





Employment
Agreements with Executive Officers





The
Company has entered into an employment agreement effective as of June 1, 2008
(the “Employment Agreement”) with Andrés Gutierrez pursuant to which Mr.
Gutierrez was appointed as our President and Chief Executive Officer, with the
following terms:





Pursuant
to the Employment Agreement, Mr. Gutierrez’s base annual compensation has
been set at $250,000, which amount shall be paid in accordance with our
customary payroll practices and may be increased annually at the discretion of
the Board. This annual compensation shall be paid in equal monthly installments
in Colombian Pesos (“COP”).  The exchange rate used to calculate Mr.
Gutierrez’s monthly salary payment will be calculated each month and shall
neither exceed a maximum of COP 2,400 nor be less than a minimum of COP 1,600.
This minimum/maximum range will be adjusted at the end of each calendar year
based upon changes in the consumer price index in Colombia.





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 may
determine in its sole discretion, based upon Mr. Gutierrez’s achievement of
certain performance milestones to be established annually by the Board in
discussion with Mr. Gutierrez (the “Milestones”). For the first year of
employment, in the event the Board and Mr. Gutierrez are unable to agree to
Milestones acceptable to both, the amount of Mr. Gutierrez’s bonus shall be
determined by the Board on a discretionary basis.  No Milestones have
yet been established for the year ending December 31, 2009.  As of
December 31, 2009, we had accrued a bonus payable to Mr. Gutierrez in the amount
of $197,915.  Of such amount, $72,915 and $125,000 relate to Mr.
Gutierrez’s performance during fiscal 2008 and 2009,
respectively.


70





On July
1, 2008, and in accordance with his employment agreement, we granted Mr.
Gutierrez an option to purchase an aggregate of 1,000,000 shares of our Common
Stock under our 2008 Equity Incentive Plan. This option vests in three equal
annual installments beginning on June 1, 2009 and is exercisable at a price
equal to the fair market value our Common Stock on the date of grant, as
determined by the Board.





The
initial term of the Employment Agreement expired on June 1, 2009; however, the
Employment Agreement automatically renews for additional one (1) year terms
thereafter, unless either party provides notice to the other party of its intent
not to renew such Employment Agreement not less than thirty (30) days prior
to the expiration of the then-current term or unless the Employment Agreement is
terminated earlier in accordance with its terms. No such notice was provided
prior to the end of the initial one year term.





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
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. All
of the foregoing shall be payable in accordance with the Company’s customary
payroll practices then in effect.




Further,
in the event of the termination of Mr. Gutierrez’s employment in connection with
a Change of Control, as defined in the Employment Agreement, without cause by
the Company within 12 months of the Effective Date, or by Mr. Gutierrez for good
reason, any options then held by Mr. Gutierrez that have not already vested in
accordance with their terms shall immediately vest and become exercisable as of
the date of such termination and Mr. Gutierrez shall have nine (9) months
from the date of termination to exercise any or all such options.





The
Employment Agreement also provides that Mr. Gutierrez shall not: (i) during
his employment and for a period of one (1) year following the termination
of his employment, unless such employment is terminated by us for cause or by
him for no reason, directly or indirectly engage or invest in, own, manage,
operate, finance, control or participate in the ownership, management,
operation, financing, or control of, be employed by, associated with, or in any
manner connected with, lend any credit to, or render services or advice to, any
business, firm, corporation, partnership, association, joint venture or other
entity that engages or conducts any business the same as or substantially
similar to the business of the Company or to the business currently proposed to
be engaged in or conducted by the Company and/or any of its affiliates,
including its Colombia subsidiary, in South America or included in the future
strategic plan of the business of the Company, anywhere within the United States
of America or South America; provided, however, that Mr.
Gutierrez may own less than 5% of the outstanding shares of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) including those engaged in the oil and gas
business, other than any such enterprise with which the Company competes or is
currently engaged in a joint venture, if such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Exchange Act; (ii) during his employment and for a period of one
(1) year following the termination of his employment, solicit any of our
current and/or future employees to leave our employ, or solicit or attempt to
take away any customers of the Company or any of its affiliates; or
(iii) during his employment and thereafter, disclose, directly or
indirectly, any confidential information of the Company to any third party,
except as may be required by applicable law or court order, in which case the
executive must promptly notify the Company so as to allow it to seek a
protective order if the Company so elects.


71





The
employment agreement with Mr. Gutierrez including its terms of compensation were
negotiated in an arm’s length transaction between Mr. Gutierrez and us and was
approved by Ms. Smith our Chairman and sole director at the time of Mr.
Gutierrez’s hiring.




Compensation
of Non-Employee Directors




Our Board
of Directors currently consists of four non-employee directors and two executive
officers.  We do not provide cash or incentive compensation for the
services of executive officers as directors.  Our Board of Directors,
on July 23, 2008, approved a compensation package for our non-employee
directors7. This
compensation package provides for the grant of stock options to purchase
100,000 shares of our Common Stock to each new non-employee director upon
his or her appointment or election to the Board of Directors. These options will
have an exercise price equal to or greater than the fair market value of the
Common Stock on the date of grant of an option award and will fully vest in
equal, one-third installments over three years. In addition, each non-employee
director will receive annual cash compensation of $12,000.  The
chairman of the Audit Committee will also receive additional annual compensation
of $15,000 and the chairmen of the Compensation, Reserves and Nominating and
Corporate Governance Committees of our Board of Directors will also each receive
additional annual cash compensation of $5,000. Each non-employee director will
receive $1,000 for attendance at each committee meeting of the Board of
Directors, or $500 for telephonic attendance. Directors are also reimbursed for
reasonable out-of-pocket expenses incurred in attending Board of Directors and
committee meetings.





Until we
establish a compensation committee, amendments to our director compensation
package must be approved by a majority of our independent
directors.





7
              On
      July 23, 2008, our Board of Directors approving our non-director
      compensation plan consisted of Nadine Smith, Andrés Gutierrez, Jaime Ruiz
      and Richard Stevens.





72




The
following table sets forth information regarding compensation accrued to the
Company’s non-employee directors for the year ended December 31,
2009.





Director
Compensation





Name
                  
                  Fees
                    earned
                    or paid
                    in cash
                    ($)
                  
                  
                  Stock
                    awards
                    ($)
                  
                  
                  Option
                    awards (1)
                    ($)
                  
                  
                  Non-
                    equity
                    incentive
                    plan
                    compen-
                    sation
                    ($)
                  
                  
                  Nonqualified
                    deferred
                    compensation
                    earnings
                    ($)
                  
                  
                  All other
                    compen-
                    sation
                    ($)
                  
                  
                  Total
                    ($)José
      Fernando
                    Montoya
      Carrillo
                  
                  $
                  14,500
                  
                  
                  $
                  -
                  
                  
                  $
                  88,605
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  103,105Jaime
      Navas Gaona
                  
                  $
                  17,000
                  
                  
                  $
                  -
                  
                  
                  $
                  90,419
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  107,419Jaime
      Ruiz Llano
                  
                  $
                  15,000
                  
                  
                  $
                  -
                  
                  
                  $
                  87,074
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  102,074Richard
      G. Stevens
                  
                  $
                  30,000
                  
                  
                  $
                  -
                  
                  
                  $
                  90,419
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  120,419





(1)
            Option
      awards expense as reported here and in our financial statements has been
      recorded in accordance with FASB ASC Topic
718.





Stock
Option Plans





The Board
of Directors and stockholders of the Company adopted the 2008 Equity Incentive
Plan on February 7, 2008 and the Board of Directors approved an amendment and
restatement of the 2008 Equity Incentive Plan on November 7,
2008.  The 2008 Equity Incentive Plan, as amended and restated,
reserves a total of 4,000,000 shares of our common stock for issuance under the
Plan.  Our stockholders approved the increase in reserved shares from
2,000,000 to 4,000,000 as of October 12, 2009.  If an incentive award
granted under the 2008 Equity Incentive Plan expires, terminates, is unexercised
or is forfeited, or if any shares are surrendered to us in connection with an
incentive award, the shares subject to such award and the surrendered shares
will become available for further awards under the 2008 Equity Incentive
Plan.





Shares
which may be issued under the 2008 Equity Incentive Plan through the settlement,
assumption or substitution of outstanding awards or obligations to grant future
awards as a condition of acquiring another entity are not expected to reduce the
maximum number of shares available under the Plan.  In addition, the
number of shares of our common stock subject to the 2008 Equity Incentive Plan,
any number of shares subject to any numerical limit in the Plan, and the number
of shares and terms of any incentive award are expected to be adjusted in the
event of any change in our outstanding common stock by reason of any stock
dividend, spin-off, split-up, stock split, reverse stock split,
recapitalization, reclassification, merger, consolidation, liquidation, business
combination or exchange of shares or similar transaction.





Administration





It is
expected that the Compensation Committee of the Board of Directors, or the Board
of Directors in the absence of such a committee, will administer the 2008 Equity
Incentive Plan.  Subject to the terms of the 2008 Plan, the
Compensation Committee would have complete authority and discretion to determine
the terms of awards under the 2008 Equity Incentive Plan.


73





Grants





The 2008
Equity Incentive Plan authorizes the grant of nonqualified stock options,
incentive stock options, restricted stock awards, performance grants and stock
appreciation rights, as described below:





Options
granted under the 2008 Equity Incentive Plan entitle the grantee, upon exercise,
to purchase a specified number of shares from us at a specified exercise price
per share.  The exercise price for shares of common stock covered by
an option cannot be less than the fair market value of the common stock on the
date of grant unless agreed to otherwise at the time of the
grant.  The compensation committee, or the Board of Directors in the
absence of such a committee, may also grant options with a reload
feature.





Restricted
stock awards may be awarded on terms and conditions established by the
Compensation Committee, which may include the lapse of restrictions on the
achievement of one or more performance goals.





Stock
appreciation rights (“SARs”) entitle the participant, upon exercise of the SAR,
to receive a distribution in an amount equal to the number of shares of common
stock subject to the portion of the SAR exercised multiplied by the difference
between the market price of a share of common stock on the date of exercise of
the SAR and the market price of a share of common stock on the date of grant of
the SAR.





Duration, Amendment and
Termination





The Board
of Directors is expected to have the power to amend, suspend or terminate the
2008 Equity Incentive Plan without stockholder approval or ratification at any
time or from time to time.  No change may be made that increases the
total number of shares of common stock reserved for issuance pursuant to
incentive awards or reduces the minimum exercise price for options or exchange
of options for other incentive awards, unless such change is authorized by our
stockholders within one year.  Unless sooner terminated, the 2008
Equity Incentive Plan would terminate ten years after it is
adopted.





Grants to Officers and
Directors





On July
1, 2008, the Board approved non-incentive stock option grants under the 2008
Equity Incentive Plan to the officers and directors of the Company and in the
amounts listed in the table below.  These options can be exercised at
a price of $2.20 per share, the fair market value of the Company’s common stock
on the date of grant, as determined by the Board, vest over three years from the
date of grant and expire after ten years.





Name of Optionee
                  
                  Number of SharesAndrés
      Gutierrez
                  
                  
                  1,000,000Jaime
      Ruiz
                  
                  
                  100,000Nadine
      C. Smith
                  
                  
                  175,000





On July
23, 2008, the Board approved non-incentive stock option grants under the 2008
Equity Incentive Plan to the officers and directors of the Company and in the
amounts listed in the table below.  These options can be exercised at
a price of $2.47 per share, vest over three years from the date of grant and
expire after ten years.


74





Name of Optionee
                    
                    Number of SharesJaime
      Navas Gaona
                    
                    
                    100,000Richard
      G. Stevens
                    
                    
                    100,000





On
November 7, 2008, the Board approved non-incentive stock option grants under the
2008 Equity Incentive Plan to purchase 100,000 shares of its common stock to
José Fernando Montoya, its newly appointed director. 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. These options can be exercised at a price of
$1.71 per share, vest over three years from the date of grant and expire after
ten years.





On March
2, 2010, the Board approved non-incentive stock option grants under the 2008
Equity Incentive Plan to purchase 100,000 shares of its common stock to
Alexander F.D. Berger, its newly appointed director. 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. These options can be exercised at a price of
$2.11 per share, vest over three years from the date of grant and expire after
ten years.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
following table sets forth information with respect to the beneficial ownership
of our common stock known by us as of April 12, 2010 by:





·
            each
      person or entity known by us to be the beneficial owner of more than 5% of
      our common stock;





·
            each
      of our directors;





·
            each
      of our executive officers; and





·
            all
      of our directors and executive officers as a
  group.





Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of our common stock owned by them, except to
the extent such power may be shared with a spouse.





Unless
otherwise indicated in the following table, the address for each person named in
the table is c/o La Cortez Energy, Inc., Calle 67 #7-35, Oficina 409, Bogotá,
Colombia.




75





Name
      and Address
                                            of Beneficial Owner
                                          
                                          Title of Class
                                          
                                          Amount
      and Nature
                                            of
      Beneficial
                                            Ownership(1)
                                          
                                          
                                          Percent
      of
                                            Class(2)Nadine
      C. Smith
                                            1266
      1st
      Street, Suite 4
                                            Sarasota,
      FL 34236
                                          
                                          Common
      Stock
                                          
                                          
                                          3,165,334
                                          (3)
                                          
                                          
                                          7.8
                                          %Andrés
      Gutierrez Rivera
                                          
                                          Common
      Stock
                                          
                                          
                                          408,334
                                          (4)
                                          
                                          
                                          1.0
                                          %Alexander
      F. D. Berger
                                          
                                          Common
      Stock
                                          
                                          
                                          0
                                          (5)
                                          
                                          
                                          *José
      Fernando Montoya Carrillo
                                          
                                          Common
      Stock
                                          
                                          
                                          333,334
                                          (6)
                                          
                                          
                                          *Jaime
      Navas Gaona
                                          
                                          Common
      Stock
                                          
                                          
                                          33,334
                                          (7)
                                          
                                          
                                          *Jaime
      Ruiz Llano
                                          
                                          Common
      Stock
                                          
                                          
                                          33,334
                                          (8)
                                          
                                          
                                          *Richard
      G. Stevens
                                          
                                          Common
      Stock
                                          
                                          
                                          33,334
                                          (7)
                                          
                                          
                                          *All
      directors and executive officers
                                            as
      a group (7 persons)
                                          
                                          Common
      Stock
                                          
                                          
                                          4,007,004
                                          
                                          
                                          
                                          9.8
                                          %Avante
      Petroleum S.A.
                                            11b
      Boulevard Joseph II
                                            L-1840
      Luxembourg
                                            Luxembourg
                                          
                                          Common
      Stock
                                          
                                          
                                          16,000,105
                                          (5)(9)
                                          
                                          
                                          37.3
                                          %Professional
      Trading Services SA
                                            Gerbergasse
      5
                                            CH
      8001 Zurich, Switzerland
                                          
                                          Common
      Stock
                                          
                                          
                                          2,600,000
                                          (10)
                                          
                                          
                                          6.5
                                          %Asset
      Protection Fund Ltd.
                                          
                                          Common
      Stock
                                          
                                          
                                          2,250,000
                                          (11)
                                          
                                          
                                          5.6
                                          %3076
      Sir Francis Drake’s HighwayRoad
      Town, Tortola, BVILW
      Securities, Ltd.
                                            Centro
      San Ignacio, Torre Copernico
                                            Piso
      7, Ofic 702, Urb. La Castellana
                                            Caracas,
      Venezuela
                                          
                                          Common
      Stock
                                          
                                          
                                          2,357,142
                                          (13)
                                          
                                          
                                          5.7
                                          %







* Less
than 1%.





(1)
            Beneficial
      ownership is determined in accordance with the rules of the SEC and
      generally includes voting or investment power with respect to securities.
      Shares of common stock subject to options or warrants currently
      exercisable or convertible, or exercisable or convertible within 60 days
      of April 12, 2010 are deemed outstanding for computing the percentage of
      the person holding such option or warrant but are not deemed outstanding
      for computing the percentage of any other
  person.





(2)
            Percentage
      based upon 40,000,349 shares of our common stock outstanding as of
      April 12, 2010.


76




(3)
            Includes
      360,000 shares of our common stock issuable within 60 days upon the
      exercise of warrants.  Includes 58,334 shares of our common
      stock issuable within 60 days upon the exercise of vested options granted
      under our 2008 Equity Incentive Plan; does not include 116,666 shares of
      our common stock issuable upon the exercise of options granted under the
      2008 Equity Incentive Plan, which vest in two equal annual installments
      beginning on July 1, 2010.





(4)
            Includes
      25,000 shares of our common stock issuable within 60 days upon the
      exercise of warrants.  Includes 333,334 shares of our common
      stock issuable within 60 days upon the exercise of vested options granted
      under our 2008 Equity Incentive Plan; does not include 666,666 shares of
      our common stock issuable upon the exercise of options granted under the
      2008 Equity Incentive Plan, which vest in two equal annual installments
      beginning on July 1, 2010.





(5)
            Mr.
      Berger is CEO of Oranje-Nassau Energie B.V, a privately held independent
      oil and gas investment company, which is an affiliate of Avante Petroleum
      SA.  Mr. Berger disclaims beneficial ownership of shares of our
      common stock beneficially owned by Avante Petroleum
  SA.





(6)
            Includes
      200,000 shares of our common stock held by Jade & Adamo Associates
      (“JAA”) and 100,000 shares of our common stock issuable within 60 days
      upon the exercise of warrants held by JAA.  Mr. Montoya owns
      sixty-five percent (65%) of JAA and disclaims beneficial ownership of
      thirty-five percent (35%) of our common stock held by and issuable to
      JAA.  Includes 33,334 shares of our common stock issuable within
      60 days upon the exercise of options granted under our 2008 Equity
      Incentive Plan; does not include 66,666 shares of our common stock
      issuable upon the exercise of options granted under the 2008 Equity
      Incentive Plan, which vest in two equal annual installments beginning on
      November 7, 2010.





(7)
            Includes
      33,334 shares of our common stock issuable within 60 days upon the
      exercise of vested options granted under our 2008 Equity Incentive Plan;
      does not include 66,666 shares of our common stock issuable upon the
      exercise of options granted under the 2008 Equity Incentive Plan, which
      vest in two equal annual installments beginning on July 23,
      2010.





(8)
            Includes
      33,334 shares of our common stock issuable within 60 days upon the
      exercise of vested options granted under our 2008 Equity Incentive Plan;
      does not include 66,666 shares of our common stock issuable upon the
      exercise of options granted under the 2008 Equity Incentive Plan, which
      vest in two equal annual installments beginning on July 1,
      2010.





(9)
            Includes
      13,142,962 shares of common stock owned directly by Avante Petroleum S.A.
      and 2,857,143 shares of common stock issuable within 60 days upon the
      exercise of warrants owned by Avante Petroleum
  S.A.





(10)
            Includes
      650,000 shares of our common stock issuable within 60 days upon the
      exercise of warrants.





(11)
            Includes
      750,000 shares of our common stock issuable within 60 days upon the
      exercise of warrants.





(12)
            Includes
      280,000 shares of our common stock issuable within 60 days upon the
      exercise of warrants.





(13)
            Includes
      750,000 shares of common stock held by LW Securities, Ltd. and 750,000
      shares of common stock issuable within 60 days upon the exercise of
      warrants held by LW Securities, Ltd.; and 571,428 shares of common stock
      held by LW Emerging Markets Opportunities Master Fund Ltd. and 285,714
      shares of common stock issuable within 60 days upon the exercise of
      warrants held by LW Emerging Markets Opportunities Master Fund
      Ltd..


77




ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR
      INDEPENDENCE





Other
than as disclosed under Item 5 above under “Recent Sales of Unregistered
Securities” and elsewhere in this report, there have been no transactions since
the beginning of our last fiscal year, and there are no currently proposed
transactions, in which we were or are to be a participant and the amount
involved exceeds the lesser of $120,000 or 1% of the average of our total assets
at year end for the last two completed fiscal years, and in which any of our
directors, executive officers or beneficial holders of more than 5% of our
outstanding common stock, or any of their respective immediate family members,
has had or will have any direct or material indirect interest.




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Audit
Fees.




The
aggregate fees billed to us by our principal accountant for services rendered
during the fiscal years ended December 31, 2009 and 2008 are set forth in the
table below:





Fee Category
                    
                    Fiscal year ended
                      December 31, 2009
                    
                    
                    Fiscal year ended
                      December 31, 2008Audit
      fees (1)
                    
                    $
                    360,000
                    
                    
                    $
                    60,000Audit-related
      fees (2)
                    
                    $
                    40,000
                    
                    
                    $
                    10,000Tax
      fees (3)
                    
                    
                    -
                    
                    
                    
                    -All
      other fees (4)
                    
                    
                    -
                    
                    
                    
                    -Total
      fees
                    
                    $
                    400,000
                    
                    
                    $
                    70,000





(1)
            Audit
      fees consists of fees incurred for professional services rendered for the
      audit of consolidated financial statements, for reviews of our interim
      consolidated financial statements included in our quarterly reports on
      Forms 10-Q and 10-QSB and for services that are normally provided in
      connection with statutory or regulatory filings or
      engagements.





(2)
            Audit-related
      fees consists of fees billed for professional services that are reasonably
      related to the performance of the audit or review of our consolidated
      financial statements, but are not reported under “Audit
    fees.”





(3)
            Tax
      fees consists of fees billed for professional services relating to tax
      compliance, tax planning, and tax
advice.





(4)
            All
      other fees consists of fees billed for all other
  services.





Audit Committee’s
Pre-Approval Practice




Our Audit
Committee is directly responsible for the appointment, compensation, retention
and oversight of the work of any registered public accounting firm engaged by us
for the purpose of preparing or issuing an audit report or performing other
audit, review or attest services for us, and each such registered public
accounting firm must report directly to the Audit Committee.  Our
Audit Committee must approve in advance all audit, review and attest services
and all non-audit services (including, in each case, the engagement fees
therefor and terms thereof) to be performed by our independent auditors, in
accordance with applicable laws, rules and regulations.




78




Our Audit
Committee selected BDO Seidman, LLP as our independent registered public
accountants for purposes of auditing our financial statements for the years
ended December 31, 2009 and 2008.  In accordance with Audit Committee
practice, BDO Seidman, LLP was pre-approved by the Audit Committee to perform
these audit services for us prior to its engagement.





PART
IV





ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





Financial
Statement Schedules





The
consolidated financial statements of La Cortez Energy, Inc. are listed on the
Index to Financial Statements on this annual report on Form 10-K beginning on
page F-1.





All
financial statement schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.





Exhibits





The
following Exhibits are being filed with this Annual Report on Form
10-K:




In
reviewing the agreements included or incorporated by reference as exhibits to
this Annual Report on Form 10-K, please remember that they are included to
provide you with information regarding their terms and are not intended to
provide any other factual or disclosure information about the Company or the
other parties to the agreements. The agreements may contain representations and
warranties by each of the parties to the applicable agreement. These
representations and warranties have been made solely for the benefit of the
parties to the applicable agreement and:





•
            should
      not in all instances be treated as categorical statements of fact, but
      rather as a way of allocating the risk to one of the parties if those
      statements prove to be inaccurate;





•
            have
      been qualified by disclosures that were made to the other party in
      connection with the negotiation of the applicable agreement, which
      disclosures are not necessarily reflected in the
  agreement;





•
            may
      apply standards of materiality in a way that is different from what may be
      viewed as material to you or other investors;
  and





•
            were
      made only as of the date of the applicable agreement or such other date or
      dates as may be specified in the agreement and are subject to more recent
      developments.





Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time. Additional
information about the Company may be found elsewhere in this Annual Report on
Form 10-K and the Company’s other public filings, which are available without
charge through the SEC’s website at http://www.sec.gov.




79




Exhibit
                  No.
              
              SEC Report
                  Reference Number
              
              Description3.1
              
              3.1
              
              Amended
      and Restated Articles of Incorporation of the Registrant as filed with the
      Nevada Secretary of State on February 8, 2008 (1)3.2
              
              3.2
              
              By-Laws
      of the Registrant (2)10.1
              
              10.1
              
              Employment
      Agreement dated May 13, 2008 by and between the Registrant and Andres
      Gutierrez Rivera (3)10.2
              
              10.1
              
              Form
      of Stock Option Agreement to Directors under the Registrant’s 2008 Equity
      Incentive Plan, as amended (4)10.3
              
              10.1
              
              Form
      of Stock Option Agreement to Executive Officers under the Registrant’s
      2008 Equity Incentive Plan, as amended (4)10.4
              
              10.1
              
              Split-Off
      Agreement dated August 15, 2008 by and among the Registrant, de la Luz
      Chocolates, Inc., and Maria de la Luz (5)10.5
              
              10.2
              
              General
      Release Agreement dated August 15, 2008, by and among the Registrant, de
      la Luz Chocolates, Inc., and Maria de la Luz (5)10.6
              
              10.1
              
              Form
      of Subscription Agreement for 2008 unit offering(6)10.7
              
              10.2
              
              Form
      of Warrant for 2008 unit offering (6)10.8
              
              10.3
              
              Form
      of Registration Rights Agreement for 2008 unit offering
  (6)10.9
              
              10.6
              
              The
      Registrant’s Amended and Restated 2008 Equity Incentive Plan
      (7)10.10
              
              10.1
              
              Memorandum
      of Understanding between the Registrant and Petroleos del Norte S. A.
      dated as of December 22, 2008 (8)10.11
              
              10.11
              
              Farm-Out
      Agreement (Maranta E&P Block) by and between Emerald Energy Plc
      Sucursal Colombia and La Cortez Energy Colombia, Inc. dated as of February
      6, 2008 (9)10.12
              
              10.1
              
              Form
      of subscription agreement for 2009 unit offering (10)10.13
              
              10.2
              
              Form
      of warrant for 2009 unit offering (10)10.14
              
              10.3
              
              Form
      of registration rights agreement for 2009 unit offering
    (10)10.15
              
              10.1
              
              Joint
      Operating Agreement between Petroleos del Norte S.A. and La Cortez Energy
      Colombia, Inc., dated as of February 23, 2009 (11)10.16
              
              4.1
              
              Form
      of common stock purchase warrant dated December 29, 2009
    (12)10.17
              
              *
              
              Stock
      Purchase Agreement between the Registrant and Avante Petroleum SA, dated
      as of March 2, 2010




80





Exhibit
                  No.
              
              SEC Report
                  Reference Number
              
              Description10.18
              
              *
              
              Stockholder
      Agreement among the Registrant, Avante Petroleum SA, Nadine Smith and
      Andres Gutierrez, dated as of dated as of March 2, 201010.19
              
              *
              
              Share
      Escrow Agreement among the Registrant, Avante Petroleum SA and Robert Jan
      Jozef Lijdman, dated as of March 2, 201010.20
              
              *
              
              Subscription
      Agreement between the Registrant and Avante Petroleum SA, dated as of
      March 2, 201010.21
              
              *
              
              Registration
      Rights Agreement between the Registrant and Avante Petroleum SA, dated as
      of March 2, 201010.22
              
              *
              
              Form
      of Common Stock Warrant issued to Avante Petroleum SA14.1
              
              14
              
              Code
      of Ethics (13)21
              
              *
              
              List
      of Subsidiaries31.1
              
              *
              
              Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 200231.2
              
              *
              
              Certification
      of Interim Principal Financial Officer, pursuant to SEC
      Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302
      of the Sarbanes-Oxley Act of 200232.1
              
              *
              
              Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002**32.2
              
              *
              
              Certification
      of Interim Chief Financial Officer, pursuant to 18 U.S.C.
      Section 1350, adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002**









(1)
            Filed
      with the SEC on February 13, 2008 as an exhibit, numbered as indicated
      above, to the Registrant’s current report (SEC File No. 333-138465) on
      Form 8-K, which exhibit is incorporated herein by
    reference.




(2)
            Filed
      with the Securities and Exchange Commission on November 7, 2006 as an
      exhibit, numbered as indicated above, to the Registrant’s registration
      statement (SEC File No. 333-138465) on Form SB-2, which exhibit is
      incorporated herein by reference.




(3)
            Filed
      with the SEC on May 20, 2008 as an exhibit, numbered as indicated above,
      to the Registrant’s current report (SEC File No. 333-138465) on Form 8-K,
      which exhibit is incorporated herein by
  reference.




(4)
            Filed
      with the SEC on July 28, 2008 as an exhibit, numbered as indicated above,
      to the Registrant’s current report (SEC File No. 333-138465) on Form 8-K,
      which exhibit is incorporated herein by
  reference.




(5)
            Filed
      with the SEC on August 21, 2008 as an exhibit, numbered as indicated
      above, to the Registrant’s current report (SEC File No. 333-138465) on
      Form 8-K, which exhibit is incorporated herein by
    reference.




81




(6)
            Filed
      with the SEC on September 16, 2008 as an exhibit, numbered as indicated
      above, to the Registrant’s current report (SEC File No. 333-138465) on
      Form 8-K, which exhibit is incorporated herein by
    reference.




(7)
            Filed
      with the SEC on November 14, 2008 as an exhibit, numbered as indicated
      above, to the Registrant’s quarterly report (SEC File No. 333-138465) on
      Form 10-Q, which exhibit is incorporated herein by
    reference.




(8)
            Filed
      with the SEC on January 9, 2009 as an exhibit, numbered as indicated
      above, to the Registrant’s current report (SEC File No. 333-138465) on
      Form 8-K, which exhibit is incorporated herein by
    reference.




(9)
            Filed
      with the SEC on April 10, 2009 as an exhibit, numbered as indicated above,
      to the Registrant’s annual report (SEC File No. 333-138465) on Form 10-K,
      which exhibit is incorporated herein by
  reference.




(10)
            Filed
      with the SEC on June 22, 2009 as an exhibit, numbered as indicated above,
      to the Registrant’s current report (SEC File No. 333-138465) on Form 8-K,
      which exhibit is incorporated herein by
  reference.




(11)
            Filed
      with the SEC on November 16, 2009 as an exhibit, numbered as indicated
      above, to the Registrant’s quarterly report (SEC File No. 333-138465) on
      Form 10-Q, which exhibit is incorporated herein by
    reference.




(12)
            Filed
      with the SEC on January 4, 2010 as an exhibit, numbered as indicated
      above, to the Registrant’s current report (SEC File No. 333-138465) on
      Form 8-K, which exhibit is incorporated herein by
    reference.




(13)
            Filed
      with the SEC on March 31, 2008 as an exhibit, numbered as indicated above,
      to the Registrant’s annual report (SEC File No. 333-138465) on Form
      10-KSB, which exhibit is incorporated herein by
  reference.




*
            Filed/furnished
      herewith.




**
              This
      certification is being furnished and shall not be deemed “filed” with the
      SEC for purposes of Section 18 of the Exchange Act, or otherwise subject
      to the liability of that section, and shall not be deemed to be
      incorporated by reference into any filing under the Securities Act or the
      Exchange Act, except to the extent that the Registrant specifically
      incorporates it by reference.




82


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
      16, 2010
            
            By:
            /s/ Andrés Gutierrez
      RiveraAndrés
      Gutierrez RiveraPresident
      and Chief Executive OfficerBy:
            /s/ Nadine C. SmithNadine
      C. SmithInterim
      Chief Financial Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




SIGNATURE
            
            TITLE
            
            DATE/s/ Nadine C. Smith
            
            Chairman
      of the Board, Interim Chief
            
            April
      16, 2010Nadine
      C. Smith
            
            Financial
      Officer/s/ Andrés Gutierrez Rivera
            
            President
      and Chief Executive Officer,
            
            April
      16, 2010Andrés
      Gutierrez Rivera
            
            Director/s/ Alexander F. D. Berger
            
            Director
            
            April
      16, 2010Alexander
      F. D. Berger/s/ José Fernando Montoya
            
            Director
            
            April
      16, 2010José
      Fernando Montoya Carrillo/s/ Jaime Navas Gaona
            
            Director
            
            April
      16, 2010Jaime
      Navas Gaona/s/ Jaime Ruiz Llano
            
            Director
            
            April
      16, 2010Jaime
      Ruiz Llano/s/ Richard G. Stevens
            
            Director
            
            April
      16, 2010Richard
      G. Stevens




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


GLOSSARY
OF OIL AND GAS TERMS





The
following are the meanings of some of the oil and gas industry terms that may be
used in this report.





2D seismic
data: Two-dimensional seismic data; geophysical data that depicts
the subsurface strata in two dimensions; a vertical section of seismic data
consisting of numerous adjacent traces acquired individually and
sequentially.





3D seismic
data:Three-dimensional seismic data; geophysical data that
depicts the subsurface strata in three dimensions; a vertical section of seismic
data consisting of multiple closely spaced adjacent traces acquired
together.





ANH:  National
Hydrocarbon Agency of Colombia (Agencia Nacional de Hidrocarburos)





API gravity
scale:A gravity scale devised by the American Petroleum
Institute.





association
contract:  Prior to 2003, the type of contract in association
with Ecopetrol in Colombia, regulating the exploration, production and
development of hydrocarbons. Association contracts give Ecopetrol the right to
back-in into any block. After 2003 with the creation of the ANH, Colombia
adopted an international E&P contract.





basin:A depression of the
earth’s surface into which sediments are deposited, usually characterized by
sediment accumulation over a long interval; a broad area of the earth beneath
which layers of rock are inclined, usually from the sides toward the
center.





block:  Subdivision
of an area for the purpose of licensing to a company or companies for
exploration/production rights.





BOPD:  Abbreviation
for barrels of oil per day, a common unit of measurement for volume of crude
oil. The volume of a barrel is equivalent to 42 US gallons.





completion:The
installation of permanent equipment for the production of oil or natural gas, or
in the case of a dry hole, the reporting of abandonment to the appropriate
agency.





concession:Usually
used in foreign operations and refers to a large block of acreage granted to the
operator by the host government for a certain time and under certain government
conditions which allows the operator to conduct exploratory and/or development
operations. The Concession Agreement assures the holder of certain rights under
the law.





crude oil:A general term for unrefined petroleum or liquid petroleum.





dry
hole:A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
would exceed production expenses and taxes.





E&P:Exploration
and production.




Ecopetrol: The Colombian
state-controlled oil company.




exploration:The
initial phase in petroleum operations that includes generation of a prospect or
play or both, and drilling of an exploration well.  Appraisal,
development and production phases follow successful
exploration.


G-1


exploratory
well:A well drilled to find and produce oil and gas reserves
that is not a development well.





field:An
area consisting of either a single reservoir or multiple reservoirs, all grouped
on or related to the same individual geological structural feature and/or
stratigraphic condition.





formation:  An
identifiable layer of rocks named after the geographical location of its first
discovery and dominant rock type.





hydrocarbon:  A
naturally occurring organic compound comprising hydrogen and carbon.
Hydrocarbons can be as simple as methane [CH4], but many
are highly complex molecules, and can occur as gases, liquids or solids. The
molecules can have the shape of chains, branching chains, rings or other
structures. Petroleum is a complex mixture of hydrocarbons. The most common
hydrocarbons are natural gas, oil and coal.





lead: A possible
prospect.





operator:The
individual or company responsible for the exploration and/or exploitation and/or
production of an oil or gas well or lease.





participation
interest:  The proportion of exploration and production costs
each party will bear and the proportion of production each party will receive,
as set out in an operating agreement.





play:  An
area in which hydrocarbon accumulations or prospects of a given type
occur.





production:  The phase that
occurs after successful exploration and development and during which
hydrocarbons are drained from an oil or gas field.





prospect:A
specific geographic area, which based on supporting geological, geophysical or
other data and also preliminary economic analysis using reasonably anticipated
prices and costs, is deemed to have potential for the discovery of commercial
hydrocarbons.




reservoir:A subsurface,
porous, permeable rock formation in which oil and gas are found.




royalty:  A
percentage share of production, or the value derived from production, paid, in
cash or kind, from a producing well.




seismic:  Pertaining
to waves of elastic energy, such as that transmitted by P-waves and S-waves, in
the frequency range of approximately 1 to 100 Hz. Seismic energy is studied by
scientists to interpret the composition, fluid content, extent and geometry of
rocks in the subsurface.




spud,
to:  To commence drilling operations.




sunk
costs:  Costs that cannot be recovered once they have been
incurred.





water cut:
The term used in production testing to specify the ratio of water produced
compared to the volume of total liquids (water and oil) produced.





West Texas
Intermediate (“WTI”):Light, sweet crude oil with high API
gravity and low sulfur content used as the benchmark for U.S. crude oil refining
and trading.  WTI is deliverable at Cushing, Oklahoma, to fill NYMEX
futures contracts for light, sweet crude oil.


G-2


working
interest:The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and to
receive a share of production.





workover:
Remedial work to the equipment within a well, the well pipework, or relating to
attempts to increase the rate of flow.





X factor:The payment to the ANH of a percentage of net production revenues over
and above the standard royalties.


G-3