DevMar Equities (DEVM) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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 000-53877

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

 (Address of principal executive offices)

+57-941-870-5433

(Registrant’s telephone number, including area code)

N.A.

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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.  Yes ¨ No x

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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer          ¨	Accelerated filer                      ¨
Non-accelerated filer            ¨	Smaller reporting company     þ
(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

As of November 12, 2010, there were 46,055,470 shares of the registrant’s common stock outstanding.

Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts included in this Report including, without limitation, statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements including, but not limited to: (i)  our ability to identify and exploit available corporate acquisition, farm-in and/or joint venture opportunities in the energy sector in Colombia and, more generally, in Latin America; (ii) our ability to establish technical and managerial infrastructure; (iii)  our ability to raise required capital on acceptable terms and conditions; (iv) our ability to take advantage of, and successfully participate in such opportunities; (v) our ability to successfully operate, or influence our joint venture partners’ operation of, the projects in which we participate in a cost effective and efficient way; and (vi) future economic conditions, political and regulatory stability and changes and volatility in energy prices. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2010, as amended on April 20, 2010.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

2

LA CORTEZ ENERGY, INC.

TABLE OF CONTENTS

			Page
Part I – Financial Information
Item 1	Financial Statements		4
	Condensed Consolidated Balance Sheets (unaudited) – September 30, 2010 and December 31, 2009		4
	Condensed Consolidated Statements of Operations (unaudited) - For the three and nine months ended September 30, 2010 and 2009 (restated)		5
	Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit) (unaudited) - For the nine months ended September 30, 2010		6
	Condensed Consolidated Statements of Cash Flows (unaudited) - For the nine months ended September 30, 2010 and 2009 (restated)		7
	Notes to Condensed Consolidated Financial Statements (unaudited)		8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3	Qualitative and Quantitative Disclosure About Market Risk		39
Item 4	Controls and Procedures		39
Part II – Other Information
		40
Item 1	Legal Proceedings
Item 1A	Risk Factors		40
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3	Defaults Upon Senior Securities		40
Item 4	(Removed and Reserved)		40
Item 5	Other Information		41
Item 6	Exhibits		41
Signatures			43

3

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LA CORTEZ ENERGY, INC.

Condensed Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(Unaudited)

	September 30,			December 31,
	2010			2009
Assets
Cash and cash equivalents	$	10,907,471		$	2,376,585
Accrued oil receivables		-			189,835
Employee advances and other receivables		54,330			26,294
Prepaid expenses		115,866			19,519
Total current assets		11,077,667			2,612,233
Oil properties, using the full cost method of accounting at cost:
Proved		7,513,057			7,513,057
Unproved		14,242,421			1,599,951
Accumulated depletion and impairment		(7,097,057	)		(6,706,603	)
		14,658,421			2,406,405
Other property and equipment, net of accumulated depreciation of $149,568 and $100,274, respectively		181,976			204,206
Goodwill		5,591,422			-
Restricted cash		2,672,500			2,672,500
Total assets	$	34,181,986		$	7,895,344
Liabilities and Shareholders' Equity (Deficit)
Liabilities:
Accounts payable	$	804,124		$	2,518,565
Accrued liabilities		515,243			267,155
Derivative warrant instruments		12,322,412			7,500,138
Total current liabilities		13,641,779			10,285,858
Asset retirement obligation		56,130			3,860
Total  liabilities		13,697,909			10,289,718
Commitments and contingencies (Note 10)
Shareholders' equity (deficit):
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $0.001 par value; 300,000,000 shares authorized; 46,030,470 and 25,428,815 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		46,030			25,429
Additional paid-in capital		38,367,677			11,396,506
Accumulated deficit		(17,929,630	)		(13,816,309	)
Total shareholders' equity (deficit)		20,484,077			(2,394,374	)
Total liabilities and shareholders' equity (deficit)	$	34,181,986		$	7,895,344

See accompanying notes to condensed consolidated financial statements.

4

LA CORTEZ ENERGY, INC.

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2010 and 2009

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
				(Restated)						(Restated)
Revenues:
Oil revenues	$	251,266		$	-		$	417,540		$	-
Total revenues		251,266			-			417,540			-
Costs and expenses:
Operating costs		281,309			-			1,124,563			-
Depreciation, depletion, accretion and amortization		87,607			16,405			181,582			44,338
Impairment of oil properties		-			-			273,318			-
General and administrative		1,235,879			738,399			3,906,248			2,262,447
Total costs and expenses		1,604,795			754,804			5,485,711			2,306,785
Loss from operations		(1,353,529	)		(754,804	)		(5,068,171	)		(2,306,785	)
Non-operating income:
Unrealized gain on fair value of derivative warrant instruments, net		1,046,452			638,639			944,429			2,899,601
Interest and other income		17,355			21,239			50,178			41,909
(Loss) income before income taxes		(289,722	)		(94,926	)		(4,073,564	)		634,725
Income taxes		(39,757	)		-			(39,757	)		-
Net (loss) income	$	(329,479	)	$	(94,926	)	$	(4,113,321	)	$	634,725
Basic and diluted (loss) earnings per share	$	(0.01	)	$	(0.00	)	$	(0.10	)	$	0.03
Basic and diluted weighted-average common shares outstanding		45,980,198			23,931,168			40,386,748			20,814,676

See accompanying notes to condensed consolidated financial statements.

5

LA CORTEZ ENERGY, INC.

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit)

  For the nine months ended September 30, 2010

(Unaudited)

					Additional
	Common Stock				Paid-in		Accumulated
	Shares		Par Value		Capital		Deficit			Total
Balance at December 31, 2009		25,428,815	$	25,429	$	11,396,506	$	(13,816,309	)	$	(2,394,374	)
January 2010, common stock and warrants sold in private placement offering at $1.75 per share, less offering costs totaling $122,802		571,428		571		653,782		-			654,353
March 2010, common stock and warrants sold in private placement offering at $1.75 per share, less offering costs totaling $184,205		857,144		857		903,827		-			904,684
March 2010, common stock and warrants sold in private placement offering to Avante at $1.75 per share		2,857,143		2,857		2,192,906		-			2,195,763
Shares issued for acquisition of Avante		10,285,819		10,286		15,274,714		-			15,285,000
April 2010, common stock and warrants sold in private placement offering at $1.75 per share, less offering costs totaling $695,374		5,905,121		5,905		7,304,175		-			7,310,080
Common stock for services		125,000		125		213,375		-			213,500
Stock-based compensation		-		-		428,392		-			428,392
Net loss		-		-		-		(4,113,321	)		(4,113,321	)
Balance at September 30, 2010		46,030,470	$	46,030	$	38,367,677	$	(17,929,630	)	$	20,484,077

See accompanying notes to condensed consolidated financial statements.

6

LA CORTEZ ENERGY, INC.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2010 and 2009

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
				(Restated)
Cash flows from operating activities:
Net (loss) income	$	(4,113,321	)	$	634,725
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation, depletion, accretion and amortization		181,582			44,338
Impairment of oil properties		273,318			-
Stock-based compensation		428,392			495,903
Unrealized gain on fair value of derivative warrant  instruments, net		(944,429	)		(2,899,601	)
Common stock for services		213,500			-
Changes in operating assets and liabilities:
Accrued oil receivables		193,488			-
Employee advances and other receivables		(28,036	)		(31,321	)
Prepaid expenses and other assets		(46,309	)		(14,281	)
Accounts payable		(1,954,886	)		88,574
Accrued liabilities		175,462			127,322
Net cash used in operating activities		(5,621,239	)		(1,554,341	)
Cash flows from investing activities:
Acquisition of Avante, net of cash received		289,937			-
Investments in unproved oil properties		(2,969,395	)		(7,365,236	)
Purchases of other property and equipment		-			(33,389	)
Net cash used in investing activities		(2,679,458	)		(7,398,625	)
Cash flows from financing activities:
Proceeds from the sale of common stock and derivative warrant instruments		17,833,964			6,331,164
Payments for offering costs		(1,002,381	)		(870,087	)
Net cash provided by financing activities		16,831,583			5,461,077
Net change in cash		8,530,886			(3,491,889	)
Cash and cash equivalents, beginning of period		2,376,585			6,733,381
Cash and cash equivalents, end of period	$	10,907,471		$	3,241,492
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	23,282		$	-
Interest	$	-		$	-
Non-cash investing and financing transactions:
Change in asset retirement obligation estimate	$	135,395		$	-
Cumulative effect of reclassification of warrants	$	-		$	2,304,561
Issuance of common stock in connection with acquisition of Avante for:
Acquisition of accounts receivable	$	3,653		$	-
Acquisition of prepaid expenses and other current assets	$	43,001		$	-
Acquisition of unproved oil properties	$	9,808,470		$	-
Acquisition of goodwill	$	5,591,422		$	-
Acquisition of other property and equipment	$	48,743		$	-
Assumption of accounts payable	$	240,445		$	-
Assumption of accrued liabilities	$	72,626		$	-
Assumption of asset retirement obligation	$	187,155		$	-

See accompanying notes to condensed consolidated financial statements. 

7

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

(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”), La Cortez Energy Colombia, E.U., a Colombia corporation (“Colombia E.U.”) and Avante Colombia S.à.r.l. (“Avante Colombia”), 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.  As discussed in Note 3 below, LCE acquired Avante Colombia on March 2, 2010.

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 8, 2008, the Company changed its name from La Cortez Enterprises, Inc. to La Cortez Energy, Inc.

Interim Financial Statements

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  The results of operations presented for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year.  Interim financial data presented herein are unaudited.  The condensed consolidated financial statements as of and for the three and nine month periods ended September 30, 2009 have been restated.  (See Note 11).

Use of Estimates

The preparation of financial statements in accordance with GAAP 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 condensed consolidated financial statements include estimates of oil reserves, future cash flows from oil properties, depreciation, depletion, amortization, asset retirement obligations and accrued revenues and effects of purchase price allocations.

8

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

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 and cash equivalents of approximately $10.9 million at September 30, 2010.

Oil Properties

As of September 30, 2010, the Company has oil properties in the amount of $14,242,421 that 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 are charged to impairment expense. The Company applies the full cost ceiling test on a quarterly basis on the date of the latest consolidated balance sheet presented.  

For the three and nine months ended September 30, 2010, the Company incurred $0 and $273,318, respectively, of impairment on its oil properties.  

As discussed in Note 6, 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.

Goodwill

Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired businesses. The Company’s goodwill results from the acquisition of 100% of the outstanding stock of Avante Colombia (as defined below). In order to determine the fair value of goodwill on the Avante Colombia acquisition, the Company allocated the fair value (determined with the assistance of independent consultants) of all Avante Colombia’s  assets and liabilities  against an increase of Avante Colombia equity. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the fair value of goodwill.  As a result, the Company recorded goodwill in the amount of approximately $5.6 million at March 2, 2010 as a non-current asset.

In accordance with guidance of the FASB ASC — Topic no. 350-10, Goodwill and Other, the Company tests goodwill for impairment in the first quarter of each fiscal year or at any other time when impairment indicators exist by comparing the fair value of the reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. Examples of such indicators, which would cause the Company to test goodwill for impairment between annual tests, include a significant change in the business climate, significant unexpected competition, significant deterioration in market share, and/or a loss of key personnel.  If goodwill is determined to be impaired, the loss is measured by the excess of the carrying amount of the reporting unit over its fair value. The Company’s annual goodwill impairment test derived no adjustment to its operating results.

Earnings (Loss) per Common Share

The Company accounts for earnings (loss) per share in accordance with FASB ASC Topic No. 260 – 10, 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 operations exists, 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.

9

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

For the nine months ended September 30, 2010, the Company had potentially dilutive shares outstanding, including 2,401,667 options to purchase shares of common stock and warrants to purchase 15,515,203 shares of common stock, and restricted stock units issued to key directors and employees that enable grantees to obtain 410,123 shares of common stock.   For the nine months ended September 30, 2009, the Company had potentially dilutive shares outstanding, including 2,301,667 options to purchase shares of common stock and warrants to purchase 7,932,900 shares of common stock.  There was no difference between basic and diluted loss per share for the three and nine months ended September 30, 2010 as well as for the three months ended September 30, 2009 as the effect of these potential common shares were anti-dilutive due to the net loss during the three and nine months ended September 30, 2010 and the three months ended September 30, 2009. There was no difference between basic and diluted earnings per share for the nine months ended September 30, 2009 as the average stock price of the Company’s common shares during the period did not exceed the exercise price of any of Company’s outstanding options and warrants to purchase shares of common stock.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accrued oil receivables, accounts payable and accrued expenses and other liabilities approximates fair value due to the short term nature of these accounts.

Foreign Currency Translation

For the nine months ended September 30, 2010 and 2009, cumulative translation gains (losses) and foreign currency transaction gains (losses) were immaterial.

Recently Issued Accounting Pronouncements

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. The Company adopted this statement effective January 1, 2010.  The adoption of the new guidance in FASB ASC 810 did not impact the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance intended to improve disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, the reasons for the transfers and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance was effective for La Cortez on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the adoption of this standard did not impact the Company’s results of operations, cash flows or financial position.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year presentation.

10

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

(2) Going Concern

At September 30, 2010, the Company had cash and cash equivalents of $10,907,471 and working capital deficit of $2,564,112. 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 the end of the second quarter of 2011 based upon its current operating plan and condition.

Through September 30, 2010, 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 November 2011.  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, Rio de Oro and Puerto Barco projects described in Note 4 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 condensed 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 condensed 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.

Additionally, the Company’s independent auditors included an explanatory paragraph in their report on La Cortez’s consolidated financial statements included in its Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC on April 16, 2010, as amended on April 20, 2010, that raises substantial doubt about La Cortez’s ability to continue as a going concern.

(3) Acquisition of Avante Colombia

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, La Cortez 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 its common stock (the “Purchase Price Shares”).

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 Exploración y Producción S.A.  The Rio de Oro field covers 2,262 hectares (5,590 acres), and the Puerto Barco field covers 2,406 hectares (5,945 acres).  Both production contracts are for a ten-year term expiring at the end of 2013.  The acquisition of Avante Colombia will provide new exploration opportunities.

11

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Under the terms of the SPA, the Company and Avante have also agreed to pursue certain opportunities in the Catatumbo area on a joint venture basis.  If the Company enters into such a joint venture with Avante, then the Company 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 the Company, (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%.

In connection with the Acquisition, on the Closing Date, La Cortez and Avante entered into a Subscription Agreement (the “Avante Subscription Agreement”), pursuant to which Avante purchased 2,857,143 shares of La Cortez’s common stock (the “Avante Shares”) and three-year warrants to purchase 2,857,143 shares of its 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).   (See Note 7).

Lock-Up

The SPA provides that, without the Company’s prior written consent, Avante may not offer, sell, contract to sell, grant any option to purchase, hypothecate, pledge, transfer title to or otherwise dispose of any of Purchase Price Shares, Avante Shares or Avante Warrants or any of the shares issuable upon exercise of Avante Warrants (the “Avante Warrant Shares”) until September 2, 2011 (the “Lock-Up Period”).  The SPA also provides that, during such period, Avante may not effect or agree to effect any short sale or certain related transactions with respect to the Company’s common stock.

Share Escrow

In connection with the Acquisition, La Cortez entered into a Share Escrow Agreement with Avante, and an escrow agent, pursuant to which 1,500,000 of the 10,285,819 Purchase Price Shares are being held in escrow to secure certain indemnification obligations of Avante under the SPA.  Subject to certain exceptions, any such escrowed shares that are not cancelled in order to satisfy indemnification obligations of Avante will be released to Avante after March 2, 2012.  Avante may not assign or transfer any interest in the escrowed shares while they are held in escrow, however, Avante is entitled to exercise voting rights with respect to such shares.

The SPA permits Avante to satisfy any indemnification obligations thereunder in whole or in part by surrender of shares of the Company’s common stock (including the shares held in escrow) in lieu of cash.  In addition, the SPA allows the Company to elect to receive Avante’s escrowed shares of Company common stock in lieu of cash to satisfy Avante’s indemnification obligations with respect to certain environmental matters.  Any shares of common stock surrendered to satisfy Avante’s indemnification obligations under the SPA shall be valued based on the volume-weighted average sale prices of the Company’s common stock for the 60 most recent trading days on which sales have occurred ending on the trading day immediately prior to the relevant date of determination.  The Company is not liable for any indemnification obligations as of the date of filing of this report.

Registration Rights Agreement

Pursuant to the SPA, the Company entered into a Registration Rights Agreement with Avante, dated as of March 2, 2010 (the “Avante RRA”).  The Avante RRA grants Avante certain “piggyback” registration rights with respect to the Purchase Price Shares, the Avante Shares and the Avante Warrant Shares; provided that in exercising such piggyback registration rights with respect to any proposed registration statement, Avante may not request inclusion in such registration statement of more than 10% of the number of shares of the Company’s common stock outstanding at such time.

12

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The Avante RRA grants Avante one demand registration right covering the Avante Shares and the Avante Warrant Shares, exercisable if (a) the Company fails to either file a registration statement on which Avante can piggyback or to complete a listing of its common stock on a United States or Canadian national securities exchange within 180 days of the final closing of the private placement offering described in Note 7 below (the “PPO”), and (b) a Total Investment Majority (as defined in the Avante RRA) joins in such demand.  The Total Investment Majority may include holders of the Company’s securities purchased pursuant to the Avante Subscription Agreement as well as securities purchased pursuant to the PPO and pursuant to warrants purchased pursuant to either, taken together on an aggregate basis.

The Avante RRA provides an additional demand registration, exercisable following the Lock-Up Period, if Avante (or its successors and permitted assignees under the Avante RRA) is an “affiliate” of the Company’s (within the meaning of Rule 144) at such time.  Each of the Avante Warrant Shares, the Avante Shares and the Purchase Price Shares will cease to be registrable under the Avante RRA if and for so long as they may be sold publicly in the United States without being subject to volume limitations (whether pursuant to Rule 144 or otherwise).  The Avante RRA contains customary cutback, discontinuation and indemnification provisions.

Stockholder Agreement

In connection with the Acquisition, La Cortez entered into a Stockholder Agreement with Avante; Nadine Smith, the Company’s Chairman of the Board; and Andres Gutierrez, the Company’s CEO, dated as of March 2, 2010 (the “Stockholder Agreement”).

Pursuant to the Stockholder Agreement, upon the closing of the SPA, the Company’s Board increased the number of directors constituting the entire Board by one and appointed Avante’s nominee, Alexander Berger, to fill the vacancy on the Board so created, to serve until the next annual meeting of the Company’s shareholders or until his successor is duly elected and qualified or his earlier death, resignation or removal in accordance with the Company’s By-Laws.  The Stockholder Agreement provides that Avante shall continue to nominate one individual reasonably satisfactory to the Company at the next and subsequent annual meetings of its shareholders, and at any special meeting of its shareholders at which directors are to be elected (any “Election Meeting”) as long as Avante and/or its affiliates own outstanding shares representing 10% or more of the votes entitled to be cast at the applicable Election Meeting.  Avante’s nominee will be subject to election and re-election by the Company’s shareholders as provided in its By-Laws.  If Avante’s nominee is not elected by the Company’s shareholders, then Avante shall have the right to designate the same or another person as its nominee at the next Election Meeting, provided that Avante and/or its affiliates own outstanding voting shares representing 10% or more of the votes entitled to be cast at the applicable Election Meeting.

The Stockholder Agreement provides that each of Avante, Ms. Smith and Mr. Gutierrez shall vote any shares of the Company’s capital stock owned by such party, or cause any shares of the Company’s capital stock owned by any immediate family member or affiliate of such party to be voted, in favor of Avante’s nominee at any Election Meeting.

In addition, for so long as Avante is entitled to name a nominee for election as a director, as provided in the Stockholder Agreement, Avante shall have the right to appoint one additional non-voting observer to attend meetings of the Board, and said observer shall have the right to visit the Company’s offices, to have interaction with its management and to receive information and documents pertaining to the Company as reasonably requested, subject to the confidentiality provisions of the Stockholder Agreement.

For a period ending on the earlier of (i) September 2, 2011 or (ii) the first date on which Avante and/or its affiliates no longer own outstanding voting shares representing ten percent (10%) or more of the votes entitled to be cast at any annual or special meeting of shareholders (if a record date for such a meeting were established on any day), in the event that the Company (or its Board) should propose to: (a) merge or consolidate with or into any other corporation (if the holders of the Company’s voting capital stock immediately prior to the transaction would not hold a majority of the voting stock or other voting equity of the surviving entity immediately after completion of the transaction), or sell, assign, lease or otherwise dispose of all or substantially all of the Company’s assets, or recommend to the Company’s shareholders a third-party tender offer for a majority of its outstanding voting capital stock; or (b) acquire a business (whether by merger, stock purchase or asset purchase) in a transaction that would result in the issuance of a number of shares of the Company’s voting capital stock equal to or exceeding thirty percent (30%) of its voting capital stock outstanding after giving effect to the proposed transaction; or (c) appoint a new Chief Executive Officer (any of the foregoing, a “Covered Transaction”), then the Company’s Board shall establish a special committee of the Board pursuant to the By-Laws, which committee shall consist of Avante’s nominated director (or if there is no Avante nominee then serving on the Board, Avante’s observer), the Company’s Chairman of the Board, and the Company’s Chief Executive Officer (the “Special Committee”).  The Covered Transaction will require the unanimous approval of all of the members of the Special Committee before it can be submitted to the full Board for consideration; provided, however, that the foregoing requirement shall be subject and subordinate to the fiduciary duties of each director and any other restrictions under applicable law and the listing standards of any exchange on which the Company’s securities are then listed.

13

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Description of Assets of Avante Colombia

Immediately following the Acquisition, Avante Colombia became La Cortez’s wholly-owned subsidiary.

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. (“Ecopetrol”) in the Department of North Santander in the Catatumbo region of northeastern Colombia, under an operating joint venture with Vetra Exploración y Producción S.A. (“Vetra” ).  The Rio de Oro field covers 2,262 hectares (5,590 acres), and the Puerto Barco field covers 2,406 hectares (5,945 acres).  Both production contracts are for a ten-year term expiring at the end of 2013.

Under the Puerto Barco production contract, Ecopetrol has a 6% production participation, Vetra a 47% working interest and Avante Colombia a 47% 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% working interest and Avante Colombia a 44% 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 the Company for 50% of any environmental losses it incurs, up to a maximum of $2.5 million.

Purchase Price Allocation

On March 2, 2010, the Company purchased substantially all of the outstanding stock of Avante Colombia.  The results of operations of Avante Colombia have been included in the Company’s consolidated statements of operations since the acquisition date.

14

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition.  The estimates of the fair value of the assets acquired, liabilities assumed and the stock issued for the acquisition were prepared with the assistance of an independent valuations consultant.  These estimates are preliminary and subject to change.  The following is a summary of the purchase price allocation:

Assets acquired
Cash	$	289,937
Accounts receivable		3,653
Prepaid expenses and other current assets		43,001
Unproved oil and gas properties		9,808,470
Goodwill		5,591,422
Other fixed assets		48,743
Total assets acquired		15,785,226
Liabilities assumed
Accounts payable and other current liabilities		313,071
Asset retirement obligation		187,155
Total liabilities assumed		500,226
Net assets acquired	$	15,285,000
Purchase price paid through issuance of 10,285,819 shares of common stock	$	15,285,000

Management believes that the goodwill acquired in the acquisition reflects the value associated with the potential to extend the term of the contracts on the acquired properties and to extend the contracts to other productive zones and development areas.  These contracts involve Ecopetrol and affect the properties acquired in the Avante acquisition.

The Company assesses the possible impairment of goodwill at least annually, on March 31, at the reporting unit level.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill.  The Company determined that the market capitalization approach is the most appropriate method of measuring fair value of the reporting unit, assuming a controlling interest.  In this case, the reporting unit is made up of the Company and all consolidated subsidiaries.  Under this approach, fair value is calculated based on the market price of common stock, multiplied by the number of outstanding shares.  A control premium, which is representative of premiums paid in the marketplace to acquire a controlling interest in a company, is then added to the market capitalization to determine the fair value of the reporting unit.  If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized.  The Company monitors changes in its closing market price and its effect on fair value and the relationship to the carrying value.  Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.  As of September 30, 2010, the Company did not identify any potential impairment related to its goodwill.

15

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The following table reflects the unaudited pro forma results of operations as though the Avante Acquisition had occurred on January 1, 2010 and 2009. The pro forma amounts are not necessarily indicative of the results that may be reported in the future:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues	$	251,266		$	-		$	417,540		$	-
Net loss	$	(329,479	)	$	(408,658	)	$	(4,153,296	)	$	(306,470	)
Loss per share – basic and diluted:	$	(0.01	)	$	(0.01	)	$	(0.10	)	$	(0.01	)
Weighted-average shares outstanding:
basic & diluted		45,980,198			34,216,987			42,685,045			31,100,495

The following table reflects the results of operations of Avante Colombia since the Closing Date that are included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2009		2010			2009
Revenues	$	-		$	-	$	-		$	-
Net loss	$	(142,759	)	$	-	$	(191,454	)	$	-

(4) Oil Properties

The Company follows the full cost method of accounting for its oil properties, whereby all costs incurred in connection with the acquisition, exploration for and development of oil 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 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, in which case the gain or loss is recognized in the statement of operations.

Depletion of proved oil properties is 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 for impairment.  As of September 30, 2010, $14,242,421 of the Company’s oil properties were unproved and were not subject to depletion or ceiling test impairment.

For the three and nine months ended September 30, 2010, the Company incurred $0 and $273,318, respectively, of impairment on its proved oil properties.  

16

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Maranta Block

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”), which covers 90,458 acres (36,608 hectares)  in the Putumayo Basin in Southwest Colombia.

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 the Company.  If the ANH does not approve this assignment, Emerald and the Company have agreed to 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.  Emerald has submitted a request to Agencia Nacional de Hidrocarburos (“ANH”) to approve the assignment of our 20% participating interest. 

Emerald completed drilling operations of the Mirto-2 exploratory well on August 15, 2010,  after having conducted a sidetrack on the well to a “measured depth” (“MD”) of  11,590 feet.  Mirto-2 production tests initiated on September 23, 2010 for a 5-day period on the Villeta U sand had an average production of 29 BOPD and a water cut of 95.9%. The well was put back on an extended production test on October 16, 2010. The workover rig will be used to run cased-hole logs in order to confirm the appropriate perforation positions. This activity has been delayed due to the service rig being used longer than expected by Emerald on a project not associated with the Company.  Emerald plans to have the rig at the Mirto-2 location in approximately three weeks.  At that time, the following activities will commence:

a. Production testing will be stopped, and the production string and Electric Submersible Pump (ESP) will be pulled out of the hole;

b. Cased-hole logs  will be conducted to verify the location of current perforations; and

c. If the perforations are not in the right location, then current perforations will be sealed and new perforations will be placed in the correct locations. If the perforations are found to be at the correct depth, the Villeta U sand will be isolated and the Villeta N sand will be tested.

With the drilling of the Mirto-2 well, Phase 3 of the exploration program has been completed. Both Emerald and the Company have complied with the exploration obligations on this block in accordance with the contract signed with the ANH. Under the contract terms and conditions, and after completion of this phase, both the Company and Emerald are required to relinquish 50% of the area of the block, as selected by both parties, and there is the option to continue exploration activities in the remaining 50% of the area by committing to additional exploration activity with the ANH, such as new seismic acquisition or drilling a new exploration well. This is a normal procedure and in accordance with the contracts entered into with the ANH. Both Emerald and the Company are currently evaluating the exploration potential of the block to determine a course of action and the alternatives regarding the area to be relinquished.

As consideration for its 20% participating interest, the Company reimbursed Emerald a total of $12.231 million as of October 31, 2010 for the Maranta Block Phase 2 costs, including production and development cost for the Mirto wells.

Putumayo-4 Block

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 the Company to a 50% net working interest in the Putumayo 4 block, which covers 126,845 acres (51,333 hectares) in the Putumayo Basin (the “Putumayo 4 Block”).  According to the MOU, the Company will have the exclusive right to a 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.

17

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Petronorte and the Company have completed identification of the number and location of indigenous people and communities in the area along with representatives from the Colombian Ministry of the Interior. A total of seven communities were identified, and the consultation process with these communities has been initiated. Based on this information, the layout for the seismic acquisition has also been completed, resulting in a 2D seismic acquisition plan of some 103 km in the north part of the block, where at least two leads have been determined with the reprocessed seismic. Progress continues in the consultation process with local communities in the Putumayo-4 block.  The Company now expects to initiate acquisition of 105 Km of 2d seismic early in 2011 due to delays in getting the consultation agreements with the different communities in the area, and the Company will be in a position to drill its first exploration well by the end of the first half of 2011. After evaluating the reprocessed seismic, several leads have been identified, which the Company will seek to confirm with the new seismic acquisition.

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.

Under the memorandum of understanding and the joint operating agreement, the Company will be responsible for fifty percent (50%) of the costs incurred under the E&P contract, entitling it 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 the Company 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 the Company for its share of these seismic costs paid by the Company (one-sixth (1/6)) with their revenues from production from the Putumayo 4 Block.

Rio de Oro and Puerto Barco Fields

La Cortez, through Avante Colombia, as operator of the fields, and with its joint venture partner Vetra Exploración y Producción S.A., has continued to conduct social activities in the area, and it has completed a plan to re-initiate production operations on the Puerto Barco field by the first quarter of 2011. This plan includes conducting workover activities in some of the existing wells, not only to determine the mechanical conditions, but also to gather geological information. In addition, the plan includes the upgrading of the production facilities as well as the access road.  Old seismic have been reprocessed and is being evaluated.  The Company has completed its technical evaluation in the Rio de Oro and Puerto Barco fields. The Company has also completed the program to re-initiate the Puerto Barco field early next year in conjunction with its joint venture partner, Vetra Exploracion  y Produccion S.A. The Company has met with representatives from the local communities and with several local and regional government officials, and has performed a detailed evaluation of the current road conditions, which will allow the Company to determine cost and timing for the necessary road improvements.

La Cortez, through Avante Colombia, continues evaluating the potential of the Rio de Oro field in order to determine options to re-initiate production operations on this field during 2011.  

La Cortez’ acquisition of Avante Colombia was in exchange for common stock of La Cortez.  The purchase includes Avante Colombia’s Colombian branch, Avante Colombia Ltd Sucursal. Avante holds interests in oil fields covering 11,535 acres in the Catatumbo region in northeast Colombia. Avante Colombia currently has a 50% participation interest and is the operator of the Rio de Oro and Puerto Barco production contracts with Ecopetrol S.A. in the Catatumbo area, under an operating joint venture with Vetra Exploración y Producción S.A.  Under the terms of the stock purchase agreement, La Cortez and Avante have also agreed to enter into a joint venture to develop further exploration opportunities in Colombia.

18

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

(5) Related Party Transactions

Common Stock Sales

On March 2, 2010, as part of a closing of its private placement offering (see Note 7 below), the Company sold 58,000 Units, at a price of $1.75 per Unit, for total consideration of $101,500 to the Company’s Chairman of the Board and Interim Chief Financial Officer, on the same terms as to other investors in the offering.

(6) 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 salvage values, 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 property accounts.  During the nine months ended September 30, 2010, a revision was made to the Company’s estimates to reflect the effects of updated anticipated plugging date estimates.

The following table reflects the changes in the ARO during the nine months ended September 30, 2010.  

	Amount
Asset retirement obligation — beginning of period	$	3,860
Liabilities incurred in connection with Avante acquisition		187,155
Current period revision to previous estimates		(135,395	)
Current period accretion		510
Asset retirement obligation — end of period	$	56,130

The following table reflects the changes in the ARO during the year ended December 31, 2009.

	Amount
Asset retirement obligation — beginning of year	$	-
Liabilities incurred with properties drilled		3,704
Current period accretion		156
Asset retirement obligation — end of year	$	3,860

The credit adjusted, risk free rate used in calculating ARO was approximately 18% at September 30, 2010. These rates approximate the Company’s borrowing rate. 

(7) Shareholders’ Equity

As of September 30, 2010, there were 46,030,470 shares of common stock and no shares of preferred stock issued and outstanding.

19

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The Avante Subscription Agreement

On March 2, 2010 (the “Closing Date”), pursuant to the terms of the Avante Subscription Agreement, Avante purchased 2,857,143 shares of the Company’s common stock and warrants to purchase 2,857,143 shares of its 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).

The Avante Warrants are exercisable to purchase a number of shares of the Company’s common stock equal to the number of Avante Shares at an exercise price of $3.00 per share (subject to adjustment upon certain events as provided in the form of the Avante Warrant).  The Avante Warrants are exercisable until three years after the Closing Date.  The Avante Warrants carry weighted-average anti-dilution protection in the event La Cortez subsequently issues shares of its common stock, or securities convertible into shares of its common stock, for a per share price that is less than the exercise price per share at such time.  The Avante Warrants are immediately exercisable.  See below under section “January, March and April 2010 Closings of the Private Placement Offering” for a further discussion of these Avante Warrants.

January, March and April 2010 Closings of the Private Placement Offering

In December 2009, January 2010, March 2010 and April 2010, the Company closed on a Private Placement Offering (“PPO”).  The details of the PPO which occurred during 2010 are as follows: (a) On January 29, 2010, the Company closed on the sale of 571,428 PPO Units (as defined below); (b) on March 2, 2010, the Company closed on the sale of 857,144 PPO Units in the PPO for gross proceeds of $1.5 million, and (c) on April 19, 2010, the Company conducted the fourth and final closing of its PPO for an additional 5,905,121 PPO Units, for gross proceeds of $10.33 million.  Each “PPO Unit” was sold at a price of $1.75 and consists of (i) one share of the Company’s common stock, and (ii) a warrant representing the right to purchase one-half (1/2) of one share of its common stock, for a period of three years commencing on the final closing date of the PPO, at an exercise price of $3.00 per whole share (the “PPO Warrants”).  

In the aggregate, in all four closings of the PPO, including the initial closing that occurred on December 29, 2009, which had gross proceeds of $1.0 million, the Company sold 8,762,264 PPO Units, consisting of an aggregate of 8,762,264 shares of its common stock and warrants to purchase an aggregate of 4,381,138 shares of its common stock (after consideration of rounding for partial shares), for total gross proceeds of $15.33 million.  With respect to certain subscriptions in the PPO, the Company is obligated to pay placement agents and/or finders (collectively, “Finders”) cash fees of up to ten percent (10%) of the purchase price of each PPO Unit sold in the PPO to investors introduced to the Company by the relevant Finder (the “Introduced Investors”), and to issue each such Finder five year warrants (the “Agent Warrants”) exercisable at no less than $1.75 per share to purchase a number of shares of the Company’s common stock equal to up to ten percent (10%) of the shares of common stock included in the PPO Units sold in the PPO to the Introduced Investors.  In addition to their term, the Agent Warrants differ from the PPO Warrants in certain other respects, including without limitation, the Agent Warrants provide for cashless exercise.  As a result of the Company’s sales of the PPO Units, the Company has paid and/or become obligated to pay an aggregate of approximately $612,037 of placement agent and/or finder fees and has issued and/or become obligated to issue Agent Warrants to purchase an aggregate of 344,022 shares of the Company’s common stock through September 30, 2010.

The PPO Warrants are subject to weighted-average anti-dilution protection in the event the Company subsequently issues shares of its common stock, or securities convertible into shares of its common stock, for a per share price that is less than the exercise price per share of the PPO Warrants at such time.  The PPO Warrants are immediately exercisable.

The Company has entered into a registration rights agreement (the “PPO RRA”) with the investors in the PPO.  The PPO RRA provide such investors with “piggyback” registration rights with respect to the PPO Shares and the shares of its common stock issuable upon exercise of the PPO Warrants (collectively, the “Registrable PPO Shares”).  The PPO RRA grants the holders of a majority of the Registrable PPO Shares subject to the PPO RRA with the right to demand registration of such shares if the Company fails to either file a registration statement on which they can piggyback or complete a listing of its common stock on a United States or Canadian national securities exchange (or, in the case of the investors in the December 29, 2009 closing, on the TSX Venture Exchange) within 180 days of the final closing of the PPO.  Registrable PPO Shares are not subject to the PPO RRA if they may be immediately sold under the Securities Act (whether pursuant to Rule 144 thereunder or otherwise).  The PPO RRA contains customary cutback, discontinuation and indemnification provisions.

20

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The Company’s offering and sale of the shares of common stock and PPO Warrants in the PPO were made in reliance on the exemption from the registration requirements of the federal securities laws provided by Section 4(2) of the Securities Act and Regulation D and/or Regulation S promulgated by the SEC thereunder.  These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act.

The Company plans to use the net proceeds of the PPO together with the proceeds of its sale of securities pursuant to the Avante Subscription Agreement towards funding its existing oil and gas exploration and production projects (including those of Avante Colombia) and possibly other potential opportunities in Colombia (e.g., acquisitions, joint ventures, and/or farm-ins) and for general working capital purposes.  However, the Company will need to obtain additional capital to meet its financial commitments on its current projects (including the newly acquired Rio de Oro and Puerto Barco projects) and to continue to execute its business plan.

The Company determined that warrants to purchase a total of 4,010,874 shares of common stock, including warrants to purchase 344,022 shares of common stock issued to agents, issued in the January, March and April 2010 closings of the PPO and the warrants to purchase a total of 2,857,143 shares of common stock issued to Avante in connection with the Avante Share Purchase Agreement 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 January 2010 Closing of the PPO, the fair value of these warrants was determined to be approximately $222,844, which was recorded as a derivative warrant instruments liability.  The Company also recorded $571 as par value to common stock and $653,782 to additional paid-in capital as part of the January 2010 Closing of the PPO.  At the March 2010 Closing of the PPO, the fair value of these warrants was approximately $411,112, which was recorded as a derivative warrant instruments liability.  The Company also recorded $857 as par value to common stock and $903,827 to additional paid-in capital as part of the March 2010 Closing of the PPO.  At the Closing of the Avante Share Purchase Agreement (as discussed under the section “Avante Subscription Agreement” above), the fair value of these warrants was approximately $2,804,237, which was recorded as a derivative warrant instruments liability.  The Company also recorded $2,857 as par value to common stock and $2,192,906 to additional paid-in capital as part of the closing of the Avante Share Purchase Agreement.  At the April 2010 Closing of the PPO, the fair value of these warrants was approximately $2,328,510, which was recorded as a derivative warrant instruments liability.  The Company also recorded $5,905 as par value to common stock and $7,304,175 to additional paid-in capital as part of the April 2010 Closing of the PPO.  

The table below reflects the breakdown of the components of gross proceeds from the Company’s closings during the nine months ended September 30, 2010:

Par value of common stock issued	$	10,190
Additional paid-in capital		11,054,690
Derivative warrant instruments		5,766,703
Offering expenses		1,002,381
Total gross proceeds	$	17,833,964

21

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Stock Option Awards

A summary of stock option activity during the nine months ended September 30, 2010 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 Value
Outstanding at December 31, 2009		2,141,667	$	2.11		8.64	$	—
Granted		100,000		2.11		—		—
Exercised		—		—		—		—
Forfeited		—		—		—		—
Expired		—		—		—		—
Outstanding at September 30, 2010		2,241,667	$	2.11		7.96	$	40,370

Of the above employee options outstanding at September 30, 2010, 1,283,339 options are vested or exercisable.   During the nine months ended September 30, 2010, the Company recognized stock-based compensation expense of approximately $428,000 related to stock options, including approximately $424,000 related to options granted to employees.  As of September 30, 2010, there was approximately $555,000 of total unrecognized compensation cost related to non-vested stock options (all of which is related to employee options), which is expected to be recognized over a weighted-average period of approximately 1.14 years.

The fair value of the options granted during 2010 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)	$	1.57
Risk-free interest rate  (2)		3.04	%
Dividend yield   (3)		0.00	%
Volatility factor   (4)		72.20	%
Expected life  (5)	6.5 years
Expected 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.

(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.

22

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Restricted Stock Units

On September 23, 2010, the Company granted restricted stock units to its directors and key employees under its 2008 Equity Incentive Plan. The restricted stock units vest in one-third increments on each of the three anniversaries from the date of grant.

Restricted stock unit activity during the nine months ended September 30, 2010 is as follows:

	Number of Restricted Stock  Shares		Weighted- average Grant Price		Weighted- average Remaining Contractual Term (years)
Outstanding at December 31, 2009		—	$	—		—
Granted		410,123	$	1.68		—
Exercised		—		—		—
Forfeited		—		—		—
Expired		—		—		—
Outstanding at September 30, 2010		410,123	$	1.68		2.98

As of September 30, 2010, none of the above restricted stock units were vested, and there was approximately $615,000 of unrecognized compensation cost related to non-vested restricted stock unit compensation arrangements granted under the 2008 Equity Incentive Plan. That cost is expected to be recognized over a weighted-average period of 2.98 years. The Company recognized compensation expense related to these restricted stock units amounting to $3,954 during the nine months ended September 30, 2010.

(8)  Derivative Warrant Instruments (Liabilities)

During the three and nine months ended September 30, 2010, the liability fair value of the warrant derivative instruments decreased by $1,046,452 and $944,429, respectively.  This was recorded as unrealized gain on fair value of derivative warrant instruments in the accompanying condensed consolidated statements of operations.

Activity for derivative warrant instruments during the nine months ended September 30, 2010 was as follows:

	December 31, 2009		Activity during the period		Decrease in Fair Value of Derivative Liability		September 30, 2010
Derivative warrant instruments	$	7,500,138	$	5,766,703	$	944,429	$	12,322,412
	$	7,500,138	$	5,766,703	$	944,429	$	12,322,412

23

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

The fair value of the derivative warrant instruments is estimated using a probability-weighted scenario analysis model with the following assumptions as of September 30, 2010:

Common stock issuable upon exercise of warrants		15,510,203
Estimated market value of common stock on measurement date (1)	$	1.67
Exercise price	$	1.25 - $3.00
Risk free interest rate (2)		0.53% - 1.27	%
Warrant lives in years		2.25 – 4.55
Expected volatility (3)		70.92	%
Expected dividend yields (4)	None

(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 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 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.

(9) 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.

24

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

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 a probability-weighted scenario analysis model (see Note 8).

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 September 30, 2010:

	Fair Value Measurements at September 30, 2010
	Quoted Prices
	In Active		Significant				Total
	Markets for		Other		Significant		Carrying
	Identical		Observable		Unobservable		Value as of
	Assets		Inputs		Inputs		September
Description	(Level 1)		(Level 2)		(Level 3)		30, 2010
Derivative warrant  instruments	$	-	$	-	$	12,322,412	$	12,322,412
Total	$	-	$	-	$	12,322,412	$	12,322,412

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)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
				(Restated)						(Restated)
Beginning balance	$	(13,368,864	)	$	(4,644,784	)	$	(7,500,138	)	$	-
Total gains		1,046,452			638,639			944,429			2,899,601
Settlements		-			-			-			-
Additions		-			(168,921	)		(5,766,703	)		(4,770,106	)
Transfers		-			-			-			(2,304,561	)(1)
Ending balance	$	(12,322,412	)	$	(4,175,066	)	$	(12,322,412	)	$	(4,175,066	)
Change in unrealized gains
included in earnings relating
to derivatives still held as of
September 30, 2010 and 2009	$	1,046,452		$	638,639		$	944,429		$	2,899,601

(1) Represents and includes the $2,304,561 cumulative effect change in accounting principle as a result of the Company adopting FASB ASC Topic No. 815 – 40 (formerly EITF 07-5) effective January 1, 2009.  This amount reflects an increase of approximately $654,679 in accumulated deficit from the amount originally reported in the Form 10-Q for the three and nine months ended September 30, 2009, due to a revised calculation of the cumulative effect change in accounting principle.

25

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Fair Value on a Non-Recurring Basis

On January 1, 2009, the Company adopted the provisions of ASC 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. As it relates to the Company, the adoption applies to certain nonfinancial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; impaired oil property assessments; and the initial recognition of asset retirement obligations for which fair value is used.

The asset retirement obligation estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, La Cortez has designated these liabilities as Level 3. A reconciliation of the beginning and ending balances of the Company’s asset retirement obligation is presented in Note 6.

Assets and liabilities measured at fair value, in conjunction with the Avante acquisition on March 2, 2010, include:

Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value as of March 2, 2010
Assets: (a)
Accounts receivable	$	-	$	-	$	3,653	$	3,653
Prepaid expenses and other current assets		-		-		43,001		43,001
Unproved properties		-		-		9,808,470		9,808,470
Other property and equipment		-		-		48,743		48,743
Goodwill		-		-		5,591,422		5,591,422
Total assets	$	-	$	-	$	15,495,289	$	15,495,289
Liabilities: (a)
Accounts payable	$	-	$	-	$	240,445	$	240,445
Accrued liabilities		-		-		72,626		72,626
Asset retirement obligation		-		-		187,155		187,155
Total liabilities	$	-	$	-	$	500,226	$	500,226

(a) The Company utilizes ASC 805-10 to identify and record the fair value of assets and liabilities acquired in a business combination. During the nine-month period ended September 30, 2010, La Cortez acquired the outstanding stock of Avante Colombia through the issuance of 10,285,819 shares of common stock with a fair value of $15,285,000. The inputs used by management for the fair value measurements of this stock include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

(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 management believes, if determined in a manner adverse to the Company, could have a potential material adverse effect on its financial condition, results of operations or cash flows.

26

LA CORTEZ ENERGY, INC.

Notes to Condensed Consolidated Statements

(Unaudited)

Additionally, the Company 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 the Company could be adversely affected.

Effective May 1, 2010, the Company entered into a consulting agreement with a third party for the third party entity to provide investor relations services to the Company for a monthly fee of $15,000 and 25,000 shares of the Company’s common stock during the first twelve months of the agreement, and $10,000 and 20,000 shares of the Company’s common stock thereafter.

(11)   Restatement of Consolidated Financial Statements

As of November 12, 2010, management of the Company determined that an inaccurate method was used to value the derivative warrant instruments on its previously filed condensed consolidated financial statements contained in the Company's Quarterly Report on Form 10-Q as of, and for the three and nine month periods ended, September 30, 2009.  Previously, the Black-Scholes model was used to value these warrants.  Management determined that a probability-weighted scenario analysis model should have been used. That model has been adopted for the valuation of derivative warrant instruments and has been applied retroactively so that the prior period financial statements are comparable to those as of, and for the three and nine month periods ended, September 30, 2010, contained in this Quarterly Report. The differences between the results of the valuation of our derivative warrant instruments when comparing the Black-Scholes model to a probability-weighted scenario analysis model for the nine months ended September 30, 2009 was mainly due to the revaluation of  the Company’s June 2009  PPO warrants which occurred during the quarter ended June 30, 2009.  Furthermore, the differences between the results of the valuation of our derivative warrant instruments when comparing the Black-Scholes model to a probability-weighted scenario analysis model for the three months ended March 31, 2009, were not material.

To reflect these differences in valuations, the Company has restated its condensed consolidated financial statements as of, and for the three and nine month periods ended, September 30, 2009.  As a result of the restatement, the originally reported net loss for three and nine month periods ended September 30, 2009 was decreased by $258,826, or $0.01 per share and $2,050,469, or $0.10 per share, resulting in net (loss) income, as restated, of $(94,926) and $634,725, respectively.  This change in accounting methodology (which has no impact on cash) is consistent with generally accepted accounting principles.

The restatement of these interim condensed consolidated financial statements will not affect the Company’s audited consolidated financial statements as of, and for the year ended, December 31, 2009, as contained in its Annual Report on Form 10-K for the year ended December 31, 2009 (as amended), because the change in valuation models was adopted prior to the end of 2009.

The following table reflects the impact of the above restatements on the Company’s condensed consolidated balance sheet, statements of operations, and cash flows as of, and for the three and nine months ended, September 30, 2009.

	September 30, 2009
	As
	Originally
	Reported			Adjustments				Restated
Consolidated Balance Sheet
Derivative warrant instruments (liability)	$	3,379,400		$	795,666		(a)	$	4,175,066
Total current liabilities		3,970,240			795,666				4,765,906
Additional paid-in capital		11,552,017			(2,191,456	)	(b)		9,360,561
Accumulated deficit		(4,434,988	)		1,395,790		(c)		(3,039,198	)
Stockholders' equity		7,141,029			(795,666	)			6,345,363
Consolidated Statement of Operations - for the 3 months ended
Unrealized gain on fair value of derivative warrant
instruments, net	$	379,813		$	258,826		(d)	$	638,639
Loss before income taxes		(353,752	)		258,826				(94,926	)
Net loss		(353,752	)		258,826				(94,926	)
Basic and diluted loss per share		(0.01	)		0.01		(d)		(0.00	)
Consolidated Statement of Operations - for the 9 months ended
Unrealized gain on fair value of derivative warrant
instruments, net	$	849,132		$	2,050,469		(e)	$	2,899,601
(Loss) income before income taxes		(1,415,744	)		2,050,469				634,725
Net (loss) income		(1,415,744	)		2,050,469				634,725
Basic and diluted income (loss) per share		(0.07	)		0.10		(e)		0.03
Consolidated Statement of Cash Flows - for the 9 months ended
Net (loss) income	$	(1,415,744	)	$	2,050,469		(e)	$	634,725
Unrealized gain on fair value of derivative warrant
instruments, net		(849,132	)		(2,050,469	)	(e)	$	(2,899,601	)

27

(a)   Net adjustment to record the derivative warrant instruments liability balance as of September 30, 2009 as a result of a change in the valuation model used to assess the fair value of the derivative warrant instruments at both the initial valuation date (closing of an offering with attached warrants) and the respective period end date.  The initial entry recorded upon the closing of an offering did not affect the statement of operations as the offset against the derivative warrant instrument liability was to additional paid-in capital.  The initial entry was further affected by an adjustment to increase accumulated deficit as a result of the Company adopting FASB ASC Topic No. 815 – 40 (formerly EITF 07-5) effective January 1, 2009 for the amount of $654,679 from the amount originally reported in the Form 10-Q as of September 30, 2009, due to a revised calculation of the cumulative effect change in accounting principle.

(b)   Net adjustment recorded to additional paid-in capital as a result of the change in valuation models used to assess the fair value of the derivative warrant instruments at both the initial valuation date (closing of offering) and the respective period end date.

(c)   Net adjustment to record a decrease of $2,050,469 to accumulated deficit as a result of the change in valuation models used to assess the fair value of the derivative warrant instruments at both the initial valuation date (closing of offering) and the respective period end date, and an adjustment to increase accumulated deficit as a result of the Company adopting FASB ASC Topic No. 815 – 40 (formerly EITF 07-5) effective January 1, 2009 for the amount of $654,679 from the amount originally reported in the Form 10-Q for the three and nine months ended September 30, 2009, due to a revised calculation of the cumulative effect change in accounting principle.

(d)   Net adjustment to record an increase to the unrealized gain on the fair value of the derivative warrant instruments balance for the three months ended September 30, 2009, as a result of a change in the valuation model used to assess the fair value of the derivative warrant instruments at both the initial valuation date (closing of an offering with attached warrants) and the respective period end date.

(e)   Net adjustment to record the effect to the unrealized gain on the fair value of the derivative warrant instruments balance for the nine months ended September 30, 2009, as a result of a change in the valuation model used to assess the fair value of the derivative warrant instruments at both the initial valuation date (closing of an offering with attached warrants) and the respective period end date.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above and “Risk Factors” included in our Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on April 16, 2010, as amended on April 20, 2010 (the “2009 Form 10-K”), for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.

The following discussion and analysis of our financial condition and results of operations is based on our condensed 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. These condensed consolidated financial statements as of September 30, 2010, and for the three and nine months ended September 30, 2010 and 2009, are unaudited. In the opinion of management, such financial statements include the adjustments and accruals necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in these financial statements as of September 30, 2010, and for the three and nine months ended September 30, 2010 and 2009.

You should read this discussion and analysis together with such financial statements and the notes thereto.

Overview and Going Concern

We are an international, early-stage oil and gas exploration and production company with operations in South America. We have entered into two initial working interest agreements, in the Putumayo 4 Block with Petroleos del Norte S.A., a subsidiary of Petrolatina Plc. (AIM: PELE), and in the Maranta Block with Emerald Energy Plc Sucursal Colombia, a branch of Emerald Energy Plc., both in the Putumayo Basin of southwestern Colombia. In addition, in March 2010 we acquired all of the outstanding capital stock of Avante Colombia S.à r.l. from Avante Petroleum S.A.  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. We are currently evaluating additional investment prospects, companies and existing exploration and production opportunities in Colombia, and seeking opportunities in other South American countries.

We plan to explore investment opportunities in oil and gas exploration and development and in associated infrastructure (e.g., storage tanks, processing facilities and/or pipelines). The scope of our activities in this regard may include, among other things, the acquisition and assignment of rights to develop exploratory acreage under concessions granted by government authorities or by 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 and assignment of obligations to fund the cost of drilling and development), and/or the purchase of debt, equity or assets of existing oil and gas exploration and development companies currently operating in Colombia.

We have established an operating branch in Bogotá, Colombia, where we engage in our existing business ventures. We will continue to evaluate ways to optimize our business structure in Colombia and in locations where we intend to develop our business, in order to comply with local regulations while optimizing our tax, legal and operational flexibility.

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Going Concern

In the course of our development activities, we have sustained losses and expect such losses to continue through at least November 2011.  We expect to finance our operations primarily through our existing cash and any future financing. However, there exists substantial doubt about our ability to continue as a going concern because we will be required to obtain additional capital in the future to continue our operations and there is no assurance that we 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 our ultimate capital needs and to support our growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted.   Therefore, there is substantial doubt as to our 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 our Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on April 16, 2010, as amended on April 20, 2010, that raises substantial doubt about our ability to continue as a going concern.  Our 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 towards us and the offering terms. In addition, our ability to complete an offering may be dependent on the status of our oil and gas exploration activities, which cannot be predicted. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.

Our condensed 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 condensed 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 this uncertainty.

Operational Update

Maranta Block – Mirto Field

As of September 30, 2010, SEC-based proved developed oil reserves in the Mirto field were estimated to be 47,170 barrels.  Emerald Energy Plc. (“Emerald”), the operator of the Maranta Block where we will hold a 20% working interest, completed drilling operations of the Mirto-2 exploratory well on August 15, 2010, after having conducted a sidetrack on the well to a “measured depth” (“MD”) of  11,590 feet. Mirto-2 production tests initiated on September 23, 2010 for a 5-day period on the Villeta U sand had an average production of 29 BOPD and a water cut of 95.9%. The well was put back on an extended production test on October 16, 2010. The workover rig will be used to run cased-hole logs in order to confirm the appropriate perforation positions. This activity has been delayed due to the service rig being used longer than expected by Emerald on a project not associated with the Company.  Emerald plans to have the rig at the Mirto-2 location in approximately three weeks. At that time, the following activities will commence:

· Production testing will be stopped, and the production string and Electric Submersible Pump (ESP) will be pulled out of the hole;

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· Cased-hole logs will be conducted to verify the location of current perforations; and

· If the perforations are not in the right location, then current perforations will be sealed and new perforations will be placed in the correct locations. If the perforations are found to be at the correct depth, the Villeta U sand will be isolated and the Villeta N sand will be tested.

On February 4, 2009, La Cortez Colombia signed a joint operating agreement with Emerald with respect to the Maranta Block.  Emerald has submitted a request to Agencia Nacional de Hidrocarburos (“ANH”) to approve the assignment of our 20% participating interest. 

The Maranta block covers an area of 90,459 acres (36,608 hectares) in the foreland of the Putumayo Basin in Southwest Colombia.  Emerald’s contract for this block was signed with the ANH on September 12, 2006.

With the drilling of the Mirto-2 well, Phase 3 of the exploration program has been completed. Both Emerald and La Cortez have complied with the exploration obligations on this block in accordance with the contract signed with the ANH. Under the contract terms and conditions, and after completion of this phase, both La Cortez and Emerald are required to relinquish 50% of the area of the block, as selected by both parties, and there is the option to continue exploration activities in the remaining 50% of the area by committing to additional exploration activity with the ANH, such as new seismic acquisition or drilling a new exploration well. This is a normal procedure and in accordance with the contracts entered into with the ANH. Both Emerald and La Cortez are currently evaluating the exploration potential of the block to determine a course of action and the alternatives regarding the area to be relinquished.

Putumayo-4 Block

Petroleos del Norte S.A. (“Petronorte”), a subsidiary of Petrolatina Plc. (AIM: PELE), as operator of the block, and La Cortez have completed identification of the number and location of indigenous people and communities in the area along with representatives from the Ministry of the Interior. A total of seven communities were identified, and the consultation process with these communities has been initiated. Several meetings with the communities are taking place in conjunction with the Ministry of the Interior representatives. Based on this information, the layout for the seismic acquisition has also been completed, resulting in a 2D seismic acquisition plan of some 103 km in the north part of the block, where at least two leads have been determined with the reprocessed seismic. Progress continues in the consultation process with local communities in the Putumayo-4 block. It is now expected to initiate acquisition of 105 Km of 2d seismic early in 2011 due to delays in getting the consultation agreements with the different communities in the area, and we will be in a position to drill our first exploration well by the end of the first half of 2011. After evaluating the reprocessed seismic, several leads have been identified, which we will seek to confirm with the new seismic acquisition. We remain optimistic on the potential of this block. Different oil companies have indicated interest in participating in this block.

Under the terms of the contract signed with the ANH, we must complete the acquisition of at least 103 km of seismic, the drilling of an exploratory well and additional work for a value of $1.60 million before September 2012, when the 3-year term of Phase I ends.

The Putumayo 4 block covers an extension of 51,333 hectares located in the Putumayo Basin.

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Rio de Oro and Puerto Barco Fields

Through our subsidiary, Avante Colombia, as operator of the fields, and with our joint venture partner Vetra Exploración y Producción S.A., we continue to conduct social activities in the area covering Rio de Oro and Puerto Barco fields, and we have completed a plan to re-initiate production operations on the Puerto Barco field during the first quarter of 2011. This plan includes conducting workover activities in some of the existing wells, not only to determine the mechanical conditions, but also to gather geological information. In addition, the plan includes the upgrading of the production facilities as well as the access road.  Old seismic have been reprocessed and is being evaluated.  We have completed our technical evaluation in the Rio de Oro and Puerto Barco fields. We have also completed the program to re-initiate the Puerto Barco field early next year in conjunction with our joint venture partner Vetra Exploracion  y Produccion S.A. We have met with representatives from the local communities and with several local and regional government officials, and have performed a detailed evaluation of the current road conditions, which will allow us to determine cost and timing for the necessary road improvements.

Restatement of Prior Results

As of November 12, 2010, our management determined that an inaccurate valuation method was used to value the derivative warrant instruments on our previously filed condensed consolidated financial statements contained in our Quarterly Report on Form 10-Q as of, and for the three and nine month periods ended, September 30, 2009. Previously, the Black-Scholes model was used to value these warrants. Management determined that a probability-weighted scenario analysis model should have been used. That model has been adopted for the valuation of derivative warrant instruments and has been applied retroactively so that the prior period financial statements are comparable to those as of, and for the three and nine month periods ended, September 30, 2010, contained in this Quarterly Report. The differences between the results of the valuation of our derivative warrant instruments when comparing the Black-Scholes model to a probability-weighted scenario analysis model for the nine months ended September 30, 2009 was mainly due to the revaluation of  our June 2009  PPO warrants which occurred during the quarter ended June 30, 2009.  Furthermore, the differences between the results of the valuation of our derivative warrant instruments when comparing the Black-Scholes model to a probability-weighted scenario analysis model for the three months ended March 31, 2009, were not material.

To reflect these differences in valuations, we have restated our consolidated financial statements as of, and for the three and nine month periods ended, September 30, 2009. As a result of the restatement, the originally reported net loss for three and nine month periods ended September 30, 2009 was decreased by approximately $259,000 or $0.01 per share and $2,050,000, or $0.10 per share, resulting in net income (loss), as restated, of $(94,926) and $634,725, respectively. This change in accounting methodology (which has no impact on cash) is consistent with generally accepted accounting principles.

This change in accounting methodology will have no effect on our audited consolidated financial statements as of, and for the year ended, December 31, 2009, as contained in our Annual Report on Form 10-K for the year ended December 31, 2009, because the change in valuation models was adopted prior to the end of 2009.

Results of Operations

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

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Three Months Ended September 30, 2010, Compared with Three Months Ended September 30, 2009

A summary of our results for the three month periods ended September 30, 2010 and 2009 is as follows:

	Three Months Ended September 30,						Percentage Increase /
	2010			2009			(Decrease)
				(Restated)
Revenues	$	251,266		$	-			n/a
Costs and expenses		(1,604,795	)		(754,804	)		112.6	%
Non-operating income, net		1,063,807			659,878			61.2	%
Income tax expense		(39,757	)		-			n/a
Net loss	$	(329,479	)	$	(94,926	)		247.1	%

Revenues

We earned oil and gas revenues of $251,266 for the three months ended September 30, 2010, compared to $-0- for the three months ended September 30, 2009.  These revenues were derived from the commencement of our production operations in the Mirto-1 well, which started during the fourth quarter of 2009.

Costs and Expenses

Our operating costs and expenses for the three months ended September 30, 2010 and 2009, consisted of the following:

	Three Months Ended September 30,				Percentage Increase /
	2010		2009		(Decrease)
			(Restated)
Operating costs	$	281,309	$	-		n/a
Depreciation, depletion, accretion and amortization		87,607		16,405		434.0	%
Impairment expense		-		-		n/a
General and administrative		1,235,879		738,399		67.4	%
Total	$	1, 604,795	$	754,804		112.6	%

Operating costs

Our operating costs for the three months ended September 30, 2010, 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 $281,309.  We incurred no such costs during the three months ended September 30, 2009.  

Depreciation, Depletion, Accretion, Amortization, and Impairment Expenses

The increase in our depreciation, depletion, accretion, amortization and impairment expenses for the three months ended September 30, 2010 as compared to 2009 was mainly due to the depletion expense on proved oil properties and depreciation of other property and equipment recognized for the three months ended September 30, 2010 amounting to $87,427. We held no proved reserves prior to late 2009.  

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General and Administrative Expenses

We incurred total general and administrative expenses of $1,235,879 for the three months ended September 30, 2010 compared to $738,399 for the three months ended September 30, 2009. This was primarily due to an increase in payroll expenses to $415,537 in the 2010 period from $406,039 in the three months ended September 30, 2009; an increase in professional fees to $600,374 for the three months ended September 30, 2010 from $194,357 for the three months ended September 30, 2009; an increase in travel expense to $48,742 for the three months ended September 30, 2010 from $21,683 for the comparable period of 2009; an increase in rent expense to $32,621 for the three months ended September 30, 2010 from $28,154 for the comparable period of 2009; and an increase in other expenses to $138,605 for the three months ended September 30, 2010 from $88,106 for the 2009 period.  In particular, increase in professional fees and other general and administrative expenses during the third quarter of 2010 as compared to the same period in 2009  is primarily due to increased audit, accounting, legal and consultancy expenses arising from our administrative exploration activities and growth in our operations and expenses in relation to the Avante acquisition.

Non-operating Income, Net

Net non-operating income for the three months ended September 30, 2010, was $1,063,807, compared to net non-operating income of $659,878 for the three months ended September 30, 2009. During the three months ended September 30, 2010, we recognized an unrealized gain from the decrease in the fair value of derivative warrant instruments liability of $1,046,452 compared to an unrealized gain of $638,639 during the three months ended September 30, 2009.

Net Loss

Our net loss for the three months ended September 30, 2010 was $329,479 compared to a net loss of $94,926 for the three months ended September 30, 2009.  The increase is mainly due to an increase in our operating costs to $281,309 for the three months ended September 30, 2010 from $0 in the same period of 2009; and an increase in general and administrative expenses to $1,235,879 in the 2010 period from $738,399 in the 2009 period.  These factors were partially offset by an increase of $251,266 in oil revenues in the 2010 period compared to $0 in the 2009 period and an increase in our net unrealized gain on fair value of derivative warrant instruments to $1,046,452 in the 2010 period from an unrealized gain of $638,639 in the 2009 period.

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 principles (“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.

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Adjusted EBITDA for the three months ended September 30, 2010 and 2009 is calculated as follows:

	Three months ended  September 30,
	2010			2009
				(Restated)
Net loss	$	(329,479	)	$	(94,926	)
Adjustments:
Depreciation, depletion, accretion and amortization		87,607			16,405
Impairment of oil properties		-			-
Unrealized gain on fair value of derivative warrant instruments, net		(1,046,452	)		(638,639	)
Interest income		(17,355	)		(21,239	)
Adjusted EBITDA	$	(1,305,679	)	$	(738,399	)

Adjusted EBITDA for the three months ended September 30, 2010 was a loss of $1.3 million, compared to a loss of $0.7 million for the three months ended September 30, 2009.  The increase in the loss was primarily caused by operating expenses incurred during the three months ended September 30, 2010 related to the commencement of oil production in the fourth quarter of 2009 and the legal and consulting fees related to the Avante acquisition.

Nine months Ended September 30, 2010, Compared with Nine months Ended September 30, 2009 

A summary of our results for the nine month periods ended September 30, 2010 and 2009 is as follows:

	Nine Months Ended September 30,						Percentage Increase /
	2010			2009			(Decrease)
				(Restated)
Revenues	$	417,540		$	-			n/a
Costs and expenses		(5,485,711	)		(2,306,785	)		137.8	%
Non-operating income, net		994,607			2,941,510			(66.2	)%
Income tax expense		(39,757	)		-			n/a
Net (loss) income	$	(4,113,321	)	$	634,725			(748.0	)%

Revenues

We earned oil and gas revenues of $417,540 for the nine months ended September 30, 2010, compared to $-0- for the nine months ended September 30, 2009.  These revenues were derived from the commencement of our production operations in the Mirto-1 well, which started during the fourth quarter of 2009.

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Costs and Expenses

Our operating costs and expenses for the nine months ended September 30, 2010 and 2009, consisted of the following:

	Nine Months Ended September 30,				Percentage Increase /
	2010		2009		(Decrease)
			(Restated)
Operating costs	$	1,124,563	$	-		n/a
Depreciation, depletion, accretion and amortization		181,582		44,338		309.5	%
Impairment expense		273,318		-		n/a
General and administrative		3,906,248		2,262,447		72.7	%
Total	$	5,485,711	$	2,306,785		137.8	%

Operating costs

Our operating costs for the nine months ended September 30, 2010, 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 $1,124,563.  We incurred no such costs during the nine months ended September 30, 2009.  Our operating costs during the second quarter of 2010 included significant costs to work over the Mirto-1 well which were not capitalizable.

Depreciation, Depletion, Accretion, Amortization, and Impairment Expenses

The increase in our depreciation, depletion, accretion, amortization and impairment expenses for the nine months ended September 30, 2010 as compared to 2009 was mainly due to the impairment expense and depletion expense on proved oil properties and depreciation of other property and equipment recognized for the nine months ended September 30, 2010, amounting to $273,318 and $181,072, respectively. We held no proved reserves prior to late 2009.  

General and Administrative Expenses

We incurred total general and administrative expenses of $3,906,248 for the nine months ended September 30, 2010 compared to $2,262,447 for the nine months ended September 30, 2009. This was primarily due to an increase in payroll expenses to $1,307,001 in the 2010 period from $1,195,800 in the nine months ended September 30, 2009; an increase in professional fees to $1,996,342 for the nine months ended September 30, 2010 from $695,812 for the nine months ended September 30, 2009; an increase in travel expenses to $124,231 for the nine months ended September 30, 2010 from $99,142 for the nine months ended September 30, 2009; an increase in rent expense to $92,350 for the nine months ended September 30, 2010 from $74,791 for the comparable period of 2009; and an increase in other expenses to $386,324 for the nine months ended September 30, 2010 from $196,902 for the 2009 period.  In particular, the increase in our payroll expenses is due to the increase in the average number of employees during the nine month period of 2010 as compared to the average number of employees during the same period in 2009, and the increase in professional fees and other general and administrative expenses during the nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to increased audit, accounting, legal and consultancy expenses arising from our administrative exploration activities and growth in our operations and expenses in relation to the Avante acquisition.

Non-operating Income, Net

Net non-operating income for the nine months ended September 30, 2010, was $994,607 compared to net non-operating income of $2,941,510 for the nine months ended September 30, 2009. During the nine months ended September 30, 2010, we recognized an unrealized gain from the decrease in the fair value of derivative warrant instruments liability of $944,429 compared to an unrealized gain of $2,899,601 during the nine months ended September 30, 2009.

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Net (Loss) Income

Our net loss for the nine months ended September 30, 2010 was ($4,113,321) compared to a net income of $634,725 for the nine months ended September 30, 2009.  The increase is mainly due to an increase in our operating costs to $1,124,563 for the nine months ended September 30, 2010 from $0 in the same period of 2009, an increase in general and administrative expenses to $3,906,248 in the 2010 period from $2,262,447 in the 2009 period, and a decrease in our net unrealized gain on fair value of derivative warrant instruments to $944,429 in the 2010 period from an unrealized gain of $2,899,601 in the 2009 period.  These factors were partially offset by an increase of $417,540 in oil revenues in the 2010 period compared to $0 in the 2009 period.

Adjusted EBITDA

Adjusted EBITDA for the nine months ended September 30, 2010 and 2009 is calculated as follows:

	Nine months ended September 30,
	2010			2009
				(Restated)
Net (loss) income	$	(4,113,321	)	$	634,725
Adjustments:
Depreciation, depletion and amortization		181,582			44,338
Impairment of oil properties		273,318			-
Unrealized gain on fair value of derivative warrant instruments, net		(944,429	)		(2,899,601	)
Interest income		(50,178	)		(41,909	)
Adjusted EBITDA	$	(4,653,028	)	$	(2,262,447	)

Adjusted EBITDA for the nine months ended September 30, 2010 was a loss of $4.7 million, compared to a loss of $2.3 million for the nine months ended September 30, 2009.  The increase in the loss was primarily caused by operating expenses incurred during the nine months ended September 30, 2010 related to the commencement of oil production in the fourth quarter of 2009, the legal and consulting fees related to the Avante acquisition, and the workover expenses incurred on the Mirto-1 well.

Liquidity and Capital Resources

Our cash and cash equivalents balance as of September 30, 2010, was $10,907,471 compared to $2,376,585 as of December 31, 2009.  This increase was due to $15.33 million in gross proceeds from sales of common stock and warrants in private placements offset by offering costs, $5.0 million of gross proceeds arising from Avante’s purchase of our common stock, and cash used in operations during this period of $5,621,239.

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.

For further discussion on going concern, please see Overview and Going Concern section above.

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We have entered into a memorandum of understanding and joint operating agreement with Petronorte for the Putumayo-4 Block and a farm-in agreement and joint operating agreement with Emerald for the Maranta Block.  

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 be used for other corporate purposes during the life of the guarantee.

In accordance with the terms of the Emerald farm-in agreement, we paid $1.41 million to Emerald on January 7, 2010, 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.  On April 12, 2010, the Company paid an additional $461,000 related to Mirto-1 well costs and Mirto well production and development costs. On May 10, 2010, the Company paid $82,000 pertaining to costs related to the Agapanto well, as well as certain 3D seismic and facilities costs. In June 2010 and July 2010, the Company paid $932,000 (which includes $107,800 of workover costs for the Mirto-1 well) and $287,000, respectively, covering additional exploration costs related to the Mirto wells. In August and September 2010, the Company paid $493,000 and $884,000, respectively, for Mirto-2 and Agapanto well costs and additional exploratory costs on the Mirto wells.  On October 19, 2010, the Company paid $162,000 for Mirto-2 and Agapanto well costs.

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.  Accordingly, 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 the joint venture goes forward.

We are currently utilizing cash of approximately $625,000 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.

Over the next twelve months, we expect to use approximately $6.4 million in order to bear our share of commitments with respect to the Putumayo 4 Block, related to Phase 1 seismic acquisition, permitting activities and exploration activities (although we have until August 2012 to complete the work).

In addition, to carry out our proposed activities over the next twelve months on Avante Colombia’s projects, we would require up to $1.1 million on Puerto Barco, related to additional seismic road and facilities upgrading and existing well workovers.

Additional investment over the next twelve months in the Maranta Block will be determined once further information on the Mirto-2 well is acquired and evaluated, as discussed above.

In addition, over the next 12 months, we expect to require up to an additional $4.5 million for general working capital to continue to execute our business plan and build our operations.

Since costs on certain of our projects are calculated in foreign currencies, changes in exchange rates, among other things, could cause our capital commitments in US dollars to differ materially from the amounts that we have budgeted.

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In the course of our development activities, we have sustained losses and expect such losses to continue through at least November 2011.  We expect to finance our operations primarily through our existing cash and any future financing.  Note 2 to the audited consolidated financial statements contained in the 2009 Form 10-K reported that as of the date of the filing of the 2009 Form 10-K on April 16, 2010, as amended on April 20, 2010, there existed substantial doubt about our ability to continue as a going concern, and the Report of Independent Registered Public Accounting Firm included in our 2009 Form 10-K included an explanatory paragraph with respect thereto.

After May 2011 we will need to obtain additional capital for such purposes.  In order to obtain capital, we may need to sell additional shares of our equity 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.

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.

ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide disclosure under this Item 3.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 September 30, 2010. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2010, 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 (i) equity transactions, (ii) financial statement disclosures and (iii) segregation of duties were material weaknesses.

To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our condensed consolidated financial statements included in this Form 10-Q accurately reflect our financial condition, results of operations and cash flows for the periods presented. In addition, we engaged independent accounting consultants to assist us with our accounting functions and in performing the additional analyses referred to above.  Accordingly, management believes that the unaudited condensed consolidated 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.

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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 error 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.

Changes in Internal Control over Financial Reporting

During the quarterly period ended September 30, 2010, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We may, from time to time, be involved in litigation and claims arising out of our operations in the ordinary course of business.  We are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors disclosed in our 2009 Form 10-K under Part I, Item 1A, therein.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Except as previously disclosed in Current Reports on Form 8-K that we have filed, we have not sold any of our equity securities during the period covered by this Report that were not registered under the Securities Act.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  (Removed and Reserved)

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ITEM 5.  OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed as part of (or are furnished with, as indicated below) this Quarterly Report or, where indicated, were heretofore filed and are hereby incorporated by reference.

In reviewing the agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q, 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 us 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 us may be found elsewhere in this Quarterly Report on Form 10-Q and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

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Exhibit  Number	SEC Report Reference Number	Description
10.1*†		Form of Restricted Stock Unit Agreement for Executive Officers and Directors
31.1*		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 2002
31.2*		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 2002
32.1*§		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

* Filed herewith.

† Management contract or compensatory plan.

§ 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  November15, 2010	LA CORTEZ ENERGY, INC.
	By:	/s/ Andres Gutierrez Rivera
		Name:    Andres Gutierrez Rivera
		Title:      Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Nadine C. Smith
		Name:    Nadine C. Smith
		Title:      Interim Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit  Number	Description
10.1	Form of Restricted Stock Unit Agreement for Executive Officers and Directors
31.1	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 2002
31.2	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 2002
32.1§	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

§ 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.

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