SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2012 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 No. 000-30219 CHANCELLOR GROUP, INC. (Exact name of Registrant as Specified in Its Charter) Nevada 50-0024298 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79105 (Address of principal executive offices, including zip code) Issuer's Telephone Number, Including Area Code: (806) 322-2731 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by checkmark if the registrant is not required to file reports to Section 13 or 15(d) of the Act. Yes [ ] No [X] 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 [X] No [ ] 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 (ss.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 [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check One): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was $2,682,401 Number of shares of Common Stock outstanding as of March 25, 2013: 69,560,030 Documents incorporated by reference: None <PAGE> TABLE OF CONTENTS PART I Item 1. Business. 1 Item 1A. Risk Factors. 3 Item 1B. Unresolved Staff Comments. 6 Item 2. Properties. 6 Item 3. Legal Proceedings 8 Item 4. Mine Safety Disclosures 9 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 9 Item 6. Selected Financial Data. 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 Items 7A. Quantitative and Qualitative Disclosures About Market Risk. 15 Item 8. Financial Statements and Supplementary Data. 16 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 35 Item 9A. Controls and Procedures. 35 Item 9B. Other Information 35 PART III Item 10. Directors, Executive Officers and Corporate Governance. 35 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 37 Item 13. Certain Relationships and Related Transactions, and Director Independence. 38 Item 14. Principal Accountant Fees and Services 38 Item 15. Exhibits and Financial Statement Schedules. 39 SIGNATURES 41 <PAGE> PART I ITEM 1. BUSINESS. Chancellor Group, Inc., a Nevada corporation ("we", "us", "Chancellor" or the "Company"), was organized under the laws of the state of Utah in 1986 and subsequently reorganized under the laws of the state of Nevada in 1993. We are an independent oil and gas exploration and development company focused on building and revitalizing our oil and gas properties located in the State of Texas. The Company is organized as a producing oil and gas company and licensed as an operator by the Texas Railroad Commission. We are in the business of acquisition, exploration, and development of oil and natural gas properties. Our common stock is quoted on the Over-The-Counter Bulletin Board market and trades under the symbol CHAG.OB. As of December 31, 2012, there were 69,560,030 shares of our common stock issued and outstanding. As of December 31, 2012 our subsidiaries are: * Gryphon Production Company, LLC (wholly-owned) * Gryphon Field Services, LLC (wholly-owned) * Pimovi, Inc. (majority owned) BUSINESS DEVELOPMENTS On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned subsidiary of Chancellor, and with which separate company financial statements are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding term sheet was signed by Chancellor summarizing the principal terms, conditions and formal establishment of Pimovi by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, who is also the Chief Scientific Officer of Pimovi, has agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. Pimovi has licensed search and recommendation software for use in its products and services (under development) from Mimvi, Inc., a company for which Mr. Franks serves as Founder CVO and Chairman. The license is for a period of three years, subject to extension. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. Pimovi was reincorporated in Nevada in March 2013. On December 13, 2011, Gryphon Production Company, LLC ("Gryphon"), a wholly owned subsidiary of the "Company", completed the sale of substantially all of the assets of Gryphon to LCB Resources, an unrelated Oklahoma limited liability company ("LCB"). Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased all of Gryphon's rights, titles and interests in certain leases, wells, equipment, contracts, data and other designated property sold. The assets sold to LCB constituted approximately 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Agreement. Since the sale of substantially all of the assets of Gryphon to LCB on December 13, 2011, the Company has continued to maintain a total of four (4) producing wells and one (1) water disposal well. Gryphon also retained its operator's license with the Texas Railroad Commission and continues to operate the Hood Leases itself. The proceeds from the asset sale to LCB are being used to provide working capital to Chancellor and also for future corporate purposes including, but not limited to possible acquisitions, including new business ventures outside of the oil and gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of 2012, as noted above. 1 <PAGE> DESCRIPTION OF PROPERTIES At December 31, 2012, the Company and its wholly-owned subsidiaries, Gryphon and Gryphon Field Services, LLC, own 5 wells located in Gray County in the Texas Panhandle, of which 4 are actively producing oil wells and 1 is a water disposal well. INDUSTRY AND ECONOMIC FACTORS In managing our business we must deal with many factors inherent in our industry. First and foremost is wide fluctuation of oil and gas prices. Oil and gas markets are cyclical and volatile, with future price movements difficult to predict. While our revenues are a function of both production and prices, wide swings in prices often have the greatest impact on our results of operations. In addition, the condition of the general economy of the local area is beginning to show some of the strain from the national economic morass, as is the general economy in the State of Texas. The national and international economic environment is unsettled and will present challenges to any form of business operations. It is uncertain what structural changes in the industry (mining for oil and gas) may need to be modified due to political changes in the national government, availability of financing, and concerns created by expectations that evolve around the concepts of carbon credits. In general it is a buyer's market if financing is available. The Company does not anticipate any severe effects upon its structure in the short-term due to any of the above-mentioned concerns because of the size and nature of the Company's operations. Our operations entail significant complexities. Advanced technologies requiring highly trained personnel are utilized in restoration of wells and production. The oil and gas industry is highly competitive. We compete with major and diversified energy companies, independent oil and gas companies, and individual operators, most of which have substantially more assets and production than us. In addition, the industry as a whole competes with other businesses that supply energy to industrial, commercial, and residential end users. Other businesses that we may undertake and develop in the future also likely will involve substantial complexity and rigorous competition. APPROACH TO OUR BUSINESS Implementation of our business approach relies on our ability to fund ongoing development projects with cash flow provided by operating activities and external sources of capital. MARKETING AND CUSTOMERS The Company plans to further develop its domestic oil and gas properties, located in Gray County, Texas, and possibly to acquire additional producing oil and gas properties. The Company's major customers, to which substantially all oil production is sold are Plains Marketing and ExxonMobil. Given the number of readily available purchasers for our products, it is unlikely that the loss of a single customer in the areas in which we sell our products would materially affect our sales. ENVIRONMENTAL REGULATIONS We are subject to extensive and complex federal, state and local laws and regulations governing the protection of the environment and of the health and safety of our employees. These laws and regulations may, among other things: * require the acquisition of various permits before drilling or production commences; * require the installation of expensive pollution control equipment; * require safety-related procedures and personal protective equipment to be used during operations; 2 <PAGE> * restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with natural gas and oil drilling production, transportation and treating activities; * suspend, limit, prohibit or require approval before construction, drilling and other activities; and * require remedial measures to mitigate pollution from historical and ongoing operations, such as the closure of pits and plugging of abandoned wells. These laws, rules and regulations may also restrict the rate of natural gas and oil production below the rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. Governmental authorities have the power to enforce compliance with environmental laws, regulations and permits, and violations are subject to injunction, as well as administrative, civil and potentially criminal penalties. The effects of these laws and regulations, as well as other laws or regulations that may be adopted in the future, could have a material adverse impact on our business, financial condition and results of operations. The Company did not incur any material environmental costs in 2012, nor has the Company been notified of any material environmental obligations from any governmental authorities. REGULATION OF THE OIL AND GAS INDUSTRY The oil and gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for noncompliance. Although the regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production. LICENSES AND PATENTS. Our new majority-owned subsidiary, Pimovi, Inc., will be engaged primarily in the mobile applications technology business and will be dependent upon licenses and patents to access and protect its rights to technology. Pimovi has licensed search and recommendation software from Mimvi, Inc. and has applied for a provisional patent covering video distribution service. EMPLOYEES As of December 31, 2012, we had no full-time employees. All of our activities are conducted by our Executive Officers and by contract laborers, independent contractors and consultants. ITEM 1A. RISK FACTORS. CRUDE OIL AND NATURAL GAS PRICES ARE VOLATILE AND A SUBSTANTIAL REDUCTION IN THESE PRICES COULD ADVERSELY AFFECT OUR RESULTS AND THE PRICE OF OUR COMMON STOCK. Our revenues, operating results and future rate of growth depend highly upon the prices we receive for our crude oil and natural gas production. Historically, the markets for crude oil and natural gas have been volatile, and these markets are likely to continue to be volatile in the future. The markets and prices for crude oil and natural gas depend on factors beyond our control. These factors include demand for crude oil and natural gas, which fluctuates with changes in market and economic conditions, and other factors, including: 3 <PAGE> * worldwide and domestic supplies of crude oil and natural gas; * actions taken by foreign oil and gas producing nations; * political conditions and events (including instability or armed conflict) in crude oil or natural gas producing regions; * the level of global crude oil and natural gas inventories; * the price and level of foreign imports; * the price and availability of alternative fuels; * the availability of pipeline capacity and infrastructure; * the availability or crude oil transportation and refining capacity; * weather conditions; * electricity dispatch; * domestic and foreign governmental regulations and taxes; and * the overall economic environment. Significant declines in crude oil and natural gas prices for an extended period may have the following effects on our business: * limiting our financial condition, liquidity, ability to finance planned capital expenditures and results of operations; * reducing the amount of crude oil and natural gas that we can produce economically; * causing us to delay or postpone some of our capital projects; * reducing our revenues, operating income and cash flows; * reducing the carrying value of our crude oil and natural gas properties; or * limiting our access to sources of capital, such as equity and long-term debt. THE CURRENT ECONOMIC ENVIRONMENT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS. The oil and gas industry is cyclical in nature and tends to reflect general economic conditions. The current economic environment may lead to significant fluctuations in demand and pricing for our crude oil and natural gas production, such as the decline in commodity prices which occurred during 2008 and into 2009. If commodity prices continue to fluctuate it could significantly impact our overall financial performance. OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT MAY RESULT IN SUBSTANTIAL LOSSES FOR WHICH INSURANCE MAY BE UNAVAILABLE OR INADEQUATE. Our operations are subject to hazards and risks inherent in operating and restoring oil and gas wells, such as fires, natural disasters, explosions, casing collapses, surface cratering, pipeline ruptures or cement failures, and environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution and other environmental damages, regulatory investigations and penalties, suspension of our operations and repair and remediation costs. In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease. We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operations. OUR PROVED RESERVE ESTIMATES MAY BE INACCURATE AND FUTURE NET CASH FLOWS ARE UNCERTAIN. Estimates of proved oil and gas reserves and their associated future net cash flow necessarily depend on a number of variables and assumptions. Among others, changes in any of the following factors may cause estimates to vary considerably from actual results: 4 <PAGE> * production rates, reservoir pressure and other subsurface information; * future oil and gas prices; * assumed effects of governmental regulation; * future operating costs; * future property, severance, excise and other taxes incidental to oil and gas operations; * capital expenditures; and * work-over and remedial costs. COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE GREATER FINANCIAL AND TECHNOLOGICAL RESOURCES. We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have large operating staffs and substantially greater capital resources than we do. WE ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS THAT MAY CAUSE US TO INCUR SUBSTANTIAL COSTS. From time to time, in varying degrees, political developments and federal and state laws and regulations affect our operations. In particular, price controls, taxes and other laws relating to the crude oil and natural gas industry, changes in these laws and changes in administrative regulations have affected and in the future could affect crude oil and natural gas production, operations and economics. We cannot predict how agencies or courts will interpret existing laws and regulations or the effect these adoptions and interpretations may have on our business or financial condition. Our business is subject to laws and regulations promulgated by federal, state and local authorities relating to the exploration for, and the development, production and marketing of, crude oil and natural gas, as well as to safety matters. Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be required to make significant expenditures to comply with governmental laws and regulations. Our operations are subject to complex federal, state and local environmental laws and regulations including, for example, in the case of federal laws, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Resource Conservation and Recovery Act, as amended, the Oil Pollution Act of 1990, the Clean Air Act, the Clean Water Act and the Occupational Safety and Health Act. Environmental laws and regulations change frequently and the implementation of new, or the modification of existing, laws or regulations could negatively impact our operations. The discharge of natural gas, crude oil, or other pollutants into the air, soil or water may give rise to significant liabilities on our part to the government and third parties and may require us to incur substantial costs of remediation. In addition, we may incur costs and penalties in addressing regulatory agency procedures involving instances of possible non-compliance. OUR ACQUISITION ACTIVITIES MAY NOT BE SUCCESSFUL, WHICH MAY HINDER OUR REPLACEMENT OF RESERVES AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Under certain circumstances, we may pursue acquisitions of businesses that complement or expand our current business and acquisition and development of new prospects that complement or expand our prospect inventory. We may not be successful in identifying or acquiring any material property interests, which could hinder us in replacing our reserves and adversely affect our financial results and rate of growth. Even if we do identify attractive opportunities, there is no assurance that we will be able to complete the acquisition of the business or prospect on commercially acceptable terms. If we do complete an acquisition, we must anticipate difficulties in integrating its operations, systems, technology, management and other personnel with our own. These difficulties may disrupt our ongoing operations, distract our management and employees and increase our expenses. COMPETITION FOR EXPERIENCED, TECHNICAL PERSONNEL MAY NEGATIVELY IMPACT OUR OPERATIONS. 5 <PAGE> Our exploratory and development drilling success depends, in part, on our ability to engage experienced professional personnel as independent contractors, consultants and executives. The loss of any key executives or other key personnel could have a material adverse effect on our operations. In particular, the loss of the services of our Chief Executive Officer, Maxwell Grant, could adversely affect our business, revenues and results of operations. Our business will require qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering, technology and operations. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. DESCRIPTION OF PROPERTIES At December 31, 2012, the Company and its wholly-owned subsidiaries, Gryphon and Gryphon Field Services, LLC, own 5 wells located in Gray County in the Texas Panhandle, of which 4 are actively producing oil wells and 1 is a water disposal well. PROVED RESERVES The following historical estimates of net proved oil and natural gas reserves are based on reserve reports as of December 31, 2012 and 2011, both of which were prepared by independent petroleum engineers. The reserve report as of December 31, 2012 and 2011 were based on the average price during the 12-month period ended December 31, 2012 and 2011, respectively, using the first-day-of-the-month price for each month. The Company maintains internal controls to ensure the reliability of reserve estimations, including: * Engaging an independent third-party reservoir engineering and geo-science professional firm to prepare all of our estimated proved reserves, and * Senior management reviewing all reserve studies annually to verify that accurate production and cost variables are used by the third-party engineering firm. GSM, INC., a registered petroleum engineering firm located in Amarillo, Texas, prepared reports of estimated proved reserves of oil and natural gas for our net interest in certain oil and natural gas properties comprising 100% of our estimated proved reserves (by volume) at year-end. A copy of the report issued by GSM, Inc. is filed with this Annual Report on Form 10-K as Exhibit 99.1. The qualifications of the technical person of this firm primarily responsible for overseeing his firm's preparation of the Company's reserve estimates is set forth below: * Over 40 years of practical experience in petroleum engineering, with primarily all of this experience being in the estimation and evaluation of reserves, * A registered professional engineer in the state of Texas, * Bachelor of Science Degree in Petroleum Engineering, * Bachelor of Science Degree in Geology, * Master of Science Degree in Geology. A summary of our proved oil reserves, all of which are located in Gray County, Texas, is presented below: 6 <PAGE> December 31, ------------------------------- Estimated Proved Reserves 2012 2011 -------- -------- Developed Oil, (Bbl) 21,281 17,326 Natural gas (Mcf) -- -- Undeveloped Oil, (Bbl) -- -- Natural gas (Mcf) -- -- OIL AND GAS RESERVE QUANTITIES Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, based on prices used to estimate reserves, from a given date forward from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time of which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Proved developed reserves are proved reserves expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively large major expenditure is required for recompletion. The table below represents the Company's estimate of proved oil reserves attributable to the Company's net interest in oil and gas properties, all of which are located in Gray County in the Texas Panhandle, based upon the evaluation by the Company and its independent petroleum engineers of pertinent geoscience and engineering data in accordance with the SEC's regulations. The Company does not have any proved undeveloped reserves and there were no material changes in the Company's undeveloped reserves during the fiscal years ending December 31, 2012 and 2011. Estimates of all of the Company's proved reserves have been prepared by independent reservoir engineers and geoscience professionals and are reviewed by members of the Company's senior management to ensure that the Company consistently applies rigorous professional standards and the reserve definitions prescribed by the SEC. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. Total Future Net Oil Net Gas Total Future Severance & Discounted Reserves Reserves Total Future Projected Ad Valorem Future Net Per Annum Proved Developed (Barrels) (Mcf) Net Revenue Cost Taxes cash flow as 10% ---------------- --------- ----- ----------- ---- ----- --------- ------ 2012 Producing 21,281 -- $1,982,108 $571,680 $170,461 $1,239,966 $377,885 2011 Producing 17,326 -- $1,554,791 $606,564 $133,712 $ 814,515 $246,543 The Company did not drill any wells or conduct any exploratory activities (including any implementation of mining methods) during the fiscal years ended December 31, 2012, 2011 or 2010, although the Company did deepen one of its existing wells during the fiscal year ended December 31, 2009 (which did not result in any incremental increase in production). However, the Company did capitalize $9,840 and $10,498 of development costs related to remedial and 7 <PAGE> restoration work to its existing proved developed properties for the fiscal years ended December 31, 2012 and 2011, respectively. As of March 25, 2013, the Company was not in the process of drilling any wells, installing any waterfloods or undertaking any pressure maintenance operations or other related activities of material importance. As of March 25, 2013, the Company owned an interest in approximately 5 gross wells and 5 net wells, all of which are located in the brown dolomite and/or granite wash formations in Gray County, Texas. There is no minimum remaining term of leases as all acreage is currently held by production or some other savings clause contained in the respective lease document. Standardized Measure of Discounted Future Net Cash Flows (Unaudited) The standardized measure of discounted cash flows and summary of the changes in the standardized measure computation from year to year are prepared in accordance with ASC Topic 932. The assumptions that underlie the computation of the standardized measure of discounted cash flows may be summarized as follows: * the standardized measure includes the Company's estimate of proved oil, natural gas and natural gas liquids reserves and projected future production volumes based upon economic conditions; * pricing is applied based upon 12-month average market prices at December 31, 2012 and December 31, 2011. The calculated weighted average per unit prices for the Company's proved reserves and future net revenues were as follows: At December 31, --------------------- 2012 2011 ------- ------- Oil (per barrel) $ 93.14 $ 89.74 Natural gas (per Mcf) $ n/a $ n/a * future development and production costs are determined based upon actual cost at year-end; * the standardized measure includes projections of future abandonment costs based upon actual costs at year-end; and * a discount factor of 10% per year is applied annually to the future net cash flows. PRODUCTION AND PRICE HISTORY For Year Ended December 31, ---------------------------------------- 2012 2011 2010 -------- -------- -------- Production: Oil Sales (Bbl) 1,067 7,794 9,854 Natural Gas Sales (Mcf) -- 6,546 10,199 Average Sales Price: Oil, per Bbl $ 85.64 $ 88.54 $ 75.64 Gas, per MMCF $ n/a $ 6.57 $ 9.06 Expenses per Bble: Lease Operating Expenses $ 36.43 $ 19.33 $ 23.51 Production Taxes $ 3.69 $ 3.96 $ 3.54 ITEM 3. LEGAL PROCEEDINGS. Chancellor is from time to time involved in legal proceedings incidental to its business and arising in the ordinary course. Chancellor's management does not believe that any such proceedings will result in liability material to its financial condition, results of operations or cash flow. 8 <PAGE> On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleged breach of contract, conversion and fraud and seeks damages of $451,998.54 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Court granted Gryphon's motion for summary judgment and entered final judgment in favor of Gryphon that Caldwell take nothing. ITEM 4. MINE SAFETY DISCLOSURES. NOT APPLICABLE PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. (a) Principal Market or Markets: The Company's common stock trades under the symbol CHAG.OB on the OTC Bulletin Board. High and low bids for the Company's common stock on the OTC Bulletin Board for the previous eight quarters are shown below. Class Quarter Ended High* Low* ----- ------------- ----- ---- Common Mar. 31, 2012 0.03 0.01 Common June 30, 2012 0.03 0.01 Common Sept. 30, 2012 0.03 0.02 Common Dec. 31, 2012 0.05 0.01 Common Mar. 31, 2011 0.10 0.06 Common June 30, 2011 0.08 0.04 Common Sept. 30, 2011 0.05 0.03 Common Dec. 31, 2011 0.04 0.01 ---------- * Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. (b) Common Stock: On December 31, 2012, there were 69,560,030 shares of common stock issued and outstanding, which were held by more than 400 stockholders of record excluding individuals holding securities in street name. Our common shares are issued in registered form. Quicksilver Stock Transfer LLC, 6623 South Las Vegas Blvd, Suite 255, Las Vegas, NV 89119 (Telephone 702.629.1883), is the registrar and transfer agent for our common shares. The Company has never paid cash dividends on its common stock and currently intends to continue its policy of retaining all of its earnings for use in its business. (c) Preferred Stock: The Company at December 31, 2012 had no preferred shares issued and outstanding. (d) Unregistered Sales of Equity Securities and Use of Proceeds:There were no Unregistered Sales of Equity Securities in the three months ended December 31, 2012 ITEM 6. SELECTED FINANCIAL DATA. Information required by this item is not required to be disclosed by the Company since it is a Smaller Reporting Company. 9 <PAGE> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Throughout this report, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Chancellor plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein, the effects of existing or continued deterioration in economic conditions in the United States or the markets in which we operate, and acts of war or terrorism inside the United States or abroad. BACKGROUND In April 2007 we commenced operations with what were 84 producing wells in Gray and Carson counties, Texas. On July 22, 2008, we had entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for the sale of our oil and gas wells in Carson County, Texas, representing for approximately 84% of our oil and gas production at that time. In 2010, the Company acquired three additional properties in Hutchinson County including approximately 16 wells. In 2011, the Company continued our operational and restoration programs and the production capacity from our 67 actively producing wells in Gray and Hutchinson counties. On October 18, 2011, pursuant to the terms of the Purchase and Sale Agreement, LCB Resources purchased all of Gryphon's rights, titles and interests in certain leases, wells, equipment, contracts, data and other designated property, which sale to LCB constituted approximately 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Agreement. Since the sale of substantially all of the assets of Gryphon to LCB, the Company has continued to maintain a total of four (4) producing wells and one (1) water disposal well. Gryphon also retains an operator's license with the Texas Railroad Commission and continues to operate the Hood Leases itself. The proceeds from the asset sale to LCB are being used to provide working capital to Chancellor and for future corporate purposes, including but not limited to possible acquisitions, including new business ventures outside of the oil and gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of 2012. On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned subsidiary of Chancellor, the separate company financial statements of which are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding term sheet was signed by Chancellor summarizing the principal terms, conditions and formal establishment of Pimovi by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the 10 <PAGE> receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, who is also the Chief Scientific Officer of Pimovi, has agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. In March 2013, Pimovi was reincorporated in Nevada. Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of March 25, 2013, there were 69,560,030 shares of our common stock issued and outstanding. RESULTS OF OPERATIONS Twelve Months Ended December 31, 2012 Compared to Twelve Months Ended December 31, 2011 PRODUCTION: During 2012, we produced and sold 1,067 barrels of oil and produced and sold no gas, generating $91,377 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 7,794 barrels of oil and 6,564 mcf of gas, generating $733,268 in gross revenues net of royalties paid during 2011. We had 4 wells producing oil and none producing gas at December 31, 2012 and had 4 wells producing oil and none producing gas at December 31, 2011. Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property. The assets sold to LCB constituted approximately 82% of the company's consolidated assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended. The Company has continued to maintain a total of four (4) producing wells and one (1) water disposal well. Gryphon will also retain an operator's license with the Texas Railroad Commission and continue to operate the Hood Leases itself. The proceeds from the asset sale will be used to provide working capital to Gryphon and for future corporate purposes including, but not limited to, possible acquisitions and other corporate programs and purposes that have yet to be identified. The following table summarizes our production volumes and average sales prices for the years ended December 31: 2012 2011 -------- -------- Oil and Gas Sales: Oil Sales (Bbl) 1,067 7,794 Natural Gas Sales (Mcf) n/a 6,546 Average Sales Price: Oil, per Bbl $ 85.64 $ 88.54 Gas, per Mcf $ n/a $ 6.57 The decrease in net sales of both oil and natural gas during the year ended December 31, 2012 (as compared to the year ended December 31, 2011) resulted primarily from the sale of substantially all of our producing wells effective December 1, 2011 to LCB. DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment decreased $243,247, or approximately 98% in 2012 from 2011. This decrease was primarily attributable to the sale of substantially all of our producing wells effective December 1, 2011 to LCB. LEASE OPERATING EXPENSES AND OTHER OPERATING EXPENSES: During 2012, our lease and other operating expenses decreased approximately $597,364, or approximately 89%. Salaries and related payroll taxes and employee benefits decreased approximately $373,363, or 98%, during 2012, non-payroll lease operating 11 <PAGE> expenses decreased approximately $224,001, or approximately 89%, during 2012. These decreases were primarily attributable to the sale of substantially all of our producing wells effective December 1, 2011 to LCB. GENERAL AND ADMINISTRATIVE EXPENSES: During 2012, our general and administrative expenses decreased $13,225, or approximately 2% in 2012 from 2011. Significant components of these expenses include consulting fees, professional fees and insurance. Professional fees increased approximately $15,500, or approximately 9% during 2012, primarily the result of increased consultation costs with third parties. Insurance decreased approximately $59,675, or approximately 60% during 2012. OTHER INCOME (EXPENSE): During 2012, approximately $83,000 of investment related professional and consulting expenses were incurred by Pimovi, Inc., as reported in the consolidated statement of operations for 2012. Approximately $5,000 of this expense incurred was for the initial organization and startup expenses of Pimovi, and the remaining $78,000 of this expense incurred was for the financing of Pimovi's general business purpose related to the initial development of technology and mobile applications fields. OVERALL: During 2012, we continued with the ongoing production, maintenance and enhancements of our 4 producing wells in Gray county. As a result of these efforts, our gross revenues from oil production for 2012 were $91,377. We also recognized $18,750 in additional revenues in the early part of 2012 for operating the properties which we sold to LCB Resources. The management of the Company has expended a large amount of time and resources in exploring other acquisitions and business opportunities, primarily outside of the oil and gas industry. During the fourth quarter of 2012 Chancellor entered into an agreement to acquire 61% of Pimovi Inc., a new majority-owned subsidiary of Chancellor beginning in the fourth quarter of 2012. Pimovi's primary focus is creating new methods for recording activities, along with editing and assembling such records in a proprietary format, including First Person Video Feeds for sporting and other events that present the different points of views of the athletes and other participants. From its inception during the fourth quarter 2012 through December 31, 2012, Pimovi incurred a loss of $83,076, mostly related to consulting fees and general and administrative expenses, as it begins to develop its product line. Chancellor recorded a $50,676 loss from Pimovi during fourth quarter 2012, representing its 61% share of Pimovi. Therefore, the Company and its Affiliate Pimovi reported a consolidated net loss of $547,967 during 2012, compared to a net loss of $341,241 reported for 2011. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW: The following table highlights certain information relating to our liquidity and capital resources at December 31: 2012 2011 ---------- ---------- Working Capital $1,712,701 $2,253,170 Current Assets 1,747,045 2,424,020 Current Liabilities 34,344 170,850 Stockholders' Equity 1,746,696 2,284,463 Our working capital at December 31, 2012, decreased by $540,469, or approximately 24%, from December 31, 2011, primarily from the loss from operations for 2012. Current assets decreased by $676,975 or approximately 28%, while current liabilities decreased $136,506, or approximately 80%, primarily as a result of the timing of cash disbursements. Our capital resources consist primarily of cash from operations and permanent financing, in the form of capital contributions from our stockholders. As of December 31, 2012, the Company had $1,700,508 of unrestricted cash on hand. Our capital expenditures related to our oil and gas operations for fiscal year 2013, estimated to be approximately $15,000 to $20,000, consist of repair and maintenance of our four producing oil wells and one water disposal well. In addition as described below under "Contractor Obligations," we are obligated to 12 <PAGE> contribute to our new majority owned subsidiary, Pimovi, Inc., an aggregate of $167,000 over the first six months of 2013 for its use in product development. We expect to pay all of these costs from cash on hand and from operations. CASH FLOW: Net cash used during 2012 was $611,268, compared to net cash generated of $1,526,678 during 2011. The most significant factor causing the increase in net cash used during 2012 was from the loss from operations and the payment of accrued expenses and accounts payable from December 31, 2011. The most significant factor in the net cash generated during 2011 was the sale of assets to LCB on December 1, 2011, which generated net cash of $1,923,085. Cash used for operations increased by $187,241, or approximately 49% during 2012, compared to 2011, primarily resulting from the loss from operations during 2012. Cash used for investing activities is $42,240 during 2012 compared to cash provided by investing activities in 2011 of $1,906,465, mainly attributable to the sale of assets to LCB which generated net cash of $1,935,306 during 2011. There was no cash provided by financing activities during either 2012 or 2011, as there were not any issuances of common stock for cash in 2012 or 2011. EQUITY FINANCING: As of December 31, 2012, our stockholders have contributed $3,608,613 in equity financing. We do not anticipate that significant equity financing will take place in the foreseeable future. CONTRACTUAL OBLIGATIONS On January 11, 2013, the final binding term sheet was signed by Chancellor summarizing the principal terms, conditions and formal establishment of Pimovi (a new majority-owned subsidiary of Chancellor) by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, who is also the Chief Scientific Officer of Pimovi, has agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. As of and during the fourth quarter ended December 31, 2012, Chancellor had funded Pimovi approximately $83,000 related to its agreement to provide the initial financing of $250,000 over a period of up to eight months, therefore it is expected that the remaining $167,000 of funding to Pimovi within the first six months of 2013 will occur, under the terms of the binding term sheet signed by Chancellor. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission (the "SEC") recently issued "FINANCIAL REPORTING RELEASE NO. 60 CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional disclosures, discussion and commentary on those accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements provided in this Annual Report on Form 10-K. NATURAL GAS AND OIL PROPERTIES In January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries -- Oil and Gas Topic of the Accounting Standards Codification with the requirements in the SEC's final rule, "MODERNIZATION OF THE OIL AND GAS REPORTING REQUIREMENTS". We implemented ASU 2010-03 as of December 31, 2009. Key items in the new rules include changes to the pricing used to estimate reserves and calculate the full cost ceiling limitation, 13 <PAGE> whereby a 12-month average price is used rather than a single day spot price, the use of new technology for determining reserves, the ability to include nontraditional resources in reserves and the ability to disclose probable and possible reserves. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data make these estimates generally less precise than other estimates included in the financial statement disclosures. As of December 31, 2011, we had proved reserves of .103 bcfe at 2011 12-month average prices of $89.74 per barrel before price differential adjustments. As of December 31, 2012, we had proved reserves of .1278 bcfe at 2012 12-month average prices of $93.14 per barrel before price differential adjustments. This increase in reserves is due primarily to increase in reserve estimate from the J.A. Hood lease. INCOME TAXES As part of the process of preparing the consolidated financial statements, we are required to estimate federal and state income taxes in each of the jurisdictions in which Chancellor operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as derivative instruments, depreciation, depletion and amortization, and certain accrued liabilities for tax and accounting purposes. These differences and our net operating loss carry-forwards result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. Generally, to the extent Chancellor establishes a valuation allowance or increases or decreases this allowance in a period, we must include an expense or reduction of expense within the tax provision in the consolidated statement of operations. Under accounting guidance for income taxes, an enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. Among the more significant types of evidence that we consider are: * taxable income projections in future years; * whether the carry-forward period is so brief that it would limit realization of tax benefit; * future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and * our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition. If (i) oil and natural gas prices were to decrease significantly below present levels (and if such decreases were considered other than temporary), (ii) exploration, drilling and operating costs were to increase significantly beyond current levels, or (iii) we were confronted with any other significantly negative evidence pertaining to our ability to realize our NOL carry-forwards 14 <PAGE> prior to their expiration, we may be required to provide a valuation allowance against our deferred tax assets. As of December 31, 2012, a deferred tax asset of $415,000 has been recognized but partially offset by a valuation allowance of approximately $411,000 due to federal NOL carry-back and carry-forward limitations. OFF-BALANCE SHEET ARRANGEMENTS There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships of the Company with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the short-term nature of our investments, we believe that there is not a material risk exposure. Credit Risk - Our accounts receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area. Commodity Price Risk - We are exposed to market risks related to price volatility of crude oil and natural gas. The prices of crude oil and natural gas affect our revenues, since sales of crude oil and natural gas comprise all of the components of our revenues. A decline in crude oil and natural gas prices will likely reduce our revenues, unless we implement offsetting production increases. We do not use derivative commodity instruments for trading purposes. The prices of the commodities that the Company produces are unsettled at this time. At times the prices seem to be drift down and then either increase or stabilize for a few days. Current price movement seems to be slightly up but with the prices of the traditionally marketed products (gasoline, diesel, and natural gas as feed stocks for various industries, power generation, and heating) are not showing material increases. Although prices are difficult to predict in the current environment, the Company maintains the expectation that demand for its products will continue to increase for the foreseeable future due to the underlying factors that oil and natural gas based commodities are both sources of raw energy and are fuels that are easily portable. 15 <PAGE> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CHANCELLOR GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 Consolidated Financial Statements TABLE OF CONTENTS Page ---- Report of Independent Registered Public Accounting Firm 17 Consolidated Balance Sheets 18 Consolidated Statements of Operations 19 Consolidated Statements of Stockholders' Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 22 16 <PAGE> [LETTERHEAD OF STARKSCHENKEIN, LLP] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Chancellor Group, Inc. We have audited the accompanying consolidated balance sheets of Chancellor Group, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2012. Chancellor Group, Inc's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chancellor Group, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. /s/ StarkSchenkein, LLP ---------------------------------- StarkSchenkein, LLP March 31, 2013 17 <PAGE> CHANCELLOR GROUP, INC. Consolidated Balance Sheets December 31, 2012 and 2011 2012 2011 ------------ ------------ ASSETS Current Assets: Cash in Bank $ 1,700,508 $ 2,086,776 Restricted Cash 25,000 250,000 Revenue Receivable 5,500 73,848 Income Tax Receivable 7,753 -- Prepaid Insurance 8,284 13,396 ------------ ------------ Total Current Assets 1,747,045 2,424,020 ------------ ------------ Property and Equipment: Leasehold Costs - Developed 57,580 47,740 Accumulated Depreciation and Amortization (23,835) (18,815) ------------ ------------ Total Property and Equipment, net 33,745 28,925 ------------ ------------ Other Assets: Investment in Unconsolidated Subsidiary -- -- Unamortized Letter of Credit -- 2,118 Deposits 250 250 ------------ ------------ Total Other Assets 250 2,368 ------------ ------------ Total Assets $ 1,781,040 $ 2,455,313 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 34,175 $ 112,405 Accrued Expenses 169 58,445 ------------ ------------ Total Current Liabilities 34,344 170,850 ------------ ------------ Stockholders' Equity Series B Preferred Stock: $1,000 Par Value 250,000 shares authorized, none outstanding -- -- Common Stock; $.001 par value, 250,000,000 shares authorized, 67,960,030 and 66,640,030 shares issued and outstanding, respectively 69,560 67,960 Paid-in Capital 3,539,053 3,498,053 Retained Earnings (Deficit) (1,829,517) (1,281,550) ------------ ------------ Total Chancellor, Inc. Stockholders' Equity 1,779,096 2,284,463 Noncontrolling Minority Interest in Pimovi, Inc. (32,400) -- ------------ ------------ Total Stockholders' Equity 1,746,696 2,284,463 ------------ ------------ Total Liabilities and Stockholders' Equity $ 1,781,040 $ 2,455,313 ============ ============ See Notes to Consolidated Financial Statements 18 <PAGE> CHANCELLOR GROUP, INC. Consolidated Statements of Operations Years Ended December 31, 2012 and 2011 2012 2011 ------------ ------------ Sales - Net of Royalties Paid: Oil $ 91,377 $ 690,042 Natural Gas -- 43,226 Other Operating Income 18,750 -- ------------ ------------ Gross Revenue 110,127 733,268 ------------ ------------ Operating Expenses: Lease Operating Expenses 38,873 171,736 Severance Taxes 3,934 35,210 Other Operating Expenses 28,051 461,276 Administrative Expenses 532,141 545,366 Depreciation and Amortization 5,020 248,267 ------------ ------------ Total Operating Expenses 608,019 1,461,855 ------------ ------------ (Loss) From Operations (497,982) (728,587) ------------ ------------ Other Income (Expense): Interest Income 4,079 2,174 Other (Expense) -- (20,119) Investment Professional and Consulting Expenses (83,076) -- Gain (Loss) on Sales of Assets, net of selling costs -- 414,710 ------------ ------------ Total Other Income (Expense) (78,997) 396,765 ------------ ------------ Financing Charges: Interest Expense -- 1,406 Bank Fees Amortization 3,478 8,193 ------------ ------------ Total Financing Charges 3,478 9,599 ------------ ------------ (Loss) Before Provision for Income Taxes (580,367) (341,421) Provision for Income Taxes (Benefit) -- 10,917 ------------ ------------ Net Loss of Chancellor, Inc. (580,367) (352,338) Net (Income) Loss attributable noncontrolling interest in Pimovi, Inc. 32,400 -- ------------ ------------ Net Loss $ (547,967) $ (352,338) ============ ============ Net (Loss) per Share (Basic and Fully Diluted) $ (0.01) $ (0.01) ============ ============ Weighted Average Number of Common Shares Outstanding 69,157,844 67,011,867 ============ ============ See Notes to Consolidated Financial Statements 19 <PAGE> CHANCELLOR GROUP, INC. Consolidated Statements of Stockholders' Equity For The Twenty Four Months Ended December 31, 2012 Retained COMMON COMMON PREFERRED Earnings/ Total STOCK STOCK Series B Paid in TREASURY TREASURY (Accumulated Stockholders' Shares Amount Amount Capital Shares Amount Deficit) Equity ------ ------ ------ ------- ------ ------ -------- ------ Balance at December 31, 2010 66,640,030 $ 66,640 $ -- $3,458,273 -- $ -- $ (929,212) $2,595,701 Compensatory Stock Issuances 1,320,000 1,320 -- 39,780 -- -- -- 41,100 Net (Loss) -- -- -- -- -- -- (352,338) (352,338) ---------- -------- -------- ---------- -------- -------- ----------- ---------- Balance at December 31, 2011 67,960,030 $ 67,960 $ -- $3,498,053 -- $ -- $(1,281,550) $2,284,463 Compensatory Stock Issuances 1,600,000 1,600 -- 41,000 -- -- -- 42,600 Net (Loss) -- -- -- -- -- -- (547,967) (547,967) ---------- -------- -------- ---------- -------- -------- ----------- ---------- Balance at December 31, 2012 69,560,030 $ 69,560 $ -- $3,539,053 -- $ -- $(1,829,517) $1,779,096 ========== ======== ======== ========== ======== ======== =========== ========== See Notes to Consolidated Financial Statements 20 <PAGE> CHANCELLOR GROUP, INC. Consolidated Statements of Cash Flows Years Ended December 31, 2012 and 2011 2012 2011 ------------ ------------ Cash Flows From Operating Activities: Net (Loss) $ (547,967) $ (352,338) Adjustments to Reconcile Net (Loss) to Net Cash Provided by (Used for) Operating Activities: Depreciation and Amortization 5,020 248,267 Stock Compensation Expense 42,600 41,100 (Gain) Loss on Sales of Assets -- (414,710) Decrease in Operating Assets 67,825 75,265 Increase in Operating Liabilities (136,506) 22,629 ------------ ------------ Net Cash (Used for) Operating Activities (569,028) (379,787) ------------ ------------ Cash Flows From Investing Activities: Proceeds from Sales of Assets, Net of Selling Costs -- 1,935,306 Investment in Unconsolidated Subsidiary (32,400) -- Other Capital Expenditures (9,840) (28,841) ------------ ------------ Net Cash (Used for) Provided by Investing Activities (42,240) 1,906,465 ------------ ------------ Cash Flows From Financing Activities: Issuance of Common Stock -- -- ------------ ------------ Net Cash Provided by Financing Activities -- -- ------------ ------------ Net Increase (Decrease) in Cash (611,268) 1,526,678 Cash and Restricted Cash at the Beginning of the Year 2,336,776 810,098 ------------ ------------ Cash and Restricted Cash at the End of the Year $ 1,725,508 $ 2,336,776 ============ ============ Supplemental Disclosures of Cash Flow Information: Interest Paid $ -- $ 1,406 ============ ============ Income Taxes Paid $ 10,917 $ -- ============ ============ See Notes to Consolidated Financial Statements 21 <PAGE> CHANCELLOR GROUP, INC. Notes to Consolidated Financial Statements December 31, 2012 and 2011 NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Chancellor Group, Inc. (the "Company", "our", "we", "Chancellor" or the "Company") was incorporated in the state of Utah on May 2, 1986, and then, on December 30, 1993, dissolved as a Utah corporation and reincorporated as a Nevada corporation. The Company's primary business purpose is to engage in the acquisition, exploration and development of oil and gas production. On March 26, 1996, the Company's corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc. During early 2012, the Company's corporate office was moved from Pampa to Amarillo, Texas. On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned subsidiary of Chancellor, and with which separate company financial statements are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Chancellor owns 61% of the equity of Pimovi in the form of Series A Preferred Stock, therefore Chancellor maintains significant financial control. As of December 31, 2012, Pimovi had not commenced principal operations and had no sales or revenues for 2012, therefore Pimovi is considered a "development-stage enterprise". The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. Operations The Company is licensed by the Texas Railroad Commission as an oil and gas producer and operator. The Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 5 wells in Gray County, Texas, of which 1 is a water disposal well. As of December 31, 2012, approximately 4 oil wells are actively producing. We produced a total of 1,067 barrels of oil in the year ended December 31, 2012. The oil is light sweet crude. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Chancellor Group, Inc. and its wholly owned subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services, LLC. These entities are collectively hereinafter referred to as "the Company". Beginning for the fourth quarter 2012, the accompanying consolidated financial statements also include the accounts of Chancellor's majority-owned subsidiary, Pimovi, Inc., with which Chancellor owns 61% of the equity of Pimovi and maintains significant financial control. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements. Accounting Year The Company employs a calendar accounting year. The Company recognizes income and expenses based on the accrual method of accounting under generally accepted accounting principles. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent 22 <PAGE> assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Products and Services, Geographic Areas and Major Customers The Company plans to operate its domestic oil and gas properties, located in Gray County in Texas, and possibly to acquire additional producing oil and gas properties. The Company's major customers, to which the majority of its oil production is sold, are Plains Marketing and ExxonMobil. Net Loss per Share The net loss per share is computed by dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. Concentration of Credit Risk Some of the Company's operating cash balances are maintained in accounts that currently exceed federally insured limits. The Company believes that the financial strength of deposit institutions mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company's financial position or results of operations. Restricted Cash Included in restricted cash at December 31, 2012 are deposits totaling $25,000, in the form of bond issued to the Railroad Commission of Texas as required for the Company's oil and gas activities. Included in restricted cash at December 31, 2011 are deposits totaling $250,000, which were held as collateral for a letter of credit issued to the Railroad Commission of Texas as required for its oil and gas activities. Accounts Receivable The Company reviews accounts receivable periodically for collectibles, establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. An allowance for doubtful accounts was not considered necessary or recorded at December 31, 2012, and 2011. Property and Equipment Property and equipment are recorded at cost and depreciated under the straight line method over the estimated useful life of the equipment. The estimated useful life of leasehold costs, equipment and tools ranges from five to seven years. The useful life of the office building and warehouse is estimated to be twenty years. Oil and Gas Properties The Company follows the successful efforts method of accounting for its oil and gas activities. Under this accounting method, costs associated with the acquisition, drilling and equipping of successful exploratory and development wells are capitalized. Geological and geophysical costs, delay rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. The carrying value of mineral leases is depleted over the minimum 23 <PAGE> estimated productive life of the leases, or ten years. Undeveloped properties are periodically assessed for possible impairment due to un-recoverability of costs invested. Cash received for partial conveyances of property interests is treated as a recovery of cost and no gain or loss is recognized. Depletion The carrying value of the mineral leases is depleted over the minimum estimated productive life of the leases, or ten years. Long-Lived Assets The Company assesses potential impairment of its long-lived assets, which include its property and equipment and its identifiable intangibles such as deferred charges, under the guidance Topic 360 "PROPERTY, PLANT AND EQUIPMENT" in the Accounting Standards Codification (the "ASC"). The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment. Asset Retirement Obligations The Company has not recorded an asset retirement obligation (ARO) in accordance with ASC 410. Under ASC 410, a liability should be recorded for the fair value of an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset, and the liability can be reasonably estimated. The associated asset retirement costs should also be capitalized and recorded as part of the carrying amount of the related oil and gas properties. Management believes that not recording an ARO liability and asset under ASC 410 is immaterial to the consolidated financial statements. Income Tax Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Revenue Recognition The Company recognizes revenue when a product is sold to a customer, either for cash or as evidenced by an obligation on the part of the customer to pay. Fair Value Measurements and Disclosures The Company estimates fair values of assets and liabilities which require either recognition or disclosure in the financial statements in accordance with FASB ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the 2012 and 2011 consolidated financial statements related to fair value measurements and disclosures. Fair value measurements include the following levels: Level 1: Quoted market prices in active markets for identical assets or liabilities. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities and federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. 24 <PAGE> Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. Level 3: Unobservable inputs that are not corroborated by market data. Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. Fair Value of Financial Instruments The carrying value of the Company's financial instruments, including cash in bank, restricted cash, revenue receivable and accounts payable as reported in the accompanying consolidated balance sheet, approximates fair values. Employee Stock-Based Compensation Compensation expense is recognized for performance-based stock awards if management deems it probable that the performance conditions are or will be met. Determining the amount of stock-based compensation expense requires us to develop estimates that are used in calculating the fair value of stock-based compensation, and also requires us to make estimates of assumptions including expected stock price volatility which is derived based upon our historical stock prices. Business Combinations The Company accounts for business combinations in accordance with FASB ASC Topic 805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets, the liabilities assumed and the goodwill acquired in a business combination. The Company did not enter into any business combinations during 2012 and 2011. The Company complies with the accounting guidance related to consolidation of variable interest entities ("VIEs") that requires a reporting entity to determine if a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach, to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company's involvement in a VIE. The Company did not have any VIEs that required consolidation in these financial statements during 2012 and 2011. Subsequent Events Events occurring after December 31, 2012 were evaluated through the date this Annual Report was issued, in compliance with FASB ASC Topic 855 "SUBSEQUENT EVENTS", to ensure that any subsequent events that met the criteria for recognition and/or disclosure in this report have been included. Recent Accounting Pronouncements ASU 2011-04, "FAIR VALUE MEASUREMENT (TOPIC 820) - AMENDMENTS TO ACHIEVE COMMON FAIR VALUE MEASUREMENTS AND DISCLOSURE REQUIREMENTS IN U.S. GAAP AND IFRSS." ASU 2011-04 amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company's consolidated financial statements. 25 <PAGE> ASU 2011-05, "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income." ASU 2011-05 amends Topic 220, "Comprehensive Income," to require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. ASU 2011-05 became effective for the Corporation on January 1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 "Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,". The adoption and application of ASU 2011-05 did not have a significant impact on the Company's consolidated financial statements as the Company has no other items of other comprehensive income, therefore, no separate statements of comprehensive income and additional footnote disclosures are included in these consolidated financial statements. In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-03 to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries -- Oil and Gas Topic of the Accounting Standards Codification with the requirements in the SEC's final rule, "MODERNIZATION OF THE OIL AND GAS REPORTING REQUIREMENTs." We implemented ASU 2010-03 as of December 31, 2009. Key items in the new rules include changes to the pricing used to estimate reserves and calculate the full cost ceiling limitation, whereby a 12-month average price is used rather than a single day spot price, the use of new technology for determining reserves, the ability to include nontraditional resources in reserves and the ability to disclose probable and possible reserves. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. In January 2010, the FASB issued ASU 2010-6, "IMPROVING DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS.". This update requires additional disclosure within the roll forward of activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair value hierarchy. In addition, the update requires enhanced disclosures of the valuation techniques and inputs used in the fair value measurements within Levels 2 and 3. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosure of purchases, sales, issuances and settlements of Level 3 measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the adoption of this update did not have a material effect on its financial position, cash flows and results of operations. There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries, and are not expected to have a material impact on the Company's financial position, results of operations or cash flows. NOTE 2. INCOME TAXES Income Tax Expense is comprised of the following: Fiscal Year ------------------------------------------- 2012 2011 2010 ---------- ---------- ---------- Current federal $ -- $ -- $ -- Current state and local -- 10,917 -- ---------- ---------- ---------- Deferred federal, state and local $ -- $ -- $ -- ========== ========== ========== 26 <PAGE> The difference between expected income tax expense (benefit) (computed by applying the statutory rate of 35% to income before income taxes) and actual income tax expense (benefit) is as follow: Fiscal Year ------------------------------------------- 2012 2011 2010 ---------- ---------- ---------- Computed "expected" Tax (Benefit) $(203,128) $(119,497) $(330,132) State and local income taxes, net of federal effect -- 10,917 -- Changes in Valuation Allowance and other adjustments 203,128 119,497 330,132 --------- --------- --------- $ -- $ 10,917 $ -- ========= ========= ========= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below. Fiscal Year --------------------------- 2012 2011 ---------- ---------- Deferred tax assets: Net operating loss carry-forward $ 414,867 $ 313,409 ---------- ---------- Total deferred tax assets 414,867 313,409 Valuation allowance against deferred tax assets (411,212) (309,553) Deferred tax assets net of valuation allowance 3,655 3,856 Deferred tax liabilities: Property and equipment 3,655 3,856 ---------- ---------- Total deferred tax liabilities 3,655 3,856 ---------- ---------- Net deferred tax assets $ -- $ -- ========== ========== Deferred income taxes are recorded for temporary differences between financial statement and income tax basis. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax basis. Deferred tax assets are recognized for temporary differences that will be deductible in future years' tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years' tax returns. At December 31, 2012, the Company has approximately $4,000 in long-term deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation. At December 31, 2011, the Company had approximately $4,000 in long-term deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation. During 2012, the Company reported an approximately $496,000 taxable loss, which increased its current net operating loss carry-forwards from prior years. A long-term deferred tax asset of approximately $415,000 has been recognized for the remaining net operating loss carry-forward but partially offset by a valuation allowance of approximately $411,000 due to federal NOL carry-back and carry-forward limitations. 27 <PAGE> Management evaluated the Company's tax positions under FASB ASC No. 740 "UNCERTAIN TAX POSITIONS," and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2009. NOTE 3. STOCKHOLDERS' EQUITY Preferred Stock The Company has provided for the issuance of 250,000 shares, par value $1,000 per share, of convertible Preferred Series B stock ("Series B"). Each Series B share is convertible into 166.667 shares of the Company's common stock upon election by the stockholder, with dates and terms set by the Board. No shares of Series B preferred stock are outstanding. Common Stock The Company has 250,000,000 authorized shares of common stock, par value $.001, with 69,560,030 shares issued and outstanding as of December 31, 2012. Stock based Compensation During 2011, the Company recognized $41,100 in professional fees expense related to stock issued to unrelated parties for business development services performed. During 2012, the Company recognized $42,600 in professional fees expense related to stock issued to unrelated parties for business development services performed. Non-employee Stock Options and Warrants The Company accounts for non-employee stock options under FASB ASC Topic 505 "EQUITY-BASED PAYMENTS TO NON-EMPLOYEES", whereby options costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. During 2012 and 2011, no options were issued, exercised or cancelled. The Company currently has outstanding warrants expiring December 31, 2014 to purchase an aggregate of 6,000,000 shares of common stock; these warrants consist of warrants to purchase 2,000,000 shares at an exercise price of $.025 per share, and warrants to purchase 4,000,000 shares at an exercise price of $0.02 per share. In July 2009, the Company issued additional warrants expiring June 30, 2014 to purchase an aggregate of 500,000 shares of common stock at an exercise price of $0.125 per share. From June 2010 thru April 2011, the Company issued additional warrants expiring June 30, 2015 to purchase an aggregate of 420,000 shares of common stock at an exercise price of $0.125 per share. On December 31, 2012, the Company had the following outstanding warrants: 28 <PAGE> Weighted Remaining Average Exercise Number of Contractual Life Exercise Price times Exercise Price Shares (in years) Number of Shares Price ----- ------ ---------- ---------------- ----- $0.025 2,000,000 2 $ 50,000 $0.020 4,000,000 2 80,000 $0.125 500,000 1.5 62,500 $0.125 420,000 2.5 52,500 --------- -------- 6,920,000 $245,000 $0.035 ========= ======== Remaining Number of Weighted Average Contractual Life Warrants Shares Exercise Price (in years) -------- ------ -------------- ---------- Outstanding at January 1, 2011 6,500,000 $0.035 --------- ------ Issued 420,000 -- Exercised -- -- Expired/Cancelled -- -- --------- ------ Outstanding at January 1, 2012 6,920,000 $0.035 --------- ------ Issued -- -- Exercised -- -- Expired/Cancelled -- -- --------- ------ Outstanding at December 31, 2012 6,920,000 $0.035 2.0 --------- ------ ------ Exercisable at December 31, 2012 6,920,000 $0.035 2.0 ========= ====== ====== Employee Stock Options The Company accounts for employee stock options under FASB ASC Topic 718 "COMPENSATION-STOCK COMPENSATION". The Company issued no employee stock options and had none outstanding as of the close of the year ended December 31, 2012 and 2011. NOTE 4. PROPERTY AND EQUIPMENT A summary of fixed assets at: Balance Balance December 31, December 31, 2011 Additions Deletions 2012 -------- --------- --------- -------- Leases & Lease Equipment $ 47,740 $ 9,840 $ -- $ 57,580 -------- -------- -------- -------- $ 47,740 $ 9,840 $ -- $ 57,580 ======== ======== ======== ======== Less: Accumulated Depreciation 18,815 5,020 -- 23,835 -------- -------- -------- -------- $ 28,925 $ 5,020 $ -- $ 33,745 ======== ======== ======== ======== 29 <PAGE> NOTE 5. CONTINGENT LIABILITY Chancellor is from time to time involved in legal proceedings incidental to its business and arising in the ordinary course. Chancellor's management does not believe that any such proceedings will result in liability material to its financial condition, results of operations or cash flow. On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleges breach of contract, conversion and fraud and seeks damages of $451,998.54 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Court granted Gryphon's motion for summary judgment and entered final judgment in favor of Gryphon that Caldwell take nothing. NOTE 6. LONG-TERM DEBT The Company had no long-term debt as of December 31, 2012 and 2011. NOTE 7. ACCUMULATED COMPENSATED ABSENCES It is the Company's policy to permit employees to accumulate a limited amount of earned but unused vacation, which will be paid to employees upon separation from the Company's service. The cost of vacation and sick leave is recognized when payments are made to employees. These amounts are immaterial and not accrued. NOTE 8. RELATED PARTY TRANSACTIONS The Company has used the services of a consulting company owned by the Chairman of the Board. The Company has paid $104,000 and $96,000 annually for those services during the years ending December 31, 2012 and December 31, 2011. The Company has paid directors fees to a company owned by the chairman of the board in the amounts of $44,500 and $13,000 during the years ended December 31, 2012 and December 31, 2011, respectively, and to one other director in the amounts of $44,500 and $21,000 in total during the years ended December 31, 2012 and December 31, 2011, respectively. During 2012, the Company has paid $2,400 in professional services to a company owned by the Chairman of Board for the supervision and storage of company documents. NOTE 9. SUBSEQUENT EVENTS Events occurring after December 31, 2012 were evaluated through the date this Annual Report was issued, in compliance FASB ASC Topic 855 "Subsequent Events", to ensure that any subsequent events that met the criteria for recognition and/or disclosure in this report have been included. On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleges breach of contract, conversion and fraud and seeks damages of $451,998.54 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Court granted Gryphon's motion for summary judgment and entered final judgment in favor of Gryphon that Caldwell take nothing. 30 <PAGE> NOTE 10. SUPPLEMENTAL INFORMAITON ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The Supplementary Information on Oil and Gas Producing Activities is presented as required by ASC Topic 932, "EXTRACTIVE ACTIVITIES -- OIL AND GAS". Supplemental information is provided for the estimated quantities of proved oil and gas reserves, future cash flows and the standardized measure of discounted future net cash flows associated with proved oil and gas reserves. Oil and Gas Reserve Quantities Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, based on prices used to estimate reserves, from a given date forward from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time of which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Proved developed reserves are proved reserves expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively large major expenditure is required for recompletion. The table below represents the Company's estimate of proved oil and natural gas reserves attributable to the Company's net interest in oil and gas properties, all of which are located in Gray and Hutchinson counties in the Texas panhandle, based upon the evaluation by the Company and its independent petroleum engineers of pertinent geoscience and engineering data in accordance with the SEC's regulations. Estimates of all of the Company's proved reserves have been prepared by independent reservoir engineers and geoscience professionals and are reviewed by members of the Company's senior management to ensure that the Company consistently applies rigorous professional standards and the reserve definitions prescribed by the SEC. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. GSM, INC., a registered Petroleum engineering firm in Amarillo, Texas, prepared reports of estimated proved reserves of natural gas and oil for our net interest in certain oil and natural gas properties located in Gray and Hutchinson counties in Texas. Total Future Net Oil Net Gas Total Future Severance & Discounted Reserves Reserves Total Future Projected Ad Valorem Future Net Per Annum Proved Developed (Barrels) (Mcf) Net Revenue Cost Taxes cash flow as 10% ---------------- --------- ----- ----------- ---- ----- --------- ------ 2012 Producing 21,281 -- $1,982,108 $571,680 $170,461 $1,239,966 $377,885 2011 Producing 17,326 -- $1,554,791 $606,564 $133,712 $ 814,515 $246,543 Presented below is a summary of changes in estimated reserves of the Company during the periods ended December 31, 2012 and 2011: 31 <PAGE> Gas Oil Total (mmscf) (mmbbl) (bcfe) -------- -------- -------- DECEMBER 31, 2012 Proved reserves, beginning of period -- 17.330 0.099 Extensions, discoveries and other additions -- -- -- Revisions of previous estimates -- 5.018 0.029 Production -- (1.067) (0.006) Sale of reserves-in-place -- -- -- Purchase of reserves-in-place -- -- -- -------- ------- ----- Proved reserves, end of period -- 21.281 0.123 ======== ======= ===== Proved developed reserves: Beginning of period -- 17.330 0.099 ======== ======= ===== End of period -- 21.281 0.123 ======== ======= ===== DECEMBER 31, 2011 Proved reserves, beginning of period 482.730 232.954 1.888 Extensions, discoveries and other additions -- -- -- Revisions of previous estimates -- -- -- Production (6.546) (7.794) (0.053) Sale of reserves-in-place (476.180) (207.830) (1.736) Purchase of reserves-in-place -- -- -- -------- ------- ----- Proved reserves, end of period -- 17.330 0.099 ======== ======= ===== Proved developed reserves: Beginning of period 482.730 232.954 1.888 ======== ======= ===== End of period -- 17.330 0.099 ======== ======= ===== During 2012, Chancellor sold .006 bcfe of our proved reserves for approximately $91,000 in gross revenues. During 2011, Chancellor sold .053 bcfe of our proved reserves for approximately $733,000 in gross revenues. Effective December 1, 2011 we sold approximately 1.736 bcfe of our reserves to LCB pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011. LCB purchased all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. The aggregate amounts of capitalized costs relating to our oil and gas producing activities and the aggregate amounts of related accumulated depletion, depreciation, and amortization as of December 31, 2012 and 2011 are as follows. Years Ended December 31, ------------------------------- 2012 2011 ---------- ---------- Unproved oil and gas properties -- -- Proved oil and gas properties $ 57,580 $ 47,740 Accumulated depreciation, depletion, and amortization, and valuation allowances (23,835) (18,815) ---------- ---------- Net capitalized costs $ 33,745 $ 28,925 ========== ========== 32 <PAGE> The costs incurred by the Company in oil and natural gas property exploration, development and acquisition activities are summarized as follows: Years Ended December 31, ------------------------------- 2012 2011 ---------- ---------- Acquisition of properties Proved $ -- $ -- Unproved -- -- Exploration costs -- -- Development costs $ 9,840 $ 10,848 The Company's results of operations from oil and natural gas producing activities are presented below for the years ended December 31, 2012 and 2011. The following table includes revenues and expenses associated directly with the Company's oil and natural gas producing activities. It does not include any interest costs or general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of the Company's oil and natural gas operations. Years Ended December 31, ------------------------------- 2012 2011 ---------- ---------- Revenues Sales, net of royalties paid $ 91,377 $ 733,268 Transfers -- -- ---------- ---------- Total Revenues 91,377 733,268 Production costs (70,858) (668,222) Exploration expenses -- -- Depreciation, depletion and amortization and valuation provisions (5,020) (170,943) Income tax expenses (benefits) -- -- ---------- ---------- Results of operations from producing activities (excluding corporate overhead and interest costs) $ 15,499 $ (105,897) ========== ========== The principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, 2012 and 2011 are as follows: Years Ended December 31, ------------------------------ 2012 2011 ---------- ---------- Net change in sales and transfer prices and in production (lifting) costs related to future production $ (1,865) $ 10,848 Changes in estimated future development costs -- -- Sales and transfers of oil and gas produced during the period, net of production taxes (91,377) (698,058) Net change due to purchase of minerals in place -- -- Net change due to revisions in quantity estimates 142,344 96,230 Previously estimated development costs incurred during the period -- -- Accretion of discount -- -- Net change due to sale of minerals in place -- (4,063,039) Net change in income taxes -- -- ---------- ----------- Aggregate change in the standardized measure of discounted future net cash flows for the year $ 131,342 $(4,654,019) ========== =========== 33 <PAGE> Standardized Measure of Discounted Future Net Cash Flows The standardized measure of discounted cash flows and summary of the changes in the standardized measure computation from year to year are prepared in accordance with ASC Topic 932. The assumptions that underlie the computation of the standardized measure of discounted cash flows may be summarized as follows: * the standardized measure includes the Company's estimate of proved oil, natural gas and natural gas liquids reserves and projected future production volumes based upon economic conditions; * pricing is applied based upon 12-month average market prices at December 31, 2012 and December 31, 2011. The calculated weighted average per unit prices for the Company's proved reserves and future net revenues were as follows: At December 31, --------------------- 2012 2011 ------- ------- Oil (per barrel) $ 93.14 $ 89.74 Natural gas (per Mcf) $ n/a $ n/a * future development and production costs are determined based upon actual cost at year-end; * the standardized measure includes projections of future abandonment costs based upon actual costs at year-end; and * a discount factor of 10% per year is applied annually to the future net cash flows. 34 <PAGE> ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. As supervised by our Board of Directors and our principal executive and principal financial officer, management has established a system of disclosure controls and procedures and has evaluated the effectiveness of that system. The system and its evaluation are reported on in the below Management's Annual Report on Internal Control over Financial Reporting. Based on the evaluation of our controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) required by paragraph (b) of Rule 13a-15, our principal executive and financial officer has concluded that our disclosure controls and procedures as of December 31, 2012, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (x) accumulated and communicated to management, including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure and (y) recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Management's Annual Report on Internal Control over Financial Reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2012. Management carried out this assessment using the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control--Integrated Framework. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm, pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report. Management concluded in this assessment that as of December 31, 2012, our internal control over financial reporting is effective. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of the year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. The Directors of the Registrant as of the date of this annual report on Form 10-K are as follows: Served as a Name Age Position Director since ---- --- -------- -------------- Maxwell Grant 75 Chairman and Director May 23, 2007 Dudley Muth 73 Director March 31, 2009 35 <PAGE> All Directors of the Company hold office until successors are elected according to the Company's by-laws. The Officers of the Registrant as of the date of this annual report on Form 10-K are as follows: Served as a Name Age Position Officer since ---- --- -------- ------------- Maxwell Grant 75 Chief Executive Officer and May 23, 2007 Principal Financial Officer Officers of the Company are elected by the Board of Directors according to the Company's by-laws and hold office until their death, resignation, or removal from office. Maxwell Grant whose company, Koala Pictures, is Chancellor's largest stockholder, has a business degree and a journalism diploma in 1960 from Melbourne University. A former international journalist and university lecturer in the early 1960's in labor relations at Monash University, Melbourne, his New York-published novels have been translated into several languages. His wide range of interests include TV and film production, film financing and more recently oil and gas. For the last three years, Mr. Grant has primarily concentrated on locating a suitable acquisition for the Company and worked on several other film and investment projects. He co-founded in the late 1990's and was a 19% shareholder of Majestic Film Management Limited, Melbourne, Australia, which raised several million dollars for international feature films for Village Roadshow Pictures. The film JOEY, which he conceived and on which he was Associate Producer, was sold internationally to MGM. Mr. Grant devoted his time and efforts to locate for Chancellor its producing oil and gas properties in Texas. He participated in negotiations on behalf of the Company for the purchase of the property and identified the sources of financing for the Company to complete the acquisitions. Mr. Dudley Muth is a Los Angeles attorney and a broker-dealer compliance officer. From January 2009 to the present, Mr. Muth has been the Compliance Director/Counsel for BMA Securities, Rolling Hills Estates, California, and prior thereto from March to December 2008, he was the Compliance Director/Consultant for Financial West Group, Los Angeles, California. From October 2002 to February, 2008, Mr. Muth was the Director of Compliance for the Shemano Group, Los Angeles, California. Mr. Muth received a BA in Economics from Pomona College in 1961, an MBA in Accounting and Industrial Relations from the University of California Los Angeles in 1963, and a JD from the University of Southern California School of Law in 1966. Mr. Muth began his career with Arthur Andersen & Co. in their tax department specializing in oil and gas taxation in Los Angeles. He has worked in the securities industry since the early 1970's, as an attorney and compliance director. From 1977 to 1979 he served as a compliance officer with the Pacific Stock Exchange. He has served as president of two listed REIT's and since 1975 as a Director of Ojai Oil Company, a small oil and gas and real estate company in Camarrilo, California. Mr. Muth was previously a member of our Board of Directors, and had resigned from our Board in November, 2008. In connection with the preparation of our Annual Report on Form 10-K for our fiscal year ended December 31, 2007, filed on April 7, 2008, he informed the Company that, he had inadvertently neglected to advise the Company as to a Financial Industry Regulatory Authority ("FINRA") regulatory disciplinary action within the past several years in which he was fined $2,500 by reason of a temporary net capital violation of a broker dealer for which he was the regulatory operative contact with FINRA, such fine having been paid by the company with which he was then associated. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE No person who at any time during the fiscal year ended December 31, 2012 was a director, officer or beneficial owner of more than ten percent (10%) of our common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2012. 36 <PAGE> CODE OF CONDUCT Our board of directors has adopted a Code of Ethics that is applicable to our principal executive and financial officer, our principal accounting officer and our controller or to persons performing similar functions for the Company. The Company will provide, free of charge, a copy of its Code of Ethics to any person who submits a written request for a copy of the Code of Ethics, such request to be submitted via first class or certified mail addressed to the Company at P.O. Box 509, Amarillo, TX 79105-0509. ITEM 11. EXECUTIVE COMPENSATION. Compensation paid to Officers is set forth in the Summary Compensation Table below. The Company may reimburse its Officers for any and all out-of-pocket expenses incurred relating to the business of the Company. SUMMARY COMPENSATION TABLE Non-Equity Nonqualified Name and Incentive Deferred Principal Stock Option Plan Compensation All Other Position Year Salary($) Bonus($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Totals($) -------- ---- --------- -------- --------- --------- --------------- ----------- --------------- --------- Maxwell Grant, 2011 -- -- -- -- -- -- $109,000 $109,000 Chairman of 2012 -- -- -- -- -- -- $148,500 $148,500 the Board of Directors (1) ---------- (1) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary Ltd. ("Koala") and Axis Network Proprietary Ltd. In 2011 and 2012, Koala was paid $96,000 and $104,000, respectively, annually in consulting fees. In addition, Mr. Grant was paid $13,000 in cash, in 2011 in director's fees. Mr. Grant was paid $30,000, in cash and $14,500 in stock awards, in 2012 in director's fees. Compensation paid to Directors is set forth in the Director Compensation Table below. The Company may reimburse its Directors for any and all out-of-pocket expenses incurred relating to the business of the Company. DIRECTOR COMPENSATION Fees Non-Equity Nonqualified Earned Incentive Deferred Paid in Stock Option Plan Compensation All Other Name Cash($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Total($) ---- ------- --------- --------- --------------- ----------- --------------- -------- Maxwell Grant $30,000 $14,500 -- -- -- -- $44,500 Dudley Muth $30,000 $14,500 -- -- -- -- $44,500 The Board of Directors has discussed and analyzed risks associated with the Company's compensation policies and practices for executive officers and all employees generally including, but not limited to, eligibility, effects on retention, balance of objectives, alignment with stockholders, affordability, possible unintended consequences and governance. The Board of Directors did not identify any risks arising from these policies or practices reasonably likely to have a material adverse effect on the Company. 37 <PAGE> ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth, as of March 25, 2013, on which date 69,560,030 shares of common stock were outstanding, the ownership of each person known by the Registrant to be the beneficial owner of five percent or more of the Company's common stock, each Officer and Director individually and all Directors and Officers of the Registrant as a group. No. of % of Name Shares Class(1) ---- ------ -------- Maxwell Grant (2) Chairman and Director 24,813,800 34.43% Dudley Muth Director 3,275,000 4.64% Directors and Executive Officers as a Group 28,088,800 38.44% ---------- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or conversion rights that are currently exercisable or exercisable within 60 days of March 25, 2013, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary Ltd. ("Koala") which owns 21,803,800 shares of common stock. Mr. Grant's address is c/o the Company, P.O. Box 509, Amarillo, TX 79105-0509. As previously reported, Koala holds warrants expiring December, 2014, to purchase 2,500,000 shares of common stock at an exercise price of $.02 per share. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. In 2012, a private company controlled by Maxwell Grant, a major stockholder (who became our Chairman of the Board of Directors in May 2007) was paid consultancy fees of $104,000. Also in 2012, another private company controlled by Maxwell Grant was paid professional fees of $2,400 for the supervision and storage of company documents. DIRECTOR INDEPENDENCE As noted above, the Company's stock is not listed on a national securities exchange or in an inter-dealer quotation system which has requirements that a majority of the board of directors be independent. The Board of Directors has determined, using the independence requirements established by the NASDAQ Stock Market and the SEC, that all of the current members of the Board of Directors other than Maxwell Grant are independent. The Board of Directors has considered and applied all facts and circumstances relating to a director in making this determination. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (1) Audit Fees. The aggregate fees billed by our current independent auditors, StarkSchenkein, LLP., for professional services rendered for the audit of our financial statements for the years ending December 31, 2012, filed as part of our 2012 Form 10-K filing and for review of our interim financial statements filed as part of our first, second and third quarter reports on Form 10-Q filed for the fiscal year of 2012 are approximately $27,000. 38 <PAGE> The aggregate fees billed by our current independent auditors, StarkSchenkein, LLP., for professional services rendered for the audit of our financial statements for the years ending December 31, 2011, filed as part of our 2011 Form 10-K filing for the fiscal year of 2011 are $36,000. (2) Audit-Related Fees. There have been no audit-related fees billed by our auditors in each of the last two fiscal years of our Company. (3) Tax Fees. There have been no tax fees billed by our auditors in each of the last two fiscal years of our Company. (4) All Other Fees. There have been no other fees billed by our auditors in each of the last two fiscal years of our Company. (5) It is the policy of our Board of Directors that before the accountant is engaged to render audit or non audit services, the engagement is approved by the Board of Directors that is at present acting as the Audit Committee. All of the services described above under the caption "Audit Fees" were approved by the Board of Directors. (6) Not applicable. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(3) Exhibits 2.1 Plan of Reorganization dated March 1, 2008, filed with the United States Bankruptcy Court for the Northern District of Texas, Amarillo Division, filed herewith. 3.1 Certificate of Incorporation of Nighthawk Capital, Inc. (Utah) (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form 10-SB12G, filed with the Securities and Exchange Commission on April 5, 2000). 3.2 Articles on Incorporation on Nighthawk Capital, Inc. (Nevada) (incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 10-SB12G, filed with the Securities and Exchange Commission on April 5, 2000). 3.3 Articles of Merger of Nighthawk Capital, Inc. (Utah) into Nighthawk Capital, Inc. (Nevada) (incorporated by reference to Exhibit 2.3 to the Company's Registration Statement on Form 10-SB12G, filed with the Securities and Exchange Commission on April 5, 2000). 3.4 By-Laws (incorporated by reference to Exhibit 2.4 to the Company's Registration Statement on Form 10-SB12G, filed with the Securities and Exchange Commission on April 5, 2000). 3.5 Amendments to the Articles of Incorporation of Nighthawk Capital, Inc., dated as of March 26, 1996. 3.6 Certificate of Amendment of Articles of Incorporation of Chancellor Group, Inc., dated as of February 25, 2000. 10.1 Agreement and Plan of Reorganization, dated October 19, 2000, between Chancellor Group, Inc. and Southwin financial, Ltd. (incorporated by reference to Exhibit No. 10.1 to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 21, 2000). 39 <PAGE> 10.2* Term Sheet for Investment in Pimovi, Inc. 21 Subsidiaries of the Registrant 23.1* Report and Consent of GSM, Inc. 31* Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002. 32* Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1* Evaluation of Oil and Gas Reserves as of December 31, 2012, prepared by GSM, INC., a registered petroleum engineering firm located in Amarillo, Texas. 99.2 Evaluation of Oil and Gas Reserves as of December 31, 2011, prepared by GSM, INC., a registered petroleum engineering firm located in Amarillo, Texas (incorporated by reference to Exhibit 99.1 to the Annual Report on Form 10-K filed by the Company on March 26, 2012 with the Securities and Exchange Commission). 101* Interactive Data Files pursuant to Rule 405 of Regulation S-T. ---------- * Filed herewith 40 <PAGE> SIGNATURES Pursuant to the requirements of Section 12(g) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 2013. CHANCELLOR GROUP, INC. By: /s/ Maxwell Grant ------------------------------------ Maxwell Grant Chief Executive Officer and Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on March 25, 2013. /s/ Maxwell Grant ----------------------------------------- Maxwell Grant Chief Executive Officer and Director /s/ Dudley Muth ----------------------------------------- Dudley Muth Director 41
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10-K Filing
Chancellor Inactive 10-K2012 FY Annual report
Filed: 29 Mar 13, 12:00am